Working Capital Project

A PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT OF
BHARAT HEAVY ELECTRICALS

LIMITED
SESSION 2008-10
DIRECTORATE OF DISTANCE EDUCATION
1
WORKING CAPITAL MANAGEMENT
GURU JAMBHESHWAR UNIVERSITY OF SCIENCE & TECHNOLOGY,
HISAR
ACKNOWLEDGEMENT
At the outset, I owe my success to God Almighty, but for his grace, nothing
would have happened.
It always takes the contribution of lot of people to complete a project. No project
can be completed through individual effort alone. The contributions of some are
direct
and evident and of others are indirect and obscured. I express my sincere
gratitude towards all those wh have directly and indirectly helped me through
out this project.
I am thankful to the BHEL for permitting me for making a project in

their organization.
I am also grateful to Maj.Gen.S S Chahal Director Netaji subash
institute of management sciences and my mentor Prof. P C Chhabra other
teacher at the institute, who helped me, in preparing the project
The learning during the project was immense and invaluable. My work
included the Management of Working Capital in BHEL.
It is with great sense of gratitude that I submitted my proj ect report.
Kishan Kumar
Enrollment No 08061237002
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CONTENTS
TOPICS PAGE NO:
BHEL AN OVERVIEW 8 - 25
Introduction 9
BHEL ,a corporate giant 11
International business 12
BHEL in India 13
Vision, mission, values 15
Objectives of proposed study. 16
Contribution to various sectors. 19
Collaborations ,competitors and its products 23
BHEL HARIDWAR UNIT, HEEP 28 - 38
Historical profile, 30
Overview of finance functions. 32
SWOT analysis. 37
WORKING CAPITAL MANAGEMENT 39 - 66
Meaning. 40
Classification 41.
Issues in working capital management. 46
Policies for financing. 48
Needs and objectives for working capital. 50
Its importance. 51
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Factors determining the WC requirements. 52
Management of WC. 55
Existing system of WC in WEEP 57

Liquidity management. 59
WC turnover ratio. 64
Current assets turnover ratio. 65
MANAGEMENT OF DIFFERENT COMPONENTS OF WORKING

CAPITAL:
DEBTOR MANAGEMENT 67 -
75
Introduction. 68
Debtor management in HEEP. 70
Analysis of debtors. 71
Steps involved in management of debts 75.
INVENTORY MANAGEMENT 76 -
88
Introduction.
77
Objectives.
78
Inventory analysis. 79
- ABC analysis. 79
- VED analysis. 80
- SSE analysis. 81
- HML analysis. 81
- FSN analysis 81
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Functions of inventory control.
82
Record keeping and related procedures. 83
Inventory management in HEEP. 84
Need of inventory.
87
Strategies/measures.
88
Suggestions.
88
CASH MANAGEMENT 89 -
94
Meaning. 90
Reasons of cash management. 91
Tools of cash control. 93
Analysis of cash management. 94
SUMMARY OF FINDINGS 98
SUGGESTIONS
100
BIBLIOGRAPHY
102
8
713HEL
AN
OVERVIEW
a
Employees - 43636 (As on 1-4-08)
Turnover - Rs 33000 Crores

(2008-
09)
'
14 Manufacturing divisions
n -
Introduction centers'

8 service centre's and 16
GOINDWAL
regional
HARIDWAR
' offices
RUDRAPUR
Major UnitsiDivisions are
JHANSI 0 JAGDISHIPUR Certified

BHOPAL 0
with ISO 9001(2000), ISO 14001
and OHSAS 18001
Continu ous Profits since 1971-72
Caters to Core Sectors viz.,
Power,
Irrduuy, Tr rauspv/ keit vui,
NEW
9
DELHI 0
DIT A I
HYDERABAD MANAGEMENT Telecommunication, Renewable
BAHGALOREE 0 Energy etc.
0 RANIPET ' Manufactures over 180
products
D TIRUCHIR APALLY under 30 major product
groups
VARANASI
CALCUTTA

PAUNA AAAA
BAIRODA W
NAG PUIR
O
R

K
I
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G
C
A
P
I
T
A
CORPORATE OFFICE L
M
0
A
MANUFACTURI
N
NG
A
LOCATIONS
G
E
M
SERVICE CENTRES
E
N
T
Figure 1
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B. H. E. L. A CORPORATE GIANT
Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED

