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A PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT OF
BHARAT HEAVY ELECTRICALS LIMITED
(Submitted in partial fulfillment of the requirement of Master of Business
Administration, Distance Education, Guru Jambheshwar University of science
& technology, Hisar)
Research supervisor: Submitted by:
Prof. Prakash Chhabra Amit Kumar
NIMS Delhi Enrollment No.08061237002
Semester MBA IV(Finance)
SESSION 2008-10
DIRECTORATE OF DISTANCE EDUCATION
GURU JAMBHESHWAR UNIVERSITY OF SCIENCE & TECHNOLOGY,
HISAR
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CERTIFICATE
This is to certify that Mr. Amit Kumar Enrolment No. 08061237002 has proceeded
under my supervision his Research Poject on WORKING CAPITAL
MANAGEMENT AT BHEL in the specialization area Finance.
The work embodied in this report is original and is of the standard expected of an
MBA student and has not been submitted in part or full to this or any other University
for the award of any degree or diploma. He has completed all requirements of
guidelines for research project report and the work is fit for evaluation.
Signature of Supervisor/ Guide (with seal)
Name : P. C. Chhabra
Designation: HOD, Finance
Organization: Netaji Subhash Institute of Management Sciences
Forwarded by Head/Director of Study Centre
(With signature, Name & SEAL)
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ACKNOWLEDGEMENT
At the outset, I owe my success to God Almighty, but for his grace, nothing would
have happened.
It always takes the contribution of lot of people to complete a project. No project can
be completed through individual effort alone. The contributions of some are direct
and evident and of others are indirect and obscured. I express my sincere gratitude
towards all those who have directly and indirectly helped me through out this project.
I am thankful to the BHEL for permitting me for making a project in their
organization.
I am also grateful to Maj.Gen.S S Chahal Director Netaji subash institute of
management sciences and my mentor Prof. P C Chhabra other teacher at the
institute, who helped me, in preparing the project
The learning during the project was immense and invaluable. My work included the
Management of Working Capital in BHEL.
It is with great sense of gratitude that I submitted my project report.
Amit kumar
Enrollment No 08061237002
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DECLARATION
Amit Kumar, Enrollment No. 08061237002 Certify that this project Report
(WORKING CAPITAL MANAGEMENT AT BHEL.) is original work done by
me for the partial fulfillment of the award of Master in Business
Administration(MBA) Degree form Guru Jambheshwar University Of Science
and Technology, Hisar , Haryana,(Session 2008-2010).
This Report or a similar report on the topic has not been submitted by any
University / Institute and does not use part /full for any other Degree/ Diploma.
Amit Kumar
Enrollment No. 08061237002
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RESUME OF SUPERVISOR/GUIDE
NAME: Prakash Chhabra
DESIGNATION: HOD, Finance
QUALIFICATIONS: B.Sc(Hons), MA, CAIIB, DBM, MBA, CFA
AREA OF SPECIALIZATION: Finance
EXPERIENCE: 34 years
OFFICIAL ADDRESS: Netaji Subhash Institude of Management Science
City Tower, Netaji Subash Place, Delhi
TELEPHONE No. 011-47007900
MOBILE: 9811326961
E-mail [email protected]
I am willing to supervise Mr.Amit Kumar
Enrolment number: 08061237002
On the Topic WORKING CAPITAL MANAGEMENT AT BHARAT HEAVY
ELECTRICALS LTD.
(Signature of supervisor with seal)
(Countersigned by Director of study centre )
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CONTENTS
TOPICS PAGE NO:
BHEL AN OVERVIEW 8 - 25
Introduction 9
BHEL ,a corporate giant 11
International business 12
BHEL in India 13
Vision, mission, values 15
Objectives of proposed study. 16
Contribution to various sectors. 19
Collaborations ,competitors and its products 23
BHEL HARIDWAR UNIT, HEEP 28 - 38
Historical profile. 30
Overview of finance functions. 32 SWOT analysis. 37
WORKING CAPITAL MANAGEMENT 39 - 66
Meaning. 40
Classification 41.
Issues in working capital management. 46
Policies for financing. 48 Needs and objectives for working capital. 50
Its importance. 51
Factors determining the WC requirements. 52
Management of WC. 55
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Existing system of WC in HEEP. 57
Liquidity management. 59
WC turnover ratio. 64
Current assets turnover ratio. 65
MANAGEMENT OF DIFFERENT COMPONENTS OF WORKING CAPITAL:
DEBTOR MANAGEMENT 67 - 75
Introduction. 68
Debtor management in HEEP. 70
Analysis of debtors. 71
Steps involved in management of debts 75.
INVENTORY MANAGEMENT 76 - 88
Introduction. 77
Objectives. 78
Inventory analysis. 79
- ABC analysis. 79
- VED analysis. 80
- SDE analysis. 81
- HML analysis. 81
- FSN analysis 81
Functions of inventory control. 82
Record keeping and related procedures. 83
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Inventory management in HEEP. 84
Need of inventory. 87
Strategies/measures. 88
Suggestions. 88
CASH MANAGEMENT 89 - 94
Meaning. 90
Reasons of cash management. 91
Tools of cash control. 93
Analysis of cash management. 94
SUMMARY OF FINDINGS 98
SUGGESTIONS 100
BIBLIOGRAPHY 102
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WORKING CAPITAL MANAGEMENT 10
BHEL Corporation - An Introduction
GOINDWAL
HARIDWAR
RUDRAPUR
JAGDISHPURJHANSI
BHOPAL
HYDERABAD
BANGALOREE
RANIPET
TIRUCHIRAPALLY
NEW
DELHI
Employees - 43636 (As on 1-4-08) Turnover - Rs 33000 Crores (2008-
09)
14 Manufacturing divisions
4 Power Sector regional centers
8 service centres and 16 regional
offices
Major Units/Divisions are Certifiedwith ISO 9001(2000), ISO 14001and OHSAS 18001
Continuous Profits since 1971-72
Caters to Core Sectors viz., Power,Industry, Transportation,Telecommunication, RenewableEnergy etc.
Manufactures over 180 productsunder 30 major product groups
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Figure 1
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BARODA
NAGPUR
PATNA
CALCUTTA
AAAA
VARANASI
CORPORATE OFFICE
MANUFACTURING
LOCATIONS
SERVICE CENTRES
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B. H. E. L. A CORPORATE GIANT
Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED (BHEL)is a name which is recognized across the industrial world. It is one of the largest
engineering and manufacturing enterprises in INDIA and is one of the leading
international companies in the power field. BHEL offers a wide spectrum of products
and services for core sectors like power transmission, industrial transportation, oil and
gas, telecommunicationetc. Besides supply of non-conventional energy systems. It has
also embarked into other areas including defense and civil aviation. A dynamic 63000
strong team embodies the BHEL philosophy excellence through continuous striving for
state of the art technology. With corporate headquarters in NEW DELHI, fourteen
manufacturing units, a wide spread regional services network and projects sites all over
India and even abroad, BHEL is India's industrial ambassador to the world with export
presence in more than 50 countries.
B.H.E.L.'s range of services extent from project feasibility studies to after sales services,
successfully meeting diverse needs through turn key capability.
BHEL has had a consistent track record of growth, performance and profitability. The
World Bank in its report on the Indian Public Sectors, has described BHEL as one of
the most efficient enterprises in the industrial sector, at par with international standards
of efficiency". BHEL has acquired ISO 9000 certificate for most of its operations and has
taken up Total Quality Management (TQM).
All the major units/divisions ofBHEL have been upgraded to the latest ISO-9001: 2000
version quality standard certification for quality management. All the major
units/divisions ofBHEL have been awarded ISO-14001 certification for environmental
management systems and OHSAS-18001 certification for occupational health and
safety management systems.
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BHEL occupies an all-important niche as evident by its ranking by CII amongst top eight
PSUs based on financial performance. Recently in survey conducted by business India,
BHEL has been rated as seventh Best Employer in India.
