PROJECT REPORT

ON

“Working Capital Management”

In
“Bharat Heavy Electrical
Limited” HERP -
Varanasi

In Partial Fulfillment of MBA Degree

(2014-2016)

Submitted By-
Aditi Mishra
MBA General (2014-2016)

Rajarshi School of Management and

Technology, Varanasi

1
 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.

2
 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.

I am extremely thankful to Mr. Ashok Srivastava (Account Officer BHEL,

HERP Varanasi) & Mr. Nitin Arora (Executive Trainee) under whose
guidance & continuous support I was able to compile this survey. I am
really admired by his special attention & cooperation extended to me
during this project.

With a deep sense of reverence, I would like to express my deep gratitude to

my Parents who have always been a source of inspiration for me. Their
everlasting support, cooperation, encouragement & smiling affection
inspired me always to do the best of my capability.

3
 DECLARATION

I hereby declare that the work presented by me in this Project Report

“Working Capital Management” In “Bharat Heavy Electrical
limited” HERP - Varanasi” submitted towards my Partial fulfillment
of Master of Business Administration (M.B.A) (2014-2016) of 2nd
semester course at RSMT is authentic record of my work carried out
under the guidance of Mr. Ashok Srivastava (Account Officer BHEL,
Varanasi). The project was done in full compliance with the requirements
& constraints of the prescribed curriculum.

4
 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:-
 About BHEL (HERP),Varanasi
 Balance Sheet of BHEL (HERP) Varanasi
 Profit & Loss A/C of BHEL (HERP) Varanasi
8. About the topic:-
 Defining Working Capital
 Determinants of Working Capital and W.C. Cycle

 Issues in Working Capital Management

✓ Receivables management

5
 ✓ Payables management
✓ Inventory management
9. Key Ratios

10. Conclusion

11. Suggestion & Recommendation

12. Limitations

13. Appendix

14. Bibliography

6
 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
 The research methodology adopted for this study is mainly from
secondary sources of data which include annual reports of BHEL, & website
of the company. The use of primary sources is limited to interviews with
few of the employees in finance department.

The study of working capital management has shown that BHEL

has a strong working capital position. The company is also enjoying
reasonable profits. BHEL has corporate tie up with maximum leading
Banks in India for providing short and medium term finance to the
company. For financial requirement of projects outside India, BHEL has
arranged forex funds. BHEL sales position is also very good. Its excellent
performance is attributed to reduced cost of product The overall position of
BHEL is good & the same is expected by continuum of existing
management policies, checking exchange rate risk, competing with
domestic and global players in terms of quality & quantity.

8
 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 don’t 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

 To study in general the working capital management procedure in

BHEL (HERP), Varanasi.

 To analyze and apply operating cycle concept of working capital in

BHEL (HERP), Varanasi.

 To know how the working capital is being financed.

 To know the various methods to be followed by BHEL for inventories

and accounts receivables.

 To give suggestions, if any, for better working capital management in

BHEL.

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

 Primary data sources

These are the original source of data i.e. the sources from which
researcher directly collects data & this data has been not previously
collected.

 Secondary data sources

These are sources containing data that have been collected and
compiled for another purpose. These data are readymade & readily
available. The secondary data in this research is obtained from internet,
books etc.

However most of study is conducted based on secondary sources.

Secondary sources of data mainly include annual reports of BHEL.

Statement of changes in working capital for the past 5 years is done using
the data taken from these financial reports. Similarly time series analysis of
operating cycle and calculations of ratios is done. Apart from this, the
website of BHEL is referred to know the products, product facilities,
network etc.

12
Industry analysis is done based on the information gathered from
newspapers and websites of Indian steel ministry & other sector related
websites.

The use of primary sources is limited to interviews with some of the

employees in finance department. The reason being, it is against the
company’s policies & producers to reveal the sensitive financial
information.

13
14
 BHARAT HEAVY ELECTRICAL LIMITED

COMPANY BACKGROUND

1956 - Company was set up at Bhopal in the name of M/s Heavy electrical
(India) Ltd. in collaboration with AEI, UK. Subsequently, three more plants
were set up at Hyderabad, Hardwar and Trichy. The Bhopal Unit was
controlled by the company, the other three were under the control of
Bharat Heavy Electricals Ltd. - The Company`s object is to manufacture of
heavy electrical equipments.

1972 - In July the Operations of all the four plants were integrated.

1974 - In January Heavy electrical (India) Ltd was merged with BHEL. -
For the manufacture of a wide variety of products, the company has
developed technological infrastructure, skills and quality to meet the
stringent requirements of the power plants, transportation, petro
chemicals, oil etc. - BHEL has entered into collaboration which are
technical in nature. Under these agreements, the collaborators have
transferred, furnished the information, documentation, including know-
how relating to design, engineering, manufacturing assembly etc.

1982 - BHEL also entered into power equipments, to reduce its dependence
on the power sector.

BHEL Has

1. Installed equipment for over 90000 MW of power generation-for

utilities, captive and industrial users.
15
2. Supplied over 225000MW a transformer capacity and other
equipment operating in transmission and distribution network up to
400Kv (AC& DC)
3. Supplied over 25000 motors with drive control system to power
projects, petro chemicals, refineries, steel, aluminum, fertilizers,
cement plants etc.
4. Supplied traction electrics and AC/DC locos to power over 12000kms
railway network.
5. Supplied over one million valves to power plants and other industries.

16
 VISION, MISSION & VALUES OF BHEL

VISION

 To become a continuously growing world class company.

 To harness the growth potential & sustain profitable growth.
 To deliver high quality & cost competitive products & to be the first
choice of customers.
 Create an inspiring work environment to unleash the creative energy
of people.
 Achieve excellence in enterprise management.
 Be a respected corporate citizen, ensure clean & green environment &
develop vibrant communities.

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
  Creativity & innovation
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
have also won the commendation for significant achievement to TQM
during 2008-2009

For the third consecutive year, BHEL performance was recognized by the
prestigious publication ‘Forbes Asia’ which featured BHEL in its fourth
annual ‘fabulous 50’ list of the best of Asia pacific’s publically – traded
company with revenue or market capitalization of a least us $ 5 billion
having highest long term profitability and sells and earnings growth
significantly BHEL is only Indian PSU top figure on the elite list since the
list was conceived. BHEL and its four units were awarded ICWAI awards
for excellence in cost management for 208- the highest among both public
and private sector companies .BHEL won EEPC’s top export award for the
eighteenth year in secession

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
The company manufactures 235 MW nuclear turbine generator sets and
has commenced production of 500 MW nuclear turbine generator sets.