(BHEL) is a name which is recognized across the industrial world. It is one of
the largest engineering and manufacturing enterprises in INDIA and is one of
the leading international companies in the power field. BHEL offers a wide
spectrum of products and services for core sectors like power transmission,
industrial transportation, oil and gas, telecommunication etc. Besides supply of non-
conventional energy systems. It has als embarked into other areas including
defense and civil aviation. A dynamic 63000 strong team embodies the BHEL
philosophy excellence through continuous striving for state of the art technology.
With corporate headquarters in NEW DELHI, fourteen manufacturing units, a wide
spread regional services network and projects sites all over India and even abroad,
BHEL is India's industrial ambassador to the world with export presence in more than
50 countries.
B.H.E.L.'s range of services extent from project feasibility studies to after sales
services, successfully meeting diverse needs through turn key capability.
BHEL has had a consistent track record of growth, performance and profitability.
The
World Bank in its report on the Indian Public Sectors, has described BHEL as "one
of the most efficient enterprises in the industrial sector, at par with international
standards of efficiency". BHEL has acquired ISO 9000 certificate for most of its
operations and has taken up Total Quality Management (TQM).
All the major units/divisions of BHEL have been upgraded to the latest 150-9001:
2000 version quality standard certification for quality management. All the
major units/divisions of BHEL have been awarded 150-14001 certification for
environmental management systems and OHSAS-18001 certification for
occupational health and safety management systems.
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BHEL occupies an all-important niche as evident by its ranking by CII amongst top
eight
PSUs based on financial performance. Recently in survey conducted by business
India, BHEL has been rated as seventh Best Employer in India.
International Business:
BHEL has, over the years, established its references in 60 countries f the world.
These references encompass almost the entire range of BHEL products and
services, covering turnkey power projects in thermal, hydro and gas-based sectors,
substation projects, rehabilitation projects, besides a wide variety of products like:
Transformers, compressors, Valves, Oil field equipment, electrostatic Precipitators,
Insulators, heat Exchangers, Switchgears, Castings and Forgings etc. Some of
the major successes achieved by BHEL have been in Gas-based power projects in
Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka, China,
Kazakhstan; Thermal Power Projects in Cyprus, Malta, Libya, Egypt, Indonesia,
Thailand, Malaysia; Hydro power plants in New Zealand, Malaysia, Azerbaijan,
Bhutan, Nepal, Taiwan and Substation projects & equipment in various countries.
Execution of these overseas projects has also provided BHEL the experience of
working with world renowned Consulting Organizations and Inspection Agencies.
The Company has been successful in meeting demanding requirements
International markets, in terms of complexity of the works as well as
technological, quality and other requirements viz., financing package, associated
&M services t name a few. BHEL has proved its capability to undertake projects
on fast-
track basis. BHEL has also established its versatility to successfully meet the
other varying needs of various sectors, be it captive power, utility power generation or
for the oil flexibility to exhibited adaptability by manufacturing and supplying
intermediate products.
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B.H.E.L. IN INDIA
REGIONAL OFFICES (POWER SECTORS)
1. NEW DELHI (NORTHERN
REGION)
KOLKATA (EASTERN REGION)
3. NAGPUR (WESTERN REGION)
4. CHENNA1 (SOUTHERN REGION)

WORKING CAPITAL
MANAGEMENT
BUSSINESS FFICES
1. BANGLORE
2. BARODA
3. BHUBANESHWAR
4. MUMBAI
5. KOLKATA
6. CHANDIGARH
7. GUWAHATI
8. JABALPUR
9. JAIPUR
10. LUCKNOW
11.CHENNAI
12. NEW DELHI
13. PATNA
14. RANCHI
5. SECUNDRABAD
6. NEW DELHI
SERVICE CENTRES
7. NAGPUR
B. PATNA
1. NOIDA
9. VARANASI
2. BARODA
3. KOLKATA
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4. CHANDIGARH 3
15. SECUNDRABAD
MANUFACTURING UNIT
1. HEAVY ELECTRICAL EQUIPMENT PLANT, HARIDWAR
2 CENTRAL FOUNDRY FORGE PLANT, HARIDWAR
3. HEAVY POWER EQUIPMENT PLANT, HYDERABAD
4. HIGH PRESSURE BOILER PLANT, TRICHY
5. HEAVY ELECTRICALS PLANT, BHOPAL
6. TRANSFORMER PLANT, JHANSI
7. ELECTRONICS DIVISION, BANGALORE
8. BOILER AUXILIARIES PLANT, RANIPET
9. INDUSTRIAL VALVES PLANT, GOINDWAL
10.ELECTRO-PORCELAINS DIVISION, BANGALORE
11.INSULATOR PLANT, JAGDISHPUR
12.COMPONENT FABRICATION PLANT, RUDRAPUR
13. HEAVY EQUIPMENT REPAIR PLANT, VARANASI
14.ELECTRICAL MACHINE REPAIR PLANT, MUMBAI
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15
-de-
vision
A World-Class Engineering
Enterprise
Committed to Enhancing
Stakeholder Value.
O
\
6.. To be an Indian Multinational
Engineering
Enterprise providing Total Business
Solutions through Quality
Products, Systems and Services in
the fields of Energy, Industry,
Transportation,
Infrastructure and other potential
areas.
VALJ
ES
Zeal to Excel and Zest for Change
Integrity and Fairness in all Matters

N Respect for Dignity and Potential of
Individuals
Strict Adherence to Commitments
Ensure Speed of Response
1It Foster Learning, Creativity and
cam ni- - Team-work
Ott 0.4 I Loyalty and Pride in the Company