International Business:
BHEL has, over the years, established its references in 60 countries of the world. These
references encompass almost the entire range of BHEL products and services,
covering turnkey power projects in thermal, hydro and gas-based sectors, substation
projects, rehabilitation projects, besides a wide variety of products like: Transformers,
compressors, Valves, Oil field equipment, electrostatic Precipitators, Insulators, heat
Exchangers, Switchgears, Castings and Forgings etc. Some of the major successesachieved by BHEL have been in Gas-based power projects in Oman, Libya, Malaysia,
Saudi Arabia, Iraq, Bangladesh, Sri Lanka, China, Kazakhstan; Thermal Power Projects
in Cyprus, Malta, Libya, Egypt, Indonesia, Thailand, Malaysia; Hydro power plants in
New Zealand, Malaysia, Azerbaijan, Bhutan, Nepal, Taiwan and Substation projects &
equipment in various countries. Execution of these overseas projects has also provided
BHEL the experience of working with world renowned Consulting Organizations and
Inspection Agencies. The Company has been successful in meeting demanding
requirements International markets, in terms of complexity of the works as well as
technological, quality and other requirements viz., financing package, associated O&M
services to name a few. BHEL has proved its capability to undertake projects on fast-
track basis. BHEL has also established its versatility to successfully meet the other
varying needs of various sectors, be it captive power, utility power generation or for the
oil flexibility to exhibited adaptability by manufacturing and supplying intermediate
products.
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B.H.E.L. IN INDIA
REGIONAL OFFICES (POWER SECTORS)
1. NEW DELHI (NORTHERN REGION)
2. KOLKATA (EASTERN REGION)
3. NAGPUR (WESTERN REGION)
4. CHENNAI (SOUTHERN REGION)
BUSSINESS OFFICES
1. BANGLORE
2. BARODA
3. BHUBANESHWAR
4. MUMBAI
5. KOLKATA
6. CHANDIGARH
7. GUWAHATI
8. JABALPUR
9. JAIPUR
10.LUCKNOW
11.CHENNAI
12.NEW DELHI
13.PATNA
14.RANCHI
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SERVICE CENTRES
1. NOIDA
2. BARODA
3. KOLKATA
4. CHANDIGARH
5. SECUNDRABAD
6. NEW DELHI
7. NAGPUR
8. PATNA
9. VARANASI
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15.SECUNDRABAD
MANUFACTURING UNIT
1. HEAVY ELECTRICAL EQUIPMENT PLANT, HARIDWAR
2. CENTRAL FOUNDRY FORGE PLANT, HARIDWAR
3. HEAVY POWER EQUIPMENT PLANT, HYDERABAD
4. HIGH PRESSURE BOILER PLANT, TRICHY
5. HEAVY ELECTRICALS PLANT, BHOPAL
6. TRANSFORMER PLANT, JHANSI
7. ELECTRONICS DIVISION, BANGALORE
8. BOILER AUXILIARIES PLANT, RANIPET
9. INDUSTRIAL VALVES PLANT, GOINDWAL
10.ELECTRO-PORCELAINS DIVISION, BANGALORE
11.INSULATOR PLANT, JAGDISHPUR
12.COMPONENT FABRICATION PLANT, RUDRAPUR
13.HEAVY EQUIPMENT REPAIR PLANT, VARANASI
14.ELECTRICAL MACHINE REPAIR PLANT, MUMBAI
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OBJECTIVES OF THE PROPOSED STUDY
The objective of the study is to provide the solutions for reducing down the duration of
the operating cycle, to analyze the working capital position of the company and the
liquidity position, finding out the problems that the company is facing in managing the
working capital and showing trend of particular ratios in future and at same suggesting
them to solve their problems.
To study the Working Capital Concept.
To see how the day to day operations of the company takes place.
To study the Working Capital Management process in Bharat Heavy ElectricalsLimited.
To see whether the company is prepared with enough Working Capital to faceany kind of contingencies.
To compare the performance of Working Capital for a particular year withprevious years.
To assess Liquidity position, Long term solvency, operational efficiency andoverall profitability of BHEL.
Providing suggestions to solve the problems of the company.
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COMPANY'S BUSINESS MISSION AND OBJECTIVES
BUSINESS MISSION
To maintain a leading position as suppliers of quality equipment, systems and
services in the field of conversion of energy, for application in the areas of
electric power transportation, oil and gas exploration and industries. Utilize
company's capabilities and resources to expand business into allied areas and
other priority sectors of the economy like defense, telecommunications and
electronics.
BUSINESS OBJECTIVES
GROWTH:
To ensure a steady growth by enhancing the competitive edge of BHEL
defense, telecommunication and electronics in existing business, new areas
and international operations so as to fulfill national expectations from BHEL.
PROFITABILITY:
Toprovide a reasonable and adequate return on capital employed, primarily
through improvements in operational efficiency, capacity utilization,
productivity and generate adequate internal resources to finance the
company's growth.
CUSTOMER FOCUS:
To build a high degree of customer confidence by providing increased value
for his money through international standards of product quality, performance
and superior services.
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PEOPLE- ORIENTATION:
To enable each employee to achieve his potential, improve his capabilities,
perceive his role and responsibilities and participate and contribute positively
to the growth and success of the company and to invest in human resources
continuously and be alive to their needs.
TECHNOLOGY:
Achieve technological excellence in operations by development of indigenous
technologies and efficient absorption and adaptations of imported
technologies to suit business need and priorities and provide the competitive
advantage to the company.
IMAGE:
To fulfill the expectations which stakeholders like government as owner,
employees, customers and the country at large have from BHEL.
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CONTRIBUTION OF BHEL IN VARIOUS CORE
SECTORS
BUSINESS SECTORS:
BHEL's operations are organized around three business sectors, mainly power,
industry and international operations. This enables BHEL to have a strong
customers orientation, to be sensitive to his needs and respond quickly to the
changes in the market.
POWER SECTORS:
Power is the core sector of BHEL and comprises of thermal, nuclear gas, diesel and
hydro business. Today BHEL supplied sets, accounts for nearly 66 % of the total
installed capacity in the country as against nil till 1969-70. BHEL manufactures
boilers auxiliaries, TG sets and associate controls, piping and station C & I up to 500
MW rating with technology and capability to go up to 1000 MW range.
BHEL has contracted so far around 240 thermal sets of various ratings, which
includes 14 power plants set up on turnkey basis. Nearly 85 % of World Bank
tenders for thermal sets floated in India have been won by the company against
international competition.
It has the capability to manufacture gas turbines up to 200 MW rating and custom
built combined cycle power plants. Nuclear steams generators, turbine generators,
sets and related equipment of 235 MW rating have been supplied to most of the
nuclear power plants in India Production of 500 MW nuclear sets, for which orders
have been received.
BHEL has developed expertise in renovation and maintenance of power plant
equipment besides specialized know how of residual life assessment, health
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diagnostic and life extensions of plants. The four power sectors regional centers at
New Delhi, Chennai, Kolkata and Nagpur will play a major role in giving a thrust to
this business and focus BHEL's efforts in this area.
INDUSTRY SECTORS:-
BHEL is a major producer of large size thruster devices. The products include
centrifugal compressors, high speed industrial drive turbines, industrial boilers and
auxiliaries, waste heat recovery boilers, gas turbines, electric motors, drives, and
control equipments, high voltage transformers, switch gears and heavy castings and
forgings.
TRANSMISSION:-A wide range of transmission products and systems are produced by BHEL to meet
the needs of power transmission and distribution sector. These include:
Dry Type Transformers
SF6 Switch Gears
400 KW Transmission Equipment
High Voltage Direct Current System
Series and Shunt Compensation Systems
In anticipation of the need for improved substations, a 33 KV gas insulated sub-
station with micro processors base control and protection system has been done.
