WORKING CAPITAL

A DISSERTATION REPORT

On

A STUDY OF WORKING CAPITAL MANAGEMENT

IN

BHEL

SUBMITTED FOR PARTIAL FULFILLMENT OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION
By
Rafique Alam
(Roll No.: 1268670137)
Under the Guidance of
Mr. Manish Sinha
Assistant Professor
Accurate Institute of Advanced Management, Greater Noida
(Affiliated to UPTU and Approved by AICTE)
2014

WORKING CAPITAL

Accurate Institute of Advanced Management

(Affiliated to UPTU and Approved by AICTE)

HEAD OF MBA PROGRAMS CERTIFICATE

This is to certify that the Dissertation titled A Study Of Working Capital Management
in BHEL is carried out by Mr .Rafique Alam Roll No. 1268670137 student of MBA
IV Semester at Accurate Institute of Advanced Management, Greater Noida, under the
supervision of Mr. Manish Sinha , Assistant Professor.
This is an original work carried out by the said student to the best of my knowledge
and I recommend for the submission of this Dissertation to Uttar Pradesh Technical
University, Lucknow in the partial fulfillment of the requirement for the award of
MBA Degree.

Prof. (Dr.) Amar Kr. Saxena

Director,
AIAM, Greater Noida
Date:
Plot No. 49, Knowledge Park-3, Greater NOIDA-201306 (UP), Phone: 0120-2328235, Fax:
0120-2320355 E. Mail.: info@accurate.in, Web: http//www.aiam.in

WORKING CAPITAL

PREFACE

The learning process of classroom is incomplete without any practical field experience. It is
because of the reason that our Institute like any other, has provision for practical training so
accordingly we have been given this Dissertation for practical exposure.

This work gave us an insight to understand that how some of the important concepts that we
have been studying as a student of management are applicable in the field. The project is a
sincere attempt to focus on the subject in a lucid manner. I sincerely attempted to carry out in
depth study of the subject.

Rafique Alam
Roll no.:- 1268670137

WORKING CAPITAL

TABLE OF CONTENT
(i)
(ii)
(iii)

Acknowledgement
Declaration
Summary
Page No.

1. INTRODUCTION

6-73

1.1 Introduction of BHEL

1.2 Objective of the Project
1.3 Need for working capital management
1.4 Working Capital Management
1.5 Scope of Project
2. RESEARCH METHODOLOGY

74-79

2.1 Research Methodology

2.2 Data collection
2.3 Data collection methods
3. FINDING & ANALYSIS

83-85

3.1 Finding
3.2 Analysis
4. CONCLUSION & RECOMMENDATION

86-122

4.1 Conclusion
4.2 Recommendation
5. BIBLIOGRAPHY

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WORKING CAPITAL

ACKNOWLEDGEMENT
I AM HIGHLY INDEBTED TO ALL THE EXECUTIVES OF B.H.E.L.JHANSI WHO HAVE GIVEN
THEIR INVALUABLE GUIDANCE AND IMPORTANT ROLE IN MAKING ME ABLE TO DO THIS
VOCATIONAL TRAINING AND WITHOUT WHOSE HELP MY EFFORTS WOULD NOT HAVE
TAKEN THE PRESENT FORM.

I have no words to express my gratefulness to my project Co-ordinator Mr.P.V.Ramakant

(Accounts Officer) for his inspiring guidance, valuable help and angelic support for the
Completion of my research on A STUDY OF WORKING CAPITAL MANAGEMENT
in B.H.E.L. Jhansi unit.

I am also thankful to Mr. C. N. Saraswat (Finance Manager), Mr. Janmejay Sharma

(Dy.Mgr.Book/Budget/), Mr.Arshad Ali (Dy.Mgr.Cost PSL & Fixed Asset), Mr. Vikram
Goel (Asst.Officer PSL), Mr K.R Nair (Dy.Mgr.Pay Roll) for heir kind Co-operation in
providing us the necessary facilities and Suggestion.

We are also thankful to Mr. Dhruv Bhargava (Sr.Mgr.HR) for their kind co-operation.

We should like to extend our gratitude to the management and staff of BHEL, Jhansi for
their co-operation during m

WORKING CAPITAL

DECLARATION

I hereby declare that this research work entitled Bharat Heavy Electrical Limited : A Study
of Working Capital Management, is my work, carried out under the guidance of my
faculty guide Mr. Manish Sinha, and my company guide Mr.P.V.Ramakant (Accounts
Officer), Bharat Heavy Electrical Limited. This report neither full nor in part has ever been
submitted for award of any other degree of either this university or any other university.

RAFIQUE ALAM

Accurate Institute Of Advance Management

Greater

WORKING CAPITAL

SUMMARY

Is a matter of fact every management student has to under go practical training in an

approved business organization for 8 weeks. Normally in the summer vocation under the
guidance of professional managers, as to became aware of the real life business environment.

I under took the said research at BHEL, Jhansi. The duration of my research is
from 13.02.2014 to 10.04.2014 during this period I did a comprehensive study of various
departments of the organization and also doing the research on A STUDY OF WORKING
CAPITAL MANAGEMENT BHEL, Jhansi unit.

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BHARAT HEAVY ELECTRICALS

In the post independence era when India was moving towards industrialization the major
thrust of the govt. was in the core sector and this sector was given to the public sector. With
this objective, heavy electrical (I) limited was setup in Bhopal in August 1956 with a view
to reach self-sufficiency in the industrial product and power equipment. This plant was
setup under technical collaboration of M/s AEI, U.K.

Three more plants were subsequently setup Tiruchy, Hyderabad and Haridwar with Soviet
and Czechoslovakian assistance in May 1965, dec1965 and Jan 1967 respectively. As there
was a need for an integrated approach for the development of power equipment to be
manufactured in India. Heavy Electricals Ltd. Bhopal was merged into BHEL in 1974

BHEL has now become the largest Engineering and Manufacturing Company employing
about 52,000 employees. Its headquarters is located at Delhi and there are 14
manufacturing units.

WORKING CAPITAL

BHARAT HEAVY ELETRICALS LIMITED JHANSI UNIT

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors
of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation,
Telecommunication, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing
divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18
regional offices, enables the Company to promptly serve its customers and provide them with
suitable products, systems and services -- efficiently and at competitive prices. The high level of
quality & reliability of its products is due to the emphasis on design, engineering and
manufacturing to international standards by acquiring and adapting some of the best
technologies from leading companies in the world, together with technologies developed in its
own R&D centres.
BHEL has acquired certifications to Quality Management Systems (ISO 9001),
Environmental Management Systems (ISO 14001) and Occupational Health & Safety
Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality
Management

BHEL has: -

WORKING CAPITAL

Installed equipment for over 90,000 MW of power generation -- for Utilities,

Captive and Industrial users

Supplied over 2,25,000 MVA transformer capacity and other equipment operating
in Transmission & Distribution network up to 400 kV (AC & DC).

Supplied over 25,000 Motors with Drive Control System to Power projects,
Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc.

Supplied Traction electrics and AC/DC locos to power over 12,000 kames
Railway network

Supplied over one million Valves to Power Plants and other Industries

BHEL's operations are organized around three business sectors, namely Power, Industry including Transmission, Transportation, Telecommunication & Renewable Energy - and
Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to
his needs and respond quickly to the changes in the market.

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BHEL's vision is to become a world-class engineering enterprise, committed to enhancing

stakeholder value. The company is striving to give shape to its aspirations and fulfill the
expectations of the country to become a global player.
The greatest strength of BHEL is its highly skilled and committed 42,600 employees.
Every employee is given an equal opportunity to develop himself and grow in his career.
Continuous training and retraining, career planning, a positive work culture and
participative style of management all these have engendered development of a committed
and motivated workforce setting new benchmarks in terms of productivity, quality and
responsiveness.

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SECTION OF BHEL, JHANSI

BHEL has many departments, while production and administrative department are
separate.

BHEL Jhansi has two main production categories.

Transformer Section

Loco Section

TRANSFORMER SECTION:

In the transformer plant there are ten bays.

Bay 0,1,2:

These are fabrication shops established in 1978 and mainly deal with

fabrication work of transformers and locomotives.

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WORKING CAPITAL
Bay 3:

It is splitted into two parts, half is the machine shop and the second half is

for the bus duct. Bus duct are used to transformer electricity from the generator to the
transformer.

Bay 4:

Here the winding work of the power transformer & dry type transformers

carried out.

Bay 5:

Basically it is core and punch section but in a part of it cast resin coil

encapsulation plant is situated. The coils of dry type transformer are casted, cut and finally
prepared.

Bay 6:

It is also engaged in two processes one half is the traction transfer

assembly.

Bay 7:

In this bay, the dry transformer are manufactured and various types of

insulation are prepared to be used in the transformers.

Bay 8:

This bay was established in the year 1974.It is one of the earliest bays setup. It

is involved in the manufacturing of instruments transformer like 132 kV and 220 kV voltage
/current transformers. ESP transformer is also used manufactured here.