Custom-made hydro sets of Francis, Pelton and Kaplan types for different
head discharge combinations are also engineered and manufactured by
BHEL. In all, orders for more than 700 utility sets of thermal, hydro, gas
and nuclear have been placed on the company as on date. The power plant
equipment manufactured by BHEL is based on contemporary technology
comparable to the best in the world, and is also internationally competitive.

The company has proven expertise plant performance improvement

through renovation, modernization and upgrading of a variety of power
plant equipment, besides specialized know how of residual life assessment,
health diagnostics and life extension of plants.

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
range of systems and equipment supplied includes: captive power plants,
dg power plants, high speed industrial drive turbines, industrial boilers
and axillaries, waste heat recovery boilers, gas turbines, heat exchangers
and pressure vessels, centrifugal compressors, electrical machines, pumps,
valves, seamless steel tubes and process controls, control systems for
process industries, and control and instrumentation systems for power
plants, defense and other applications. The company has commenced
manufacture of large scale desalination plants to help augment the supply
of drinking water to people.

TRANSPORTATION
Mostly of the trains operated by the Indian railways, including the metro in
Calcutta, are equipped with BHEL’s 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
Technologies that can be offered by BHEL for exploiting non-conventional
and renewable resources of energy include: wind electric generators, solar
power based water pumps, lighting and heating systems. The company
manufactures wind electric generators of unit size up to 250 KW for wind
farms, to meet the growing demand for harnessing wind energy.

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,
castings and forgings. Apart from over 1100MW of boiler capacity
contributed in Malaysia, some of the other major successes achieved by the
company have been in Oman, Saudi Arabia, Libya, Greece, Cyprus, Malta,
Egypt, Bangladesh, Azerbaijan, Sri Lanka, Iraq etc. execution of overseas
projects’ has also provided BHEL the experience of working with world
renowned consulting organizations and inspection agencies.

TECHNOLOGY UP GRADATION AND RESEARCH AND

DEVELOPMENT

To remain competitive and meet customers’ expectations, BHEL lays great

emphasis on the continuous Up gradation of products and related
technologies, and development of new products. The company has
upgraded its products to contemporary levels through continuous in-house

22
efforts as well as through acquisitions of new technologies from leading
engineering organizations of the world.

The corporate R&D Division at Hyderabad leads BHEL’s research efforts in

a number of areas of importance to BHEL’s product range. Research and
product development centers at each of the manufacturing divisions play a
complementary role.

Reinforcing its position as a total solution provider BHEL has developed

and successfully commissioned a maintenance controller at the western
mountain power project, Libya. Based on power package , software jointly
development by BHEL and TCS , this is the system for complete power
plant application and takes care of all the maintenance needs of a power
station.

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.

Nuclear Power Plants

23
  Steam generator & Turbine generator up to 700 MW capacity.

Gas-Based Power Plants

 Gas turbines of up to 280 MW (ISO) advance class rating.

 Gas turbine-based co-generation and combined-cycle systems of
industry and utility applications.

THERE ARE OTHER PRODUCTS GIVEN AS FOLLOWS

 Hydro Power Plants

 DG Power Plants

 Industrial Sets

 Boiler

 Boiler Auxiliaries

 Piping System

 Heat Exchangers and Pressure Vessels

 Pumps

 Power Station Control Equipment

 Switchgear

 Bus Ducts

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 Mr.B Prasada Rao

Mr.Saurabh Chandra

Mr. Rajiv Bansal

Mr. Ashok kumar basu

Mr. M A Pathan

Smt. Reva Nayyar

DIRECTORS Mr. S. Ravi

DIRECTOR (Finance) Mr. C. S. Verma

DIRECTOR (E, R & D) Mr. C. P. Singh

DIRECTOR (HR)

Mr. Anil Sachdev

26
COMPANY SECRETARY Mr. I.P Singh

BHEL ….YEAR AT A GLANCE

PARTICULARS 2009 - 10 2008 - 09 Change (%)

Order outstanding 117000 23.33

144300
Order received 59037 59678 -1.07

Turnover 34154 28033 21.83

Value added 13171 9894 33.12

Employees(nos) 46274 45666 1.33

Profit before tax 6591 4849 35.92

Profit after tax 4311 3138 37.38

Dividend 1141 832 37.14

Corporate dividend 191 142 36.17

tax
Retained earnings 2979 2164 37.62

27
Total 46960 39581 18.64

assets Net 15917 12939 23.02

worth 128 149 -14.09

Total borrowings 0.01 0.01

Debt equity
325.16 264.32 23.02
PER SHARE (IN 88.06 64.11 37.36

Econom Val 2670 2008 32.97

ic

28
29
30
31
32
33
BALANCE SHEET

As at March 31, 2010

34
PROFIT & LOSS ACCOUNT

For the year ended 31st March, 2010

35
 RECENT PERFORMANCE ACHIEVEMENTS

13-Jun- BHEL achieves major landmark with deployment of Space Grade

2011 Solar Panels on GSAT-8 Satellite of ISRO
36
2-Jun- BHEL secures major turnkey contract for Grid-Connected Eco-
2011 friendly Solar Power Plant from KPCL

27-May- BHEL develops India's first Ultra High Voltage AC 1200 kV

2011 Transformer through in-house Research and Development efforts

23-May- BHEL accelerates growth momentum in 2010-11; Achieves 27

2011 per cent jump in top line, bottom-line surges 39 per cent;
Cumulative order book at Rs.1,640,000 Million

23-May- Audited financial results for the year / quarter ended 31.03.2011
2011

19-May- BHEL achieves major milestone with the successful manufacture

2011 and testing of India's first large capacity new series Turbo
Generator

5-May- Mr. B. Prasada Rao, CMD, BHEL, welcoming the new Secretary,
2011 Heavy Industry, Mr. S. Sundareshan
4-May- BHEL bags Intellectual Property Award 2011
2011

3-May- BHEL receives Essar Steel Infrastructure Excellence Award 2011

2011

18-Apr- Sh. Praful Patel, dedicates BHEL's state-of-the-art Electrical

37
2011 Machines manufacturing facility to the Nation

11-Apr- BHEL presented SCOPE Meritorious Award for Research and

2011 Development, Technology Development and Innovation by
the President of India

2-Apr- BHEL signs MoU with Ministry of Heavy Industries and Public
2011 Enterprises