TRANSPORTATION:-
65 % of trains in Indian Railways are equipped with BHEL's traction and traction
control equipment. These include:
Broad Gauge 3900 HP AC / DC locomotives
Diesel Shunting Locomotives up to 2600 HP
5000 HP AC Loco with thyristor control
Battery Powered Road Vehicles and Locomotives
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RESEARCH AND DEVELOPMENT:-
BHEL has a corporate R & D center supported by R & D groups at each of the
manufacturing divisions. The dedicated effort of BHEL's R & D engineers haveproduced several new products like automated storage retrieval system automated
guide vehicles for material transportation etc. Establishment of Asia's largest fuel
evaluation test facility at Tiruchy was high light of the year. This facility will enable
evaluation of combustion, heat transfer and pollution parameters in boilers.
Major R & D achievement include:
Design manufacture and supply of countries first 17.2 MW industrial steam
turbines.
Development of 4700 HP AC / DC loco for Indian Railways.
Development of largest capacitor voltage transformers of 8800 PF 400 KV rating.
Development and application low cost ROBOTS for job loading/unloading.
According to ex- CMD MR. R.K.D. SHAH, "BHEL is spending Rs. 60 Crores on
Research and Development. Earning from product which has beencommercialized
hasgone up 26 % to Rs. 760 Crores."
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HUMAN RESOURCE DEVELOPMENT INSTITUTE:-
BHEL has envisioned becoming "A World Class Engineering Enterprise committedto enhancing stakeholder value". Force behind realization of this vision and the
source of our competitive advantage is the energy and ideas of our 44,000 strong
highly skilled and motivated people. The Human Resource Development Institute
situated in NOIDA, a corner-stone of BHEL learning infrastructure, along with
Advanced Technical Education Center (ATEC) in Hyderabad and the Human
Resource Development Center at the manufacturing Units, through various
organizational developmental efforts ensure that the prime resource of the
organization the Human Capital is Always in a state of Readiness, to meet the
dynamic challenges posed by a fast changing environment. It is their constant
endeavour to take the HRD activities to the strategic level of becoming active
partner to the (organizational) pursuits of achieving the organizational goals.
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TECHNICAL COLLABORATIONS, DIVISIONS,COMPETITORS AND VARIOUS PRODUCT OF BHEL
TECHNICAL COLLABORATION
PRODUCT COLLABORATIONS
# Thermal Sets, Hydro Sets, Motors & PROMMASHEXPORT
Control Gears. RUSSIA
# Bypass & Pressure Reducing Systems SULZER BROTHER LTD.
SWITZERLAND
# Electronic Automation System for SIEMENS AG.
Steam Turbine & Generators GERMANY
# Francis Type Hydro Turbines GENERAL ELECTRIC
CANADA
# Moisture Separator Reheaters BALOKE DUERR
GERMANY
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# Christmas Trees & Conventional Well NATIONAL OIL WELL
Head Assemblies USA
# Steam Turbines, Generators and Axial SIEMENS AG.
Condensers GERMANY
# Cam Shaft Controllers and Tractions SIEMENS AG.
Current Control Units GERMANY
# HDVC ABB
SWEDEN
# Programmable Controls ABB
SWITZERLAND
# Gas Turbines GENERAL ELECTRIC CO.
USA
# Tube Mills STIEN INDUSTRIES
FRANCE
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DIVISIONS OF BHEL:
There are 20 Divisions of BHEL, they are as follows:
HEEP, Haridwar
HPEP, Hyderabad
HPBP, Tiruchy
SSTP & MHD, Tiruchy
CFFP, Haridwar
BHEL, Jhansi
BHEL, Bhopal
EPD, Bangalore
SG, Bangalore
ED, Bangalore
BAP, Ranipet
IP, Jagdishpur
IOD, New Delhi
COTT, Hyderabad
IS, New Delhi
CFP, Rudrapur
HERP, Varanasi
Regional Operations Division ARP, New Delhi
TPG, Bhopal
Power Group (Four Regions and PEM)
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MAJOR COMPETITORS OF BHEL
Ansaldo Italy
Asea Brown Boueri Switzerland
Beehtel USA
Block & Neatch USA
CNMI & EC China
Costain U.K.
Elect rim Poland
Energostio Russia
Electro Consult Italy
Franco Tosi France
Fuji Japan
GEC Alsthom U.K.
General Electric USA
Hitachi Japan
LMZ Russia
Mitsubishi Japan
Mitsui Japan
NEI U.K.
Raytheon USA
Rolls Royce Germany
Shanghai Electric Co. China
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PRODUCTS OF BHEL
1. Thermal power plants
2. Nuclear power plants
3. Gas Based power plants
4. Hydro power plants
5. Dg power plants
6. Industrial sets
7. Boilers
8. Boiler Auxiliaries
9. Piping System
10. Heat exchangers and pressure
Vessels
11. Pumps
12. Power station Control
equipment
13. Switchgear
14. Bus Ducts
15. Transformers
WORKING CAPITAL MANAGEMENT
16. Industrial and special ceramics
17. Capacitors
18. Energy Meters
19. Electrical Machines
20. Compressors
21. Control Gear
22. Silicon Rectifiers
23. Thyristor GTO/ IGBT equipments
24. Power Devices
25. Transportation equipments
26. Oil Field equipments
27. Castings and Forgings
28. Steams Steel Tubes
29. Distributed power Generation and Small
Hydro Plant
30. Systems and Services
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The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of the
major manufacturing plants of BHEL. The core business of HEEP includes design
and manufacture of large steam and gas turbines, turbo generators, hydro turbines
and generators, hydro turbines and generators, large AC/DC motors and so on.
Heavy Electrical Equipment Plant, Haridwar of this Multi-unit corporation with 7467
strong highly skilled technicians, engineers, specialists and professional experts is
the symbol of Indo Soviet and Indo German Collaboration. It is one of the four major
manufacturing units of the BHEL. With turnover of 164059 lacks and PBT of
Rs.32489 lacks HEEP added 3000 MW of power to the National grid during 2005-
06.
HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW,
Hydro Sets up to HT Runner dia 6300mm, associated Apparatus Control gears, AC
& DC Electrical machines and large size Gas Turbine of 60-200 MW. HEEP
Haridwar contributes about 44% of Indias total installed capacity for power
generation with total capacity of Thermal, Nuclear & Hydro Sets of over 45000MW
currently working at a Plant Load Factor of 76% and Operational Availability of 86%.
In spite of acute recession in economy, BHEL Haridwar received recent orders for
Mejia-5&6, Sipat, Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, Dholpur.
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HISTORICAL PROFILE:
The construction of heavy electrical equipment Plant commenced in Oct.1963after
indo- soviet technical co-operation agreement in Sept.1959The first product to roll
out from the plant was an electric motor in January 1967.This was followed by first
100 MW Steam Turbine in Dec.1969 and first 100MW Turbo Generator in August
1971.The plants break even was achieved in March 1974.BHEL went in for
technical collaboration with M/s Siemens, Germany to undertake design and
manufacture to large size thermal sets upto a unit rating of 1000 MW in the year
1976.First 200 MWTG set was commissioned at Obra in 1977.The continuum of
technological advancement subsequently saw the commissioning of 500 MW TG
Set in 1984 .The technical cooperation of Gas Turbine manufacture was also signed
with M/s Siemens Germany. First 150 MW ISO rating gas Turbine was exported to
Germany in Feb1995.Our 250 MW thermal set up at Dahanu Plant of BSES made
a history by continuous operation for over 150 days and notching up a record plant
load factor greater than 100%.
CORPORATE CITIZEN:
HEEP Hardwars Strategic plans and its policy & strategy are commensurate with
BHEL Corporate / strategic Plan . As first PSU to adopt Corporate Planning as a
process . Board meetings for long range development , BHEL has always guided
other PSUs in their Corporate planning process .Board meeting , monthly
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Management Committee meetings, Annual Revenue Budget exercise , Mid term
reviews , Apex TQ council reviews, Personnel Heads Meet, Quality Heads Meet ,
Technology Meets , Product committees meetings, Inter-Unit Quality Circle Meets
etc. Are the some of crore strengths of BHEL Corporations vast network.
.