Bay 9:

This is one of the largest bay in the unit engaged in the assembly of

power and rectifier transformers. The time taken for assembly ranges from 4-12 weeks.
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LOCO SECTION
The other section, locomotives department is one of the most important departments in
factory. It deals with the manufacture and production of the following types of
locomotives.

1. AC locomotives
2. AC/DC locomotives
3. Thryster type locomotives.
4. Diesel electric locomotives shunting locomotives (DESl)
5. Diesal shunting? Engine of various capacities and haula

The unique modern machines available in Jhansi unit are follows:

CNC cropping line machines

Vapour phase drying system

Computer ICM 6040 and 6080 and IRISHI

40/20 with graphic facilities.
Bogie frame machining center
CNC axle turning lathe Facing and centering machines
Wheel forcing press CNC pipe bending machines

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FINANCE DEPARTMENT IN BHEL, JHANSI

A sound financial management is the crux of the efficient Management of a business
enterprise and financial management on scientific and sound lines is a prime consideration
of BHEL.The Finance/Accounts Department of the company controls all the financial
operation. That is directed at improving profitability and internal resource generation
through Optional utilization of men, material, tools and money.
According to its various function the Finance/Account Department is
Divided into following section: -

Price Store Ledger (PSL)

Supply Bills

Cash

Pay

Books Budget and MIS

Sales

Miscellaneous and Revenue

Internal Audit

Export Incentives, Sales Tax and Income Tax

Provident Fund
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WORKING CAPITAL

Works Traveling Allowance

PRICE STORE LEDGER

PSL section is entrusted wITH THE JOB OF MATERIAL PRICING Determination
of material consumption. PSL are used for the

Material

Accounting as well as their

financial ACCOUNTING. THE DOCUMENT involved Are:

SRV Store Receipt voucher

MIV Material Issue voucher
SRN Store Return Note
MTV- Material Transformer Note
RCDV- Receipt cum dispatch voucher

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WORKING CAPITAL
Passing Bills

The bills Passing process starts after the account section gets the
Purchase order, SRVs and bills from suppliers. The accountants section
then makes payment.

Terms of payment are of three kinds:

10% in advance payment

100% after receipt and acceptance
Partial advance and the remaining after receipt and acceptance

Foreign Purchase
There are certain items, which are to be imported. A license is
Required for such items. The license can be acquired from DGTD.There is
Also provision for forward cover.

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WORKING CAPITAL

Cash

This section is responsible for banking of all money worth received by the company from
customers and disbursement of all authorized payment on behalf of the company to
suppliers, contractors in form cheques, cash, drafts, postal orders etc.

It is also concerned with payment of salaries, wages and other

Personal payment of employees. Cash section prepare these statement for management
information

Daily cash flow > Daily collection of sales.

Weekly cash inflow > outflow- during week

Statement of pending bills of cash section status of margin money

Monthly cash inflow forecast for 3 months.

Operating result statement

Statement of outstanding letter of credit & bank guarantee.

Daily bank transfer statement

Bank reconciliation statement is also prepared BHEL has centralized Cash Credit system.
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WORKING CAPITAL

Pay Section

It is assigned the job of payment of salaries and other personal

Payment to employees it looks after provident fund, gratuity and bonuses insurance
facilities extend to employees.

Employees leave encashment official traveling reimbursement and

This Section deals other welfare expenses. It is entrusted with
Clearance of medical claims.

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WORKING CAPITAL

Books, Budget and MIS

Journal ledger is the consolidated list of journal entries. As soon as the journal voucher is
received, the journal ledger is prepared.

In the journal ledger, receipt and expenditure both are recorded. This Section
prepares section wise and monthly Trial balance. After the preparation of journal ledger,
trial balance, P&L account and the balance sheet are prepared yearly. The balance sheet is
prepared in accordance with the companys act.

Two types of audit are done: 1.

Internal

audit

2. Government

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WORKING CAPITAL

Budget
Budget is a target setting for operation.

Two types of budget are prepared: -

Revenue Budget: It consist of consolidated production programmed & related expenses to

carry out that programme.

Capital Budget: It includes the fixed assets.

Preparation of Budget is done at three level

1. Internal level: Each department is sent information about the Budgeted expenses
provided to the department. It is necessary for control

2. Corporate level: Budget of BHEL unit is sent to the corporate Office

3. Government level: Budget of BHEL is also sent to govt. Level

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WORKING CAPITAL

MANAGEMENT INFORMATION SYSTEM

Three types of information system are generated

1. Internal for the unit

2. Foe the corporate office
3. For Government
Every month information is generated regarding allocation of fund on various aspects for
each department and is sent to every department Information is generated mainly for
control purpose. Other information-generated are-

1. Cash flow
2. Inventory level (non moving and slow moving items)
3. Inventory of finished goods

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WORKING CAPITAL

COST SECTION
This section is responsible for accounting and reporting of costs. It determines direct labor
rates and eng. Rates and overheads recovery factors of manufacturing, engineering,
commercial and administration for cost estimation. The cost accounting is done to record
and collect cost for work order and product level information. It prepares material, labor,
and overheads, cost consumption statement. It furnishes cost report to management about:

Profitability

- Product wise, order wise

Variance

- Estimated and Actual cost

Performance

- Efficiency and operating result

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WORKING CAPITAL
SALES SECTION

The accounting of sales is done in the section. The activity of this Section starts when
the commercial department issues a work order. Work Order part II (Financial) summarizes
the financial terms of the contracts. It Contains the information like the name of customer
& consignee, description Of goods to be produce and sold, quantity, sales value, terms of
delivery And payment, price variation clause, sales tax, excise duty, liquidated Damages,
Bank guarantee, freight etc. with the part II W.O. details. A part from that the term and
conditions embodied in W.O. part II as regards Adjustment of advances, deferred debts and
calculation of PVC, Excise duty And Sales Tax must also be complies with. Sales section
submits the bills to the customers as desired by commercial either direct or through
Financial Such as Banks.

This section does the necessary accounting for the bills raised; money collected from
customers in from of advance or sale proceeds.

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WORKING CAPITAL

MISCELLANEOUS AND REVENUE

Miscellaneous wing of this section deals with payment of advance to employees going on
official tour, LTC etc. Payment to transporters, welfare activities, security services, repairs
and maintenance, daily wages, furniture, departmental and other petty expenses.

The revenue wing of this section with recovery of rent, electricity and Water charges for
other facilities from the salary of the employees.

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WORKING CAPITAL

INTERNAL AUDIT
BHEL is having its own team of internal auditors, who to unearth the Discrepancies in
accounting, check periodically the books of accounts as Well as schedules forming part of
accounts.

SALES TAX
This section deals with export procedures of finished goods. It is entrusted to get licenses
for exports. It is also responsible for claim of duty drawback and export incentives. This
section also looks the import of raw materials that forms par to finished good.

It also assess of sales tax, income tax and other matters related to Custom duty.

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WORKING CAPITAL

1.2 OBJECTIVE OF THE PROJECT

Working capital is synonymous with current assets. There is no denying
the fact that working capital is one of the most important tool in the hands of
the company for the successful operation of the business. It is imperative for
the finance manager to properly assess the future requirement of working
capital in the company. Keeping in the view this objective in mind, the
company assigned me this challenging project of estimating the future needs
of working capital of the company. The project itself speaks for the
importance of the study.
To study organizations working capital financial mix.
To access the working capital requirement.
To know about the length of operative cycle.
To study the financial pattern of
To study the earning and payment of the organization.
To find current assets and current liabilities
To know about the optimum maintainable.
To study the growth and performance
To study the inflow and outflow of funds.
To locate weakness and suggest various suggestion.
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WORKING CAPITAL

1.3 NEED FOR WORKING CAPITAL MANAGEMENT

Along with the fixed capital almost every business requiring working capital
though the extent of working capital requirement differs in different
businesses. Working capital is needed for purchasing raw materials. The
raw material is then converted into finished goods by incurring some
additional costs on it. Now goods are sold. Sales do not convert into cash
instantly because there is invariably some credit sales. Thus, there exists a
time lag between sales of goods and receipt of cash. During this period,
expenses are to be incurred for continuing the business operations. For this
purpose working capital is needed which shall be involved from the
purchase of raw materials to the realization of cash. The time period, which
is required to convert raw materials to the realization of cash? The time
period, which is required to convert raw materials into finished goods and
then into cash is known as operating cycle or cash cycle. The time need for
working capital can also be explained with the help of operating cycle.
Operating cycle of a manufacturing concern involves five phases:

Conversion of cash into raw material

Conversion of raw material into work in progress
Conversion of work in progress into finished goods
Conversion of finished goods into debtors by credit sales
Conversion of finished goods into cash by realizing cash from them.