Eiharat.Heavy Electricals Limited
:1",wisau.,;!N -. --
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OBJECTIVES OF THE PROPOSED STUDY
The objective of the study is to provide the solutions for reducing down the duration
of the operating cycle, to analyze the working capital position of the company and
the liquidity position, finding out the problems that the company is facing in managing
the working capital and showing trend of particular ratios in future and at same
suggesting them to solve their problems.
To study the Working Capital Concept.
To see how the day to day operations of the company takes place.
To study the Working Capital Management process in Bharat Heavy

Electricals
Limited.
To see whether the company is prepared with enough Working Capital to

face
any kind of contingencies.
To compare the performance of Working Capital for a particular year

with
previous years.
To assess Liquidity position, Long term solvency, operational efficiency

and
overall profitability of BHEL.
Providing suggestions to solve the problems of the company.
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COMPANY'S BUSINESS MISSION AND OBJECTIVES
BUSINESS MISSION
To maintain a leading position as suppliers of quality equipment, systems
and services in the field of conversion of energy, for application in the
areas of electric power transportation, oil and gas exploration and
industries. Utilize company's capabilities and resources to expand business
into allied areas and other priority sectors of the economy like defense,
telecommunications and electronics.
BUSINESS OBJECTIVES
GROWTH:
To ensure a steady growth by enhancing the competitive edge of

BHEL defense, telecommunication and electronics in existing business,
new areas and international operations so as to fulfill national expectations
from BHEL.
PROFITABILITY:
To provide a reasonable and adequate return on capital employed,

primarily through improvements in operational efficiency, capacity
utilization, productivity and generate adequate internal resources to
finance the company's growth.
CUSTOMER FOCUS:
To build a high degree of customer confidence by providing increased

value for his money through international standards of product quality,
performance and superior services.
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PEOPLE- ORIENTATION:
To enable each employee to achieve his potential, improve his

capabilities, perceive his role and responsibilities and participate and
contribute positively to the growth and success of the company and to
invest in human resources continuously and be alive to their needs.
TECHNOLOGY:
Achieve technological excellence in operations by development of

indigenous technologies and efficient absorption and adaptations
of imported technologies to suit business need and priorities and provide
the competitive advantage to the company.
IMAGE:
To fulfill the expectations which stakeholders like government as

owner, employees, customers and the country at large have from BHEL.
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CONTRIBUTION OF BHEL IN VARIOUS CORE
SECTORS
BUSINESS SECTORS:
BHEL's operations are organized around three business sectors, mainly

power, industry and international operations. This enables BHEL to have
a strong customer's orientation, to be sensitive to his needs and respond
quickly to the changes in the market.
POWER SECTORS:
Power is the core sector of BHEL and comprises of thermal, nuclear gas, diesel
and hydro business. Today BHEL supplied sets, accounts for nearly 66 % of the
total installed capacity in the country as against nil till 1969-70. BHEL
manufactures boilers auxiliaries, TG sets and associate controls, piping and station C
& I up to 500 MW rating with technology and capability to go up to 1000 MW
range.
BHEL has contracted so far around 240 thermal sets of various ratings,
which includes 14 power plants set up on turnkey basis. Nearly 85 % of
World Bank tenders for thermal sets floated in India have been won by the
company against international competition.
It has the capability to manufacture gas turbines up to 200 MW rating and

custom built combined cycle power plants. Nuclear steams generators, turbine
generators, sets and related equipment of 235 MW rating have been supplied to
most of the nuclear power plants in India Production of 500 MW nuclear sets,
for which orders have been received.
BHEL has developed expertise in renovation and maintenance of power

plant equipment besides specialized know how of residual life assessment,
health
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diagnostic and life extensions of plants. The four power sectors regional centers
at
New Delhi, Chennai, Kolkata and Nagpur will play a major role in giving a thrust
to this business and focus BHEL's efforts in this area.
INDUSTRY SECTORS:-
BHEL is a major producer of large size thruster devices. The products

include centrifugal compressors, high speed industrial drive turbines, industrial
boilers and auxiliaries, waste heat recovery boilers, gas turbines, electric
motors, drives, and control equipments, high voltage transformers, switch gears
and heavy castings and forgings.
TRANSMISSION:-
A wide range of transmission products and systems are produced by BHEL to

meet the needs of power transmission and distribution sector. These include:
Dry Type Transformers
SF6 Switch Gears
400 KW Transmission Equipment
High Voltage Direct Current System
Series and Shunt Compensation Systems
In anticipation of the need for improved substations, a 33 KV gas insulated

substation with micro processors base control and protection system has been
done.
TRANSPORTATION:-
65 % of trains in Indian Railways are equipped with BHEL's traction and

traction control equipment. These include:
Broad Gauge 3900 HP AC 1 DC locomotives
Diesel Shunting Locomotives up to 2600 HP
5000 HP AC Loco with thyristor control
Battery Powered Road Vehicles and Locomotives