FAVOURABLE BUSINESS ENVIRONMENT:
Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus, the
demand for thermal sets will remain high. Central Electricity Authority (CEA) is the
guiding authority for Power Sector strategies in our country. BHEL representatives,
along with representatives from various domestic customers, are an integral part of
various committees formed by CEA. This enables us to guide and understand the
market requirements and future challenges. To meet the 11th Five Year Plan target
of adding 61,000MW, CEA has planned addition of 23 nos. Standardized 500MW
sets for faster project execution and cost reduction. BHEL, including HEEP, is a part
of this process. CEA has standardized for the next capacity of 800MW sets and has
asked BHEL to prepare itself for manufacturing and supply in the 11th Five Year
Plan. BHEL has tied up with Siemens for upgradation of technology. Further CEAs
stress on R&M of ageing Power Plants is also providing business opportunity to unit.
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OVERVIEW OF FINANCE FUNCTIONS
ROLE OF FINANCE FUNCTION
Finance function is the backbone of any organization. The finance function plays a
very critical role in the maximization of shareholders who provide the funds to the
company. This objective is being achieved by the finance department, which
provides the carious information on the financial parameters such as cash flows,
profitability, cost and margin, assets, working capital and shareholder value for the
purpose of efficient utilization of resources resulting in better profitability of the
company. The importance of the finance functions cannot be undetermined in any
organization as many companies have perished not due to bad production
management but due to poor financial management function acts like radar of the
ship, which guides the direction of the ship and saves it from the perils of the sea.
The various activities undertaken by the finance department achieve the aforesaid
objectives, may be summarized as follows-
Maintenance of account books, cost records.
Preparation of salary bills and other related payment to employees: PP, bonus,
TA, departmental advances of PF accounts etc.
Preparation of Profit & Loss a/c and Balance Sheet.
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Generation of various mirs for management use: mires relating to turnover,
profitability, cash requirements, inventory.
Coordination with company auditors, Govt. Auditors, cost auditors and tax
auditors. Decisions relating to purchase and sales.
Investment decisions: capital investment decisions and working capital
management decisions.
Financing decisions: decisions relating to financing-mix or capital structure or
leverage and Dividend policy decisions.
COST SECTION
Cost- section of the company is divided into following two sections viz,
PRODUCT COST & CENTRAL COST and these deals with the following
functions: -
(i) Determination of periodic profits including inventory valuation.
(ii) Determination of pricing policy of the company.
(iii) Work related to capital expenditures of the company.
(iv) Developing variance Management Information report for different parts of
management for purpose of cost control and reduction.
(v) Valuation of work in progress and finished goods.
(vi) Interaction with management of top management link for achieving cost
control and cost reduction and thereby improving bottom line of the company.
(vii) Preparation of cost sheet of different product and their analysis for future
planning.
BOOKS AND BUDGET SECTION
This section deals mainly with the following:-
(i) Preparation of operating budget for the company as a whole.
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(ii) Co-ordination with various functions of organization with regard to generation
and submission of important MIR's to corporate office.
(iii) Preparation of annual accounts of the company.
(iv) Coordination with company auditors with regard to company accounts.
(v) Maintenance and accounting of fixed assets accounts.
(vi) Preparation of long term profit plans based on broad objectives of the
company.
SALES SECTION
Sales accounts section will deal mainly with the following items:-
(i) Scrutiny and vetting of estimates / quotation for sale of products / services,
wherever financial concurrence is required.
(ii) Scrutiny and vetting of agreements for sales of products and services
(iii) Invoicing for sale / advance or progressive payment / erection income and
other.
(iv) Maintenance of subsidiary records like sales journals / sales daybook, sundry
debtors ledgers, advances from customer ledger etc.
(v) Payments, recovery and accounting of sales tax, excise duty.
(vi) Accounting of claims on carriers/ insurance companies for missing items /
damages on outward consignments.
(vii) Scrutiny, payments and accounting of bills of carriers and insurers and other
miscellaneous claims relating to the outwards consignments.
(viii) Calculation and scrutiny of data for payments of royalties to the collaborators.
(ix) Review and reconciliation as well as follow up of recovery of outstanding dues
from the customers in coordination with the commercial department.
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STORES SECTION
For the convenience of performance of various functions it is divided in to
further three sections which are as follows: -
a) Stores bills.
b) Stores review.
c) Foreign payment.
They deal mainly with the following items of works:
(i) Payment of suppliers bills including bills for advances - indigenous and
foreign.
(ii) Pricing of stores receipt vouchers including fixed assets vouchers and fixed
assets receipt vouchers.
(iii) Maintenance of accounts of advances to suppliers, claims recoverable, claims
for short suppliers, rejections and rectifications of materials and sundrycreditors.
(iv) Opening of letter of credit and arranging payments to foreign suppliers under
foreign credit / differed payment agreements.
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(v) Payment of bills for ocean freight, port trust dues, custom duty, local agents
commission and clearing agents bills, transit insurance bills, bills of
contractors for transport /handling etc. And accounting of such payments is
made at regional offices.
(vi) Maintenance of accounts of material issued on loan and materials issued to
subcontractors.
(vii) Keeping account of earnest money and security deposits received from
tender and suppliers.
(viii) Adjustment of stores in transit to be made at the close of the year.
PAYROLL SECTION
This section deals mainly with the following functions:
(i) Preparation of monthly wage bills.
(ii) All account work related to personal payments and discloses profit and loss
account of the company.
(iii) Dealing with income tax authority with regard to personal taxation of
employee.
(iv) Dealing with other statutory authority such as P.F. Commissioner, ESI
(employee state insurance).
(v) To ensure correct payment of salary and wages and other benefits to
employees in, telephone and miscellaneous payments
WORKS SECTION
Works section of the company is dealing with the following functions:
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(i) Payments of contractors bills including bills for advance.
(ii) Maintenance of accounts of contractors with regard to security deposits,
earnest money, progressive payments.
(iii) Maintenance of accounts of materials issued on loans to contractors.
(iv) All accounting work related to capital expenditure in progress on erection of
plant & machinery and building.
(v) All other miscellaneous work relating to hiring of various facilities.
STRENGTH (S):
Low cost producer of quality equipment due to cheap labour and fully
depreciated plants.
Flexible manufacturing set up.
Entry barrier due to high replacement cost of its manufacturing facilities.
WEAKNESSES (W):
High working capital requirement due to its exposure to cash starved SEBs
(State electricity boards) and High WIP.
Inability to provide project financing.
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OPPORTUNITIES (O):
High-expected growth in power sectors (7000 MW/p.a.needs to be added)
High growth forecast in Indias index of industrial production would increase
demand for industrial equipment such as motors and compressors.
THREATS (T): -
Technical suppliers are becoming competitors with the opening up of the Indian
economy.
Fall in global power equipment prices can affect profitability
RESEARCH METHODOLOGY
After discussion with my locality member. I choose the project of Working capital
management. I discussed the project with my instructor and coordinator
Mrs.SANTOSH ANAND (Sr.A/0) at H.E.E.P., BHEL, Hardwar.
She approved the project. After that, a simple course of action has been followed
for working on this project. Entire information and data were gathered from the
respective annual report of BHEL, Haridwar. All the figures are taken from their
balance sheet, profit & loss account of the respective years and the other internal
documents, which were personally shown by the members of company in our
interest.
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MEANING OF WORKING CAPITAL
Working Capital is commonly defined as the difference between current assets and
current liabilities. Efficient working capital management requires that firms should
operate with some amount of working capital, the exact amount varying from firm to
firm and depending, among other things on the nature of industry.
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Capital required for a business can be classified in two main categories viz.
1) Fixed capital, and
2) Working capital.
Every business needs funds for two purposes-for establishments and to carry out its
day-to-day operations. Long-term funds are required to create production facilities.