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WORKING CAPITAL

1.4 WORKING CAPITAL MANAGEMENT

Meaning of Working Capital
capital required for a business can be classified under two main categories are: 1. Fixed capital
2. Working capital.
Every business needs funds for two purposes for establishment and to carry out its
day-to-day operations. Long-term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery. Land, building, furniture, etc.
investments in these assents represent that part of firms capital which is blocked on a
permenat or fixed basis and is called fixed capital. Funds are also needed for short-term
purpose for the purchase of raw material, payment of wages and other day-today expenses,
etc. these funds are known as working capital. In simple words, working capital refer to
that part of the firms capital which is required for financing short term or current assets
such as cash. Marketable securities, debtors and inventories. Funds thus, invested in
current assets keep revolving fast and are constantly converted into cash and this cash f
lows out again in exchange for other current assets. Hence, it is also know as revolving or
circulating capital or short-term capital.

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WORKING CAPITAL
DEFINITION: In the words of shubin, working capital is the amount of funds necessary to cover the
cost of operating the enterprise.

According to genesterberg, circulating capital means current assets of a company that are
changed in the ordinary course of business from one from to another, as for example, from,
from cash to inventories, inventories to receivables, receivables into cash.

Concepts of working capital

There are two concept of working capital: 1. Gross working capital
2. Net working capital

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WORKING CAPITAL
Gross working capital
Gross working capital refers to the firms investment in current assts. Current assets are
assets, which can be converted into cash within as accounting year.
Current assets include cash and bank balance, short-term securities, debtors, bill receivable
and inventory. The gross working capital concepts focuses attention on two aspects of
current assets management. Optimum investment in current assets. Financing of current
assets

Net working capital

Net working capital refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outside, which are expected to nature. The payments
are within an accounting year and include bills payable and outstanding expenses. Net
working capital can be positive or negative. Net working capital indicates the liquidity
position of the firm. Generally net working capital is referred to as working capital.

THE NEED OR OBJECTS OF WORKING CAPITAL

The need for working capital. The for working capital arises due to the time gap between
production and realization of cash from sales. There is an operating cycles involved in the
sales and realization of cash. There are time gaps in purchase of raw material and
production, production and sales, and sales and realization of cash. Thus, working capital
is needed for the following purposes:
1. For the purchase of aw materials, components ad spares.
2. To pay wages and salaries,
3. To incur day-to-day expenses and overhead costs such as fuel, power and offices
expenses, etc.
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WORKING CAPITAL
4. Together selling costs as packing, advertising, etc.
5. To provide credit facilities to the customers.
6. To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.

Debtors

Cash

Sales

operating cycle

Work-in-progress

finished goods

Raw material

In case of manufacturing company, the operating cycle is the length of time necessary to
complete the following cycle of events:
1. Conversion of raw into raw material.
2. Conversion of raw material. into work-in-process.
3. Conversion of work-in-process into. finished goods
4. Conversion of. finished goods into accounts receivable
5. Conversion of. accounts receivable into cash

Classification or kinds of working capital

Working capital may be classified in two ways:
On the basis of concept.
On the basis of time.
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WORKING CAPITAL
On the basis of concept, working capital is classification as gross working capital and net
working capital as discuses earlier. This classification is important from the point of view
of financial manager. On the basis of time,

Working

capital may be classified as:

1. Permanent or working capital.

2. Temporary or variable working capital

Kinds of working capital

On the basis of concept

GROSS WORKING
CAPITAL

NET WORKING
CAPITAL

REGULAR
WORKING CAPITAL

on the basis of time

PERMANENT OR
FIXED WORKING
CAPITAL

TEMPORARY OR
VARIABLE
WORKING CAPITAL

RESERVE
SEASONAL
SPECIAL
WORKING CAPITAL WORKING CAPITAL WORKING CAPITAL

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WORKING CAPITAL
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is the minimum amount, which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current assets.
There is an always a minimum level of current assets which is continuously required by the
enterprises to carry out its normal business operations. For example, every firm has to
maintain a minimum level of current assets is process, finished goods and cash balance.
This minimum level of current assets is called permanent or fixed working capital, as this
part of capital is permanently working capital as this part of capital is permanent working
capital also increase in current assets. The permanent working capital can further be
classified as regular working capital and reserve working required to ensure circulation of
current assets from cash to inventories, from inventories to receivable and from receivables
to cash and so on. Reserve working capital is the excess amount over the requirement for
regular working capital which may be provide for contingencies that may arise at unstated
periods such as strikes, rise in pries depression, etc.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is
required to meet the seasonal demands and some special exigencies. Variable working
capital can be further classified as seasonal working capital and special working capital
and special working capital. Most of the enterprises have to provide additional working
capital to meet the seasonal needs of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required to meet special
exigencies such as launching of extensive marketing campaigns for conducting research
etc.
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WORKING CAPITAL

Temporary or variables
Temporary or variables
Working capital
PERMANENT OR FIXED
WORKING CAPITAL

PERMANENT OR FIXED WORKING CAPITAL

In fig. 1 permanent working capital is stable or fixed over time while the Temporary or variable
working capital fluctuates. In fig. 2 permanent working capital is also increasing with the
passage of time due to expansion of business but even then it does not fluctuate as variable
working capital which sometimes increase and sometimes decrease.

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WORKING CAPITAL

The basic objective of working capital is to provide adequate support for the smooth
functioning of normal business operations of the company. The term adequate working
capital is subjective depending on managements attitude towards uncertainty / risk.
Maintenance of working capital
Availability of ample funds at the time of need.

SAFETY

LIQUIDITY

PROFITABILITY

CREDIT MGMT.
MINIMIZE TIME

BANK MGMT.
MINIMIZE TIME
EXCESS

CASH
ACCT.RECEVIABLE
MGMT.
MINIMIZE TIME

ACCT.PAYBLE
MGMT.
OPTIMIZE TIME
MEDIA

Goals of working capital management

WCW: A TRADE-OFF BETWEEN LIQUIDITY AND PROFITABILITY

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WORKING CAPITAL
The two important aims of working capital are to gain profitability along with liquidity.
Liquidity is the form continuous ability to meet maturing obligations. To ensure liquidity,
the firm has to maintain a relatively large investment in current assets holding. But there is
a cost associated with maintaining a sound liquidity position. A considerable amount of
firms profitability will suffer. To achieve higher profitability, the firm can sacrifice
liquidity and maintain a relatively low level of current assets. If the firm does so, its
profitability will improve as fewer funds as tied up in the current assets, but its solvency
will be threatened and exposed to greater risk.

Therefore, firm should maintain its current assts at that level where the liquidity cost is
quite low and the firm is also able to achieve adequate profitability.

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WORKING CAPITAL

DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business.
2. Manufacturing cycle.
3. Sales growth.
4. Nature of raw material used.
5. Demand condition.
6. Production policy.
7. Price level changes.
8. Operating efficiency and performance.
9. Firms credit policy.
10. Available of credit.

11. Degree of synchronization among cash inflows and outflows.

GUIDELINES AND SOURCES OF FUNDS FOR WORKING CAPITAL REQUIREMENTS OF BHEL

CASH CREDIT FROM BANKS:

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WORKING CAPITAL
The requirements of working capital will be met either from internal resources or
borrowing from banks. All the banking transitions have been centralized at consortium of
banks for total cash credit required for the company as a whole.

Working

capital loan from government:

The funds for working capital over and above cash credit limits may also be

arranged through government loans.

RECEIPTS FROM CUSTOMERS:

The bulk of working capital requirements are met from the advances from
customers in accordance with the contract conditions as approved by the board, the receipts
are deposited in the centralized account.

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WORKING CAPITAL
FIXIED DEPOSITS FROM MEMBERS OF PUBLIC:
Subject

to the approval of the government and the board of directors, the funds

may be raised from public by obtaining fixed deposits under the provisions of the company
rules to meets the working capital requirements of the company

Provisions of the funds for site offices: funds required to site offices will be provided by
the divisions under which they are functioning and for the purpose. Current accounts will
be authorized to be opened with branches of SBI or any other nationalized bank.

OTHER SOURCE OF FUNDS:

1. BILL

REDISCOUNTING SCHEME OF

IDBI: the scheme was introduced in1965 the

manufacturer of indigenous capital equipment can push up the sales of their

products by offering to the prospective deferred payments facilities.
The IDBI does not itself discount bill of exchange/promissory notes
but rediscounts those discounted by any other approved bankers.

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WORKING CAPITAL
2. BILL MARKET SCHEME:
RBI providing rediscounting facility for bills having maturity of not more than
120 days introduced this scheme. This facility enables the supplier to get payment for their
supplies at a reduced rate of interest
.
3. EXPORT PRE-SHIPMENT/ POST SHIPMENT CREDITS:
In respect of export orders finance at concessional rates is made available by the
banking system on specific conditions. Pre-shipment finance at a concessional rate is
granted for the period of 180 days. Post-shipment finance is available at same concessional
rate for a maximum period of 90 days. The pre-shipment finance will form part of credit
granted by banking system to the customers.