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RESEARCH AND DEVELOPMENT:-
BHEL has a corporate R & D center supported by R & D groups at each of
the manufacturing divisions. The dedicated effort of BHEL's R & D engineers
have produced several new products like automated storage retrieval system
automated guide vehicles for material transportation etc. Establishment of Asia's
largest fuel evaluation test facility at Tiruchy was high light of the year. This
facility will enable evaluation of combustion, heat transfer and pollution parameters
in boilers.
Major R & achievement include:
Design manufacture and supply of countries first 17.2 MW industrial

steam
turbines.
Development of 4700 HP AC I DC loco for Indian Railways.
Development of largest capacitor voltage transformers of 8800 PF 400 KV

rating.
Development and application low cost ROBOTS for job loading/unloading.
According to ex- CMD MR. R.K.D. SHAH,_ "BHEL is spending Rs. 60 Crores
on Research and Development. Earning from product which has been
commercialized
has gone up 26 % to Rs. 760 Crores."
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HUMAN RESOURCE DEVELOPMENT INSTITUTE:-
BHEL has envisioned becoming "A World Class Engineering Enterprise

committed to enhancing stakeholder value". Force behind realization of this
vision and the source of our competitive advantage is the energy and ideas of
our 44,000 strong highly skilled and motivated people. The Human Resource
Development Institute situated in NOIDA, a corner-stone of BHEL learning
infrastructure, along with Advanced Technical Education Center (ATEC) in
Hyderabad and the Human Resource Development Center at the
manufacturing Units, through various organizational developmental efforts
ensure that the prime resource of the organization the Human Capital is
"Always in a state of Readiness", to meet the dynamic challenges posed by a
fast changing environment. It is their constant endeavour to take the HRD
activities to the strategic level of becoming active partner to the
(organizational) pursuits of achieving the rganizational goals.
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TECHNICAL COLLABORATIONS, DIVISIONS,
COMPETITORS AND VARIOUS PRODUCT OF BHEL
..- TECHNICAL COLLABORATION
PRODUCT COLLABORATIONS
# Thermal Sets, Hydro Sets, Motors & PROM MASH EXPORT
Control Gears. RUSSIA
# Bypass & Pressure Reducing Systems SULZER BROTHER LTD.
SWITZERLAND
# Electronic Automation System for SIEMENS AG.
Steam Turbine & Generators GERMANY
# Francis Type Hydro Turbines GENERAL ELECTRIC
CANADA
# Moisture Separator Reheaters BALOKE DUERR
GERMANY
2
WORKING CAPITAL MANAGEMENT 4
# Christmas Trees & Conventional Well WORKING CAPITAL
MANAGEMENT
Head Assemblies
# Steam Turbines, Generators and Axial
Condensers
# Cam Shaft Controllers and Tractions
Current Control Units
# HDVC
# Programmable Controls
# Gas Turbines
# Tube Mills
NATIONAL IL WELL
ABB
USA
SWITZERLAND
SIEMENS AG.
GERMANY GENERAL ELECTRIC CO.
USA
SIEMENS AG.
GERMANY STIEN INDUSTRIES
FRANCE
ABB
SWEDEN
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DIVISIONS OF BHEL:
There are 20 Divisions of BHEL, they are as follows:
HEEP, Haridwar
HPEP, Hyderabad
HPBP, Tiruchy
SSTP & MHD, Tiruchy
CFFP, Haridwar
BHEL, Jhansi
BHEL, Bhopal
EPD, Bangalore
SG. Bangalore
ED. Bangalore
BAP, Ranipet
IP. Jagdishpur
10D, New Delhi
COTT, Hyderabad
IS. New Delhi
CFP. Rudrapur
HERP, Varanasi
Regional Operations Division ARP. New Delhi
TPG. Bhopal
Power Group (Four Regions and PEM)
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> MA4Q13,PP.MKTITQR5.P.F. 131-.1F1,
AnsaIda Italy
Asea Brown Boueri Switzerland
Beehtel USA
Block & Neatch USA
CNMI & EC China
Costain U.K.
Elect rim Poland
Energostio Russia
Electra Consult Italy
Franco Tosi France
Fuji Japan
GEC Alsthom U.K.