Through purchase of fixed assets such as plants and machinery, land, building,
furniture, etc. Investments in these assets represent that part of firms capital which
is blocked on permanent or fixed basis and is called fixed capital. Funds are also
needed for short-term purpose for the purchase of raw material, payment of wages
and other day-to-day expenses, etc. These funds are known working Capital. In
simple words, working capital refers to that part of the firms capital, which is
required for financing short-term or current assets such as cash, marketable
securities, debtors and inventories. Funds thus invested in current assets keep
revolving fast and are being constantly converted into cash and this cash flows out
again in exchange for other current assets. Hence, it is also known as revolving or
circulating capital or short-term capital.
CLASSIFICATION OF WORKING CAPITAL
Working Capital may be classified on two basis: -
a) On the basis of Concept: -
On the basis of concept, working capital can be classified as,
Gross Working Capital
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Net Working Capital
b) On the basis of Time: -
On the basis of time, working capital can be classified as,
Permanent or Fixed Working Capital
Temporary or Variable Working Capital
Gross Working Capital:
The Gross Working Capital is the Capital invested in the total current assets of the
enterprises. Current assets are those assets, which can be converted into cash
within a short period, normally an accounting year.
Net Working Capital:
The term Net Working Capital refers to the excess of current assets over current
liabilities, or say,
Net Working Capital can be positive or negative. When the current assets exceed
the current liabilities the working capital is positive and the negative working capitalresults when the current liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to be paid in the ordinary course of
business within a short period of normally one accounting year out of the current
assets of the income of the business. The gross working capital concept is financial
WORKING CAPITAL MANAGEMENT
Gross Working Capital = Total Current Assets
Net Working Capital = Current Assets Current Liabilities
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or going concern concept whereas net working capital is an accounting concept of
working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital
for the following reasons: -
It enables the enterprise to provide correct amount of working capital at correct
time.
Every management is more interested in total current assets with which it has to
operate then the sources from where it is made available.
It takes into consideration of the fact every increase in the funds of the enterprise
would increase its working capital.
The concept is also useful in determining the rate of return on investments in
working capital.
The net working capital concept, however, is also important for the following
reasons:-
It is a qualitative concept, which indicates the firms ability to meet its operating
expenses the short-term liabilities.
It indicates the margin of protection available to short term creditors.
It is an indicator of financial soundness of enterprise.
It suggests the need of financing a part of working capital requirement out of the
permanent sources of funds.
Permanent or Fixed Working Capital:
Permanent or fixed capital is the minimum amount, which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of current assets is called
permanent or fixed working capital as this part of working capital is permanently
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blocked in current assets. As the business, grow the requirement of working capital
also increases due to increase in current assets.
Temporary or Variable Working Capital:
Temporary or variable working capital is the amount of working capital, which is
required to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise is
called the seasonal working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive
marketing campaign for conducting research etc.
Temporary working capital differs from permanent working capital in the sense that it
is required for short periods and cannot be permanently employed gainfully in
business
Calculate current assets to fixed asset ratio:
A firm needs current and fixed assets to support a particular level of output.
However, to support the same level of output the firm can have different levels of
current assets. As the firms output and sales increases, the need for current asset
increases. Generally the current assets do not increase in direct proportion to
output; current assets may increase at a decreasing rate with input. This relationship
is based upon the notion that it takes a greater proportional investment in current
assets when only a few units of output are produced than it does later on when
the firm can use its current assets more efficiently.
The level of the current assets can be measured by relating current assets to fixed
assets.
There are three policies:-
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1) Conservative current assets policy:
CA/FA is higher. It implies greater liquidity and lower risk.
2) Aggressive current assets policy:
CA/FA is lower. It implies higher risk and poor liquidity.
3) Moderate current assets policy:
CA/FA ratio falls in the middle of conservative and aggressive policies.
Figure 2 Alternative current asset policies
In case of BHEL HEEP Haridwar theratio of current asset to fixed asset is
CURRENT ASSETS / FIXED ASSETS RATIO
PARTICULARS 2003-04 2004-05 2005-06 2006-07 2007-08
Current Assets 100671 112836 139668 167961 200112
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Fixed Assets 14082 16565 13896 16858 15948
CA/FA 7.15:1 6.81:1 10.05:1 9.96:1 12.5:1
Table 1 : showing ratio of current assets to fixed assets
ISSUES IN WORKING CAPITAL MANAGEMENT
1. Liquidity vs. Profitability: Risk Return Trade Off.
The firm would make just enough investment in current assets if it were possible to
estimate working capital needs exactly. Under perfect certainty, current assets
holdings would be at the minimum level. A larger investment in current assets under
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certainty would mean a low rate of return of investment for the firm, as excess
investment in current assets will not earn enough return. A small invest in current
assets, on the other hand, would mean interrupted production and sales, because of
frequent stock-cuts and inability to pay to creditors in time due to restrictive policy.
As it is not possible to estimate working capital needs accurately, the firm must
decide about levels of current assets to be carried.
2. The Cost Trade Off:
A different way of looking into the risk return trade off is in terms of the cost of
maintaining a particular level of current assets. There are two types of cost
involved:-
I. Cost of liquidity
II. Cost of illiquidity
--If the firms level of current assets is very high, it has excessive liquidity. Its
return on assets will be low, as funds tied up in idle cash and stocks earn
nothing and high level of debtors reduces profitability. Thus, the cost of
liquidity increases with the level of current assets.
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--the cost of illiquidity is the cost of holding insufficient current assets. The firm
will not be in a position to honor its obligations if it carries to little cash. This
may force the firm to borrow at high rates of interests. This will also adversely
affect the credit-worthiness of the firm and it will face difficulties in obtaining
funds in the future. All this may force the firm into insolvency. Similarly, the
low levels of stock will result in loss of sales and customers may shift to
competitors. Also, low level of debtors may be due to right credit policy, which
would impair sales further. Thus the low level of current assets involves cost
that increase as this level falls.
POLICIES FOR FINANCING CURRENT ASSETS
The following policies for financing current assets in HEEP, Haridwar:-
LONG TERM FINANCING:
WORKING CAPITAL MANAGEMENT
Figure 3: Cost Trade-off
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The sources of long term financing include ordinary shares capital, preference share
capital debentures, long term borrowings from financial institutions and reserves and
surplus. The HEEP Haridwar manages its long term financing from capital reserve,
share premium A/C, foreign project reserve, bonds redemption reserve and general
reserve.
SHORT TERM FINANCING:
The short term financing is obtained for a period less than one year. It is arranged in
advance from banks and other suppliers of short-term finance include working
capital funds from banks, public deposits, commercial paper, factoring of receivables
etc.
The HEEP, Haridwar manages SECURED LOANS as:-
1) Loans and advances from banks
2) Other loans and advances:
A) Debentures/bonds
B) Loans from State Govt.
C) Loans from financial institutions (secured by pledge of PSU
Bonds and bills accepted guaranteed by banks)
3) Interest accrued and due on loans
a) From State Govt.
b) From financial institutions bonds and other
The HEEP, Haridwar manages UNSECURED LOANS as: -
1) Public deposits
2) Short term loans and advances:
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a) From banks
b) Commercial papers
c) From companies
d) From financial institutions
3) Other loans and advances
a) From banks
b) From others
-from govt. of India
-from state govt.
-from financial institutions
-from foreign financial institution
-post shipment credit exim bank
-credit for assets taken on lease
4) Interest accrued and due on
-Post shipment credit
-Govt. credit
-State Govt. loans
-Credits for assets taken on lease
-Financial institutions and others
-Foreign financial institutions
-Public deposits
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SPONTANEOUS FINANCING:-
Spontaneous financing refers to the automatic sources of short term funds arising in
the normal course of a business. Trade Credit and outstanding expenses are
examples of spontaneous financing.
A firm is expected to utilize these sources of finances to the fullest extent. The real
choice of financing current assets, once the spontaneous sources of financing have
been fully utilized, is between the long term and short term sources of finances.
Needs and Objectives for Working Capital
Every business needs some amount of working capital. The needs for working
capital, arises due to time gap between production and realization of cash from
sales. There is an operating cycle involved in sales and realization of cash. There
are time gaps in purchase of raw material and production, production and sales,
and realization of cash.
Thus, working capital is needed for the following purposes: -
For the purchase of raw material, component and spares.