30-Mar- BHEL wins Rs.54,500 Million Mega Contract for 3x660 MW

2011 Supercritical Power Project from the Bajaj Group

23-Mar- BHEL wins order for World's first 800 kV 6,000 MW Ultra High
2011 Voltage Multi Terminal DC Transmission link

1-Mar- BHEL continues winning streak; Secures Rs.3,220 Crore Mega

2011 Contract for installing two 500 MW thermal units in West Bengal

14-Feb-
2011 BHEL achieves another breakthrough in the Middle East region;
Bags single largest export order for a Gas Turbine-based power
plant from Yemen

38
7-Feb- BHEL joins hands with Abengoa to develop Concentrated Solar
2011 Power projects in India

22-Nov- BHEL joins hands with GE for Water Treatment Systems

2010

12-Nov-
2010 Mr. B.P. Rao, CMD, BHEL, receiving the Golden Peacock Award
for Excellence in Corporate Governance 2010 from Justice P.N.
Bhagwati

39
29-Oct- BHEL maintains growth momentum; Achieves 33.2 per cent
2010 jump in bottomline in the second quarter of 2010-11; Cumulative
orderbook at record Rs.1,540,000 Million
29-Oct- Mr. B.P. Rao, CMD, BHEL administers the pledge of
2010 maintaining integrity during the Vigilance Awareness Week in
BHEL
20-Oct- BHEL secures major turnkey contract for setting up Grid-
2010 Interactive Solar Power Plants in Lakshadweep

7-Oct-
2010 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

15-Sep- 2010
2010

13-Sep-
40
BHE
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win
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mum
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Prim
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Minis
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Shra
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Awar
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BHE
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41
13-Sep- BHEL wins India Pride Growth Leader of the Year Award
2010

23-Aug- CMD, BHEL honoured with Distinguished Fellow Award - 2010

2010

9-Aug- BHEL signs Rs.25,250 Million Contract with Abhijeet Infra

2010 Limited for setting up a 1,080 MW Thermal Power Plant in
Jharkhand
30-Jul- BHEL synchronizes second 490 MW Unit at Dadri Thermal
2010 Power Plant having higher Steam parameters ensuring Reduced
coal consumption and better performance w.r.t. Environment

42
9-Jul- BHEL wins ICWAI National Awards for Excellence in Cost
2010 Management for the fifth consecutive year; maximum number of
awards conferred on BHEL among public and private sector
companies

28-Jun- BHEL-built power generating sets record All-Time High

2010 generation in 2009-10; Contribute 80 per cent of the country's
coal based power generation

7-Jun- BHEL achieves major milestone in the Middle East with the
2010 commissioning of Two Gas Turbine-based Power Plants in UAE
and Oman
2-Jun- BHEL augments Transformer manufacturing capacity by setting
2010 up a new Core and Tank Shop at its Jhansi plant

19-May- BHELs Industry Sector Business Segment registers 40 percent

2010 growth, Witnesses order inflow

10-May- IPPs repose confidence in BHEL, Cumulative order book at an

2010 All Time High

29- Apr- Engineering Excellence: BHEL registers significant increase in

2010 Intellectual Capital, files one patent a day

43
EXPANSION OF MANUFACTURING CAPACITY

44
BHEL has embarked upon a plan of enhancing its manufacturing capacity
and capability for preparing itself to meet the country’s power demand, for
providing “Power to all by 2012” and to contribute fully for meeting the
power forecast of the 11th Plan and beyond. Towards this end, BHEL has
been augmenting its capacity and capability and has already enhanced its
power generating equipment manufacturing from 6000 MW in 1999-2000
to 10,000 MW per annum w.e.f. 1st January,2010. This manufacturing
enhanced to 15,000 MW per annum by end of March, 2010. This will
further go up to 20,000 MW per annum by March, 2012. A new
transformer manufacturing facility at Bhopal Unit to produce an additional
12,000 MVA of transformers per annum was dedicated to the nation by
Hon’ble Union Minister HI&PE on 17.11.2010. With this, transformer
manufacturing capacity of Bhopal Unit stands enhanced to 30,000 MVA
per annum.
FINANCIALS (Comparison)

INCOME STATEMENT

Mar 31,
Period Ending Mar 31, Mar 31, Mar 31, 2007
2010 2009 2008
Total Revenue 331,992,000 265,477,000 194,013,000 173,371,000
Cost of Revenue 205,400,000 171,850,000 115,195,000 104,668,000
Gross Profit 126,592,000 93,628,000 78,818,000 68,703,000
Operating Expenses
Research Development - - - -
Selling General and - - - -
Administrative
Non Recurring - - - -
Others - - - -

Total Operating Expenses 276,075,000 226,606,000 158,783,000 139,380,000

45
Operating Income or Loss 55,917,000 38,871,000 35,230,000 33,991,000

Income from Continuing Operations

Total Other Income/Expenses - - -
Net -
Earnings Before Interest And
55,917,000 38,871,000 35,230,000 33,991,000
Taxes
Interest Expense (367,000) (352,000) (354,000) (433,000)
Income Before Tax - - - -
Income Tax Expense 22,940,000 17,228,000 15,711,000 13,214,000
Minority Interest - - - -

Net Income From Continuing 31,152,000 28,593,000 24,147,000

43,269,000
Ops

Non-recurring Events
Discontinued Operations - - - -
Extraordinary Items - - - -
Effect Of Accounting Changes - - - -
Other Items - - - -

Net Income 43,269,000 31,152,000 28,593,000 24,147,000

Preferred Stock And Other - - -
Adjustments -

Net Income Applicable To Common - - -

Shares -

BALANCE SHEET OF BHEL

All numbers in thousands

46
Period Ending Mar 31, 2010 Mar 31, 2009 Mar 31, 2008 Mar 31, 2007
Assets
Current Assets
Cash And Cash Equivalents 98,564,000 103,295,000 83,860,000 58,089,000
Short Term Investments - - - -
Net Receivables 212,263,000 164,577,000 124,044,000 97,972,000
Inventory 92,838,000 78,920,000 57,364,000 42,177,000
Other Current Assets 26,562,000 23,060,000 13,793,000 11,562,000
Total Current Assets 430,228,000 369,852,000 279,062,000 209,800,000
Long Term Investments 59,000 59,000 83,000 83,000
Property Plant and Equipment - - - -
Goodwill 1,859,000 1,859,000 - -
Intangible Assets - - - -
Accumulated Amortization - - - -
Other Assets - - - -
Deferred Long Term Asset Charges 15,286,000 18,410,000 13,379,000 9,352,000
Total Assets 487,004,000 416,539,000 308,917,000 232,147,000
Liabilities
Current Liabilities
Accounts Payable 76,099,000 58,981,000 44,240,000 34,570,000
Short/Current Long Term
1,483,000 1,666,000 952,000 893,000
Debt
Other Current Liabilities 227,816,000 208,531,000 140,051,000 94,684,000
Total Current Liabilities 327,092,000 286,177,000 200,568,000 143,676,000
Long Term Debt 170,000 144,000 23,000 23,000
Other Liabilities - - - -
Deferred Long Term Liability
Charges 24,000 - - -
Minority Interest - - - -
Negative Goodwill - - - -
Total Liabilities 328,044,000 287,353,000 201,175,000 144,264,000
Stockholders' Equity
Misc Stocks Options Warrants - - - -
Redeemable Preferred Stock - - - -
Preferred Stock - - - -
Common Stock 4,895,000 4,895,000 4,895,000 2,448,000

