EXECUTVE SUMMARY

Working capital is the capital required for maintaining day to day business operations. The present day competitive environment calls for an efficient management of working capital; ineffective management may force the firm to stop its business operations or may lead to bankruptcy. Holding of current assets in substantial amount strengthens the liquidity position and reduces the riskiness but 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 an business concern will not bring back cash immediately. There is time lag between sale of goods and revenue realization. The capital requirement during this time lag is maintained by working capital in the form of current assets; the whole process of which is explained by the concept of operating cycle. This study gives in detail the working capital practices of BHEL-EDN (Electronics Division). Management of each current assets namely cash management, inventory management and accounts receivables management is studied with respect to BHEL-EDN. Similarly management of Accounts payable is studied to understand the management of current liabilities. The research methodology adapted for this study comprises mainly of secondary sources of data which include annual reports of the company and its official website whereas primary sources of data include interview with financial officials. The study of working capital management of BHEL-EDN shows that the company enjoys a good working capital position; thereby earning reasonable profits. It has got corporate tie ups with many leading banks in India for providing short and medium term funds. For financial requirement of projects outside India, BHEL has arranged forex funds. The overall position of BHEL-EDN is good and the same is expected in continuum of existing management policies, checking exchange rate risks, competing with domestic and global players in terms of quality and quantity.

1. INTRODUCTION
Management is an art of anticipating and preparing for risks, uncertainties and overcoming obstacles. An essential precondition for sound and consistent assets management is establishing the sound and consistent assets management policies covering fixed as well as current assets. In modern financial management, efficient allocation of funds has a great scope, in finance and profit planning, for the most effective utilization of enterprise resources, the fixed and current assets have to be combined in optimum proportions. Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Finance manager should develop sound techniques of managing current assets.Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash. Long term finance involves the cash flow over the extended period of time i.e 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle. Working capital management is a short term financial management. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm. Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully. In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures.

To meet the current requirements of a business enterprise such as the purchase of services, raw materials etc. working capital is essential. It is also pointed out that working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the human body like finance s life and strength i.e. profit of solvency to the business enterprise. Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down. Thus enterprise can have a balance between liquidity and profitability. Therefore the management of working capital is essential in each and every activity.

1.1. OBJECTIVES

1) To identify the financial strengths & weakness of the company.

2) Through the net profit ratio & other profitability ratio, understand the profitability of the company.

3) Evaluating company s performance relating to financial statement analysis.

4) To know the liquidity position of the company with the help of current ratio.

5) To find out the utility of financial ratio in credit analysis & determinig the financial capacity of the firm.

6) To study the financial trends of the company 7) Diagnosis of financial ills in working capital management

1.2. REVIEW OF LITERATURE

1.2.1 WORKING CAPITAL MANAGEMENT

i.

WORKING CAPITAL: Working capital refers to the investment by the company in short terms assets such as cash, marketable securities. Net current assets or net working capital refers to the current assets less current liabilities. Symbolically, it means, Net Current Assets = Current Assets - Current Liabilities.

ii.

DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working capital: 1) Working capital is the difference between the inflow and outflow of funds. In

other words it is the net cash inflow. 2) Working capital represents the total of all current assets. In other words it is the

Gross working capital, it is also known as Circulating capital or Current capital for current assets are rotating in nature. 3) Working capital is defined as The excess of current assets over current liabilities

and provisions. In other words it is the Net Current Assets or Net Working Capital. iii. COMPOSITION OF WORKING CAPITAL: Major Current Assets 1. Cash 2. Accounts Receivables 3. Inventory 4. Marketable Securities Major Current Liabilities 1. Bank Overdraft 2. Outstanding Expenses 3. Accounts Payable 4. Bills Payable

The Goal of Capital Management is to manage the firms current assets & liabilities, so that the satisfactory level of working capital is maintained.If the firm cannot maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. To maintain the margin of safety current asset should be large enough to cover its current assets. Main theme of the theory of working capital management is interaction between the current assets & current liabilities. iv. CONCEPT OF WORKING CAPITAL There are 2 concepts: Gross Working capital Net Working capital

Gross working capital: - It is referred as total current assets. Focuses on, Optimum investment in current assets: Excessive investments impair firms profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets. Financing of current assets: Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term securities. Net working capital (NWC) :NWC=Current Assets Current liabilities If the working capital is efficiently managed then liquidity and profitability both will improve. They are not components of working capital but outcome of working capital. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk.

Implications of Net Working Capital: Net working capital is necessary because the cash outflows and inflows do not coincide. In general the cash outflows resulting from payments of current liability are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are, the less NWC will be required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC. For evaluating NWC position, an important consideration is trade off between probability and risk. The term profitability is measured by profits after expenses. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured by NWC. If the firm wants to increase profitability, the risk will definitely increase. If firm wants to reduce the risk, the profitability will decrease.

v.

PLANNING OF WORKING CAPITAL: Working capital is required to run day to day business operations. Firms differ in their

requirement of working capital (WC). Firms aim is to maximize the wealth of share holders and to earn sufficient return from its operations; convert into cash instantly; there is invariably a time lag between sale of goods and the receipt of cash. WC management affect the profitability and liquidity of the firm which are inversely proportional to each other, hence proper balance should be maintained between two. To convert the sale of goods into cash, there is need for WC in the form of current asset to deal with the problem arising out of immediate realization of cash against good sold. Sufficient WC is necessary to sustain sales activity. This is referred to as the operating or cash cycle.

vi.

WORKING CAPITAL CYCLE:

FIGURE 1:

A firm requires many years to recover initial investment in fixed assets. On contrary the investment in current asset is turned over many times a year. Investment in such current assets is realized during the operating cycle of the firm. 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 dues 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.

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 plughole, they remove liquidity from the business

vii.

OPERATING CYCLE: The working capital cycle refers to the length of time between the firms paying the cash for materials, etc., entering into production process/stock & the inflow of cash from debtors (sales), suppose a company has certain amount of cash it will need raw materials. Some raw materials will be available on credit but, cash will be paid out for the other part immediately. Then it has to pay labour costs & incurs factory overheads. These three combined together will constitute work in progress. After the production cycle is complete, work in progress will get converted into sundry debtors. Sundry debtors will be realized in cash after the expiry of the credit period. This cash can be again used for financing raw material, work in progress etc. thus there is complete cycle from cash to cash wherein cash gets converted into raw material, work in progress, finished goods and finally into cash again. Short term funds are required to meet the requirements of funds during this time period. This time period is dependent upon the length of time within which the original cash gets converted into cash again. The cycle is also known as operating cycle or cash cycle

FIGURE 2:

Working capital cycle can be determined by adding the number of days required for each stage in the cycle. For example, company holds raw material on average for 60 days, it gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days is the total of working capital. Thus the working capital cycle helps in the forecast, control & management of working capital. It indicates the total time lag & the relative significance of its constituent parts. The duration may vary depending upon the business policies. In light of the facts discusses above we can broadly classify the operating cycle of a firm into three phases viz.

1 2 3

Acquisition of resources. Manufacture of the product and Sales of the product (cash / credit).

First and second phase of the operating cycle result in cash outflows, and be predicted with reliability once the production targets and cost of inputs are known. However, the third phase results in cash inflows which are not certain because sales and collection which give rise to cash inflows are difficult to forecast accurately. Operating cycle consists of the following: Conversion of cash into raw-materials

 Conversion of raw-material into work-in-progress Conversion of work-in-progress into finished stock; Conversion of finished stock into accounts receivable through sales; and Conversion of accounts receivable into cash. In the form of an equation, the operating cycle process can be expressed as follows: Operating cycle = R + W + F + D R = Raw material storage period W = Work in progress holding period F = Finished goods storage period D = Debtors collection period C = Credit period availed Operating cycle for manufacturing firm: FIGURE 3: C

The firm is therefore, required to invest in current assets for smooth and uninterrupted functioning.

RMCP WIPCP FGCP ICP RCP

- Raw Material Conversion Period - Work in Progress Conversion Period - Finished Goods Conversion Period - Inventory Conversion Period - Receivables Conversion Period - Payables Deferral Period

Payables (PDP) NOC GOC

- Net Operating Cycle - Gross Operating Cycle

Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed for producing and selling the products. Hence it is the sum total of RMCP, WIPCP and FGCP. On the other hand, RCP is the total time required to collect the outstanding amount from customers. Usually, firm acquires resources on credit basis. PDP is the result of such an incidence and it represent the length of time the firm is able to defer payments on various resources purchased. The difference between GOC and PDP is know as Net Operating Cycle and if Depreciation is excluded from the expenses in computation of operating cycle, the NOC also represents the cash collection from sale and cash payments for resources acquired by the firm and during such time interval between cash collection from sale and cash payments for resources acquired by the firm and during such time interval over which additional funds called working capital should be obtained in order to carry out the firms operations. In short, the working capital position is directly proportional to the Net Operating Cycle.

viii.

TYPES OF WORKING CAPITAL:

1. PERMANENT AND 2. VARIABLE WORKING CAPITAL

The need for current assets arises because of the operating cycle. The operating cycle is a continuous process and, therefore, the need for current assets is felt constantly. But the magnitude of current assets needed is not always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent, or fixed, working capital. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in production and sales, the need for working capital, over and above permanent working capital, will fluctuate. For example, extra inventory of finished goods will have to be maintained to support the peak periods of sales, and investment in receivable may also increase during such periods. On the other hand, investment in raw material, work-in-process and finished goods will fall if the market is slack. The extra working capital, needed to support the changing production and sales activities is called FLUCTUATING, or VARIABLE, or TEMPORARY working capital. Both kinds of working capital PERMANENT and TEMPORARY - are necessary to facilitate production and sale through the operating cycle, but temporary-working capital is created by the firm to meet liquidity requirements that will last only temporary working capital. It is shown that permanent working capital is stable over time. While temporary working capital is fluctuating- sometimes increasing and sometimes decreasing. However, the permanent capital is difference between permanent and temporary working capital can be depicted through figure.

ix.

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 as well as inadequate working capital positions are dangerous from the firm s point of view. Excessive working capital not only impairs the firm s profitability but also result in production interruptions and inefficiencies.

The dangers of excessive working capital are as follows: It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase.