4. OTHER SCHEMES:
Discounting supply bills can also raise short-term funds. Another scheme related
to raising of funds to the extent of 75% or 80% of the value of inventories not required for
production for next few weeks/months by pledging of such inventories with a banker under
a key loan or pledge account.

FORECASTING OF WORKING CAPITAL

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WORKING CAPITAL
If the working capital is to be estimated for the ensuring year, then the currently
requirement of the assets and cash flows for that period is to be estimated. The basic object
of forecasting is either to measure the cash position of the enterprise or to exercise control
over the liquidity position of the concern
There are many popular methods available for forecasting the working capital requirement,
which follows:

1.. Cash forecasting method

2.The balance sheet method
3.The profit & loss adjustment method
4.Percent of sale method
5.The operating cycle method
6.Regression Analysis method

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WORKING CAPITAL

CASH MANAGEMENT

Cash is an important current asset for the operation of the business. Cash is the
basic input needed to keep the business running on a continuaton basis. It is also the
ultimate output realized by selling the services or the product manufactured by the firm.
Cash is the most liquid of all the current assets. Higher cash and bank balances indicate
high position result in lower profitability, as idle cash fetches no return. Thus a major
function of finance manager is to maintain sound cash position.

Cash management is concerned with managing of: 1.Cash flows in and out of the firm
2.Cash flows with in firm
3.Cash balance held by the firm at a point at time by financing deficit or investing
surplus cash.

OBJECTIVES OF CASH MANAGEMENT

To meet day to day business requirements

To provide for schedule major payment i.e. capital expenditure.

To face unexpected cash drain.

To maintain image of credit worthiness

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WORKING CAPITAL

To size potential opportunities fro profitable long term investment.

To meet requirement of bank relations.

Efficient cash management function calls for cash planning, evaluation of benefits and cost
of policies, sound procedures and practices and synchronization of cash inflows and out
flows. Thus for achieving goals and objectives of cash management, finance manager has
to plan cash needs of the firm followed by cash flow management, determination of
optimum level of cash and finally investment of surplus.

FACTORS AFFECTING CASH REQUIREMENTS

(A) Internal factors.

Profit level

Dividend an taxation policy

Reserves and surplus

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WORKING CAPITAL

Deprecation policy

Expansion program

Operating efficiency

(B) External factors

Fluctuation in market interest rate

Investment avenues available in market

Government economic policy

Rule and regulations of RBI and other regulatory bodies

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WORKING CAPITAL
CASH MANAGEMENT IN BHEL, JHANSI:

In BHEL the centralized cash credit system is followed. From 24-07-75 all the banking
transaction of company has been centralized at corporate office .new Delhi. Under this
system all the sale proceeds of the units are deposited in a centralized account. This
account number is universal for all units at RODs. They have to deposit the sales process if
this account withdraw money form it, only the corporate office operates it

Fir meeting day-to-day expenses the unit have to prepare the estimates of such expenses,
which are then sent to corporate office weekly or monthly, or both .at unit level the cash
budget is prepared on yearly basis for estimating the expected cash inflows and outflows.
The yearly budget is broken down into monthly and weekly intervals. The inflows and
outflows and estimated on following basis.
The only source of cash inflow for unit is the corporate office. The sale proceeds cannot be
directly utilized. Based on the above requisition, the corporate office allocates the funds.
For cash credit, corporate office will negotiate with consortium of bank for total cash credit
required for the company as a whole. A consortium deed for hypothecation of stock and
store of company is executed office. All the information, document etc. required in this
connection will be called for by corporate office from tee division.

Arrangement have already been made with state bank of India, HDFC Bank, Canara
Bank, Bank of Baroda and Indian overseas bank for centralizing total cash credit limits at
New Delhi.
Under this scheme, the units have the following documents. The units will send
estimated, monthly cash flow statement to the corporate office by 18th of every month.
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WORKING CAPITAL
Based on these cash flow statement the corporate office will allocate the sub limit will be
transferred to the consortium of banks by 25th of the month. The units can utilize this fund.
The actual cash flows statement will be sending to corporate office monthly i.e. 1 st of
succeeding month.
The units are also required to send the weekly report of daily bank transactions, to the
corporate office. These reports show the details of daily debit and credit transaction
appearing in bankbooks of the company, enabling the positing of corporate bankbooks as
well as verification of banks statement received from banks.

These report are sent to corporate office on1st (showing the transaction from 25th to 30th of the previous month)
8th(showing the transaction from 1st to 7th of current month)
16th (showing the transaction from 8th to 15th of current month)
25th (showing the transaction from 16th to 21st of current month)

The units are required to send the comparative statement of estimated and annual cash flow
of the preceding month. This report will be sent quarterly after inter-unit reconciliation
meeting. The total interest payable a cash credit available by corporate office is to be
allocated among the units in the ratio of utilization of funds. Thus cash forecast and budget
are the principle tools of cash management. Forecasting helps manager to know how much
cash will be held in balance, to what extent the firm should rely on bank financing and how
much to invest in marketable securities.

ADVANTAGE OF CENTRALIZED SYSTEM

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WORKING CAPITAL

Excess cash at various units can be effectively used for various purpose and
improvements.

Deficit of cash at various units can be sorted out through centralized cash system

Idle cash at various units, may be noted or avoided.

CASH BUDGET IN BHEL, JHANSI

Cash budget is the most significance device to plan for and control receipt and payment.
Cash budget is a summary statement of the firms expected cash inflows and inflows over a
projected time period. In BHEL, cash mangement is centralized and is controlled directly
from corporate office, whatever requirement of funds is felts in BHEL, Jhansi it is sent to
the corporate office and corporate office disburse the funds accordingly.
Cash budget in BHEL, Jhansi is prepared on the basis of production schedule, in prepared
after receiving customers order at the beginning of the year. There are two aspects of cash
budget inflows and outflows. Inflow in cash budget is determined on the basis of receiving
the customers orders and preparing production schedule.

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WORKING CAPITAL
Out flow is determined on the basis of requirement of raw materials, payment of taxes and
duties, interest on borrowing etc. outflow in cash budget is categorized into operation ands
non-operation outflow consist of capital expenditure, exchange variations and suppliers
credit
.
Thus after determining the budgeted estimates of inflows and
outflows cash budget is prepared at the beginning of the year. The distribution of cash is
determination on monthly basis in every month of that year. In the last quarter of the year
cash budget is revised and the latest estimates are calculated and fixed. Monitoring of cash
budget is done through management information system.

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WORKING CAPITAL

RECEIVABLE MANAGEMENT

Customers arising from sale of goods or services define the term receivable as
debt owed to the firm. In the ordinary course of business. Receivable constitute a
substantial portion of current assets. Granting credit and creating debtors amount to the
blocking of firms funds. The interval between the data of sale and date of payment has to
be financed out of working capital. Thus traders debtors represent investment.
Business firm generally sell goods on credit to facilitate sales. When a firm
makers an ordinary sale of goods on services and does not receive payment. The firm
grants trade credit and create accounts receivable that would be collected in the future.

Cost of Maintaining Receivable

The costs associated with the maintenance of account receivable are

1. Capital Cost

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WORKING CAPITAL
When a firm maintains receivables, there is a time lag between the sales of
goods and payment by the customers. Mean while. The firm has to are made by the use of
additional capital which alternatively could be profitably employed elsewhere.

2. Collection Cost
These are costs, which the firm has to in for collection of the amounts at the
appropriate time from the customers.

3. Administrative Cost
In the process of maintaining receivable company incurs some administrative
expenses in the form of salaries to clerks who maintain record of debtors, expenses on
investigating the credit worthiness of debtors etc.

4. Default Cost
When customers makes default in payments, not only the collection efforts has
to be increased but the firm may also have to incur losses due to bad debts.

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WORKING CAPITAL

OBJECTIVE OF RECEIVABLE MANAGEMENT

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

Credit Policy
Credit policy of a firm can be regarded as a kind of trade-off between increased
credit sales leading to increase in profit and the coasts of having larger amount of funds
locked up in form of receivable and loss due to incidence of bad debts.

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WORKING CAPITAL

The variables associated with credit policy are-

1. Credit standard
2. Credit terms
3. Collection efforts

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

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WORKING CAPITAL

RECEIVABLE MANAGEMENT IN BHEL JHANSHI:

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL
grants liberal terms regarding trade credit to lure the potential customers to buy its products
at favorable selling prices.

To utilize its excess capacity, BHEL is granting liberal trade credit terms to its
customers. The main customers of BHEL are railways, power industries and other private
parties. BHEL has overseas sales also.

All the BHEL units are having their commercial department. Commercial department and
regional operational division (RODs) primarily carry out the job of recovery from
customers. The sales section of finance department also actively takes part in receivable
management by preparing and sending invoices and reminders to customers at appropriate
time. They keep track of money received from customers as advances, as against dispatch
of finished goods and money recoverable on account of price variation claims and
conversion of deferred debts into debtors. This monitoring is done work order wise. The
aging schedule of customers if also prepared which gives the picture regarding period of
outstanding balances.