General Electric USA
Hitachi Japan
LMZ Russia
Mitsubishi Japan
Mitsui Japan
NEI U.K.
Raytheon USA
Rolls Royce Germany
Shanghai Electric Co. China

pRoppycTs
1. Thermal power plants 16. Industrial and special ceramics

2. Nuclear power plants 17. Capacitors
3. Gas Based power plants 18. Energy Meters
4. Hydro power plants 19. Electrical Machines
5. g power plants 20. Compressors
6. Industrial sets 21. Control Gear
7. Boilers 22. Silicon Rectifiers
8. Boiler Auxiliaries 23. Thyristor GTO/ IGBT equipments
9, Piping System 24. Power Devices
10. Heat exchangers and pressure 25. Transportation equipments
Vessels 26. Oil Field equipments
11. Pumps 27. Castings and Forgings
12. Power station Control 28. Steams Steel Tubes
equipment 29. Distributed power Generation and
Small
13. Switchgear Hydro Plant
14. Bus Ducts 30. Systems and Services
15. Transformers

BHEL
HARIDWAR
UNIT
HEEP
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HEAVY ELECTRICAL EQUIPMENT
PLANT
HARIDWAR:
The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of
the major manufacturing plants of BHEL. The core business of HEEP
includes design and manufacture of large steam and gas turbines, turbo
generators, hydro turbines and generators, hydro turbines and generators, large
AC/DC motors and so n.
Heavy Electrical Equipment Plant, Haridwar of this Multi-unit corporation with

7467 strong highly skilled technicians, engineers, specialists and professional
experts is the symbol of Indo Soviet and Indo German Collaboration. It is ne
of the four major manufacturing units of the BHEL. With turnover of 164059
lacks and PBT of Rs.32489 lacks HEEP added 3000 MW of power to the
National grid during 2005-
06.
HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to

1000MW, Hydro Sets up to HT Runner dia 6300mm, associated Apparatus
Control gears, AC & DC Electrical machines and large size Gas Turbine of
60-200 MW. HEEP Haridwar contributes about 44% of India's total
installed capacity for power generation with total capacity of Thermal, Nuclear
& Hydro Sets of ver 45000MW currently working at a Plant Load Factor of
76% and Operational Availability of 86%. In spite of acute recession in
economy, BHEL Haridwar received recent orders for Mejia-5&6, Sipat,
Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, Dholpur.
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HISTORICAL PROFILE:
The construction of heavy electrical equipment Plant commenced in

Oct."1963after indo- soviet technical co-operation agreement in Sept."1959"The
first product to roll out from the plant was an electric motor in January 1967.This
was followed by first 100 MW Steam Turbine in Dec.1969 and first 100MW
Turbo Generator in August 1971.The plant's 'break even' was achieved in
March 1974.BHEL went in for technical collaboration with M/s Siemens.
Germany to undertake design and manufacture to large size thermal sets upto
a unit rating of 1000 MW in the year 1976.First 200 MWTG set was
commissioned at Obra in 1977.The continuum of technological advancement
subsequently saw the commissioning of 500 MW TG Set in 1984 _The technical
cooperation of Gas Turbine manufacture was also signed with MIs Siemens
Germany. First 150 MW ISO rating gas Turbine was exported to Germany in
Feb"1995".Our 250 MW thermal set up at Dahanu Plant of BSES made a history
by continuous operation for over 150 days and notching up a record plant load
factor greater than 100%.
CORPORATE CITIZEN:
HEEP Hardwars Strategic plans and its policy & strategy are commensurate
with BHEL Corporate I strategic Plan As first PSU to adopt Corporate
Planning as a process . Board meetings for long range development , BHEL has
always guided
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other PSU's in their Corporate planning process .Board meeting ,
monthly
Management Committee meetings, Annual Revenue Budget exercise , Mid
term reviews , Apex TQ council reviews, Personnel Heads Meet, Quality Heads
Meet , Technology Meets , Product committees meetings, Inter-Unit Quality
Circle Meets etc. Are the some of crore strengths of BHEL Corporation's vast
network.
FAVOURABLE BUSINESS ENVIRONMENT:
Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus,
the demand for thermal sets will remain high. Central Electricity Authority (CEA)
is the guiding authority for Power Sector strategies in our country. BHEL
representatives, along with representatives from various domestic customers, are
an integral part of various committees formed by CEA. This enables us to
guide and understand the market requirements and future challenges. To meet the
11th Five Year Plan target of adding 61,000MW, CEA has planned addition of
23 nos. Standardized 500MW sets for faster project execution and cost reduction.
BHEL, including HEEP, is a part of this process. CEA has standardized for the
next capacity of 800MW sets and has asked BHEL to prepare itself for
manufacturing and supply in the 11th Five Year Plan. BHEL has tied up with
Siemens for upgradation of technology. Further CEA's stress on R&M of ageing
Power Plants is also providing business opportunity to unit.
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QVERVIEW_QF.F.INANcE..F.U.NCT.IQNS
ROLE OF FINANCE FUNCTION
Finance function is the backbone of any organization. The finance function plays a
very critical role in the maximization of shareholders who provide the funds to
the company. This objective is being achieved by the finance department,
which provides the carious information on the financial parameters such as
cash flows, profitability, cost and margin, assets, working capital and shareholder
value for the purpose of efficient utilization of resources resulting in better
profitability of the company. The importance of the finance functions cannot be
undetermined in any organization as many companies have perished not
due to bad production management but due to poor financial management
function acts like radar of the ship, which guides the direction of the ship and
saves it from the perils of the sea.
The various activities undertaken by the finance department achieve the

aforesaid objectives, may be summarized as follows-
Maintenance of account books, cost records.
Preparation of salary bills and other related payment to employees: PP,
bonus,
TA, departmental advances of PF accounts etc.
Preparation of Profit & Loss a/c and Balance Sheet.