 It is an indication of defective credit policy slack collections period. Consequently, higher incidence of bad debts results, which adversely affects profits. Excessive working capital makes management complacent which degenerates into managerial inefficiency. 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: It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non- availability of working capital funds. It becomes difficult to implement operating plans and achieve the firm s profit target. Operating inefficiencies creep in when it becomes difficult even to meet day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the firm s profitability would deteriorate. Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. The firm loses its reputation when it is not in a position to honour 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 a continuous basis. Only then a proper functioning of business operations will be ensured. Sound financial and statistical techniques, supported by judgment, 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 firm s risk.Risk in this regard means chances of the firm being unable to meet its obligations on due date. The lender considers a positive net

working as a measure of safety. All other things being equal, the more the net working 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.

x.

DETERMINANTS OF WORKING CAPITAL There are no set rules or formula to determine the working capital requirements of firms.

A large number of factors, each having a different importance, influence working capital needs of firms. Also, the importance of factors 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.

1. 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. Retail stores, for example, must carry large stocks of a variety of goods to satisfy varied and continuous demand of their customers. Some manufacturing business, such as tobacco manufacturers and construction firm, also have to invest substantially in working capital and a nominal amount in fixed assets. In contrast, public utilities have a very limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are nominal because they may have only cash and supply services, not products. Thus, no funds will be tied up in debtors and stock (inventories). Working capital requires most of the manufacturing concerns to fall between the two extreme requirements of trading firms and public utilities. Such concerns have to make adequate investment in current assets depending upon the total assets structure and other variables.

2. Sales and Demand Conditions:

The working capital needs of a firm are related to its sales. It is difficult to precisely determine the relationship between volume 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 a continuous basis. A growing firm may need to invest funds in fixed assets in order to sustain its growing production and sales. This will, in turn, increase investment in current assets to support enlarged scale of operations. It should be realized that a growing firm needs funds continuously. It uses external sources as well as internal sources to meet increasing needs of funds. Such a firm faces further financial problems when it retains substantial portion of its profits. It would not be able to pay dividends to shareholders. It is, therefore, Imperative that proper planning be done by such companies to finance their increasing needs for working capital.

Sales depend on demand conditions. Most firms experience seasonal and cyclical fluctuations in the demand for their products and services. These business variations affect the working capital requirements, 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 firm will require further additions of working capital. To meet their requirements of funds for fixed assets and current assets under boom further 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 a decline in the economy, sales will fall and consequently, levels of inventories and debtors will also fall. Under recessionary conditions, firms try to reduce their short term borrowings.

Seasonal fluctuations not only affect working capital requirements but also create production problems for the firm. During periods of peak demand, increasing production may be expensive for the firm. Similarly, it will be more expensive during 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 steady 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. However, the financial plan or arrangement should be flexible enough to take care of some abrupt seasonal fluctuations.

3. Technology and Manufacturing Policy The manufacturing cycle (or the inventory conversion cycle) comprises of the purchase and use of raw material the production of finished goods. Longer the manufacturing cycle, larger will be the firm working capital requirements. For example, the manufacturing cycle in the case of a boiler, depending on its size, may range between six to twenty- four months. On the other hand, the manufacturing cycle of products such as detergent powder, soaps, chocolate etc. may be a few hours. An extended manufacturing time span means a larger tie- up of funds in inventories. Thus, if there are alternative technologies of manufacturing a product, 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 is completed within the specified period. This needs proper planning and coordination at all levels of activity. Any delay in manufacturing process will results in accumulation of work- in-process and waste of time. In order to minimize their investment in working capital, some firms, especially firm

Manufacturing industrial products have a policy of asking for advance payment from their customers. Non-manufacturing firms, service and financial enterprises do not have a manufacturing cycle.

A strategy of constant production may be maintained in order to resolve the working capital problems arising due to seasonal changes in the demand for the firm product. A steady production policy will cause inventories to accumulate during the off- reason periods and the firm will be exposed to greater inventory costs and risks. Thus, if costs and risks of maintaining a constant production policy, varying its production utilized for manufacturing varied products, can have the advantage of diversified Activities and solve their working capital problems. They will manufacture the original product line during its increasing demand and when it has an off- season, other products may be manufactured to utilize physical resources and working force. Thus, production policies will differ from firm to firm, depending on the circumstances of individual firm.

4. Credit Policy

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 be 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 creditworthiness of customers, will be detrimental to the firm and will create a problem of collections. A high collection period will mean tie- up of large funds in book debts. 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 periodically review the creditworthiness of the exiting customers. The case of delayed payments should be thoroughly investigated.

5. Availability of Credit

The working capital requirements of a firm are also affected by credit terms granted

by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly, the availability of credit from banks also influences the working capital needs of the firm. A firm which can get bank credit easily on favorable condition will operate with less working capital than a firm without such a facility.

6. Operating Efficiency

The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. The firm will be effectively contributing in keeping the working capital investment at a lower level if it is efficient in controlling operating costs and utilizing current assets. 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 efficiency and effective use of its materials, labour and other resources.

7. Price Level Changes

The increasing shifts 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 higher amount of working capital. Same levels of current assets will need increased investment when price are increasing. However, companies which can immediately revise their product price levels will not face a server working capital problem.

Further, effects of increasing general price level will be felt differently by firm as individual price may move differently. It is possible that some companies may not be affected by rising price will be different for companies. Some will face no working capital problem, while working capital problems of other may be aggravated.

xi.

REQUIREMENTS OF FUNDS FIGURE 4:

Funds Requirements of company

Fixed Capital

Working Capital

Preliminary Expenses

Raw Material

Purchase of Fixed Assets

Inventories

Establishment work exp.

Goods in Process

Fixed working capital

Others

Every company requires funds for investing in two types of capital i.e. fixed capital, which requires long-term funds, and working capital, which requires short-term funds.

xii.

SOURCES OF WORKING CAPITAL FIGURE 4: sources of working capital

Long-term source (Fixed working capital) a) Loan from financial institution b) Floating of Debentures c) Accepting public deposits d) Issue of shares e) f) Cash credit Commercial paper

Short-term source (Temporary working capital) a) Factoring b) Bill discounting c) Bank overdraft d) Trade credit

LONG TERM SOURCES a. ISSUE OF SHARES

Ordinary shares are also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company. Since the profits of companies can vary wildly from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial.The nominal value of a share is the issue value of the share - it is the value written on the share certificate that all shareholders will be given by the company in which they own shares. The market value of a share is the amount at which a share is being sold on the stock exchange and may be radically different from the nominal value. When they are issued, shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold for their nominal value only - so if Rs.10 share is sold at par, the company selling the

share will receive Rs. 10 for every share it issues. If a share is sold at a premium, as many shares are these days, then the issue price will be the par value plus an additional premium.

b. DEBENTURES

Debentures are loans that are usually secured and are said to have either fixed or floating charges with them. A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees. If the debenture is for land and/or buildings it can be called a mortgage debenture. Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges. If the business fails, the debenture holders will be preferential creditors and will be entitled to the repayment of some or all of their money before the shareholders receive anything.

c. LOANS FROM OTHER FINANCIAL INSTITUTIONS

The term debenture is a strictly legal term but there are other forms of loan or loan stock. A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details.

SHORT TERM SOURCES

a. FACTORING

Factoring allows you to raise finance based on the value of your outstanding invoices. Factoring also gives you the opportunity to outsource your sales ledger operations and to use more sophisticated credit rating systems. Once you have set up a factoring arrangement with a Factor, it works this way:

Once you make a sale, you invoice your customer and send a copy of the invoice to the factor and most factoring arrangements require you to factor all your sales. The factor pays you a set proportion of the invoice value within a pre-arranged time - typically, most factors offer you 80-85% of an invoice's value within 24 hours. The major advantage of factoring is that you receive the majority of the cash from debtors within 24 hours rather than a week, three weeks or even longer.

b. INVOICE DISCOUNTING

Invoice discounting enables you to retain the control and confidentiality of your own sales ledger operations. The client company collects its own debts. 'Confidential invoice discounting'ensures that customers do not know you are using invoice discounting as the client company sends out invoices and statements as usual. The invoice discounter makes a proportion of the invoice available to you once it receives a copy of an invoice sent.

Once the client receives payment, it must deposit the funds in a bank account controlled by the invoice discounter. The invoice discounter will then pay the remainder of the invoice, less any charges.

The requirements are more stringent than for factoring. Different invoice

discounters will impose different requirements.

c. OVERDRAFT FACILITIES

Many companies have the need for external finance but not necessarily on a longterm basis. A company might have small cash flow problems fromtime to time but such problems don't call for the need for a formal long-term loan. Under these circumstances, a company will often go to its bank and arrange an overdraft. Bank overdrafts are given on current accounts and the good point is that the interest payable on them is calculated on a daily basis. So if the company borrows only a small amount, it only pays a little bit of interest. Contrast the effects of an overdraft with the effects of a loan.

d. TRADE CREDIT

This source of finance really belongs under the heading of working capital management since it refers to short-term credit. By a 'line of credit' they mean that a creditor, such as a supplier of raw materials, will allow us to buy goods now and pay for them later. Why do they include lines of credit as a source of finance? They ll, if they manage their creditors carefully they can use the line of credit they provide for us to finance other parts of their business.

Take a look at any company's balance sheet and see how much they have under the heading of Creditors falling due within one year'- let's imagine it is Rs. 25,000 for a company. If that company is allowed an average of 30 days to pay its creditors then they can see that effectively it has a short term loan of Rs. 25,000 for 30 days and it can do whatever it likes with that money as long as it pays the creditor on time.

CASH MANAGEMENT
Cash management is one of the key areas of WCM. Apart from the fact that it is the most liquid asset, cash is the common denominator to which all current assets, that is, receivables & inventory get eventually converted into cash. Cash is oil of lubricate the everturning wheels of business: without it the process grinds to a shop.

Cash with reference to cash management is used in two senses: It is used broadly to cover currency and generally accepted equivalents of cash, such as cheques, drafts and demand deposits in banks It includes near-cash assets, such as marketable securities & time deposits in banks. The main characteristic of these is that they can be readily sold & converted into cash. They serve as a reserve pool of liquidity that provides cash quickly when needed. They provide short term investment outlet to excess cash and are also useful for meeting planned outflow of funds.

i.