47
Retained Earnings 154,037,000 124,249,000 102,794,000 85,372,000
Treasury Stock 27,000 41,000 53,000 63,000
Capital Surplus 781,000 1,032,000 584,000 565,000
Other Stockholder Equity - - - -
Total Stockholder Equity - - - -
Net Tangible Assets - - - -

CASH FLOW STATEMENT

48
 All numbers in thousands
Mar 31, Mar 31, Mar 31, Mar 31,
Period Ending 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 - - -
Changes In Accounts Receivables (51,671,000) (46,810,000) (23,860,000) (24,741,000)
Changes In Liabilities - - -
Changes In Inventories (13,918,000) (21,081,000) (15,187,000) (4,733,000)
Changes In Other Operating
Activities - - -

Total Cash Flow From Operating 16,301,000 34,632,000 34,779,000 28,214,000

Activities
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (17,279,000) (13,562,000) (7,030,000) (4,424,000)
Investments - - -
Other Cash flows from Investing - - -
Activities
Total Cash Flows From Investing
(9,418,000) (4,675,000) (125,000) (2,127,000)
Activities
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid - - -
Sale Purchase of Stock - - -
Net Borrowings - - -
Other Cash Flows from Financing 7,775,000 8,569,000 6,851,000 2,234,000
Activities
Total Cash Flows From Financing
(11,614,000) (10,621,000) (8,883,000) (9,338,000)
Activities
Effect Of Exchange Rate Changes - - -
Change In Cash and Cash
(4,730,000) 19,336,000 25,771,000 16,749,000
Equivalents

Currency in INR.

49
SWOT Analysis of BHEL

Strength

Weakness

STRENGTHS

Sound engineering base and ability to assimilate relatively stable industrial relation
Access to contemporary technologies with the support from renowned collaborators.

 Ability to set up power plants on turnkey basis,

 Complete know- how for manufacture of entire equipment is

available with the company.

50
  Ability to manufacture or procure to supply spares. Fully
equipped to take capital maintenance and servicing of the
power plants.

 Largest source of domestic business leading to major presence

and influence in the market.

 Ability to successfully overhaul and renovate power stations

equipment of different international companies.

 Low labor cost.

 For non- BHEL products, services and spares are not easily
available and if they are, price charged are very high.

 Sound financial position in terms of profitability and solvency.

 Low debt equity ratio for all the years under study, enabling
company to raise capital.

WEAKNESSES

 Difficulty in keeping up the commitments on the product

delivery and desired sequence of supplies.

 Larger delivery cycles in comparison with international

suppliers of similar equipment.

 Inability to provide supplier’s credit, soft loans and financing of

power projects.

51
 Lack of effective marketing infrastructure.

 Due to poor financial position of state electricity boards, which

are the major customers of BHEL in India, liquidity position of
BHEL is not satisfactory.

 Being a public sector company BHEL is suffering from sub

optimality of control due to:-

✓ Displacement of social objectives by political objectives,

which may lead to redundant costs and also rising costs.

✓ Direct political intervention in managerial decision over an

arm length relationship that would restrict government’s
task of setting appropriate managerial incentive structure.

✓ Private goals that lead to budget growth and employment

growth.

OPPORTUNITIES

 Demand for power and hence plant equipment is expected to

grow.

 Private sector power plants to offer expanded market as

utilities suffers resource crunch.

 Ageing power plants would give rise to more spares and

services business.

52
 Life expansion program for old power stations.

 Export opportunities.

 Easy processing of joint ventures/ collaboration/import/

acquisition of new technology.

 Financial and operational autonomy for profit making public

sector enterprises. To make the public sector more efficient
government has decided to grant enhanced autonomy and
delegation of powers to the profit making public sector
enterprises.

THREATS

 Increased competition both national and international.

 More concessions to private sector and not to government

owned utilities like NTPC or S.E.Bs, so future power projects
would be opened up in private sector.

53
54
 BHEL : HERP Varanasi

(Heavy Equipment Repair Plant)

Varanasi is endowed with five universities, Lord Buddha’s first

preaching center and many religion / cultural centers, situated near
the holy Ganga, with Lord Kashi Vishwanath Temple at the heart of
it. HERP is located at Shivpur, 11 Kms from main railway station and
15 Kms from Varanasi Airport.
HERP is also situated at the center of the largest power belt of
northern region. This power belt supplies 10650 MW of power to the
country. In the line with BHEL’s of providing constant service at their
doorsteps, the idea of establishing repair shop in the vicinity of power
station was mooted objective.
Accordingly, two repair plants at Bombay & Varanasi came into
existence, the foundation equipment repair plant sprawling in 29.8
acre area at Varanasi was laid on 20th September 1984 by Chief
Minister of U.P. Shri Narayan Dutt Tiwari within a short span of 21
month much before the schedule.
Starting a manufacturer of O&M spares for the boiler and boiler
auxiliaries, repair activities got a real break in 1990 when rebabitting
of TG set bearing was taken up in the plant. Since than rebabitting of
different type of bearing including an unconventional synchronous

55
condenser has been carried out to the entire satisfaction of the
customers. Now HERP manufactures turbine spares, tools & tackles
complete spares of bowl mill XRP 623,803,883 & 1003. The unit has
a plan to add Constant load hanger, Variable load hanger &
condensate polishing unit in near future.
Through small in size, HERP has been in adequate attention to all the
facts of plant operation like computerization, inventory control,
quality assurance. In order to channelize the creative energy of
employees suggestion scheme and quality circle and productivity
improvement project are in operation.
HERP takes pride in being one of the best among BHEL unit in term
of value added per employee. it has a track reward of continuing
harmonious industrial relations. Being a public sector, HERP is
aware of social responsibility as a corporate citizen as quality of like
for the residents of near by area.
Heavy Equipment Repair Plant, Varanasi has highly skilled &
dedicated technicians, engineers & specialist catering the
requirements of various power plants of their mill and turbine O&M
spares. HERP has contributed a lot in refurbishing of various units of
NTPC after taking it over from SEB’s and is a major player in
Government of India PIE program.