To pay wages and salaries.
To incur day- to- day expenses and overhead costs such as fuel, power and
office expenses etc.
To meet the selling costs such as packing, advertising etc.
To provide credit facilities to the customers.
To maintain the inventories of raw material, work in progress, store, spares, and
finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as new concern, as a growing and one,
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which has attained maturity. A new concern requires a lot of funds to meets its initial
requirement such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for working capital
depends upon the size of the company and the ambition of its promoters. Greater
the size of the business unit, generally will be the requirement of the working capital.
The requirement of the working capital goes on increasing with the growth and
expansion of the business until its gains maturity. At maturity, the amount of working
capital required is called normal working capital.
IMPORTANCE OF WORKING CAPITAL
1. Time devoted to working capital management:-
The largest portion of financial managers time is devoted to day to day internal
operation the firm. This may be appropriately sum up under the heading "WORKING
CAPITAL MANAGEMENT".
2. Investment in current assets:
Current assets represent more than half of the total assets of a business firm.
Because they represent largest investment and because this investment tends to
relatively volatile, current assets are worthy for the financial manager's careful
attention.
3. Importance for small firm:-
Current assets are similarly important for the financial manager's of small firm.
Further small firm are relatively limited access to the long term markets, it must
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necessarily rely on the trade credit and short term bank loan , both of net effect on
net working capital by increased current liabilities.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT
NATURE OF BUSINESS:
PRODUCTION POLICY:
LENGTH OF PRODUCTION CYCLE:
CREDIT POLICY:
WORKING CAPITAL CYCLE:
The speed with which the working cycle completes one cycle determines the
requirements of working capital. Longer the cycle larger is the requirement of
working capital.
Figure 4: Working Capital Cycle
WORKING CAPITAL MANAGEMENT
DEBTORS
CASH FINISHED
GOODS
RAW
MATERIAL
WORK IN
PROGRESS
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Each component of working capital (namely inventory, receivables and payables)
has two dimensions ... TIME ......... and MONEY. When it comes to managing
working capital - TIME IS MONEY. If you can get money to move faster around the
cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of
money tied up (e.g. reduce inventory levels relative to sales), the business will
generate more cash or it will need to borrow less money to fund working capital. As
a consequence, you could reduce the cost of bank interest or you'll have additional
free money available to support additional sales growth or investment.
WORKING CAPITAL MANAGEMENT
Figure 5 : Working Capital Cycle
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RATE OF GROWTH AND EXPANSION OF BUSINESS:
BUSINESS FLUCTUATION:
EARNING CAPACITY AND DIVIDEND POLICY:
PRICE LEVEL CHANGES:
AVAILABILITY OF RAW MATERIAL:
OTHER FACTOR:
a) Operating efficiency b) Management ability
c) Irregularities of supply d) Import policy
e) Asset structure f) Importance of labor
g) Seasonal Variations
WORKING CAPITAL MANAGEMENT
If you ... Then ...
Collect receivables
(debtors) faster
You release cash
from the cycle
Collect receivables
(debtors) slower
Your receivables
soak up cash
Get better credit (in
terms of duration or
amount) from suppliers
You increase your
cash resources
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MANAGEMENT OF WORKING CAPITAL
Management of working capital means management of all aspects of current assets
and current liabilities. Basically, Working capital management is
concerned with the problems that arise in attempting to manage the
current assets, current liabilities and the inter relationship that exist
between them.
Financial management should determine the quantum and structure of current
assets. It should also see that current assets are financed from the proper sources.
Management should also see that current liabilities are paid in time, while managing
the working capital.
The main objective of working capital management is to manage current assets and
current liabilities in a manner so that working capital can be kept in a satisfactory
level. It is also taken in to account that the working capital should be neither
excessive nor inadequate. The amount of current assets should be adequate to pay
the current liabilities in time and adequate security margin can be maintained.
Accordingly, proper balance among the different constituents of current assets is
maintained so that no current has more than require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the business
significantly. Management should, therefore, maintain proper balance among these
factors while managing working capital. If the quantum of working capital is more, it
will increase liquidity, but decrease profitability and risk. If working capital relatively
declines, it will decrease liquidity but cause an increase in profitability and risk. If
business wants to earn more profit, it will have to bear higher risk. Risk means
inability of the firm to pay current liabilities in time.
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Working capital management is three dimensional in nature: -
1) It concerned with the formulation. It of policies with regard to profitability, liquidity
and risk.
2) It is concerned with the decisions about the composition and level of current
assets.
3) It is concerned with the decisions about the composition and level of current
liabilities.
Policies regarding to Profitability,
Liquidity and Risk
Composition of Composition of
level of level of
Current assets current liabilities
Figure 6: Dimensions of Working Capital
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EXISTING SYSTEM OF WORKING CAPITAL IN BHEL, HEEP,
HARIDWAR
To maintain the optimum level of working capital in such a big organization is really
a challenging task. The three basic components that determine the level of working
capital in any organization are: -
Cash
Debtors ,B/R
Inventory.
On the basis of our research in the BHEL Hardwar, these basic componentsare managed in the organisation, in the under mentioned manner.
Particulars 2003-04 2004-05 2005-06 2006-07 2007-08
Current Assets
Cash and Bank Balance 10 9 9 111 5
Sundry Debtors 55866 48552 64709 91067 123091
Inventory 39214 58976 69798 67627 65365
Loans and Advances 5581 5299 5152 9156 11651
TOTAL 100671 112836 139668 167961 200112
Current Liabilities
Sundry Creditors 13953 16205 16674 21570 33545
Advances from customer 45214 55048 61889 94345 128554
Other Liabilities 8457 9250 12370 14307 23956
Provisions 14572 18887 19990 19834 23348
TOTAL 82196 99390 110923 150056 209403
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Net working capital 18475 13446 28745 17905 -9291
Turnover 97432 140697 164059 210494 235096
Table 2: Working Capital in HEEP (In RS/ LACS)
Graphical presentation of current assets of the company
Current Assets
Years/Particulars 03-04 04-05 05-06 06-07 07-08
Debtors 55866 48552 64709 91067
12309
1
Inventory 39214 58976 69798 67627 65365
Cash 10 9 9 111 5
Loan &
Advances 5581 5299 5152 9156 11651
Total 100671
11283
6
13966
8
16796
1
20011
2
Table 3: Current Assets of HEEP Haridwar
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Graphical presentation of current assets
Figure 7 : current assets position in past five years
Focusing on liquidity management
Net working capital is a qualitative concept. It indicates the liquidity position of the
firm and suggests the extent to which working capital needs may be financed by
permanent sources of funds. Current assets should be sufficiently in excess of
current liabilities to constitute a margin or buffer for maturing obligations within the
ordinary operating cycle of a business. In order to protect their interests, short-term
creditors always like a company to maintain current assets at a higher level than
current liabilities. It is a conventional rule to maintain the level of current assets twice
the level of current liabilities. However, the quality of current assets should be
considered in determining the level of current assets Vis-a Vis current liabilities. A
weak liquidity position poses a threat to the solvency of the company and makes it
unsafe and unsound. Anegative working capital means a negative liquidity and
may prove to be harmful for the companys reputation.
WORKING CAPITAL MANAGEMENT
0
20000
40000
60000
80000
100000
120000
140000
D
In
C
Lo
ad
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Excessive liquidity is also bad. It may be due to mismanagement of current assets.
Therefore prompt and timely action should be taken by management to improve and
correct imbalances in the liquidity position of the firm.
Net working capital concept also covers the question of judicious mix of long-term
and short-term funds for financing current assets. For every firm there is a minimum
amount of net working capital, which is permanent. Therefore a portion of the
working capital should be financed with the permanent sources of funds such as
equity, share capital, debentures, long-term debt, preference share capital or
retained earnings. Management must decide the extent to which current assets
should be financed with equity capital or borrowed capital.