CASH IS MAINTAINED FOR FOUR MOTIVES:

A. Transaction motive:

Transaction motive refer to the holding of cash to meet routine cash requirements to finance the transactions which a firm carries on in a variety of transactions to accomplish its objectives which have to be paid for in the form of cash. E.g. payment for purchases, wages, operating expenses, financial charges like interest, taxes, dividends etc. Thus requirement of cash balances to meet routine need is known as the transaction motive and such motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronized with cash receipts.

B. Precautionary motive:

A firm has to pay cash for the purposes which cannot be predicted or anticipated. The unexpected cash needs at the short notice may be due to: Floods, strikes & failure of customer Slow down in collection of current receivables Increase in cost of raw material Collection of some order of goods as customer is not satisfied The cash balance held in reserves for such random and unforeseen fluctuations in cash flows are called as precautionary balance. Thus, precautionary cash provides a cushion to meet unexpected contingencies. The more unpredictable are the cash flows, the larger is the need for such balance.

C. Speculative motive:

It refers to the desire of the firm to take advantage of opportunities which present themselves at unexpected moment & which are typically outside the normal course of business. If the precautionary motive is defensive in nature, in that firms must make provisions to tide over unexpected contingencies, the speculative motive represents a positive and aggressive approach. The speculative motive helps to take advantages of: An opportunity to purchase raw material at reduced price on payment of immediate cash. A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline. Make purchases at favorable price. Delay purchase of raw material on the anticipation of decline in prices.

ii.

OBJECTIVES OF CASH MANAGEMENT:

a) To meet the cash disbursement needs

In the normal course of business firms have to make payment of cash on a continuous and regular basis to the supplier of goods, employees and so son. Also the collection is done from the de4btorw. Basic objective is to meet payment schedule that is to have sufficient cash to meet the cash disbursement needs of the firm.

b) To minimize the funds committed to cash balances

First of all if we keep high cash balance, it will ensure prompt payment together with all the advantages. But it also implied that the large funds will remain idle, as cash is the non-earning asset and firm will have to forego profits. On the other hand, low cash balance mean failure to meet payment schedule. Therefore we should have optimum level of cash balance.

iii.

FACTORS DETERMININING CASH NEEDS:

1)

Synchronization of cash - need for the cash balances arises from the non-

synchronization of the inflows & outflows of cash. First need in determining cash needs is, the extent of non-synchronization of cash receipts & disbursements. For this purpose cash budget is to be prepared. Cash budget point out when the firm will have excess or shortage of cash.

2)

Short cash Cash period reveals the period of cash shortages. Every shortage of cash

whether expected or unexpected involves a cost depending upon the security, duration & frequency of shortfall & how the shortage is covered. Expenses incurred as a shortfall are called short costs.

There are following costs included in the short cash

 Transaction cost: this is usually the brokerage incurred in relation to the some short-term near-cash assets like marketable securities. Borrowing costs: these include interest on loan, commitment charges & other expenses relating to loan. Loss of cash discount: that s a loss because of temporary shortage of cash. Cost associated with deterioration of credit rating. Penalty rates: By a bank to meet a shortfall in compensating balances.

3)

Excess cash balance - cost associated with excessively large cash balances is known

as excess cash balance cost. If large funds are idle the implication is that the firm has missed the opportunity to invest those funds and has thereby lost interest. This loss of interest is primarily the excess cost.

iv.

DETERMINING THE CASH NEEDS:

Cash needs can be determined though preparing cash budget, for year, month, week etc. Cash reports, providing a comparison of actual development with forecast figures, are helpful in controlling and revising cash forecasts on a continual basis. The important cash reports are The daily cash reports Daily treasury reports The monthly cash report

Monitoring collection and receivables:

The Finance Manager must control the levels of cash balance at various points in the organization. This task assumes special importance on account of the fact that there is generally tendency amongst divisional manager to keep cash balance in excess of their needs. Hence a finance manager must devise a system whereby each division of organization retains enough cash to meet its day-to-day requirements without having surplus balance on hand. For this methods have to be employed to: Speed up the mailing

time of payment from customers

Reduce the time during which payments received by the firm remain uncollected and speed up the movement funds to disbursement banks. For this purpose following can be helpful:

1.

Prompt billing often there is time lag between the dispatch of goods or provision of

service and the sending of bills. By preparing and sending the bills promptly, a firm can ensure earlier remittance. It should be realized that it is in the area of billing that the company control is high and there is a sizeable opportunity to free up cash. For this treasure should work with controller and others in : Accelerating invoice data Mailing bills promptly Identifying payment locations.

2.

Expeditious collection of cheques - expediting collecgion of cheques is important

and there are two methods 1. Concentration banking, 2. Lock box method Concentration banking: (decentralized collection) key elements are,The major bank account of the company is wet up with a concentration bank, generally situated in the same place where the company is head quartered. Customers are advised to mail their remittances to collection centre close tgo them. Payments collected in different collection centres are deposited in local banks which in turn transfer them to the concentration banks

Lock box method: Silent features are as follows A number of post office boxes are rented by the company in different locations. Customers are advised to mail there remittances to the lock boxes. Banks are authorized to picked up the cheques from the lock boxes and deposit them in the companys account. Controlling payables/disbursements: by proper control of payables company can manage cash resources. This involves

Payment should be made as and when it fall due. Centralized disbursement payables and their disbursements may be centralized. This helps in consolidating the funds at head office scheduling payments, reducing unproductive bank balance and investing surplus funds more effectively.

Proper synchronization of inflows and outflows helps a company to get greater mileage from cash resources. Float: when firm issues cheques they reduce the balance in their books, but balance in banks book is not reduced till the payment is made by bank. This amount of cheques issued by the firm but not paid for by the bank is referred to as payment float .

When the cheques are deposited with bank the firm increases the balance in its books. The balance in the bank s book however is cleared. The amount of cheques deposited by the firm in the bank but not cleared is referred to as collection float . Difference between payment float and collection float is called as net float . When the net float is positive the balance in the books of bank is higher than the balance in the books of firm. When the firm enjoys the positive float (net) it may issue cheques even if it have an overdrawn bank account in its books. Such an action is referred to as playing the float It is considered risky.

Accruals: accruals can be defined as current liabilities that represent a service or goods received by a firm but not yet paid for. For example remuneration to employee s that render services in advance and receive payment later. In a way, they extend credit to the firm for a period at the end of which they are paid. Weekly is more important as compared to monthly. Other examples, rent to lessors, taxes to government.

v.

OPTIMAL CASH BALANCE

If a firm maintains a small cash balance, it has to sell its marketable securities more frequently than if it holds a large cash balance. Hence trading or transaction costs will tend

to diminish if cash balance becomes larger. However, the opportunity costs of maintaining cash rise as the cash balance increases.

Deployment of surplus funds:

Company s often have surplus funds for short period of time before they are required for capital expenditure, loan repayment or some other purposes. At the one end they are invested in term deposit in bank and on other end are invested in equity shares. They can be invested in several options like Units of the unit 1964 scheme: This is the most important mutual fund scheme in India. It has the following features It is a open ended scheme as it accepts funds from investors & also permits to withdraw their investments. The units have face value of Rs. 10.00/- The sale & purchase price of units are not squarely based on the net asset per unit, as should be the case for a truly open ended scheme.

DEBTORS MANAGEMENT
i. Assessing the credit worthiness of customers

Before extending credit to a customer, a supplier should analyze the five Cs of credit worthiness, which will provoke a series of questions. These are:

Capacity: will the customer be able to pay the amount agreed within the allowable credit period? What is their past payment record? How large is the customer's businesscapital. what is the financial health of the customer? Is it a liquid and profitable concern, able to make payments on time?

Character: do the customers management appear to be committed to prompt payment? Are they of high integrity? What are their personalities like?

Collateral: what is the scope for including appropriate security in return for extending credit to the customer?

Conditions: what are the prevailing economic conditions? How are these likely to impact on the customers ability to pay promptly?

Whilst the materiality of the amount will dictate the degree of analysis involved, the major sources of information available to companies in assessing customers credit worthiness are:

Bank references. These may be provided by the customers bank to indicate their financial standing. However, the law and practice of banking secrecy determines the way in which banks respond to credit enquiries, which can render such references uninformative, particularly when the customer is encountering financial difficulties.

Trade references. Companies already trading with the customer may be willing to provide a reference for the customer. This can be extremely useful, providing that the companies approached are a representative sample of all the clients suppliers. Such references can be misleading, as they are usually based on direct credit experience and contain no knowledge of the underlying financial strength of the customer.

Financial accounts. The most recent accounts of the customer can be obtained either direct from the business, or for limited companies, from Companies House. While subject to certain limitations past accounts can be useful in vetting customers. Where the credit risk appears high or where substantial levels of credit are required, the supplier may ask to see evidence of the ability to pay on time. This demands access to internal future budget data.

Personal contact. Through visiting the premises and interviewing senior management, staff should gain an impression of the efficiency and financial resources of customers and the integrity of its management.

Credit agencies. Obtaining information from a range of sources such as financial accounts, bank and newspaper reports, court judgments, payment records with other suppliers, in return for a fee, credit agencies can prove a mine of information. They will provide a credit rating for different companies. The use of such agencies has grown dramatically in recent years.

Past experience. For existing customers, the supplier will have access to their past payment record. However, credit managers should be aware that many failing companies preserve solid payment records with key suppliers in order to maintain supplies, but they only do so at the expense of other creditors. Indeed, many companies go into liquidation with flawless payment records with key suppliers.

General sources of information. Credit managers should scout trade journals, business

magazines and the columns of the business press to keep abreast of the key factors influencing customers' businesses and their sector generally. Sales staffs who have their ears to the ground can also prove an invaluable source of information.

ii.

Credit terms granted to customer:

Although sales representatives work under the premise that all sales are good (particularly, one may add, where commission is involved!), the credit manager must take a more dispassionate view. They must balance the sales representative's desire to extend generous credit terms, please customers and boost sales, with a cost/benefit analysis of the impact of such sales, incorporating the likelihood of payment on time and the possibility of bad debts. Where a customer does survive the credit checking process, the specific credit terms offered to them will depend upon a range of factors. These include: Order size and frequency: companies placing large and/or frequent orders will be in a better position to negotiate terms than firms ordering on a one-off basis.

Market position: the relative market strengths of the customer and supplier can be influential. For example, a supplier with a strong market share may be able to impose strict credit terms on a weak, fragmented customer base.