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WORKING CAPITAL

The terms and condition with the customers ate finalized according to the credit policy
laid down by corporate office BHEL. However deviation are permitted with the due
approval from corporate office.

While lying down of credit policy by head office, industry conditions are
taken into consideration. Seeing huge investment in execution of work order, BHEL
demands considerable payment in advance in different phases of completion of work i.e.
erection, installation, commissioning, maintenance etc. Despite all these BHEL is presently
facing cash crunch because a major chunk of BHELs customers consists of government
bodies, which are very casual in clearance of dues.

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WORKING CAPITAL

INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of large
majorities of companies in India. On an average, inventories are approximately 60% of
current assets in public limited companies in India. Inventories are stock of the product, a
company is manufacturing for sale and components that make up the product. The various
forms in which inventories exists in manufacturing company are raw materials; work in
process and finished goods.

The levels of above-mentioned three kinds of inventories for a firm depend on

the nature of its business. A manufacturing firm will have substantially high level of all
three kinds of inventories, while a retail or wholesale firm will have a very high of finished
goods inventories and raw material work in process inventories.

In a manufacturing firm the level of inventory depends on the operating cycle.

A manufacturing firm with a long operating cycle has to maintain a high inventory level.

Need to Hold Inventories

There are three general motive to hold inventories-

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1. Transaction Motives Companies hold inventories to facilitate smooth

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

2.

Precautionary Motives Firm holds inventories to guard against the risk of

unpredictable changes in demand and supply forces and other factors. Firm may also
purchase large quantities of raw material than needed for desired production and sales level
to obtain quantity discounts on bulk purchases.

3. Speculative Motive It influence the decision of the firm to increase or decrease

inventory level to take advantage of price fluctuations.

Cost Associated with holding inventories are

Material Cost

Order Cost
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WORKING CAPITAL

Carrying Cost

Cost of funds tied up in inventory

Cost of running out of goods

Objectives of Inventory Management

To maintain a large size of inventory for efficient and smooth production and
sales operation.

To maintain a minimum investment in inventory to maximize profitability.

The effective management of inventory involves a trade off between having too little and too
much inventory. The firm should avoid a situation of over investment or under investment in
inventories.

The major disadvantage of over investment are

Unnecessary tied up of firms funds and losses of profit.

Excessive carrying cost.

Risk of liquidity.

Physical detritions of inventory during storage.

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Maintaining an adequate level is also dangerous. The consequences of under investment in
inventory are-

Production hold ups

Failure to meet delivery commitment

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

Factors Effecting level of Investment in Inventories

Seasonal nature of raw material

Length and technical nature of production process

Style factor in end product

Terms of purchase

Time factors

Supply conditions

Loan facilities

Other factors
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INVENTORY MANAGEMENT IN BHEL, JHANSI:

The investment in inventory in proportion to total is a dominant determinant of working

capital management. It holds much importance in context of BHEL as it is having a long
production cycle where a good amount of capital is tied up in the form of raw material;
work in process and conversion cost.

Production planning and control department plays a pivotal role in inventory

management. The engineering department plays a supporting role and provides the
requisition regarding technology to be applied and material required to PPC department. In
BHEL the inventory control is perform with following steps-

1.Planning This is done by PPC department is consultation with purchase,

commercial, design and manufacturing department prepares the planning schedule. This
schedule along with information provided by engineering and design department helps in
material planning and inventory control.

2.ProcurementThe procurement done by purchase department. It is done with the assistance

of PPC and commercial department for maintaining a tradeoff between carrying cost and
ordering cost. A single purchase order is placed for the entire quantity of a specific item
and its scattered delivery over a period of time is received. This method helps in obtaining
cash and quantity discounts and saving carrying cost.
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In case of foreign purchase also one order is placed for full requirement of an
item and scattered delivery is opted because variation caused in material cost due to
fluctuation in exchange rate is much less than the carrying cost of the material which is
approximately 25% of the total price.

3.Receipts and CustodyFor the proper inventory control on receipts of material in store, quality
control department checks the material as per specification. The cost section fills details of
all the purchase by issuing store receipts voucher and material issue voucher.

4.IssueAfter receiving the material and storing, the management keeps the
information whether these material are being issued to desired destination. Full record of
every issuing of material is kept for the proper inventory control.

5.AccountingThe record of every transaction regarding the use of material in every

department is kept. These records give the overall view of how and where inventories have
been used.

METHODS USED FOR INVENTORY CONTROL

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

ABC analysis

Slow moving and non- moving goods analysis.

Budgeting material requirements

Fixation of raw material levels

Variety reduction

Codification of materials

Control of work in progress

ABC Analysis

In case of manufacturing company like BHEL, the number of items of raw

material run into thousands (67000 in BHEL, Jhansi) From the point of view of monitoring
information for control, it become extremely difficult to consider each one of these items.

In this case ABC analysis become useful and enables management to concentrate
attention and keeps a close watch on a relatively less number of items, which account for a
high percentage of annual usage value of all items of inventory.

Annual usage value = Annual requirement per unit cost

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In the analysis, items are categorized into A, B, & C category on the basis of their usage
value. The more costly items are classified as an A. This represent large investment item
but is low in number. In B.H.E.L. A category items amount to 60% of investment in
inventory items. Inventory items of average usage are put in S category and these accounts
for 30% of total investment in inventory. Low usage items are pull in C category. It
represents 10% of degree of control and accurate planning. B category requires moderate
control. As C category represents low usage value, much importance is to pay on try
control. Also the planning and control cost incurred for this category will be greater than
their total cost.

the advantages of this system are-

Ensues closer control on costly on costly items.

Helps in developing scientific methods of controlling inventories. Clerical cost is

reduced and stock is maintained at minimum level.

Helps in achieving the main objective of inventory control at minimum level.

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Slow moving and Non-moving goods analysis

It is advantageous to compare the turnover of different stock, which does not move, and
kinds of materials as a means of detecting stock which does not move regularly. Thus
enabling management to avoid keeping capital locked up in undesirable stock. Stock
turnover helps in analyzing such items.

Stock turnover =

Cost of material consumed during period

Average stock of raw material during period

Stock turnover figures the presence of slow moving stock and helps in keeping the level of
such stock to a low mark

Slow Moving stock material which have a low turnover are classified as slow moving
stock. In B.H.E.L., Jhansi an item is regarded as slow moving one, If stock turnover ratio is
less than 10%.

Non-Moving stock- These item have no immediate demand but may be required in future.
Here the items, which are not consumed since two years, are regarded as non-moving stock
or dead inventory. This category includes mainly directly chargeable items.

These item having turn over ratio of 10% or more a fast moving items and some more
important

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DOCUMENTS USED FOR INVENTORY CONTROL
The various documents used for control of inventory are discussed below: -

Store Receipt Voucher

This is issued when raw material purchased reaches the store. It is

issued by store in charge.

Material Issued Voucher

This is an authorization to the storekeeper to issue raw material. Any material

ordered for a specific work order will be recorded on MIV details of material requisition is
entered on the Bin card.

Material Transfer Note

This is issued when the material booked to one particular order is transferred to

another work order.

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Material Return Note

This is an authorization to the storekeeper regarding, raw material, finished parts

or other stores no longer required by the factory. The various stock record and cost
accounts are adjusted in due course from the details given in the form.

Material is kept in appropriate bin and draws. For each kind of material a bin card is
maintained showing details. A bin card assists the storekeeper to control the stock. The bin
card incorporates all information viz. opening balance of materials, material ordered, and
material allotted and closing balance of materials. As a result bin card shows the full cycle
of material like the order of few supplies, allocation of material to jobs, receipt and issue of
material, stock in hand and balance available.

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INVENTORY VALUATION
Inventory is valued at actual / estimated cost or net realizable value, whichever is lower.

Finished goods in plant and work in progress involving hydro and thermal sets including
gas- based power plants, boilers auxiliaries, compressors and industrial turbo sets are
valued at actual/ estimated factory cost or at 97% of the realizable value whichever is
lower.

In respect of valuation of finished goods in plant and work in progress, cost means factory
cost, actual/estimated cost includes excise duty payable on manufactured goods.
In respect of raw material, components, loose tools, store and spare cost means weighted
average cost.

The component and other material purchased / manufactured against production order but
declared surplus are charged off to revenue retaining residual value based on technical
estimates.

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1.5 SCOPE OF THE PROJECT

During the entire duration an emphasis was Laid on understanding the foundational principal
which govern the economy of a state and also the interacting variables influencing the financial
well being of any particular organization be it a mammoth size government running a state or a
small enterprise promoted for the social cause by that state. The project was confined to not
study of state government financials that were collection from various sources for each of the
state of the country. The Annual Performance three year -2001, 02 and 03 for each of the state
were analyzed on the basis of certain set parameters.
Once a rating modal based on the financial well being of the states was formalized the study of
the various state government enterprises was carried out. Due to time constraint only five
sectors were chosen so as to justify the quality of study. The selected sector for the study werea. Irrigation
b. State Electricity Boards
c. Power Financial Corporations
d. Roads
e. State Finance Corporations
These sectors were chosen on the basis of number of issues of Bond, Fixed Deposits, and etc.
for raising fund either privatel or through public offering that coce out from them. Apart from
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that the kind of guarantees extended by the state government to various sector also formed the
basis of selecting thes sectors.