Range Of Products/Services Provided By HERP,

VARANASI

 Bowl Mill XRP/XRS 623, 703HP, 783, 803, 803HP, 883, 1003
spares
 Turbine fasteners
 Repair/Rebabbiting of TG bearings
 Rotor machining
 Spares for Boiler Auxiliaries like Coal Burners, Fuel Piping,
ESP, Air Preheater & R.C. Feeder etc.
 Hydro Turbine component machining like Guide Vanes, Guide

56
 Bearings.
 Tools & Tackles of Steam Turbines
 Limiter Assembly, Oil Filter Assembly & Speed Changer
Assembly of Governing System.

Services Offered By HERP,VARANASI

Repair Machining Of --

✓ HP/LP rotor of steam turbine (removal of thermal cracks)

✓ Casing Liners and Diaphragm of steam turbine.
✓ Minor machining of Power plant components at the site.
✓ NDT like Ultrasonic testing of bearings at site
✓ Consultancy for performance improvement of Bowl mills
through modification of mill components.

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.

TOTAL QUALITY FOCUS

HERP has achieved certification of ISO 9001, ISO 14001 & OHSAS
18001 and targeted TQM score during 03-04. Unit level TQ council is

57
committed towards improvement on regular basis in line with the
organizational goals. The other apex level committee like HMC, PQC
& PEC is also having meetings as per schedule for review as per
agenda keeping in view, the interests of our Stakeholders.

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.

58
BALANCE SHEET

As 31-03-11 As 31-03-10

Sources of funds
Shareholders fund
share capital
Funds from Head office 48.82 48.82
Funds TO &From Corp. Off ccc
A/C (cr. Balance) 50.44 130.99
19214.1
Reserves and surplus 26329.84 26429.1 19034.37 8
Loan Funds
Secured Loan
Unsecured loan 51.17 51.17
Deferred tax liability
19265.3
26492.86 5
Application of funds
Fixed assets
Gross block 2620.2 2565.19
Less DEP. /Amortization to date 1583.61 1381.78
1036.59 1183.41
Add/ deduct: lease adjustment
account
less :Impairment loss
Net Block 1036.59 1183.41
Capital work in Progress 481.78 1518.37 9.15
1192.56 1149.19
Investment NIL NIL
Inter division a/c (Dr. 15777.22 1192.56
balance) Current assets ,
Loans And
Advances

59
Current assets
Inventories 5853.93 5828.46
Sundry debtors 12108.57 9800.98
Cash and bank balance 2.7 1.08
Other current assets
Loans and advances 391.33 224.48
18356.53 15855
less:
Current Liabilities And provision
Liabilities 7473.28 7251.99
Provisions 1685.98 1180.85
9159.26 8432.84
Net current assets 9197.27 7422.16
Profit and loss account (Dr. 19265.3
balance ) 26492.86 5

60
 WORKING CAPITAL MANAGEMENT

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment
decisions. A good way to judge a company's cash flow prospects is to look at its working
capital management (WCM).

Defining Working Capital

Working capital refers to the cash a business requires for day-to-day operations, or,
more specifically, for financing the conversion of raw materials into finished goods,
which the company sells for payment. Among the most important items of working
capital are levels of inventory, accounts receivable, and accounts payable. Analysts look
at these items for signs of a company's efficiency and financial strength.
The term working capital refers to the amount of capital which is readily available to an
organization. That is, working capital is the difference between resources in cash or
readily convertible into cash (Current Assets) and organizational commitments for
which cash will soon be required (Current Liabilities).

Thus:

61
 WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of working capital

are reported under the following headings:

Current Assets

 Liquid Assets (cash and bank deposits)

 Inventory

 Debtors and Receivables

Current Liabilities

 Bank Overdraft

 Creditors and Payables

 Other Short Term Liabilities

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.

 Gross Working Capital:- it refers to the firm’s investment in current assets.

62
 Net Working Capital:- it refers to the difference between current assets and
current liabilities.

Net Working Capital Is Positive

When current assets >current liabilities

Net Working Capital Is Negative

When current asset<current liabilities

The Importance of Good Working Capital Management

Working capital management involves the relationship between a firm's short-term

assets and its short-term liabilities. The goal of working capital management is to ensure
that a firm is able to continue its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational expenses. The management
of working capital involves managing inventories, accounts receivable and payable, and
cash.
Working capital constitutes part of the Crown's investment in a department. Associated
with this is an opportunity cost to the Crown. (Money invested in one area may "cost"
opportunities for investment in other areas.) If a department is operating with more
working capital than is necessary, this over-investment represents an unnecessary cost
to the Crown.

From a department's point of view, excess working capital means operating

inefficiencies. In addition, unnecessary working capital increases the amount of the
capital charge which departments are required to meet from 1 July 1991.

There are many aspects of working capital management which make it an

important function of the financial manager

63
  TIME: working capital management requires much of the financial
manager’s time.

 INVESTMENT: working capital represents a large portion of the

total investments in assets.

 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 firm’s growth.

Sources Of Working Capital

1. Sale of non-current assets

a. Sale of long term investments (shares, bonds/debentures etc.)
b. Sale of tangible fixed assets like land, building, plant or equipments.
c. Sale of intangible fixed assets like goodwill, patents or copyrights

2. long term financing

a. Long term borrowings/institutions loans, debentures, bonds etc.
b. issuance of equity and preference shares

3. Short term financing such as bank borrowings.

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

64
cycle of a business. In order to protect their interests, short-term creditors always like a
company to maintain current assets at a higher level than current liabilities. It is a
conventional rule to maintain the level of current assets twice the level of current
liabilities. However, the quality of current assets should be considered in determining
the level of current assets vis-a–vis current liabilities. A weak liquidity position poses a
threat to the solvency of the company and makes it unsafe and unsound. A negative
working capital means a negative liquidity and may prove to be harmful for the
company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement
of current assets. Therefore prompt and timely action should be taken by management
to improve and correct imbalances in the liquidity position of the firm.
Net working capital concept also covers the question of judicious mix of long-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.