Profitability: the size of the profit margin on the goods sold will influence the generosity of credit facilities offered by the supplier. If margins are tight, credit advanced will be on a much stricter basis than where margins are wider.

Financial resources of the respective businesses: from the supplier's perspective, it must have sufficient resources to be able to offer credit and ensure that the level of credit granted represents an efficient use of funds. For the customer, trade credit may represent an important source of finance, particularly where finance is constrained. If credit is not made available, the customer may switch to an alternative, more understanding supplier.

Industry norms: unless a company can differentiate itself in some manner (e.g.,

unrivalled after sales service), its credit policy will generally be guided by the terms offered by its competitors. Suppliers will have to get a feel for the sensitivity of demand to changes in the credit terms offered to customers.

Business objectives: where growth in market share is an objective, trade credit may be used as a marketing device (i.e., liberalized to boost sales volumes).

iii.

TRADE POLICY:

The main elements of a trade policy are:

Terms of trade: the supplier must address the following questions: which customers should receive credit? How much credit should be advanced to particular customers and what length of credit period should be allowed?

Cash discounts: suppliers must ponder on whether to provide incentives to encourage customers to pay promptly. A number of companies have abandoned the expensive practice of offering discounts as customers frequently accepted discounts without paying in the stipulated period.

Collection policy: an efficient system of debt collection is essential. A good accounting system should invoice customers promptly, follow up disputed invoices speedily, issue statements and reminders at appropriate intervals, and generate management reports such as an aged analysis of debtors. A clear policy must be devised for overdue accounts, and followed up consistently, with appropriate procedures (such as withdrawing future credit and charging interest on overdue amounts). Materiality is important. Whilst it may appear nonsensical to spend time chasing a small debt, by doing so, a company may send a powerful signal to its customers that it is serious about the application of its credit and collection policies. Ultimately, a balance must be struck between the cost of implementing a strict collection policy (i.e., the risk of alienating otherwise good customers) and the tangible benefits resulting from good credit management

Problems in collecting debts

Despite the best efforts of companies to research the companies to whom they extend credit, problems can, and frequently do, arise. These include disputes over invoices, late payment, deduction of discounts where payment is late, and the troublesome issue of bad debts. Space precludes a detailed examination of debtor finance, so this next section concentrates solely on the frequently examined method of factoring.

iv.

FACTORING:

Key elements:

Factoring involves raising funds against the security of a company's trade debts, so that cash is received earlier than if the company waited for its credit customers to pay. Three basic services are offered, frequently through subsidiaries of major clearing banks:

Sales ledger accounting, involving invoicing and the collecting of debts; Credit insurance, which guarantees against bad debts; Provision of finance, whereby the factor immediately advances about 80% of the value of debts being collected.

There are two types of factoring service:

1.

Non-recourse factoring is where the factoring company purchases the debts

without recourse to the client. This means that if the clients debtors do not pay what they owe, the factor will not ask for his money back from the client. 2. Recourse factoring, on the other hand, is where the business takes the bad debt

risk. With 80% of the value of debtors paid up front (usually electronically into the clients bank account, by the next working day), the remaining 20% is paid over when either the debtors pay the factor (in the case of recourse factoring), or, when the debt becomes due (non-recourse factoring). Factors usually charge for their services in two ways:

administration fees and finance charges. Service fees typically range from 0.5 - 3% of annual turnover. For the finance made available, factors levy a separate charge, similar to that of a bank overdraft.

ADVANTAGES

Provides faster and more predictable cash flows; Finance provided is linked to sales, in contrast to overdraft limits, which tend to be determined by historical balance sheets; Growth can be financed through sales, rather than having to resort to external funds; The business can pay its suppliers promptly (perhaps benefiting from discounts) and because they have sufficient cash to pay for stocks, the firm can maintain optimal stock levels; Management can concentrate on managing, rather than chasing debts; The cost of running a sales ledger department is saved and the company benefits from the expertise (and economies of scale) of the factor in credit control . DISADVANTAGES

The interest charge usually costs more than other forms of short-term debt; The administration fee can be quite high depending on the number of debtors, the volume of business and the complexity of the accounts; By paying the factor directly, customers will lose some contact with the supplier. Moreover, where disputes over an invoice arise, having the factor in the middle can lead to a confused three-way communication system, which hinders the debt collection process; Traditionally the involvement of a factor was perceived in a negative light (indicating that a company was in financial difficulties), though attitudes are rapidly changing.

CREDITORS MANAGEMENT
i. MANAGING PAYABLES (CREDITORS)

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems.

Consider the following: Who authorizes purchasing in a company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do we use order quantities, which take account of stock holding and purchasing costs? Do we know the cost to the company of carrying stock? Do we have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of the suppliers have a returns policy? Are we in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets the company down can it charge back the cost of the delay? Can we arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis? There is an old adage in business that if we can buy well then we can sell well. Management of the creditors and suppliers is just as important as the management of the debtors. It is important to look after the creditors - slow payment may create ill feeling and can signal that company is inefficient (or in trouble!).

INVENTORY MANAGEMENT

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.

The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stockholding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a Just-In-Time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize stock holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management.

The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks.

i.

OPTIMUM STOCK LEVELS:

Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers?

 Can you remove slow movers from your product range without compromising best seller? For better stock control, the following should be followed: Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it. Consider having part of the product outsourced to another manufacturer rather than make it yourself. Review the security procedures to ensure that no stock "is going out the back door!" Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.

BHEL-AN OVERVIEW
Bharat Heavy Electricals Limited (BHEL) was set up in 1959 by the Government of India with the objective of creating indigenous manufacturing base for power plant equipments. Today, BHEL is the 12th largest company in the world in Power Plant Equipments manufacturing and the largest in India. The company has the ability to manufacture the entire range of power plant equipment and has one of the largest capacities of power plant equipment in the world. This enables the company to bid for large power projects. BHEL's cost-competitiveness vis--vis international competition in the power sector can be attributed to the factors like fully depreciated manufacturing facilities, lower labor and freight costs and economies of scale. Apart from being the lowest cost producer, BHEL also possesses the infrastructure that can supply power equipment for 4,000 MW of generating capacity annually MILESTONES: 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. So, it developed the capability to produce a variety of electrical, electronic and mechanical equipments for all sectors, including transmission, transportation, oil and gas and other allied industries. 1991 - On 24th December converted into a public Limited company. As per resolution passed on 23rd Dec. 1991, existing shares of Rs.1000 each was subdivided into equity shares of Rs.10 each. 2447,60,000 No. of equity shares of Rs.10 each allotted for consideration other than cash. 1992 - Between January to February the company disinvested 489,52,000 equity shares of Rs.10 each. During the year, 10 thermal sets, 2 gas sets and 11 hydro sets were

commissioned. During the year, first commercial HUDC transmission line in the country between Rihand & Delhi rated for transmitting power at 500 KV at 1500 MW was respectively completed. Also, the company completed prestigious contracts in Malta and Cyprus through supply and erection of 2 sets of 60 MW thermal sets each. 1994 - The company commissioned two sets of 250 MW at Maharashtra and one 500 MW once-through tower type boiler at Orissa. During the year the company established Asia's largest fuel evaluation test facility at Tiruchi. The Company commissioned ten industrial power plants resulting in power generating capacity addition of 293 KW. The Company undertook the development of photovoltaic power systems for grid assisted operation, solar power refrigerator useful for vaccine and medical Bharat Heavy Electricals Limited (BHEL) was set up in 1959 by the Government of India with the objective of creating indigenous manufacturing base for power plant equipments. Today, BHEL is the 12th largest company in the world in Power Plant Equipments manufacturing and the largest in India. The company has the ability to manufacture the entire range of power plant equipment and has one of the largest capacities of power plant equipment in the world. This enables the company to bid for large power projects. BHEL's cost-competitiveness vis--vis international competition in the power sector can be attributed to the factors like fully depreciated manufacturing facilities, lower labor and freight costs and economies of scale. Apart from being the lowest cost producer, BHEL also possesses the infrastructure that can supply power equipment for 4,000 MW of generating capacity annually 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. So, it developed the capability to produce a variety of electrical, electronic and

mechanical equipments for all sectors, including transmission, transportation, oil and gas and other allied industries. 1991 - On 24th December converted into a public Limited company. As per resolution passed on 23rd Dec. 1991, existing shares of Rs.1000 each was subdivided into equity shares of Rs.10 each. 2447,60,000 No. of equity shares of Rs.10 each allotted for consideration other than cash. 1992 - Between January to February the company disinvested 489,52,000 equity shares of Rs.10 each. During the year, 10 thermal sets, 2 gas sets and 11 hydro sets were commissioned. During the year, first commercial HUDC transmission line in the country between Rihand & Delhi rated for transmitting power at 500 KV at 1500 MW was respectively completed. Also, the company completed prestigious contracts in Malta and Cyprus through supply and erection of 2 sets of 60 MW thermal sets each. 1994 - The company commissioned two sets of 250 MW at Maharashtra and one 500 MW once-through tower type boiler at Orissa. During the year the company established Asia's largest fuel evaluation test facility at Tiruchi. The Company commissioned ten industrial power plants resulting in power generating capacity addition of 293 KW. The Company undertook the development of photovoltaic power systems for grid assisted operation, solar power refrigerator useful for vaccine and medical storage and demonstration of 2X5 KW phosphoric acid fuel cell module at a Chlor Alkali plant. 1995 - The country's premier state owned undertaking, BHEL, has commissioned India's first 250 mw capacity thermal generating unit at Dahanu power station in Maharashtra. BHEL won this world bank contract against competition from multinationals. 1996 - This year company handed over 100th Electric Locomotive to Indian Railway. And 250th Hydro set installed at Dhupdal-1, successfully synchronized and handed over the 30 MW Fr.6 Gas turbine at Wadi Al Jizzi, Oman. The company signed an agreement with Indian Railways for building and leasing 53 nos. AC/DC locos of 5,000/4,600 HP. During the year company undertook Indira Sugar Project of Narmada Valley Development Authority in M.P., Kurichu Project from NHPC in Bhutaan, Ghanvi project and Gumma Project both from HPSEB, H.P., 8*16 MW Diesel Generating sets for Kerala State Electricity Boards DG Power plant at Kozhikode, 4 numbers 125 TPM HRSGs, 18 MW Steam Turbine Generator for Mysore Paper Mills, 9 numbers 400KV 102 MWA single