Balanced working capital position
The firm should maintain a sound working capital position. it should have adequate
working capital to run its business operations. both excessive and inadequate
working capital positions are dangerous from the firms point of view. Excessive
working capital means holding costs and idle funds which earn no profits for the firm.
paucity of working capital not only impairs the firms profitability but also results in
production interruptions and inefficiencies and sales disruptions.
The dangers of excessive working capital are as follows:
1. It results in unnecessary accumulation of inventories. Thus chances of inventory
mishandling, waste, theft and losses increase.
2. It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts results, which adversely affects profits.
3. Excessive working capital makes management complacent which degenerates
into managerial inefficiency.
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4. Tendencies of accumulating inventories tend to make speculative profits grow.
This may tend to make dividend policy liberal and difficult to cope with in future when
the firm is unable to make speculative profits.
Inadequate working capital is also bad and has the following dangers which
BHEL might face if inadequate working capital continuous for longer period of time:
1. It stagnates growth. It becomes difficult for the firm to undertake profitable
projects for non-availability of working capital funds.
2. It becomes difficult to implement operating plans and achieve the firms profit
target.
3. Operating inefficiencies creep in when it becomes difficult even to meet day to
day commitments.
4. Fixed are not efficiently utilized for the lack of working capital funds. Thus the
firms profitability would deteriorate.
5. paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc,
6. The firm loses its reputation when it is not in a position to honor its short term
obligations. As a result the firm faces tight credit terms.
Management of BHEL, HEEP should, therefore, maintain the right amount of
working capital on the continuous basis. Only then a proper functioning of business
operations will be ensured. Sound financial and statistical techniques, supported by
judgement, should be used to predict the quantum of working capital needed at
different time periods.
A firms net working capital position is not only important as an index of liquidity but it
is also used as a measure of the firms risk. Risk in this regard means chances of
the firm being unable to meet its obligations on due date. The lender considers a
positive networking as a measure of safety. All other things being equal, the more
the networking capital a firm has, the less likely that it will default in meeting its
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current financial obligations. Lenders such as commercial banks insist that the firm
should maintain a minimum net working capital position.
Graphical Representaion Of Working Capital In BHEL
Interpretation
In the above chart, it is clearly visible that the net working capital has
decreased drastically in the past five years as it was in negative in 2007-08 i.e.
-9291 as compare to other years. It has come down to 13446 Lacs in 2004-05 from
18475 Lacs in 2003-04.But in 2005-06 it has increased which is good for the
company because its turnover has also increased. Moreover if we see 2007-08 year
there is a huge turn around in WC, as cash balance has decreased drastically in
comparison to previous year and on the other hand creditors have also increased
.The main reason for working capital to be in negative is the untimely payment from
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL
18475
13446
28745
17905
-9291
Figure 8: Graphical Representation of Working Capital in BHEL HEEP Haridwar
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debtors. And more over, there is a direct relation between working capital
requirements with Debtors and Inventory.
There has given reasons to the organization to take certain strategic measures to
manage its Debtors and Inventory.
Following are the measures:
Special task forces were built up from debtors and Inventory
Management at senior level.
Regular follow up at senior level.
A close contact with the customers.
Proper age- wise analysis of the debtors.
Proper classification between collectible Debtors and bad debts.
Bad debts written off as early as possible after making all efforts for its
collection.
Product cycle minimized so that cost of the product does not become
high to the agreed amount because of time factor.
Formation of specific group in each area to identify the wastage
elements and seek participation of all.
Formulation of action plan to eliminate/minimize wastages.
Identification of corrective actions and their implementation.
.
Working Capital Turnover Ratio
This ratio helps to measure the efficiency of the utilization of the working capital. It
signifies that for an amount of sales, a relative amount of working capital is needed.
This ratio shows the direct relationship between the sales and working capital.
WORKING CAPITAL MANAGEMENT
W.C. Turnover Ratio = Sales/ Working Capital
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YEARSCALCULAT IONRAT I
2003-04 97432/ 18475 5.27
2004-05 140697/ 13446 10.42005-06 164059/ 28745 5.7
2006-07 200864/ 17905 11.2
2007-08 235096/ -9291 -25.3
Table 4: Calculation of Working Capital Turnover Ratio In HEEP Haridwar
Graphical Presentation of Working Capital Turnover Ratio
Figure 9: Working Capital Ratio of HEEP Haridwar
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Current Assets Turnover Ratio
This ratio indicates the efficiency with which current assets turn into sales. A higher
current assets turnover rate or a lower current assets turnover period is better. It
indicates the efficient use of the funds and the reverse case indicates reduced lock-
up of funds in current assets.
WORKING CAPITAL MANAGEMENT
Years Calculations Ratio
2003-2004 97432 / 100671 0.97:1
2004-2005 140697 /112836 1.25:1
2005-2006 164060 /139668 1.18:1
2006-2007 200864/167961 1.19:1
2007-2008 235096/200112 1.17:1
Table 5: Calculation of Current Assets Turnover Ratio
C.A. Turnover Ratio = Sales / Current Assets
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Graphical presentation of current assets turnover ratio
Figure 10: Graphical Presentation of Current Assets Turnover
Ratio
Interpretation
By observing the above ratio we find that current assets turnover rate
increased from 03-04 to 04-05. Then after there was a slight decline in 05-06 and invery next year there was slight increase in it. In 2007-2008 ratios shows a slight
decline but taking into consideration last five years from 03-04 to 07-08 the
company improved its current assets position from 0.97 to 1.17 which shows that
current assets management is improved.
WORKING CAPITAL MANAGEMENT
0
0.2
0.4
0.6
0.8
1
1.21.4
2003-04 2004-05 2005-06 2006-07 2007-08
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INTRODUCTION
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It is very difficult for the organization to sell always on cash basis in todays
competitive market. In almost every business, we have to sell on credit basis. The
basic objective of management of sundry debtor is to optimize the return on
investment on this asset. It is obvious that if there are large amounts tied up in
sundry debtors, working capital requirement would be high and consequently
interest charges will be high. In such cases, the bad debts and cost of collection of
debts would be high. On the other hand if the credit policy is very tight, investment in
sundry debtors is low but the sale may be restricted, since the competitors may offer
more liberal credit term.
We have limited resources and therefore every resource has its own opportunity
cost. Therefore, the management of sundry debtors is an important issue andrequires proper policies and efficient execution of such policies. Debtors and cost of
debtors have direct relation; cost will increase due to increase in debtors and vice
versa. It depends on the credit sale of concern and credit period (collection period)
allowed to customer. It is in interest of customer to pay as late as possible, and
company whom made sales, would like to collect their debtor as early as possible.
There is a conflict between the two aspects. Debtor management is the process of
finding the equilibrium at which company agrees to receive its payment without
hampering or having any adverse effect on its sales and customer agree to pay at
their economical buying concept.
Sundry debtor level depends on two measure issues
One is volume of credit sales and another is credit period allowed to customer.
It is the essence of every business that to sale on credit and allow credit period to
the customer in such a competitive market.
Following factors may be considered before allowing credit period to the
customer
Nature of the product
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Credit worthiness of the customer, which varies from customer to customer.
Quantum of advance received from customers
Credit policy of company, say number of days allowed to customer for payment
to the customers. Cost of debtors
Manufacturing cycle time of the product etc.
Debtors Management
There are mainly three aspects of Management of Debtors
1. Credit Policy:The credit policy is to determine. It involves a tradeoff between the profits on
additional sale that arises due to credit being extended on one hand and the cost of
carrying those debtors and bad debts losses on the other.
2. Credit Analysis
This requires determining as how risky is to advance credit to a particular customer.
3. Control of Receivables
This requires to the firm to follow up debtors and decide about a suitable credit
collection policy. It involves both lying down of credit policy and execution of such
policies.
There is a cost of maintaining receivables, which comprises Cost of: -
The company require additional funds as resources are blocked in
receivables which involves a cost in the form of interest (loan fund) or
opportunity cost (own fund).
Administrative cost which includes record keeping, investigation of credit
worthiness etc.