RESEARCH METHODOLOGY
DATA COLLECTION SOURCES

The make conclusion and give recommendation it is necessary to research

about the given topic. As my topic is related to the working capital, the
secondary data has been very useful for this purpose. The cost audit reports
of various years have been used in analyzing the data. Mainly secondary
data has been used. To know about the working capital management, I have
talked to various persons in accounts departments.
Main topics of Research Methodology are:
I.

Research Methodology

II.

Steps in Research Methodology

Collection of data

Organization of data

Presentation of data

Interpretation of data

PROBLEM
To know the working capital requirement of the BHEL and to give some
practicable suggestion in this regard.

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TYPES OF RESEARCH
This research employed four type of research:

Descriptive Research

Analytical Research

Qualitative research

Quantitative Research

DESCRIPTIVE RESEARCH OR EX-POST FACTO

RESEARCH
To conduct the research work accurately, we conducted descriptive
research. It includes surveys and fact-finding inquiries of different kinds.
It is done to know following facts:

The BHEL sales are more influenced by quality.

Frequency of using BHEL products.

Liking in respect of quality.

Media for awareness of schemes.

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ANALYTICAL RESEARCH
In it, we have to use facts and information already available and
analysis theses to make an evaluation for project.
QUALITATIVE RESEARCH
In selection the appropriate research design of the study and the type of
data needed, the choice of data collection techniques is four grouped. It is
done for:

Consumers needs

Consumers preference for brand

Availability for consumers.

QUANTITATIVE RESEARCH
Quantitative research is obtained to rate the different aspect on parameters.

Image of brands

Brand loyalty

Expectation of customers

Awareness among consumers for schemes

Switch ability of consumers.

Trails etc.

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METHODOLOGY

The project includes both primary & secondary sources of data.

The data collected through these sources has been organized, analyses and
interpreted so as to draw conclusion and arrive at appropriate recommendation
a) Primary sources of data include personal interviews from various
accounts officers in the enterprise.
b) The secondary sources of data includes the annual reports, website of
BHEL. Company, which contains details, which is helpful for making
my project report.

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Data collection method:

Both the primary and secondary data has been collected from the
market and the company respectively. The secondary data was
provides through the annual reports, website etc. of the company and
the primary data was collected through the medium of face-to-face
interaction/interviews with the businesspersons in the market.

Data collection instruments

Data once collected needed to be organized for further processing.
Data collected by me was carefully gone through then the relevant
And useful matter was assorted and properly organized.

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Sampling plan
The data collected is of no use unless and unstill it is given in a
presentable from. Thus, after proper organization, the data is given in
a presentable form with complete details with the help of bar
diagram, pie charts etc.

Analysis of data:
The data is carefully analyzed keeping in consideration both the pros
and cons for purpose of arriving at concrete conclusions.

Interpretation of data:
After carefully analyzing the data, it has been aptly interpreted in
order to give concrete conclusions and proper recommendations.

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SCOPE OF THE PROJECT

Solvency of the business: Adequate working capital helps in maintain solvency

of the business by providing uninterrupted flow of production.

Goodwill: Sufficient working capital enables a business concern to make prompt

payment and helps in creating and maintaining goodwill.

Easy loan: A concern having adequate working capital can arrange loan from banks
and other sources on easy and favorable terms.

Cash discount: Adequate working capital also enables a concern avail cash
discounts on the purchase and hence in reduces cost.

Regular supply of raw material: Sufficient working capital ensures regular

supply of raw material and continuous production.

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Regular payment of salaries, Wages and other day-to-day commitment: A company which
has adequate working capital can make regular

payments of salaries, wages and other day to day commitments which raises the morale
of its employees, increases their efficiency, reduces stages and costs.
Ability to face crisis: Adequate working capital enables a company to face
business crises in emergencies such as depression because during such period, generally
there is much pressure on working capital.
So keeping in views all these point we can say that a business should have adequate Working
capital.

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FINDING & ANALYSIS

The Analysis of working capital is primarily a test of short-term solvency. There is danger
in having too little or too much working capital.
Therefore: The financial manager has to be very vigilant all throughout about the trends in the items
that make up working capital.
The questions to be studied and answered in connection with the analysis of working
capital include the following:

Is the management utilizing working capital effectively?

Is the amount working capital adequate, excessive or insufficient?

Does the firm have a favorable credit rating?

Is the current financial position improving?

Objective of Analysis

To maintain adequate working capital at every time.

To minimize the cost of short term financing.

To plant the various sources of short-term finance well in advance in case of the
need.

To study the trends in the working capital positions.

To assess the effectiveness of management of the current assets.

To maximize the return on investment of equity shareholders.

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INVENTORY VALUATION:

Inventory is valued at actual / estimated cost or net realizable value, whichever is lower.
Finished goods in plant and work in progress involving hydro and thermal sets including
gas-based power plants, boiler auxiliaries, compressors and industrial turbo sets are valued
at actual / estimated factory cost or at 97.5% of realizable value whichever is lower.
In respect of valuation of finished goods in plant and work in progress, cost means factory
cost, actual / estimated factory cost includes excise duty payable on manufactured goods.
In respect of raw material, a component, loose tools, stores and spares cost means weighted
average cost.
The components and other material purchased / manufactured against production order but
declared surplus are charged off to revenue retaining residual value based on technical
estimates.

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Tools of Analysis of working capital

Working capital ratio analysis.

Movement of working capital statement.

Fund flow analysis.

Cash flow analysis

Working capital budget.

Working capital report.

We are using the technique of ratio analysis as a means of checking upon the efficiency
with which working capital is being used in the company. These ratios would measure the
pulse of working capital management in BHEL. These are as follows:-

(1)Current ratio: Current ratio represents a margin of safety for creditors. The higher the current ratio, the
greater the margin of safety, the larger the amount of current assets in relation to current
liabilities, the more the firms ability to meet its current obligation. This ratio is calculated
as follows: -

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CURRENT ASSETS
CURRENT RATIO=
CURRENT LIABILITIES

(2) QUICK RATIO: This ratio provides a better measure of overall liquidity. A firms inventory cannot be easily
being converted into cash so it is not taken account here. A ratio 1:1 is considered
satisfactory. Ratio is computed as under: -

CURRENT ASSETS

INVENTORY

QUICK RATIO=
CURRENT LIABILITIES

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(3) CASH RATIO

Cash is the most liquid asset and it should be minimum in the firm as the excess of cash in
hand/bank implies loss of interest i.e. the misutilisation of funds, which could have been
utilized/invested elsewhere. There is nothing to be worried about lack of cash if the company
has reserve borrowing power.

Cash ratio=

Cash

Current liabilities

(4) INVENTORY TURNOVER RATIO AND HOLDING PERIOD

It

shows how rapidly the inventory is turning into receivable through sales. High ratio is

indicative of good inventory management. A low ITR implies excessive inventory levels. Ratio
should neither be too low nor too high.
It is computed as follows: -

ITR=

Sales

Average inventory

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(5) RAW MATERIAL INVENTORY RATIO AND HOLDING PERIOD

RMI turnover ratio indicates the efficiency with which the firm converts raw material into
work in progress and into finished goods.
Calculation is done by this formula

RMI ratio=

Raw

material consumption

Average inventory

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CURRENT RATIO :

CURRENT RATIO: - CURRENT ASSETS / CURRENT LIABILITIES

YEAR
C. Ratio

2002-03
2.67

2.67

2003-04
2.54

2004-05
1.99

2005-06
1.90

2006-07
2.10

2.54

2.5

1.99

1.9

2.1

1.5
1
0.5
0
2002-03

2003-04

2004-05

2005-06

2006-07

It measures the short-term solvency of the firm, its ability to meet short-term
obligations that indicates the rupees of current assets available for each rupee of the current
liability. It is a margin of safety for creditors. The current ratio of 2:1 is been considered
satisfactory.

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WORKING CAPITAL
In context to BHEL, Jhansi the current ratio is more the than standard. Although in the
year 2004-05 and 2005-2006,it is 1.99 & 1.90 respectively, but it is approximately 2, which is
acceptable. The data shows increase in current ratio due to increase in debtors and inventory as
compared to increase in advances and creditors. When we compare the data of the last two
years, following important facts is revealed: -

CURRENT ASSETS

Increase in debtors = 43.54%

Increase in inventory = 38.4%

CURRENT LIABLITIES
Increase in creditors = 16.42%
Increase in loans & advances = 42.8%.

The higher ratio indicates its ability to meet the current obligations as soon as possible. The
higher current ratio shows higher liquidity of the firm to pay for its liabilities.