phase generator transformers for 1500 MW Nathpa Jhakri HEP, 6 nos.3950 KW, 18 pole synchronous motors and 6 nos. 3950 KW 6 pole squirrel cage induction motors for ONGC's Santhal Project. 1997 - In May a joint venture company named Bhe-Ge Gas Turbine Services private Ltd. was incorporated with General Electric to carryout after sales repair and servicing of GE designed heavy duty gas turbines installed in India and certain other countries abroad. Another joint venture company with Siemens AG was incorporated under the name `Powerplant Performance Improvement Private Ltd.' to carry out plant performance Improvement to old fossil fuel power plants in India and abroad. The public sector Bharat Heavy Electricals Ltd (BHEL) has won the national best exporter award for 1995-96, instituted by the Engineering 1998 - Bharat Heavy Electricals Ltd (BHEL) has successfully commissioned the fifth unit (210 mw) of Gandhinagar Thermal Power Station, the first project undertaken by Gujarat State Electricity Corporation Ltd. The public sector Bharat Heavy Electricals Ltd (BHEL) has entered into an agreement with the Indian Space Research Organisation (ISRO) for manufacture and supply of solar panels for upcoming Indian Satellites. Bharat Heavy Electricals Limited (BHEL) has successfully commissioned the maiden unit of the Kodasalli Hydro-Electric Project (HEP) in Karnataka. In Karnataka, BHEL has recently supplied and commissioned hydro-generating equipment for Chunchunakatte HEP (2 x 9 MW) and Bhadra HEP (1 x 6 MW). Hydro-generating equipment for the Narayanpur HEP (2 x 5 MW) has already been supplied and is being installed. Bharat Heavy Electricals Ltd (BHEL) has commissioned the country's new rating thermal power generating set of 250 MW capacity at Andhra Pradesh State Electricity Board's Kothagudem thermal power station in record time. Bharat Heavy Electrical Ltd has commissioned the first grid interactive solar photovoltaic power plant at its Bangalore division. The plant which has a capacity of 30 kw will use solar energy to generate power. 1999 - Bharat Heavy Electrical have achieved yet another milestones by synchronising the fifth unit of 210 MW capacity at the Richur Thermal Power Station in Karnataka, much ahead of schedule, in just 29 months. With this, BHEL has set a new benchmark in the commissioning of future generating sets in the country, in the shortest possible time. 2000 - The Company has signed a memorandum of understanding with Bhakra Beas

Management Board to renovate, modernise and upgrade its old hydroelectric power stations.- The Company has enter the infotech sector and setting up a dotcom company with will provide B2B service in the area of electrical engineering and power sector. The Company has won the top exporters award among the public and private sector companies in India for the 11th Consecutive year. The electronics division of public sector Bharat Heavy Electricals Ltd. has been given the ISO 140001 certification by the Det Norske Veritas. 2001 - Bharat Heavy Electricals Ltd. has bagged the prestigious Golden peacock national quality award for the second consecutive year for achieving excellence in quality conforming to global standards. India's state-run Bharat Heavy Electricals won an order to set up a fifth 250 megawatt (mw) unit at Suratgarh thermal power station in the western state of Rajasthan. The company has bagged the `Golden Trading House' status for attaining excellence in global export operations. 2002 - Awarded the top exporters award by Engineering Export Promotion Council for the year 1999-2000. BHEL and PFC tie up for joint bids of projects. Ties up with USbased Metso Automation Max Control Systems Inc to establish a diagnostic and monitoring center to identify faults in power plants with maxDNA control systems. 2003- Forays into Operations & Maintenance (O&M) of power plants. First indigenously manufactured advance class gas turbine manufactured by BHEL, Ramachandrapuram unit flagged off to Gujarat State Electricity Corporation (GSEC). BHEL and Skokdaexport tieup for overseas project. Announces the successful deployment of its solar panels on the recently launched satellites Insat 3A and GSAT 2 by the Indian Space Research Organisation (ISRO).-Awarded ISO 14001 and OHSA 18001 certifications by Det Norske Veritas, Netherlands. The company bags the award for implementing an integrated management system, HSE Health, Safety and Environment Management System. 2004 -BHEL gets compressor and drive turbine package contract worth of Rs 20-cr. BHEL bags Rs 599 Cr order to set up 250 MW power project in Maharashtra state. A Centre of Excellence (CoE) for simulators set up with an investment of Rs 3.8 crore was been declared operational at the corporate R&D unit of BHEL. 2005 -Delists equity shares from the Madras Stock Exchange Ltd (MSE) w.e.f. January 19, 2005. Delists equity shares of the Company voluntary from the Stock Exchange,

Ahmedabad (ASE) with effect from January 28, 2005. Bharat Heavy Electricals Ltd (BHEL) and Rural Electrification Corporation (REC) have entered into a memorandum of understanding to work jointly in offering solutions along with financial packages in the power generation sector, overing both new power generation projects and renovation and modernisation of existing power plants. 2006 -BHEL inks agreement with IIT Madras for new courses. Bechtel signs Dabhol agreement with BHEL .Bharat Heavy Electricals Tiruchirapalli on May 31 signed a MoU with National Institute of Technology, Tiruchirapalli to recognize and strengthen instituteindustry interaction. 2007 -BHEL and French company Alstom will together produce 1,50,000MW of power over the next ten years. Bharat Heavy Electricals Ltd (BHEL) has appointed Shri. N Gokulram as Part-time Official Director on the Board of the Company w.e.f. January 25, 2007.Bharat Heavy Electricals Ltd (BHEL) and NTPC Ltd have singed a Memorandum of Understanding (MOU) to form a Joint Venture Company with the propose to work jointly to complement their respective strength and to carry out engineering procurement and construction (EPC) activities in the power sector. 2008 - Bharat Heavy Electricals Limited (BHEL), Trichy, has secured orders worth Rs 15,000 crore, its all-time high. BHEL, said the recent MoU with the TNEB for setting up two 800 Mw thermal power stations near Chennai had resulted in the power plant major bagging orders. Bharat Heavy Electricals Ltd (BHEL) has informed that pursuant to order dated March 04, 2008 issued by Ministry of Heavy Industries and Public Enterprises, Department of Heavy Industry, Shri. K Ravi Kumar Director (Power)/BHEL has been entrusted with additional charge of the post of the Chairman and Managing Director/BHEL w.e.f. March 01, 2008. 2009 - Bharat Heavy Electricals on June 12 said it has bagged a Rs 4,015-crore from Hindalco Industries for supplying boilers, turbines and generators at its 900-MW captive power plant in Orissa.BHEL has bagged a Rs. 1,300-crore order from NTECL, a joint venture of power producer NTPC and Tamil Nadu Energy Company, for supply of turbines to the upcoming Vallur Thermal Power Project in Tamil Nadu. 2010 - Bharat Heavy Electrical Limited (BHEL), Indian power equipment maker, has

bagged orders valued at Rs 900 crore from Oil and Natural Gas Commission (ONGC) in order to supply six on-shore oil rigs. Bharat Heavy Electricals Limited (BHEL) has bagged orders worth Rs 3,348 crore in order to set up 376 MW captive power plant at the upcoming Paradip refinery Project of Indian Oil Corp in Orissa. 2011 - Bharat Heavy Electricals Ltd. (BHEL) has secured 90 per cent of the Rs.59,037crore orders from clients in the private sector. Products of BHEL: Power Air Preheaters Boilers Control Relay Panels Electrostatic Precipitators Fabric Filters Fans Gas Turbines Hydro Power Plant Piping Systems Pulverizers Pumps Seamless Steel Tubes Soot blowers Steam Generators Steam Turbines Turbogenerators Valves Industry Capacitors Ceralin Compressors

 Desalination Plants Diesel Generating Sets Industrial Motors & Alternators Gas Turbines Oil Field Equipment Solar Photovoltaics Power Semiconductor Devices Seamless Steel Tubes Sootblowers Steel Castings & Forgings Steam Generators Steam Turbines Turbogenerators Valves

Transmission Bushings Capacitors Control Relay Panels Dry-type Transformers Energy Meters HVDC Transmission System Insulators Switchgears Power Semiconductor Devices Power System Studies Control Shunt Reactor

Transportation Electric Rolling Stock Electrics for Rolling Stock Electrics for Urban Transportation System Non Conventional Energy Source Mini/Micro Hydro Sets Solar Lanterns Solar Photovoltaics Solar Water Heating Systems Wind Electric Generators R&D Products Fuel Cells Surface Coatings Automated storage & Retrivals Load Sensors Transparent Conducting Oxide

SYSTEMS AND SERVICES Power Generation Systems Turnkey power stations. Combined-cycle power plants. Cogeneration systems. Modernisation and rehabilitation of power stations. Erection commissioning, operation and maintenance services. Spares management. Consultancy services.

 Transmission Systems Sub-stations switchyards. VDC transmission systems Shunt and series compensation systems. Power system studies. Erection commissioning, operation and maintenance services. Consultancy services. Transportation Systems Traction systems. Urban transportation systems. Erection commissioning, operation and maintenance services. Consultancy services. Industrial Systems Industrial drives and control systems. Erection commissioning, operation and maintenance services. Spares management. Consultancy services.

Marketing accomplishments of BHEL: New Orders: Existing customers repose confidence with new orders-2x660 MW Supercritical sets from DB Power (MP) Ltd., 2x660MW Steam Generator order for Mauda supercritical Thermal Plant of NTPC and for new rating thermal set of 300 MW from Ahijeet Projects Ltd. Main plant equipment package for 2 x 600 MW Singareni Thermal power project from Singareni Colleries Co.Ltd. Contract signed with PGCIL for setting up the worlds first + 800 kV,6000 MW UHVDC multi-terminal transmission system to supply hydro power across 1700 kms. (North-east to Agra), with highest ever converter capacity, in consortium with ABB.