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Generation of various miry for management use: mires relating to
turnover,
profitability, cash requirements, inventory,
Coordination with company auditors, Govt. Auditors, cost auditors and
tax
auditors.
Decisions relating to purchase and sales.
Investment decisions: capital investment decisions and working
capital
management decisions.
Financing decisions: decisions relating to financing-mix or capital structure
or
leverage and Dividend policy decisions.
COST SECTION
Cost- section of the company is divided into following two sections viz,
PRODUCT COST & CENTRAL COST and these deals with the
following functions: -
(i) Determination of periodic profits including inventory valuation.

(ii) Determination of pricing policy of the company.
(iii) Work related to capital expenditures of the company.
(iv) Developing variance Management Information report for different parts of
management for purpose of cost control and reduction.
(v) Valuation of work in progress and finished goods.
(vi) Interaction with management of top management link for achieving cost
control and cost reduction and thereby improving bottom line of the
company. (vii) Preparation of cost sheet of different product and their analysis
for future
planning.
BOOKS AND BUDGET SECTION

This section deals mainly with the following:-
(i) Preparation of perating budget for the company as a whole.

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(ii) Co-ordination with various functions of organization with regard to
generation
and submission of important MIR's to corporate office.
(iii) Preparation of annual accounts of the company.
(iv) Coordination with company auditors with regard to company accounts.
(v) Maintenance and accounting of fixed assets accounts.
(vi) Preparation of long term profit plans based on broad objectives of the
company.
SALES SECTION
Sales accounts section will deal mainly with the following items:-
(i) Scrutiny and vetting of estimates I quotation for sale of products /

services,
wherever financial concurrence is required.
(ii) Scrutiny and vetting of agreements for sales of products and services
(iii) Invoicing for sale / advance or progressive payment I erection income
and
other.
(iv) Maintenance of subsidiary records like sales journals / sales daybook,
sundry
debtor's ledgers, advances from customer ledger etc.
(v) Payments, recovery and accounting of sales tax, excise duty.
(vi) Accounting of claims on carriers/ insurance companies for missing items /
damages on outward consignments.
(vii) Scrutiny, payments and accounting of bills of carriers and insurers and
other
miscellaneous claims relating to the outwards consignments.
(viii) Calculation and scrutiny of data for payments of royalties to the
collaborators.
(ix) Review and reconciliation as well as follow up of recovery of utstanding
dues
from the customers in coordination with the commercial department.
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STORES SECTION
For the convenience of performance of various functions it is divided in

to further three sections which are as follows: -
a) Stores bills.
b) Stores review.
c) Foreign payment.
They deal mainly with the following items of works:
(0 Payment of supplier's bills including bills for advances - indigenous

and
foreign.
(ii) Pricing of stores receipt vouchers including fixed assets vouchers and
fixed
assets receipt vouchers.
(iii) Maintenance of accounts of advances to suppliers, claims recoverable,
claims
for short suppliers, rejections and rectifications of materials and
sundry creditors.
(iv) Opening of letter of credit and arranging payments to foreign suppliers
under
foreign credit / differed payment agreements.
36
(v) Payment of bills for ocean freight, port trust dues, custom duty, local
agents
commission and clearing agents bills, transit insurance bills, bills
of contractors for transport /handling etc. And accounting of such
payments is made at regional ffices.
(vi) Maintenance of accounts of material issued on loan and materials issued
to
subcontractors.
(vii) Keeping account of earnest money and security deposits received
from
tender and suppliers.
(viii) Adjustment of stores in transit to be made at the close of the year.
PAYROLL SECTION
This section deals mainly with the following functions:
(i) Preparation of monthly wage bills.

(ii) All account work related to personal payments and discloses profit and
loss
account of the company.
(iii) Dealing with income tax authority with regard to personal taxation
of
employee.
(iv) Dealing with other statutory authority such as P.F. Commissioner,
ESI
(employee state insurance).
(v) To ensure correct payment of salary and wages and other benefits
to
employees in, telephone and miscellaneous payments
WORKS SECTION
Works section of the company is dealing with the following functions:
37
(i) Payments of contractor's bills including bills for advance.
(ii) Maintenance of accounts of contractors with regard to security
deposits,
earnest money, progressive payments.
(iii) Maintenance of accounts of materials issued on loans to contractors.
(iv) All accounting work related to capital expenditure in progress on erection
of
plant & machinery and building.
(v) All other miscellaneous work relating to hiring of various facilities.
CII=ICICICICII=ICI
SW A
STRENGTH (5):
Low cost producer of quality equipment due to cheap labour and
fully
depreciated plants.
Flexible manufacturing set up.
Entry barrier due to high replacement cost of its manufacturing facilities.
WEAKNESSES ON):
High working capital requirement due to its exposure to cash starved