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WORKING CAPITAL

QUICK RATIO:

QUICK RATIO: - QUICK ASSETS / CURRENT LIABILITIES

Quick Assets: It includes all current assets other than stock and prepaid
Expenses.

Year

2002-03

2003-04

2004-05

2005-06

Quick

1.93

1.86

1.45

1.35

2006-07
1.46

Ratio

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WORKING CAPITAL

2.5
2

1.93

1.86
1.45

1.5

1.35

1.46

1
0.5
0
2002-03

2003-04

2004-05

2005-06

2006-07

It is widely available test of measure of liquidity position of firm. It is superior to the

current ratio test. The quick ratio of 1:1 is considered to be satisfactory as a firm can easily
meet all current claims while calculating it prepaid expenses and inventory are been excluded
from current assets.
The ratio of BHEL, Jhansi is almost more than standard i.e. 1:1.The company is capable of
meeting its liability frequently as shown in the data i.e. debtors are more frequently converted
into cash. Liquid ratio of the year 2006-07 is less as compared to 2005-06 due to less cash
balance & other current assets.

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WORKING CAPITAL

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO :-COST OF GOOD SOLD /AVG.INVENTORY

Year

ITR

2002-03

2.91

2003-04

2004-05

2005-06

2006-07

2.55

3.15

3.4 6

3.17

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WORKING CAPITAL
4
3.5
3

3.15

2.91

3.46

3.17

2.55

2.5
2
1.5
1
0.5
0
2002-03

2003-04

2004-05

2005-06

2006-07

It shows the relationship between the cost of good sold and the average inventory in
hand. It is also indicative of the number of times the inventory has been given the shape of
final sales during the year. This ratio indicates how frequently the stock has been converted
into sales /cash. The inventory turnover ratio has been frequently increasing which indicates
that the stock is frequently converted into sales.
The average ratio for the given years comes around 3, which shows that the inventory
has been considerably decreased which indicate that the amount of stock, which is kept in
warehouse, has been decreased. The production cycle is to be consistent. The main product is
locomotives and transformers, which normally have a long production cycle.

The major problem of investment inventory is in form of WIP on an average account

for 59% of total inventory. To keep the production flow even certain amount of inventory
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WORKING CAPITAL
buildup is in the form of W/P is essential. The inventory T/O ratio keeps fluctuating depending
on the number of orders.

Material with low turnover ratio is classified as slow moving (it is 10 % in case of
BHEL.Jhansi) while item, which have number immediate demand are non-moving items.

Non-moving item includes mainly directly chargeable items. The requirement of which may
change due to work designing and technology improvement.

DEBTORS COLLECTION PERIOD: -

Year

2002-03

2003-04

2004-05

2005-06

2006-07

DCP

11.21

13.21

10.34

8.63

8.15

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WORKING CAPITAL

DCP
14
12
10
8
6
4
2
0

13.21
11.21

2002-03

10.34

2003-04

2004-05

8.63

8.15

2005-06

2006-07

This ratio indicates the speed with which debtors and receivable are being collected
a very long collection period would empty either poor Cr selection or an inadequate collection
effort. The delay in collection to receivables would mean that apart from the interest cost involved
in maintaining a high level of debtors the liquidity of the firm is adversely effected a large number
of a/c s receivable becoming bad debts short period of average collection is not necessarily good.
It is to that it avoids the risk of receivable being bad debts as well as the burden of high interest on
outstanding debtors it may have the adverse effect on the volume of sale of the firm. Sales may be
confirmed to the customers making prompt payment in the debtors collection period has been

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WORKING CAPITAL
increased form 11.21 to 13.21 in the year 2002 to 2004 it is decreased from 10.34 to 8.15 in the
last 3 years.

CREDITORS TURN OVER RATIO :

Creditor turnover ratio= Net Cr. Purchase
Avg. Cr.

Year

2002-03

2003-04

2004-05

2005-06

2006-07

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WORKING CAPITAL
Ratio

2.84

2.66

3.97

3.75

4.00

3.97

3.75

2004-05

2005-06

5
4
3

2.84

2.66

2002-03

2003-04

2
1
0
2006-07

The ratio indicate that the net credit purchase to average Credit. The creditor
turn over ratio of BHEL, Jhansi is quite good because the company is capable of making payment
to its creditors frequently. Comparison of credit payment period with debtors collection period
shows that BHEL is very liberal in collecting due from its customers. There is no synchronization
between cash outflows and an inflow regarding payments to suppliers and collection from
debtors collection period is more than twice the credit Payment period BHEL, Jhansi needs to
take a serious step in this area.

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WORKING CAPITAL

TURNOVER CAPITAL EMPLOYED

Year
Cap.Employed

2002-03
20171

2003-04
22961

2004-05
21203

2005-06
23688

2006-07
33442

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WORKING CAPITAL

40000
35000
30000
25000
20000
15000
10000
5000
0

33442

20171

2002-03

22961

21203

2003-04

2004-05

23688

2005-06

2006-07

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WORKING CAPITAL

CONTENT OF WORKING CAPITAL MANAGEMENT

Working Capital Cycle

Sources of Additional Working Capital

Handling Receivables (Debtors)

Managing Payables (Creditors)

Inventory Management

Key Working Capital Ratios

Introducing Invest-Tech & PlanWare

Copyright & Legal Stuff

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WORKING CAPITAL

1. WORKING CAPITAL CYCLE

Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and
every manager's primary task is to help keep it flowing and to use the cashflow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash
surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and
expire. Click here for more information about the vital distinction between profits and
cashflow.
The faster a business expands, the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right within
business. Good management of working capital will generate cash will help improve
profits and reduce risks. Bear in mind that the cost of providing credit to customers and
holding stocks can represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and
work-in-progress) and Receivables (debtors owing you money). The main sources of cash
are Payables (your creditors) and Equity and Loans.

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WORKING CAPITAL

Each component of working capital (namely inventory, receivables and payables) has two
dimensions ...TIME ......... and MONEY. When it comes to managing
working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g.
collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g.
reduce inventory levels relative to sales), the business will generate more cash or it will need to
borrow less money to fund working capital. As a consequence, you could reduce the cost of bank
interest or you'll have additional free money available to support additional sales growth or
investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit
or an increased credit limit; you effectively create free finance to help fund future sales.

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WORKING CAPITAL

If you .......
Collect receivables (debtors) faster

Then ......
You release cash from the cycle

Collect receivables (debtors) slower

Your receivables soak up cash

Get better credit (in terms of duration

You increase your cash resources

or amount) from suppliers

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more cash

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WORKING CAPITAL

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If you do pay cash, remember that this is now longer available for working capital.
Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity,
leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and,
like water flowing down a plug hole, they remove liquidity from the business

2.Sources of Additional Working Capital

Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash !)

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long-term loans

If you have insufficient working capital and try to increase sales, you can easily overstretch the financial resources of the business. This is called overtrading. Early warning
signs include:

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WORKING CAPITAL

Pressure on existing cash

Exceptional cash generating activities e.g. offering high discounts for early cash
payment

Bank overdraft exceeds authorized limit

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors

Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing

Frequent short-term emergency requests to the bank (to help pay wages, pending
receipt of a cheque).

3.Handling Receivables (Debtors)

Cashflow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed....
how long it is owing.... for what it is owed.

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WORKING CAPITAL

LATE PAYMENTS ERODE PROFITS AND CAN LEAD TO BAD DEBTS

Slow payment has a crippling effect on business, in particular on small businesses who can
least afford it. If you don't manage debtors, they will begin to manage your business as you
will gradually lose control due to reduced cashflow and, of course, you could experience
an increased incidence of bad debt.

The following measures will help manage your debtors:

Have the right mental attitude to the control of credit and make sure that it gets
the priority it deserves.

Establish clear credit practices as a matter of company policy.

Make sure that these practices are clearly understood by staff, suppliers and
customers.

Be professional when accepting new accounts, and especially larger ones.

Check out each customer thoroughly before you offer credit. Use credit agencies,
bank references, industry sources etc.

Establish credit limits for each customer... and stick to them.

Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.

Keep very close to your larger customers.

Invoice promptly and clearly.

Consider charging penalties on overdue accounts.

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WORKING CAPITAL

Consider accepting credit /debit cards as a payment option.

Monitor your debtor balances and ageing schedules, and don't let any debts get
too large or too old.

Recognize that the longer someone owes you, the greater the chance you will never get
paid. If the average age of your debtors is getting longer, or is already very long, you may
need to look for the following possible defects:

Weak credit judgments

Poor collection procedures

Lax enforcement of credit terms

Slow issue of invoices or statements

Errors in invoices or statements

Customer dissatisfaction.

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WORKING CAPITAL

Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention. Look for the warning signs of a future bad debt.
example.........

Longer credit terms taken with approval, particularly for smaller orders

Use of post-dated checks by debtors who normally settle within agreed terms

Evidence of customers switching to additional suppliers for the same goods

New customers who are reluctant to give credit references

Receiving part payments from debtors.