ONGCs order for state of the art-6 nos of AC drilling rigs Single interest Raw Material Handling System(RMHS) from NMDC Product Offerings: Introduced new rating 300 MW sets, further enhancing the range of thermal sets on offer in subcritical as well as supercritical range. Commissioned new rating 525MW thermal sets for first time in the country. Achieved stabilization of CFBC boiler for Indian conditions with Indias largest CFBC boiler of 250MW International Ventures: Export orders from 21 countries Power and transmission projects commissioned in Oman, Taiwan, Nepal and Afghanistan Operational Excellence and Quality 9 power stations out of 12 and 10 power stations out of 13 equipped with BHEL equipment were awarded with Govt of Indias National Awards for Meritorious performance for the years2009-10 & 2010-11 respectively. BHEL equipments contributed 69% of power generated in the country in FY 201112. Consistent operating availability of 500MW thermal sets at more than 90% for last five years. Strategic Initiative Focus on Renewable Sets new record in SPV business-15MWp of Solar power plants installed across the country. Two eco- friendly Grid - interactive Solar power plants of 5MWp for IOCL and 3 MWp for KWPCL

Accolades Received SCOPE meritorious award for R&D, Technology Development and Innovation Received MoU Excellence Award 2000-10 as the top performing CPSE in industrial sector Conferred the NDTV Profit Business Leadership Award BHEL is awarded EEPCs Top export award for projects export Significant orders being executed by BHEL in Power Sector: 1. Singrauli Supercritical power project (2 x 660MW) 2. Singareni Thermal Power Project (2 x 600MW) 3. NTPC Mauda 2 x 660MW Steam Generator 4. Abhijeet Chandwa 300 MW thermal plant 5. 500 MW Bhavini Kalpakkam Nuclear Power Project 6. Kakrapara Nuclear Plant

Major Power projects commissioned by BHEL: 1. 2 x 525 MW unit 1 & 2 for Maithon Power Ltd 2. 2 x 500 MW DVC Durgapur 3. 1 x 500 MW APGENCO Kothagudem 4. 1 x 500 MW KPCL Bellary unit-2 5. 2 x 500 MW MSPGCL Bhusawal 6. 1 x 500 MW APCPL Jhajjar 7. 1 x 500 MW MSPGCL Khaperkheda 8. 1 x 500 MW DVC Koderma 9. 1 x 250 MW WBPDCL Santaldih 10. 1 x 250 MW UPRVUNL Hariduaganj 11. 1 x 250 MW NLC Neyveli TS II expansion 12. 351 MW CCPP Hazira 13. 1 x250 MW STG1 Pragati 14. 1 x 500 MW Vallur

15. 1 x 500 MW Simhadri 16. 2 x 100 MW Hydro sets for Koteshwar 17. 1 x 37 MW APGCL Lakwa 18. 2 x 126 MW GTGs in Oman 19. 1 x 63 MW Hydro sets in Taiwan 20. 2 x 5 MW Hydro sets in Nepal, etc.

BHEL-ELECTRONICS DIVISION(EDN)-An insight: EDN was established in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. EDN is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence. BHEL-EDN commenced manufacture of power semiconductor devices in the year 1978, to cater to the growing requirements of power electronic systems and controls in India. The semiconductor devices from BHEL, consisting of thyristors, diodes and power modules, have earned a reputation for high reliability and quality and are also exported to other countries. These devices are manufactured in a state-of-the-art fabrication facility having diffusion, alloying, encapsulation and testing equipment and this centre is the first in India to have been accredited with ISO 9001 and ISO 14000 certification among semiconductor product segment. BHEL-make devices are widely used in a variety of applications such as High Current Rectifiers, UPS & Battery Chargers, Industrial & Traction Equipment, High Speed Exciters of Turbo-generators and HVDC transmission systems. BHEL-EDN is presently geared to design, develop manufacturing processes and quality procedures, and to supply special-purpose power semiconductor devices & semi-processed chips according to customised requirements, in addition to the standard range of products. As a testimony to its capability, BHEL-EDN has won the ELCINA award thrice from the

Electronic Components Industries Association of India and has also been recognised as the "Centre for Development of Technology for Power Semiconductor Devices" by Department of Electronics (Presently Ministry of Information Technology), Government of India As a part of Power Plant automation, BHEL-EDN has been manufacturing Excitation systems from 1978. Over 1200 units of excitation systems (direct and indirect type), based on different hardware platforms, are in operation in India as well as abroad. The present range of manufacture for all applications, are Digital Excitation Systems, on well established Digital Voltage Regulation where in BHEL has bagged orders for over 300 systems, most of which are in operation in various project sites. Direct excitation systems Bharat Heavy Electricals Ltd(EDN) has been providing several power plant automation solutions, based on the well proven PROCONTROL P-13 DCS system. The applications range from SG, TG controls and Station DCS for Industrial Co-generation CPP to geographically distributed Unified Plant Automation systems for Large Utilities upto 500 MW. BHEL is now well positioned with a Technical Collaboration Agreement with Metso Automation MAX Controlc USA for manufacture and supply of maxDNA DCS system for complete plant controls of Industrial CPP and Utility Power Plants, whose tenure got expired by 2004 and now has entered into collaboration with Metso Automation Finland for Metso DNA control system. Switchyard forms an integral part of any power plant i.e. Industrial CPP, Thermal Power Utilities, Gas Turbines based power plants or Hydel power plants. These power plants have their main plant equipment integral controls (Boiler / Turbine / Gas Turbine / Hydro Turbine) as well as plant DCS System (BoP / Station C & I). While the entire power plant is integrated at the DCS level, true unification is achieved by incorporating / integrating switchyard controls (SCADA) also in the plant DCS. BHEL has incorporated switchyard SCADA on IBS hardware (Multibus compatible) and integrated with main plant DCS in a few projects. With the Technical Collaboration Agreement for the state-of-the art maxDNA system, BHEL is is now well position to provide this unification on the same platform as the plant level DCS system.

The Supervisory control and data acquisition system (SCADA) of switchyard consists of Operator Stations, Engineer's Stations, Historical Storage, Computers and associated peripherals and the switchyard bay control systems interconnected through a high speed network . The system constitutes several operator work stations and engineer's work station with high resolution Color display monitors, touch screen, function key board, mouse, track ball and printers. The system collects digital and analog information available throughout the plant and presents information in various graphic displays, alarms, logs, reports. The operator can perform control via CRT.

POWER PLANT AUTOMATION SYSTEMS & PRODUCTS BY EDN: Power Semiconductor Devices Steam Generators Electronic Automation System For Steam Turbines Electronic Automation System For Hydro Turbines Station C & I and MMI-DAS Non Conventional Energy Digital Excitation Systems DDC Hardware Platforms for Procontrol P-13 DDC Hardware Platforms Switchyard

Steam generators occupy a vital place in a Thermal Plant - be it a utility or process industry. They are required to produce steam safely /economically with a high degree of availability. The concept of steam generation being a complex thermodynamic process; imposes an exciting demand on the Automation and controls systems. BHEL- Electronics Division since its inception in 1976 has evolved on unfalliable strategy for a variety of control systems needed for steam generators.

With the successful adaptation of a field Proven digital technology, BHEL-Electronics Division offers a comprehensive and unifled control system with a high degree of automation based on Distributed Digital Control principles for all ranges and varieties of Steam generators (SPEEDTRONIC systems) BHEL Electronics Division supplies Gas Turbine Control Systems for all ratings (frame sizes) of Heavy duty gas turbines, which are manufactured / supplied by BHEL, Hyderabad. BHEL is the first and the only licensee of GE, USA for manufacturing of Mark-IV control systems and the licensee for Mark-V and Mark-VI Control systems.

BHEL's Gas Turbine Controls are supplied for Mechanical drives, Captive Power Plants (Simple cycle / combined cycle) and Co-generation plants. BHEL is also providing technical services, supply of spares and upgradation of control systems with the current technologies.

RESEARCH METHODOLOGY
i. Primary Data:

The information is collected through the primary sources like: personal interaction with the employees of the department. Getting information by observations e.g. in manufacturing processes. Discussion with the head of the department.

ii.

Secondary Data:

The data is collected through the secondary sources like: Annual Reports of the company. Office manuals of the department. Magazines, Reports in the company. Policy documents of various departments.

DATA ANALYSIS

i.

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and weaknesses of a firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information available in a companys financial statements. The level and historical trends of these ratios can be used to make inferences about a companys financial condition, its operations and attractiveness as an investment. The information in the statements is used by Trade creditors, to identify the firms ability to meet their claims i.e. liquidity position of the company.

 Investors, to know about the present and future profitability of the company and its financial structure. Management, in every aspect of the financial analysis. It is the responsibility of the management to maintain sound financial condition in the company.

ii.

RATIO ANALYSIS

The term Ratio refers to the numerical and quantitative relationship between two items or variables. This relationship can be expressed as Percentages Fractions Proportion of numbers. Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements so that the strengths and weaknesses of a firm, as well as its historical performance and current financial condition can be determined. Ratio reflects a quantitative relationship which helps to form a quantitative judgement.

iii.

STEPS IN RATIO ANALYSIS

The first task of the financial analysis is to select the information relevant to the decision under consideration from the statements and calculate appropriate ratios. To compare the calculated ratios with the ratios of the same firm relating to the past or with the industry ratios. It facilitates in assessing success or failure of the firm. Third step is interpretation, drawing of inferences and report writing. Conclusions are drawn after comparison.

iv.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between

variables.

They enable analyst to draw conclusions regarding financial operations. Their use of ratios

as a tool of financial analysis involves the comparison with related facts. This is the basis of ratio analysis. The basis of ratio analysis is of four types. Past ratios, calculated from past financial statements of the firm. Competitors ratio, of the most progressive and successful competitor firm at the same point of time. Industry ratio, the industry ratios to which the firm belongs to Projected ratios, ratios of the future developed from the projected or proforma financial statements

v.

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent imitations of ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes, change in accounting policies, window dressing etc., should also be kept in mind when attempting to interpret ratios. The interpretation of ratios can be made in the following ways. Single absolute ratio Group of ratios Historical comparison Projected ratios Inter-firm comparison

vi.

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios are Accuracy of financial statements Objective or purpose of analysis Selection of ratios

 Use of standards Caliber of the analysis

vii.

IMPORTANCE OF RATIO ANALYSIS

Aid to measure general efficiency Aid to measure financial solvency Aid in forecasting and planning Facilitate decision making Aid in corrective action Aid in intra-firm comparison Act as a good communication Evaluation of efficiency Effective tool

viii.