SEBs
(State electricity boards) and High WIP.
Inability to provide project financing.
38
OPPORTUNITIES (0):
High-expected growth in power sectors (7000 MW/p.a.needs to be added)

High growth forecast in India's index of industrial production would
increase
demand for industrial equipment such as motors and compressors.
THREATS (T): -
Technical suppliers are becoming competitors with the pening up of the

Indian
economy.
Fall in global power equipment prices can affect profitability
RUWPki.METHQPQI,QPY
After discussion with my locality member. I choose the project of Working

capital management. I discussed the project with my instructor and
coordinator Mrs.SANTOSH ANAND (Sr.A/0) at H.E.E.P., BHEL, Hardwar.
She approved the project. After that, a simple course of action has been
followed for working on this project. Entire information and data were
gathered from the respective annual report of BHEL, Haridwar. All the figures
are taken from their balance sheet, profit & loss account of the respective years
and the other internal documents, which were personally shown by the members
of company in our
interest.
W
ORKING CAPITAL MANAGEMENT
39
40
WO
MANAGEMENT
MEANING OF WORKING CAPITAL
Working Capital is commonly defined as the difference between current assets

and current liabilities. Efficient working capital management requires that firms
should operate with some amount of working capital, the exact amount varying
from firm to firm and depending, among other things on the nature of industry.
Capital required for a business can be classified in two main categories viz.
1) Fixed capital, and
2) Working capital.
Every business needs funds for two purposes-for establishments and to carry out
its day-to-day operations. Long-term funds are required to create production
facilities.
Through purchase of fixed assets such as plants and machinery, land,

building, furniture, etc. Investments in these assets represent that part of firm's
capital which is blocked on permanent r fixed basis and is called fixed capital.
Funds are also needed for short-term purpose for the purchase of raw material,
payment of wages and other day-to-day expenses, etc. These funds are known
working Capital. In simple words, working capital refers t that part of the
firm's capital, which is required for financing short-term or current assets
such as cash, marketable securities, debtors and inventories. Funds thus
invested in current assets keep revolving fast and are being constantly converted
into cash and this cash flows out again in exchange for other current assets.
Hence, it is also known as revolving or circulating capital or short-term capital.
CLASSIFICATION OF WORKING CAPITAL
Working Capital may be classified on two basis: -

a) On the basis of Concept: -
On the basis of concept, working capital can be classified as,
Gross Working Capital

W
O
RKING CAPITAL MANAGEMENT
42
Net Working Capital
b) On the basis of Time: -
On the basis of time, working capital can be classified as,
Permanent or Fixed Working Capital
Temporary or Variable Working Capital
Gross Working Capital:
The Gross Working Capital is the Capital invested in the total current assets of
the enterprises. Current assets are those assets, which can be converted into
cash within a short period, normally an accounting year.
Gross Working Capital = Total Current Assets
Net Working Capital:
The term Net Working Capital refers to the excess of current assets over
current liabilities, or say,
Net Working Capital = Current Assets - Current Liabilities
Net Working Capital can be positive or negative. When the current assets
exceed the current liabilities the working capital is positive and the negative
working capital results when the current liabilities are more than the current
assets. Current liabilities are those liabilities, which are intended to be paid in the
ordinary course of business within a short period of normally one accounting
year out of the current assets of the income of the business. The gross working
capital concept is financial
W
43
or going concern concept whereas net working capital is an accounting concept
of
working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working

capital for the following reasons: -
It enables the enterprise to provide correct amount of working capital at

correct
time.
Every management is more interested in total current assets with which it has
to
operate then the sources from where it is made available.
It takes into consideration of the fact every increase in the funds of the
enterprise
would increase its working capital.
The concept is also useful in determining the rate of return on investments
in
working capital.
The net working capital concept, however, is also important for the
following
reasons:-
It is a qualitative concept, which indicates the firm's ability to meet its
operating
expenses the short-term liabilities.
It indicates the margin of protection available to short term creditors.
It is an indicator of financial soundness of enterprise.
It suggests the need of financing a part of working capital requirement out of
the
permanent sources of funds.
Permanent or Fixed Working Capital:
Permanent or fixed capital is the minimum amount, which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation
of current assets. Every firm has to maintain a minimum level of current
assets is called permanent or fixed working capital as this part of working
capital is permanently
44
blocked in current assets. As the business, grow the requirement of working
capital
also increases due to increase in current assets.
Temporary or Variable Working Capital:
Temporary or variable working capital is the amount of working capital, which

is required to meet the seasonal demands and some special exigencies.
Variable working capital can further be classified as seasonal working capital
and special working capital. The capital required to meet the seasonal need of
the enterprise is called the seasonal working capital. Special working capital is
that part of working capital which is required to meet special exigencies such as
launching of extensive marketing campaign for conducting research etc.
Temporary working capital differs from permanent working capital in the sense that
it is required for short periods and cannot be permanently employed
gainfully in business
Calculate current assets to fixed asset ratio:
A firm needs current and fixed assets to support a particular level of

output. However, to support the same level of output the firm can have different
levels of current assets. As the firm's output and sales increases, the need for
current asset increases. Generally the current assets do not increase in direct
proportion to output; current assets may increase at a decreasing rate with input.
This relationship is based upon the notion that it takes a greater proportional
investment in current assets when only a few units of output are produced than
it does later on when the firm can use its current assets more efficiently.
The level of the current assets can be measured by relating current assets to
fixed assets.
There are three policies:-