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WORKING CAPITAL
PROFITS ONLY COME FROM PAID SALES.
The act of collecting money is one, which most people dislike for many reasons and
therefore put on the long finger because they convince themselves there is something more
urgent or important that demands their attention now. There is nothing more important than
getting paid for your
product or service. A customer who does not pay is not a customer. Here are a few ideas
that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments.

Track and pursue late payers.

Get external help if your own efforts fail.

Don't feel guilty asking for money.... its yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction.

In difficult circumstances, take what you can now and agree terms for the
remainder. It lessens the problem.

When asking for your money, be hard on the issue - but soft on the person. Don't
give the debtor any excuses for not paying.

Make it your objective is to get the money - not to score points or get even.

Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities
for exploring alternative payment scenarios for receivables. See also the white paper on
Making Cash flow Forecasts and Checklist for Improving Cash flow.

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WORKING CAPITAL
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 your company - is it tightly managed or spread

among a number of (junior) people?

Are purchase quantities geared to demand forecasts?

Do you use order quantities, which take account of stock holding and purchasing
costs?

Do you know the cost to the company of carrying stock?

Do you 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 your suppliers have a returns policy?

Are you in a position to pass on cost increases quickly through price increases to
your customers?

If a supplier of goods or services lets you down can you charge back the cost of
the delay?

Can you arrange (with confidence!) to have delivery of supplies staggered or on a

just-in-time basis?
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WORKING CAPITAL

There is an old adage in business that if you can buy well then you can sell well.
Management of your creditors and suppliers is just as important as the management of
your debtors. It is important to look after your creditors - slow payment by you may create
swill feeling and can signal that your company is inefficient (or in trouble!).
Remember, a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.
Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities
for exploring alternative payment scenarios for payables. See also the white paper on
Making Cash flow Forecasts and Checklist for Improving Cash flow.

5. 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.

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WORKING CAPITAL
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 stock-holding
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.

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WORKING CAPITAL

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. 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 sellers?

Remember that stock sitting on shelves for long periods of time ties up money, which is
not working for you. For better stock control, try the following:

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.

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WORKING CAPITAL

Consider having part of your product outsourced to another manufacturer rather

than make it yourself.

Review your 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.
Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities
for exploring alternative stock-holding strategies. See also the white paper on Making
Cash flow Forecasts and Checklist for Improving Cash flow.

6. Key Working Capital Ratios

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

Formulae

Result

Interpretation
On average, you turn over the value of
your entire stock every x days. You may

Average

need to break this down into product

Stock *
Stock Turnover

=x
365/

(in days)

days
Cost of

groups for effective stock management.

Obsolete stock, slow moving lines will
extend overall stock turnover days. Faster

Goods Sold

production, fewer product lines, just in

time ordering will reduce average days.
Receivables Ratio

Debtors *

=x

It takes you on average x days to collect

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WORKING CAPITAL
monies due to you. If your official credit
terms are 45 day and it takes you 65
365/
(in days)

days
Sales

days... why?
One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.
On average, you pay your suppliers every
x days. If you negotiate better credit

Creditors *

terms this will increase. If you pay earlier,

365/
Payables Ratio

=x
Cost of

(in days)

days
Sales (or
Purchases)

say, to get a discount this will decline. If

you simply defer paying your suppliers
(without agreement) this will also increase
- but your reputation, the quality of
service and any flexibility provided by

Current Ratio

Total
Current
Assets/
Total
Current
Liabilities

your suppliers may suffer.

= x Current Assets are assets that you can
times readily turn in to cash or will do so within
12 months in the course of business.
Current Liabilities are amount you are due
to pay within the coming 12 months. For
example, 1.5 times means that you should
be able to lay your hands on $1.50 for
every $1.00 you owe. Less than 1 times
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WORKING CAPITAL
e.g. 0.75 means that you could have
liquidity problems and be under pressure
to generate sufficient cash to meet
oncoming demands.

(Total
Current
Assets -

Similar to the Current Ratio but takes

=x

Quick Ratio

Inventory)/

account of the fact that it may take time

times

Total

to convert inventory into cash.

Current
Liabilities
A high percentage means that working
capital needs are high relative to your
(Inventory

sales.

+
As %
Working Capital Ratio

Receivables
Sales
- Payables)/
Sales

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WORKING CAPITAL

Other working capital measures include the following:

Bad debts expressed as a percentage of sales.

Cost of bank loans, lines of credit, invoice discounting etc.

Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for your business, it is important to track them over time
and to compare them with ratios for other comparable businesses or industry sectors.
When planning the development of a business, it is critical that the impact of working
capital be fully assessed when making cashflow forecasts. Our financial planning software
packages - Exl-Plan and Cashflow Plan - can facilitate this task as they provide for the
setting of targets for receivables, payables and inventory

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WORKING CAPITAL

Introducing Invest-Tech & PlanWare

Invest-Tech develops and sells a range of financial planning packages - Exl-Plan and
Cashflow Plan - for businesses of all sizes & types. Trial versions of all products can be
downloaded from our PlanWare site and many other sources on the 'Net. We also offer an
extensive range of commercial software for writing business plans, market planning,
assessing business ideas and evaluating strategies.
PlanWare also features
:

Papers on cash flow, financial, strategic and business planning topics.

Advice on getting new business ideas, managing working capital, devising

business strategies and much more.

Free Online Financial Planner to produce 'first-cut' five-year projections.

Pages devoted to famous business quotations and examples of bad business

advice and mistakes.

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WORKING CAPITAL
8. Copyright & Legal Stuff
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs
License. This means that this page and any related files are subject to the normal rules
about copyright and Attribution

If you wish to make an electronic or printed copy for YOUR PERSONAL USE,
you are free to do so PROVIDED THAT IT IS UNMODIFIED AND REMAINS
COMPLETE IN ALL RESPECTS. All copying for commercial use requires written prior
permission secured from info@planware.org. You are free to quote short extracts provided
our site's URL <www.planware.org> is acknowledged as the source.

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WORKING CAPITAL

RECOMMENDATION
During my project period. I have studied the working capital management in BHEL, Jhansi. On
the basis of my study I am putting forward some suggestions. Implementation of which may
certainly improve the efficiency of working capital management in the unit.
1.Estimationof working capital requirement should be done on the basis of length of operating
cycle of different products

W.C. requirement = Average daily requirement of

Working capital X length of operating cycle.
2.The credit policy of BHEL, Jhansi should be made more practical to shorten the debt
collection period. The age wise schedule of debtors shows that debtors pertaining since financial
year 1991-92 are outstanding. This an alarming phenomenon assist point that the terms and
conditions of payment as well as recovery procedure had been very-very liberal. The current
cash crunch would have been not there had all the recoveries been made on time. A new credit
policy is need of the hour, which should specific strict terms and penalties in case of

delay release of payments without doing my harm to relation with BHELs customer.

To decrease loss due to bad debts and to reduce collection period. Credit rating of
customers should be done more efficiently. Evaluation of credit worthiness is
precursor to the final decision to grant credit or not for decision-making. Decision
Tree Approach can be adopted under this approach. Probability of default and
payment by the customer are determined. The weighed net benefit is calculated as.

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WORKING CAPITAL

p(Revenue-cost)-(1-p)cost
Where P is probability that customer pay his dues. The customer
Should not be granted credit if answer is negative.

Quality of the product should be improved so that the company can dictate terms
of payment. This will screen out unworthy customers and recovery position will
definitely improve.

3.inventory management plays an important roe in effective working capital management for a
business firm producing industrial goods.

For improvement in the area of inventory management. Suggested steps are as under: -

The ABC analysis used considers only the value of material and quantity of usage.
It does not consider the important of material in production function. To overcome
this VED analysis could also be used which categories the items according to
theory importance as vital essential and desirable.

I suggest through research in this regard to arrive at some suitable mix of both these methods
which gives due consideration to value, quality, importance, etc of stock items

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WORKING CAPITAL

The maximum and minimum level of each items should be indicated to avoid
over-stock or under-stock situations

Internal performance report on inventory on at least monthly basis should be

prepared to study the material price variance, material usage variance and
inventory level variance from the estimated figures

The indenting and tendering process for purchases should be made expeditious to
decrease the lead time and reduce the chances of
Stock out situations..

It has been seen that delay in supply of raw materials is regularly

Occurring and this ultimately to delay in supply to customer. This
should be avoids as it lowers the performance rating of the company.

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BIBLIOGRAPHY

FINANCIAL MANAGEMENT
BY

I M PANDEY

(Working Capital Management page 729-747)

PRINCIPLE OF MANAGEMENT ACCOUNTING

BY

DR. S N MAHESHWARI

(Financial Ratios Page: B.44 - B. 45)

ANNUAL REPORT

2007-08

(Accounting Policies Followed by BHEL,

Balance Sheet And Profit And Loss A/C)

119