LIMITATIONS OF RATIO ANALYSIS

Differences in definitions Limitations of accounting records Lack of proper standards No allowances for price level changes Changes in accounting procedures Quantitative factors are ignored Limited use of single ratio Background is over looked Limited use Personal bias

ix.

CLASSIFICATIONS OF RATIOS

The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. Various accounting ratios can be classified as 1. Traditional Classification 2. Functional Classification 3. Significance ratios a) Traditional Classification It includes the following. Balance sheet (or) position statement ratio: They deal with therelationship between two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items must, however, pertain to the same balance sheet. Profit & loss account (or) revenue statement ratios: These ratios deal with the relationship between two profit & loss account items, e.g. the ratio of gross profit to sales etc., Composite (or) inter statement ratios: These ratios exhibit the relation between a profit & loss account or income statement item and abalance sheet item.

b) Functional Classification These include liquidity ratios, long term solvency and leverage ratios, activity ratios and profitability ratios. c) Significance ratios Some ratios are important than others and the firm may classify them as primary and secondary ratios. The primary ratio is one, which is of the prime importance to a concern. The other ratios that support the primary ratio are called secondary ratios. x. FUNCTIONAL RATIOS-AN INSIGHT:

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

 Liquidity ratio Leverage ratio Activity ratio Profitability ratio

a) Liquidity Measurement Ratios

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities.

In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.

The biggest difference between each ratio is the type of assets used in the calculation. While each ratio includes current assets, the more conservative ratios will exclude some current assets as they aren't as easily converted to cash.

1) CURRENT RATIO

The current ratio compares a company's current assets (those that can be converted to cash during the current accounting period) to its current liabilities (those liabilities coming due during the same period). The usual formula is: Current Ratio = Current Assets / Current Liabilities

The current ratio measures the company's ability to repay the principal amounts of its liabilities.The current ratio is closely related to the concept of working capital. Working capital is the difference between current assets and current liabilities. Is a high current ratio good or bad? Certainly, from the creditor's standpoint, a high current ratio means that the company is well-placed to pay back its loans. Consider, though, the nature of the current assets: they consist mainly of cash and cash equivalents. Funds invested in these types of assets do not contribute strongly and actively to the creation of income. Therefore, from the standpoint of stockholders and management, a current ratio that is very high means that the company's assets are not being used to best advantage. When looking at the current ratio, it is important that a company's current assets can cover its current liabilities; however, investors should be aware that this is not the whole story on company liquidity. Try to understand the types of current assets the company has and how quickly these can be converted into cash to meet current liabilities. This important perspective can be seen through the cash conversion cycle. By digging deeper into the current assets, you will gain a greater understanding of a company's true liquidity.

2) QUICK RATIO The quick ratio is a variant of the current ratio. It takes into account the fact that inventory, while it is a current asset, is not as liquid as cash or accounts receivable. Cash is completely liquid; accounts receivable can normally be converted to cash fairly quickly, by pressing for collection from the customer. But inventory cannot be converted to cash except by selling it. The quick ratio determines the relationship between quickly accessible current assets and current liabilities: Quick Ratio = (Current Assets - Inventory) / Current Liabilities The quick ratio shows whether a company can meet its liabilities from quicklyaccessible assets. In practice, a quick ratio of 1.0 is normally considered adequate, with this caveat: the credit periods that the company offers its customers and those granted to the company

by its creditor must be roughly equal. If revenues will stay in accounts receivable for as long as 90 days, but accounts payable are due within 30 days, a quick ratio of 1.0 will mean that accounts receivable cannot be converted to cash quickly enough to meet accounts payable. It is possible for a company to manipulate the values of its current and quick ratios by taking certain actions toward the end of an accounting period such as a fiscal year. It might wait until the start of the next period to make purchases to its inventory, for example. Or, if its business is seasonal, it might choose a fiscal year that ends after its busy season, when inventories are usually low. As a potential creditor, you might want to examine the companys current and quick ratios on, for example, a quarterly basis. 3) CASH RATIO The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities. Cash ratio=Cash / Current Liabilities The cash ratio is the most stringent and conservative of the three short term liquidity ratios (current, quick and cash). It only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations. It also ignores inventory and receivables, as there are no assurances that these two accounts can be converted to cash in a timely matter to meet current liabilities. Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn't necessarily a bad thing, so focus on this ratio being above 1:1 is not required. b) PROFITABILITY INDICATOR RATIOS These ratios, much like the operational performance ratios, give users a good understanding of how well the company utilized its resources in generating profit and shareholder value

1)

Gross Profit Margin

A company's cost of sales, or cost of goods sold, represents the expense related to labor, raw materials and manufacturing overhead involved in its production process. This expense is deducted from the company's net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favorable profit indicator. Gross profit margin = Gross profit / sales. Industry characteristics of raw material costs, particularly as these relate to the stability or lack thereof, have a major effect on a company's gross margin. Generally, management cannot exercise complete control over such costs. 2) Net Profit Margin

Often referred to simply as a company's profit margin, the so-called bottom line is the most often mentioned when discussing a company's profitability. While undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behooves investors to take a comprehensive look at a company's profit margins on a systematic basis. Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. c) ACTIVITY RATIOS

Funds are invested in various assets in business to make sales and earn profits. Activity ratios measure the efficiency (or)effectiveness with which a firm manages its resources (or) assets. These ratios are also called Turn over ratios because they indicate the speed with which assets are converted or turned over into sales. Working capital turnover ratio

 Fixed assets turnover ratio Capital turnover ratio Current assets to fixed assets ratio

1) WORKING CAPITAL TURNOVER RATIO Working capital of a concern is directly related to sales Working capital = Current assets - Current liabilities It indicates the velocity of the utilization of net working capital.This indicates the no. of times the working capital is turned over in the course of a year. A higher ratio indicates efficient utilization of working capital and a lower ratio indicates inefficient utilization. Working capital turnover ratio=cost of goods sold/working capital 2) FIXED ASSETS TURNOVER RATIO It is also known as sales to fixed assets ratio. This ratiomeasures the efficiency and profit earning capacity of the firm. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio meansunder-utilization of fixed assets.

Fixed assets turnover ratio =Cost of sales/Net fixed assets Cost of Sales = Income from Services Net Fixed Assets = Fixed Assets - Depreciation

3) CAPITAL TURNOVER RATIOS Sometimes the efficiency and effectiveness of the operations are judged by comparing the cost of sales or sales with amount of capital invested in the business and not with assets held in the business, though in both cases the same result is expected. Capital invested in the business may be classified as long-term and short-term capital or as fixed capital and working capital or Owned Capital and Loaned Capital. Capital turnover ratio =Cost of goods sold/Capital employed Cost of Goods Sold = Income from Services Capital Employed = Capital + Reserves & Surplu

4)

CURRENT ASSETS TO FIXED ASSETS RATIO

This ratio differs from industry to industry. The increase in theratio means that trading is slack or mechanization has been used. A declinein the ratio means that debtors and stocks are increased too much or assets are more intensively used. If current assets increase with the corresponding increase in profit, it will show that the business is expanding. Current Assets to Fixed Assets Ratio =Current Assets/Fixed Assets

d) LEVERAGE RATIOS Leverage ratios are the financial statement ratios which show the degree to which the business is leveraging itself through its use of borrowed money. 1) FINANCIAL LEVERAGE RATIO The financial leverage ratio is also referred to as the debt to equity ratio. The financial leverage ratio indicates the extent to which the business relies on debt financing. Financial Leverage Ratio = total debt / shareholders equity. Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more than onethird of debt in long term. A high financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining more funding. 2) OPERATING LEVERAGE RATIO The operating leverage reflects the extent to which a change in sales affects earnings. Operating Leverage = percent change in EBIT / percent change in sales. A high operating leverage ratio, with a highly elastic product demand, will cause sharp earnings fluctuations.

In a sense, operating leverage is a means to calculating a company's breakeven point. However, it's also clear from the formula that companies with high operating leverage ratios can essentially make more money from incremental revenues than other companies, because they don't have to increase costs proportionately to make those sales. Accordingly, companies with high operating leverage ratios are poised to reap more benefits from good marketing, economic pickups, or other conditions that tend to boost sales. Likewise, however, companies with high operating leverage are more vulnerable to declines in revenue, whether caused by macroeconomic events, poor decision-making, etc. It is important to note that some industries require higher fixed costs than others. This is why comparing operating leverage is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

RESULTS AND INTERPRETATION OF DATA ANALYSIS

1. STATEMENT SHOWING CURRENT RATIO:

TABLE 1: YEAR 2007-2008 2008-2009 2009-2010

Rs. in lakhs 2010-2011 2011-2012

CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO

72841.66

99870.46

117545.75

149034.04

154202.46

69807.22

101464.37

111188.38

125064.15

95044.32

1.04

0.98

1.06

1.19

1.62

CHART 1:

CURRENT RATIO
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00

CURRENT RATIO

INTERPRETATION: For an industry the ideal current ratio required is 1.5:1.Here BHEL has not shown much variation in its liquidity position over the period of 5 years. It has maintained its current ratio around 1.0 to 1.6. The ratio was less during the years 2008 to 2011 whereas in 2012 a good ratio of 1.62 is achieved. 2. STATEMENT SHOWING QUICK RATIO:

TABLE 2: YEAR LIQUID ASSETS 2007-2008 57039.76 2008-2009 74615.69 2009-2010 91193.59

Rs. in lakhs 2010-2011 90730.44 2011-2012 116308.73

CURRENT LIABILITIES QUICK RATIO

69807.22 0.82

101464.37 0.74

111188.38 0.82

125064.15 0.73

95044.32 1.22

CHART 2:

QUICK RATIO
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 QUICK RATIO

INTERPRETATION: For a firm, ideal quick ratio should be 1:1. The ratios over the period of 5 years have not shown much variations and it is always around 1. Hence the company is capable of repaying its current liabilities. Quick ratio was 1.22 during 2011-2012 is much healthier than the previous years and the company should maintain its inventory level in such a way to have a good quick ratio.