Balanced working capital position

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

The dangers of excessive working capital are as follows

65
1. It results in unnecessary accumulation of inventories. Thus chances of inventory
mishandling, waste, theft and losses increase.
2. Is an indication of defective credit policy and slack collection period. Consequently,
higher incidence of bad debts results, which adversely affects profits.

3. Excessive working capital makes management complacent which degenerates into

managerial inefficiency.

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

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

Inadequate working capital is also bad and has the following

dangers

1. It stagnates growth. It becomes difficult for the firm to undertake profitable

projects for non-availability of working capital funds.
2. It becomes difficult to implement operating plans and achieve the firm’s profit
target.
3. Operating inefficiencies creep in when it becomes difficult even to meet day to
day commitments.
4. Fixed are not efficiently utilized for the lack over working capital funds. Thus the
firm’s profitability would deteriorate.
5. Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc,
6. The firm loses its reputation when it is not in a position to honor its short term
obligations. as a result the firm faces tight credit terms.
An enlightened management 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.

66
A firm’s net working capital position is not only important as an index of liquidity but it
is also used as a measure of the firm’s risk. 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.

DETERMINANTS OF WORKING CAPITAL

There are not set rules or formulae to determine the working capital requirements of
firms. A large number of factors, each having a different importance, influence working
capital needs of firms. The importance of factors also changes for a firm over time.
Therefore, an analysis of relevant factors should be made in order to determine total
investment in working capital. The following is the description of factors which
generally influence the working capital requirements of firms.

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

67
firms and public utilities. Such concerns have to make adequate investment in current
assets depending upon the total assets structure and other variables.

MARKET AND DEMAND CONDITIONS

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 firm’s 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.

68
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. A firm may thus follow a policy of level
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.

TECHNOLOGY AND MANUFACTURING POLICY

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 technology has been
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

69
 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.

AVAILABILITY OF CREDIT FROM SUPPLIERS

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 firm’s 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
70
at minimum costs. The efficiency in controlling operating costs and utilizing fixed and

71
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.

PRICE LEVEL CHANGES

The increasing shift in price level make functions of financial manager difficult.

He should anticipate the effect of price level changes on working capital requirement of
the firm. Generally rising price levels will require a firm to maintain a higher amount of
working capital. Same levels of current assets will need increased investment when
prices are increasing. However, companies that can immediately revise their product
prices with rising price levels will not face a severe working capital problem. Further,
Firms will feel effects of increasing general price level differently as prices of individual
Products move differently. Thus, it is possible that some companies may not be affected
by rising prices while others may be badly hit.

WORKING CAPITAL CYCLE

Cash flows in a cycle into, around and out of a business. It is the business's life blood
and every manager's primary task is to help keep it flowing and to use the cash flow to
generate profits. If a business is operating profitably, then it should, in theory, generate
cash surpluses. If it doesn't generate surpluses, the business will eventually run out of
cash and expire. The faster a business expands, the more cash it will need for working
capital and investment. The cheapest and best sources of cash exist as working capital
right within business. Good management of working capital will generate cash will help
improve profits and reduce risks. Bear in mind that the cost of providing credit to
customers and holding stocks can represent a substantial proportion of a firm's total

72
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

73
 If You ....... Then ......

You release cash from

Collect receivables (debtors) faster
the cycle

Your receivables soak

Collect receivables (debtors) slower
up cash

You increase your cash

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

You free up cash

Shift inventory (stocks) faster

You consume more

Move inventory (stocks) slower
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

ISSUES IN WORKING CAPITAL

Working capital management involves arranging short term financing negotiating

favorable credit terms, controlling the movement of cash administreing inventory, thus
Working capital management has following three components:

 Management Of Cash

74
  Management Of Sundry Debtors
 Management Of Inventory

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.

OBJECTIVE OF CASH MANAGEMENT

1) To meet day to day business requirements.

2) To provide for schedule major payment i.e. Capital expenditure.
3) To face unexpected cash drain.
4) To maintain image of credit worthiness.
5) To size potential opportunities for profitable long term investments.
6) To meet requirement of bank relationships. Efficient cash management function calls
for cash planning, evaluation of cash benefits and cost of policies, sound procedures and
practices and synchronization of cash inflows and outflows. Thus for achieving goals
and objectives of cash management, finance manager has to plan cash needs of the firm
followed by cash flow management, determination of optimum level of cash and finally
investment of surplus.

75
FACTORS AFFECTING CASH REQUIREMENT

(A) Internal Factors

(a) Profit level
(b) Dividend and Taxation policy
(c) Reserve and surplus
(d) Depreciation policy
(e) Expansion programme
(f) Operating efficiency
(B) External Factors
(a) Fluctuating in marketing interest rates
(b) Investment avenues available in market
(c) Government economic policies
(d) Rules and regulations of RBI and other regulatory bodies

CASH MANAGEMENT IN B.H.E.L.

In B.H.E.L., the centralized cash credit system is followed. From 24-07-75 all the
banking transactions of the company have been centralized at corporate office, New
Delhi. Under this system all the sales proceeds of the units are deposited in a centralized
account. This account number is universal for all the units of ROD’s. They have to
deposit the sales process if this account withdraws money from it. Only the corporate
office operates it. For meeting day to day expenses, the units have to prepare the
estimates of such expenses, which are then sent to corporate office weekly or monthly,
or both. At unit level, the cash budget is prepared on yearly basis for estimating the
expected cash inflows and outflows. The yearly budget is broken down into monthly and
weekly intervals. The inflows and outflows and estimated on following basis.

76
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.

77
ADVANTAGES OF CENTRALIZED SYSTEM
1) Excess cash at various units can be effectively used for various purposes and
improvements.
2)Deficit of cash at various units can be sorted out through centralized cash system.
3) Idle cash at various units, may be noted or avoided.

CASH BUDGET IN B.H.E.L.

Cash budget is the most significance device to plan for and control receipt and payment.
A cash budget is a summary statement of the firms expected cash inflows and outflows
over a projected time period. In B.H.E.L., cash management is centralized and is
controlled directly from corporate office, whatever requirement of fund is felt in BHEL,
Varanasi it is sent to the corporate office and corporate office disburse the funds
accordingly. Cash budget in BHEL, Varanasi is prepared on the basis of production
schedule, which is prepared after receiving customer’s orders at the beginning of the
year. There are two aspects of cash budget inflow and outflow. In flow of cash budget is
determined on the basis of receiving the customer’s orders and preparing production
schedule. Outflow is determined on the basis of requirement of raw materials, payment
of taxes and duties, interest on borrowings etc. Outflow in cash budget is categorized
into operation and non-operation outflow consist of capital expenditure, exchange
variations and supplier’s credit. Thus after determining the budgeted estimates of inflow
and outflows, cash budget is prepared at the beginning of the year. The distribution of
cash is determined on monthly basis in every month of that year. In the last quarter of
the year cash budget is received and the last estimates are calculated and fixed.
Monitoring of cash budget is done though management information system.