Collection cost
Defaulting cost or Bad debts
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DEBTORS MANAGEMENT IN HEEP - HARIDWAR
B.H.E.L Haridwar is engaged in the manufacturing business of heavy electrical
equipments, where cycle time of the product is 18- 24 months and most of the
contracts take approximately 3-5 years to complete. Customers of B.H.E.L. Hardwar
are broadly divided into following categories: -
State electricity board
Power Project
Public Sector Under takings
Railways
Government Departments
Private Sectors
Exports
In most of the contracts, payments of B.H.E.L. Hardwar are made in following
stages:
Payment Terms
Advance from customers:-
- At the time of dispatch of goods.
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- At the time of MRC (material receipt at site) Deferred payment after
commissioning of project with certain test
However, the above terms may vary from contract to contract.
Based on the above payment terms, B.H.E.L. Hardwar categories their debtors intotwo parts:
Collectible debtors
Deferred debtors
Collectible debtors are those, which are due for payment as on now and there is
no credit time allowed to the customer say payment at the time of dispatch.
Deferred debtors are those, which will become due on the occurrence of a
particular event such as issuing of MRC (material Receipt Certificate) from customeror completion of contract with certain tests etc.
ANALYSIS OF DEBTORS
Management with the help of certain ratios
DEBTORS TURNOVER RATIO
Debtors turnover ratio establishes a relationship between net credit sales and
average trade debtors. The major objective to calculate ratio is to determine the
efficiency with which the trade debtors are managed. We can easily calculate this
ratio with the help of the following formula:
Debtor Turnover Ratio = Net Credit sales / Average Debtors
YEARS 2003-04 2004-05 2005-06 2006-07 2007-08
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Turnover 97432 140697 164060 200864 235096
Average
Debtors55866 48552 64709 91067 123091
Ratio 1.74 2.89 2.53 2.21 1.9
Table 6: Debtor Turnover Ratio in HEEP Haridwar (In Rs/ lacks)
Graphical presentation of debtor turnover ratio
J
Figure 11: Graphical Presentation of Debtor Turnover Ratio
Interpretation:
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It indicates the speed with which the debtors turnover an average each year. In
general a high ratio indicates the shorter collection period which implies prompt
payments by debtors and a low ratio indicates a long collection period which implies
delayed payment by debtors. So we can see from the graph and the table above
that in the last five years the company debtors turnover ratio has declined. In 2000-
03 it is the least i.e. 1.74 but it improved in 2004-05 i.e. .2.89. From 2005 to 2008 the
debtor turnover ratio has continuously declined. It depicts that how inefficiently
debtors are collected.
AVERAGE COLLECTION PERIOD
YEARS 2003-04 2004-05 2005-06 2006-07 2007-08
Turnover 97432 140697 164060 200864 235096
Average
Debtors55866 48552 64709 91067 123091
Ratio 1.74 2.89 2.53 2.21 1.9
Average
Collection
Period
210 126 144 165 192
Table 7: Calculation of Average Collection Period In HEEP Haridwar
Graphical representation of average collection period
WORKING CAPITAL MANAGEMENT
Average Collection Period = 365 / Debtors Turnover Ratio
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Figure 12: Graphical representation of Average Collection Period
Interpretation:
We can check the managerial efficiency with the help of this ratio by the comparison
of average collection period and credit policy of the company form the table we can
clearly see that in the year 2003-04 is 210 days, but in year 2004-05 there was a
decrease and it falls down to 126 and from the year 2005-06 there is constant
increase in it. As it was 144 days, 165 days, and 192 days in the year 05-06, 06-07,
07-08 respectively. This indicates that the company is following a very liberal policy
in recent years. If the days are increasing it indicates that the bad debts are also
increasing. It is difficult to lay down a standard collection period; it depends upon the
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nature of the business. As a general rule the receivables should not exceed 4 to 5
months of credit sales.
STEPS INVOLVED IN MANAGEMENT OF DEBTS:
The following steps are involved in debtors management
There should a close contact with the customers.
There should be proper age- wise analysis of the debtors.
There should be proper classification between collectible Debtors and bad debts.
Bad debts should be written of as early as possible after making all efforts for its
collection.
Product cycle should be minimized so that cost of the product should not become
high to the agreed amount because of time factor.
There must be a provision of discount for early payment of debts by the
customers.
Regular checking of the records of the debtors is essential so as to analysis the
current position of that organization.
While making a policy, regarding the debtors the point should be considered that
customer having excellent past record, follow the lenient policy is adopted for
doubtful customers
Manage the working capital according to need as recovering the debt from
customer as early as possible while, get extension of payment of dues on the
company of others as suppliers of raw material as late as possible.
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INVENTORY MANAGEMENT
Introduction
Inventories constitute most significant part of current assets, in most of the
companies in India. To maintain a large size of inventory, a considerable amount of
fund is required. It is, therefore, absolutely imperative to manage inventories
efficiently and effectively in order to avoid unnecessary investment. A firm neglecting
the management of inventories will be jeopardizing its long-run profitability and may
fail ultimately. It is possible for a company to reduce its levels of inventories to a
considerable degree, e.g.10% to 20%, without any adverse effect on production and
sales, by using inventory planning and control techniques. The reduction in
excessive inventories carries a favorable impact on a companys profitability.
There are at least three motives for holding inventories:
1. To facilitate smooth production and sales operation (transaction motive).
2. To guards against the risk of unpredictable changes in usage rate and delivery
time (precautionary motive).
3. To make advantage of price fluctuations (speculativemotive).
OBJECTIVE:
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Inventories represent investment of a firms funds. The objective of the inventory
management should be the maximization of the value of the firm. The firm should
therefore consider:
(a) Costs,
(b) Return, and
(c) Risk factors in establishing its inventory policy.
Two types of costs are involved in the inventory maintenance:
1-Ordering costs: - Requisition, placing of order, transportation, and staff services.
Ordering costs are fixed per order size increases.
2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance
and taxes. Carrying cost increases.
The firm should minimize the total cost (ordering cost + carrying cost). The economic
order quantity (EOQ) of inventory will occur at a point where the total cost is
minimum. The following formula can be used to determine EOQ:
EOQ= (2AO/C) 1/2 Where, A = Annual requirement.
O = Per order cost.
C = Per unit carrying cost.
WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH INVENTORY?
The inventory level at which the firm places order to replenish inventory is called
reorder point. It depends on (a) the lead time and (b) the usage rate.
Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero
lead time0, the reorder point will be equal to:
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Lead-time *Usage rate +Safety stock.
The firm should strike a trade-off between the marginal rate of return and marginal
cost of funds to determine the level of safety stock.
INVENTORY ANALYSIS
Altogether the company deals with stock of thousands of items raising a serious
problem of how one can keep control of track of all items also, where it is necessary
to have some extent of control on each and every item. Different types of analysis
each having its own advantages and purpose help in bringing a particular solution to
the control of inventory. The most important of all such analysis is ABC analysis.
The other one -
ABC analysis VED analysis SDT analysis
HML analysis FSN analysis
ABC ANALYSIS
A formal way of classifying inventory items so that important ones will be given the
most attention. Through this analysis the professional inventory manager will
concentrate his efforts on where they will yield the greatest rewards. The ABC of
ABC analysis refers to the classes, A, B and c into which the inventory is divided.
is high value items whose rupee volume typically account for 75-80% of the value oftotal inventory while representing only 10-15% of the inventory items.
Class is lesser value items whose rupee volume accounts for 15-20% of the value of
inventory, while representing 15-20% of the inventory items.
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Class items are low value items whose volume accounts for 10-15% of the inventory
values but 75-80% of the inventory items.
The same degree of control is not justified for all the three classes of items. Class
[A] requires the greatest attention and class [C] items require least attention. Class
[C] items need no special calculations since they represent a low inventory
investment. The order might be placed once a year and periodically reviewed once a
year, class [B] items are paid more attention then, proper CODs are developed and
semi-annual review of variables must be done. Class [A] items needs direct attention
to the inventory items, EOQ's are to be developed each time an order is placed. The
major concern of an AB