3. CREDITORS TURNOVER RATIO OR ACCOUNTS PAYABLE TURNOVER RATIO:

TABLE 3:

Rs. in lakhs

YEAR COST OF GOODS SOLD CREDITS/ACCOUNTS PAYABLE ACCOUNTS PAYABLE TURNOVER RATIO

2007-2008 60244.59

2008-2009 74783.92

2009-2010 102831.75

2010-2011 109113.33

2011-2012 142450.54

13508.59

18291.54

23547.77

30759.32

42779.78

4.46

4.09

4.37

3.55

3.33

CHART 3:

ACCOUNTS PAYABLE TURNOVER RATIO

6.00 4.00 2.00 0.00

ACCOUNTS PAYABLE TURNOVER RATIO

INTERPRETATION: The accounts payable turnover ratio indicates how many times a company pays off its suppliers during an accounting period. It measures how a company manages paying its own bills. A higher ratio is generally more favorable as payables are being paid more quickly. The company has shown a slow decrease in this ratio over the years. Effort has to be taken to maintain this ratio.

4. DEBTORS TURNOVER RATIO:

TABLE 4: YEAR 2007-2008 2008-2009 2009-2010

Rs. in lakhs 2010-2011 2011-2012

NET CREDIT SALES DEBTORS ACCOUNTS PAYABLE TURNOVER RATIO

94610.35 52318.11

114281.37 70663.70

136351.85 84873.88

185104.57 113322.07

212128.92 112735.52

1.82

1.62

1.61

1.63

1.88

CHART 4:

DEBTORS TURNOVER RATIO

1.90 1.80 1.70 1.60 1.50 1.40

DEBTORS TURNOVER RATIO

INTERPRETATION Higher debtor turnover ratio is good because more higher debtor turnover ratio means, more fastly, money is collected from debtors. The above ratio indicates money collected from debtors over the years 2007 2012 is around 1.6 to 1.8 times only. Measures shall be taken to manage debtors in a better way such that money collection period reduces, increasing BHELs liquidity position.

5. STATEMENT SHOWING CASH RATIO:

TABLE 5:

Rs. in lakhs

YEAR CASH CURRENT LIABILITIES CASH RATIO

2007-2008 52632.91

2008-2009 70675.72

2009-2010 84894.24

2010-2011 85740.72

2011-2012 111924.91

69807.22 0.75

101464.37 0.70

111188.38 0.76

125064.15 0.69

95044.32 1.18

CHART 5:

CASH RATIO
1.20 1.00 0.80 0.60 0.40 0.20 0.00 CASH RATIO

INTERPRETATION A cash ratio of 1.00 and above means that the business will be able to pay all its current liabilities in immediate short term. Therefore, creditors usually prefer high cash ratio. But businesses usually do not plan to keep their cash and cash equivalent at level with their current liabilities because they can use a portion of idle cash to generate profits. This means that a normal value of cash ratio is somewhere below 1.00. And BHEL has shown a steady cash ratio which is appreciable. 6. CASH TO CURRENT ASSETS RATIO:

TABLE 6:

Rs. in lakhs

YEAR CASH CURRENT ASSETS CASH TO CURRENT ASSETS RATIO

2007-2008 52632.91

2008-2009 70675.72

2009-2010 84894.24

2010-2011 85740.72

2011-2012 111924.91

72841.66

99870.46

117545.75

149034.04

154202.46

0.72

0.71

0.72

0.58

0.73

CHART 6:

CASH TO CURRENT ASSETS RATIO

0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

CASH TO CURRENT ASSETS RATIO

INTERPRETATION: A high, or increasing Cash to Current Assets ratio is generally a positive sign, showing the company's most liquid assets represent a larger portion of its Total Current Assets. It also indicates the company may be better able to convert its non-liquid assets, such as inventory, into cash. But generally manufacturing firms do not hold more cash assets which may be effectively diverted to other businesses. 7. CASH TURNOVER RATIO:

TABLE 7: YEAR SALES CASH CASH TURNOVER RATIO 1.80 1.62 1.61 2.16 2007-2008 94610.35 52632.91 2008-2009 114281.37 70675.72 2009-2010 136351.85 84894.24

Rs. in lakhs 2010-2011 185104.57 85740.72 2011-2012 212128.92 111924.91

1.90

CHART 7:

CASH TURNOVER RATIO

2.50 2.00 1.50 1.00 0.50 0.00 CASH TURNOVER RATIO

INTERPRETATION: Indicates a firm's efficiency in its use of cash for generation of sales revenue. BHEL has effectively managed cash for its revenue generation over the period of observation.

8. INVVENTORY TURNOVER RATIO:

TABLE 8: YEAR SALES INVENTORY INVENTORY TURNOVER RATIO 5.99 4.53 5.17 6.95 2007-2008 94610.35 15801.90 2008-2009 114281.37 25254.77 2009-2010 136351.85 26352.16

Rs. in lakhs 2010-2011 185104.57 26620.90 2011-2012 212128.92 37893.73

5.60

CHART 8:

INVENTORY TURNOVER RATIO

10.00 5.00 0.00 INVENTORY INVENTORY TURNOVER RATIO

INTERPRETATION A low inventory turnover ratio shows that a company may be overstocking or deficiencies in the product line or marketing effort. It is a sign of ineffective inventory management because inventory usually has a zero rate of return and high storage cost. Higher inventory turnover ratios are considered a positive indicator of effective inventory management. However, a higher inventory turnover ratio does not always mean better performance. It sometimes may indicate inadequate inventory level, which may result in decrease in sales. 9. INVENTORY HOLDING PERIOD:

TABLE 9: YEAR DAYS/MONTH IN YEAR INVENTORY TURNOVER RATIO INVENTORY HOLDING PERIOD 60.93 80.57 70.60 5.99 4.53 5.17 6.95 2007-2008 365 2008-2009 365 2009-2010 365

Rs. in lakhs 2010-2011 365 2011-2012 365

5.60

52.52

65.18

CHART 9:

INVENTORY HOLDING PERIOD

100.00 50.00 0.00 2007-2008

2008-2009

2009-2010

INVENTORY HOLDING 2010-2011 2011-2012

INVENTORY HOLDING PERIOD

INTERPRETATION This ratio calculates the average time that inventory is held. Individual inventories should be looked at to find areas where the inventory, and inventory holding period, can be reduced. The average inventory period should be compared to competitors. BHEL has got a lesser inventory holding period which is maintained over the years of observation. 10. ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL:

A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio. TABLE 10: YEAR INVENTORIES (%) SUNDRY DEBTORS (%) CASH & BANK BALANCE (%) LOANS AND ADVANCES (%) TOTAL(%) 2007-2008 21.7 71.8 2008-2009 25.3 70.75 2009-2010 22.4 72.2 2010-2011 22.68 72.83 2011-2012 24.57 72.34

0.4

0.01

0.01

0.23

0.24

6.05 100

3.9 100

5.4 100

4.25 100

2.8 100

CHART 10:

2007-2008
LOANS AND ADVANCES (%) CASH & BANK BALANCE (%) 2007-2008 SUNDRY DEBTORS (%) INVENTORIES (%) 0 20 40 60 80

CHART 11:

2008-2009
LOANS AND ADVANCES (%) CASH & BANK BALANCE (%) 2008-2009 SUNDRY DEBTORS (%) INVENTORIES (%) 0 20 40 60 80

CHART 12:

2009-2010
LOANS AND ADVANCES (%) CASH & BANK BALANCE (%) 2009-2010 SUNDRY DEBTORS (%) INVENTORIES (%) 0 20 40 60 80

CHART 13:

2010-2011
LOANS AND ADVANCES (%) CASH & BANK BALANCE (%) 2010-2011 SUNDRY DEBTORS (%) INVENTORIES (%) 0 20 40 60 80

CHART 14:

2011-2012
LOANS AND ADVANCES (%) CASH & BANK BALANCE (%) 2011-2012 SUNDRY DEBTORS (%) INVENTORIES (%) 0 20 40 60 80

INTERPRETATION: BHEL-EDN has managed most of its working capital requirement with sundry debtor funds in all these years of analysis. It has maintained sufficient amount of inventories over all the years. Loans and advances are maintained as minimum to avoid more money payment loss as interests. It has maintained only the required amount of cash balance rest all of it is pooled in business. 11. GROSS PROFIT RATIO:

TABLE 11: YEAR GROSS PROFIT/PROFIT BEFORE TAX TOTAL SALES GROSS PROFIT RATIO 103717.48 0.55 122647.91 0.61 141138.42 0.40 56881.32 74714.72 57094.31 2007-2008 2008-2009 2009-2010

Rs. in lakhs 2010-2011 2011-2012

76205.32

83168.61

194478.23 0.39

222002.62 0.37

CHART 15:

GROSS PROFIT RATIO

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 GROSS PROFIT RATIO

INTERPRETATION The ideal level of gross profit margin depends on the industries, how long the business has been established and other factors. Although, a high gross profit margin indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. A low margin indicates that the business is unable to control its production cost. BHEL EDN should take immense effort in controlling the production costs since it is a manufacturing firm.

SUMMARY AND CONCLUSIONS:

Working capital management is of critical importance to all companies. Ensuring that sufficient liquid resources are available to the company is a pre-requisite for corporate survival. Companies must strike a balance between minimizing the risk of insolvency (by having sufficient working capital) with the need to maximize the return on assets, which demands a far less conservative outlook. To achieve objectives, BHEL is employing a variety of strategies, products, and partners, all with the potential to improve efficiency and limit risk. In addition to accumulating sizable cash positions, BHEL is centralizing treasury operations; integrating working capital functions such as trade finance, cash management and foreign exchange; and automating liquidity management, collection processes and other key elements of working capital management. Among the most important techniques utilised by BHEL to optimise working capital are minimizing inventories, reducing days sales outstanding (DSO), lengthening payment terms with suppliers and taking advantage of supplier financing. With the function playing such a central role in corporate funding strategies, BHELEDN can be expected to continue its intensive drive to improve working capital management and to realise potentially significant benefits in terms of operational efficiency, risk management and overall financial performance. The company can compare its ratio with the similar product line companies to improve its working capital position further. Gross profit ratio has to be improved by taking good attention in reducing the manufacturing or production costs A higher inventory turnover ratio does not always mean better performance. It sometimes may indicate inadequate inventory level, which may result in decrease in sales. Accounts Payable turnover ratio has shown decrease over past two years, where attention has to be taken to improve this, to improve more creditors.

Measures shall be taken to manage debtors in a better way such that money collection period reduces, increasing BHELs liquidity position.