78
 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 firm’s fund. The interval between the date of sale and date of payment has to be
financed out of working capital. Thus trader’s 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.

COST OF MAINTAINING RECEIVABLE

The cost associated with the maintenance of account receivables are:

1) Capital Cost
When a firm maintains receivables, there is a time lag between the sales of good and
payments by the customers. Mean while, the firm has to pay to the employees and to the
suppliers of raw materials. These payments are made by the use of traditional capital
which alternatively could be
profitably employed elsewhere.
2) Collection Cost
These are costs, which the firm has to in for collection of the amounts at the appropriate
time from the customers.
3) Administrative Cost
In the process of maintaining receivable company incurs some administrative expenses
in the form of salaries to clerks who maintain records of debtors, expenses on
investigating the credit worthiness of debtors etc.

79
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.
OBJECTIVE OF RECEIVABLE MANAGEMENT

The objective of receivable management is to promote sales and profits until that point
is reached where return on investment in future funding of receivables is less than cost
of funds raised to finance that additional credit.

Credit Policy Credit Policy of a firm can be regarded as a kind of trade-off between
increased credit sales leading to increase in profit and the cost of having large amount of
fund locked up in the form of receivables and loss due to incidence of bad debts. The
variables associated with credit policy are: -

(A) Credit Standard

(B) Credit Terms
(C) Collection Efforts

Credit Standards are criteria to decide the type of customers to whom goods could be
sold on credit.
Credit Terms specify duration of credit and terms of payment by customers.
Collection Efforts determine the actual collection period. The lower the collection
period, the lower is the investment in accounts receivable and vice versa.

RECEIVABLE MANAGEMENT IN BHEL.

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL
grants liberal terms regarding trade credit to lure the potential customers to buy its
product at favorable selling prices. To utilize its excess capacity, BHEL is granting
liberal trade credit terms to its customers. The main customers of BHEL are Railways,

80
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 BHEL’s customers consists of government bodies,
which are very casual in clearance of dues.

81
 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.

NEED TO HOLD INVENTORIES

There are three general motives for holding inventories: -

1. Transaction Motives: - Companies hold inventories to facilitate smooth

production and sales operation. Company should maintain adequate stock of raw
material for a continuous supply to the factory for uninterrupted production and
keeping stock of finished goods as the firm cannot immediately when customers
demand goods.

2. Precautionary Motive: - Firm holds inventories to guard against the risk of

unpredictable change in demand and supply of force and other factors. Firm may also
purchase large quantities of raw material; than needed for desired production and sales
82
level to obtain quantity discount on bulk purchases.

83
3. Speculative Motive: - It influence the decision of the firm to increase or decrease
inventory level to take advantage of price fluctuations.
COST ASSOCIATED WITH INVENTORY HOLDING

There are five costs associated with inventory holding. Of these, three are direct costs
that are immediately connected to buying and holding goods and other two are indirect
costs, which are losses of revenues. These costs of holding inventories are: -

(1) Material cost

(2) Order Cost
(3) Carrying Cost
(4) Cost of fund tied up in inventory
(5) Cost of running out of goods

OBJECTIVES OF INVENTORY MANAGEMENT

1. To maintain a large size of inventory for efficient and smooth production and sales
operation
2. To maintain a minimum investment in inventories to maximize profitability. The
effective management of inventory involves a tradeoff between having too little and
much more inventory.
The firm should always avoid a situation of over investment or under investment in
inventories.

THE MAJOR DISADVANTAGES OF OVER INVESTMENT ARE

(i) Unnecessary tide up of firm’s funds and losses of profit.

(ii) Excessive carrying cost.
(iii) Risk of liquidity.

84
(iv) Physical deterioration of inventory during storage. Maintaining an inadequate level
is also dangerous.

THE CONSEQUENCES OF THE UNDER INVESTMENT

(i) Production hold ups.

(ii) Failure to meet delivery commitment.

Thus the aim of inventory management should be to avoid excessive and inadequate
level of inventories and to maintain sufficient inventory for the smooth production and
sales operations. Efforts should be made to place an order at the right time with right
source to acquire the right quantity ant the right price and quality.

FACTORS AFFECTING LEVEL OF INVESTMENT IN

INVENTORIES

(1) Seasonal nature of raw material.

(2) Length and technical nature of production process.
(3) Style factor in end product.
(4) Terms of purchase.
(5) Time factor.
(6) Supply condition.
(7) Loan facilities.
(8) Other factors.

INVENTORY MANAGEMENT IN BHEL

The investment in inventory in production to total is a dominant determinant of

working capital management. It holds much important in context of BHEL as it is
having a long production cycle where a good amount of capital is tied up in form of raw
85
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.

86
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.

METHODS USED FOR INVENTORY CONTROL

In BHEL, planning and control of inventory is done by using two methods —

(i)ABC analysis
(ii) Slow moving and non-moving goods analysis.
(iii) Budgeting material requirements
(iv) Fixation of raw material levels
(v) Variety reduction
(vi) Codification of materials
(vii) Control of work in progress

(i) ABC Analysis

In case of manufacturing company like BHEL, the number of items of raw material runs
into thousands. From the point of view of monitoring information for control, it
becomes extremely difficult to consider each one of these items. In this case ABC
analysis becomes useful and enables management to concentrate attention and keeps a
close watch on a relatively less number of items, which account for a high percentage of
annual usage value of all items of inventory.

Annual usage value = Annual requirement per unit

In this analysis, items are categorized into A, B, & C category on the basis of their usage
value. The more costly items are classified as ‘A’. This represents large investments
items but is low in number. In BHEL ‘A’ category items amounts to 60% of investment
in inventory items. Inventory items of average usage are put in B category and these
accounts for 30% of total investment in inventory. Low usage items are pull in C

87
category. It represents 10% of degree of control and accurate planning. B category
requires moderate control. As ‘C’ category represents low usage value, much importance
is to pay on its control. Also the planning and control cost incurred for this category will
be greater than their total cost.
The advantages of this system are —

 Ensures closer control on costly items.

 Helps in developing scientific methods of controlling inventories. Clerical costs are
reduced and stock is maintained at minimum level.
 Helps in achieving the main objective of inventory control at minimum level.

(ii) Slow moving and Non-moving goods analysis

Slow Moving Stock – Material which have low turnover are classified as slow moving
stock. In BHEL an item is regarded as slow moving one, if turnover ratio is less than
10%. Non-Moving Stocks-- These items have no immediate demand but may be
required in future. Here the items, which are not consumed since two years, are
regarded as non-moving stock or dead inventory. This category includes mainly directly
chargeable items. These items having turnover ratio of 10% or more are fast moving
items and such acquire more importance.

DOCUMENTS USED FOR INVENTORY CONTROL

The various documents used for control of inventory in BHEL are:-

(i) Store Receipt Voucher this is issued when raw material purchased reaches the
store. It is issued by store in charge.

(ii) Material Issued Voucher this is an authorization to the storekeeper to issue raw
material. Any material ordered for a specific work order will be recorded on MIV details
of material requisition is entered on the Bin card.

88
(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”.

89
 Wixon, kell & beoford

“Ratio analysis is a study of relationship among the various financial factors in a

business”.

-Jhon.N.Myer

A financial ratio is the relationship between two accounting figure expressed as a

proportion. Ratio provides clues to the financial position of a concern. These are the
pointers or indicators of financial strength, soundness, position or weakness of an
enterprise. Ratio analysis is one of the methods of analyzing financial statements. It is
an attempt to present the information of the financial statements in simplified,
systematized and summarized form. It measures the profitability, efficiency and
financial soundness of the business. Ratio analysis is therefore, a toll to present the
figures of financial statements in simple, concise and intelligible form. There are a
number of ratios, which can be calculated from the information given in the financial
statements, but the analyst has to select the appropriate data and calculate only a few
appropriate ratios from the same, keeping in mind the objectives of analysis.
Calculation of ratios is comparatively simple, routine clerical in nature but
interpretation of ratios is highly sophisticated and intricate phenomenon. The benefit of
ratio analysis depends on a great deal upon the correct interpretation. It needs skill,
intelligence, training, farsightedness and intuition of high order on the part of the
analyst.

FACTOR TO BE KEPT IN MIND WHILE UNDERTAKING RATIO

ANALYSIS

 Quality of financial statements

 Purpose of analysis
 Selection of ratios
 Standard to be applied
 Capability of the analyst

SIGNIFICANCE OF THE RATIO ANALYSIS

90
 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.

91
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.

KEY WORKING CAPITAL RATIOS

The following, easily calculated, ratios are important measures of working capital
utilization.

92
Ratio Formulae Result Interpretation

On average, you turn over the value of your

entire stock every x days. You may need to
Average Stock * break this down into product groups for
Stock
365/ = x effective stock management.
Turnover
(in days) Cost of Goods Obsolete stock, slow moving lines will extend
days
overall stock turnover days. Faster
Sold
production, fewer product lines, just in time
ordering will reduce average days.

It take you on average x days to collect

monies due to you. If your official credit
Receivables
Debtors * 365/ = xterms are 45 day and it takes you 65 days...
Ratio why?
Sales days
(in days) One or more large or slow debts can drag out
the average days. Effective debtor
management will minimize the days.

On average, you pay your suppliers every x

days. If you negotiate better credit terms this
Creditors will increase. If you pay earlier, say, to get a
Payables
= x discount this will decline. If you simply defer
Ratio
* 365/
(in days) Cost of Sales paying your suppliers (without agreement)
days
this will also increase - but your reputation,
(or Purchases)
the quality of service and any flexibility
provided by your suppliers may suffer.

Current
Total Current
Ratio
Assets/
=
Total Current
Current Assets are assets that you can readily
93
t thin
u 12
r mon
n ths

i
n

t
o

c
a
s
h

o
r

w
i
l
l

d
o

s
o

w
i

94
 in the course of business. Current Liabilities are amount you are due t
hands on $1.50 for every $1.00 you owe. Less
times
than 1 time e.g. 0.75 means that you could
haveliquidityproblemsandbeunder pressure to generate sufficient cas
x
oncoming demands.
Liabilities

(TotalCurrent Assets-
Quick Ratio Inventory)/
Similar to the Current Ratio but takes
=x
account of the fact that it may take time to
TotalCurrent times
convert inventory into cash.
Liabilities
(Inventory Receivables Payables)/
Sales +
Working - As% Ahighpercentagemeansthatworking Salescapital needs are high re
Capital Ratio

95
KEY RATIO LEVELS

Particulars Low Risk Medium Risk High 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

Inventory (No. of Days) <60 60-90 >90

Debtors (No. of Days) <45 45-90 >90

Debt.-Equity Ratio <1.25 1.25-1.75 >1.75

DSCR ( For TL) >2.00 1.25-2.00 <1.25

96
 RATIO ANALYSIS OF BHEL

CURRENT RATIO ( Rs in lakhs)

CURRENT ASSET

CURRENT LIABILITY

31-03-2009
CU 31-03-2010
RRENT RATIO

9031
CURRENT ASSET 15855

4476
CURRENT LIABILITY 7252

2.017
RATIO 2.186

QUICK RATIO

( Rs in lakhs)

C.A.-INVENTORY

C.L.

31-03-2009
QUICK RATIO 31-03-2010

97
 4629
C.A.-INVENTORY 10027

4476
CURRENT LIABILITY 7252

1.034
RATIO 1.382

98
 RECOMMENDATIONS AND SUGGESTIONS

There is a great need for effective management of working capital in any firm. There is
no precise way to determine the exact amount of gross or net working capital for any
firm. The data and problems of each company should be analyzed to determine the
working capital. There is no specific rule as to how current assets should be financed. It
is not feasible in practice to finance current assets by short-term sources only. Keeping
in view the constraints of the company, a judicious mix of short and long term finances
should be invested in current assets. Since current assets involve cost of funds they
should be put to productive use.

During my project period, I have studied the working capital management in

BHEL (HERP), Varanasi. On the basis of my study I am putting forward some
suggestions. Implementation of which may certainly improve the efficiency of working
capital management in the unit.

➢ 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.

99
 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.

10
0
 BIBLIOGRAPHY

Books of these kinds naturally proved to be very helpful by

dealing with subject matter that is presented here.

REFERENCE BOOKS

 Financial Management Pandey I.M

 Financial Management Chandra Prasanna

 Financial Management Rustagi R.P

 Annual Reports of BHEL

 General Articles of BHEL (HERP), Varanasi

WEBSITE
 www.bhel.com
 www.indianinfoline.com

NEWSPAPERS
 Economic Times of India
 The Hindu

Which provided a very clear concept to study & understand.

101