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O
45
1) Conservative current assets policy:
CA/FA is higher. It implies greater liquidity and lower risk.
2) Aggressive current assets policy:
CA/FA is lower. It implies higher risk and poor liquidity.
3) Moderate current assets policy:
CA/FA ratio falls in the middle of conservative and aggressive policies.
conservative policy
verage policy
CA
aggresive policy
fixed asset level
output
Figure 2 Alternative current asset policies
In case of BHEL HEEP Haridwar the ratio of current asset to fixed asset
is
CURRENT ASSETS 1 FIXED ASSETS RATIO
LI3_ARTICULAR0003-04 2004-0Cr2005-06 2_006-0][2007-081
Current Assets 100671 112836 139668 167961 200112

46
Fixed Assets 14082 16565 [13896 16858 15948
CA/FA 7.15:1 6.81:1 110.05:3:1 9.96:1 [12.5:1
Table 1 : showing rati of current assets to fixed assets
ISSUES IN. WORKING.CAPITAL MANAGEMENT
1. Liquidity s. Profitability: Risk Return Trade Off.
The firm would make just enough investment in current assets if it were possible
to estimate working capital needs exactly. Under perfect certainty, current assets
47
holdings would be at the minimum level. A larger investment in current assets
under
certainty would mean a low rate of return of investment for the firm, as
excess investment in current assets will not earn enough return. A small invest
in current assets, on the other hand, would mean interrupted production and
sales, because of frequent stock-cuts and inability to pay to creditors in time due to
restrictive policy.
As it is not possible to estimate working capital needs accurately, the firm

must decide about levels of current assets to be carried.
2. The Cost Trade Off:
A different way of looking into the risk return trade off is in terms of the cost
of maintaining a particular level of current assets. There are two types of
cost involved:-
I Cost of
liquidity II. Cost
of illiquidity
--If the firm's level of current assets is very high, it has excessive liquidity.
Its
return on assets will be low, as funds tied up in idle cash and stocks
earn nothing and high level of debtors reduces profitability. Thus, the
cost of liquidity increases with the level of current assets.
W
O
R
K
I
N
G
C
APITAL MANAGEMENT
48
--the cost of illiquidity is the cost of holding insufficient current assets. The
firm
will not be in a position to honor its obligations if it carries to little cash.
This may force the firm to borrow at high rates of interests. This will also
adversely affect the credit-worthiness of the firm and it will face difficulties
in obtaining funds in the future. All this may force the firm into insolvency.
Similarly, the
total
minimum cost
cost
cost of liquidity
cost
cost of illiquidity
level of current
optimum level of assets
current assets
low levels of stock will result in loss of sales and customers may shift to
Figure 3: Cost Trade-off
competitors. Also, low level of debtors may be due to right credit policy,
which
would impair sales further. Thus the low level f current assets involves
cost that increase as this level falls.
POLICIES FOR FINANCING CURRENT ASSETS
The following policies for financing current assets in HEEP, Haridwar:-
LONG TERM FINANCING:

49
The sources of long term financing include ordinary shares capital, preference
share
capital debentures, long term borrowings from financial institutions and reserves
and surplus. The HEEP Haridwar manages its long term financing from capital
reserve, share premium A/C, foreign project reserve, bonds redemption reserve
and general reserve.
SHORT TERM FINANCING:
The short term financing is obtained for a period less than one year. It is arranged
in advance from banks and other suppliers of short-term finance include
working capital funds from banks, public deposits, commercial paper, factoring of
receivables etc.
The HEEP, Haridwar manages SECURED LOANS as:-
1) Loans and advances from banks

2) Other loans and advances:
A) Debentures/bonds
B) Loans from State Govt.
C) Loans from financial institutions (secured by pledge of
PSU Bonds and bills accepted guaranteed by banks)
3) Interest accrued and due on loans

a) From State Govt.
b) From financial institutions bonds and
other The HEEP, Haridwar manages UNSECURED
LOANS as: -
1) Public deposits
2) Short term loans and advances:

50
a) From banks
b) Commercial papers
c) From companies
d) From financial institutions
3) Other loans and advances
a) From banks
b) From others
-from govt, of India
-from state govt.
-from financial institutions
-from foreign financial institution
-post shipment credit exim bank
-credit for assets taken on lease
4) interest accrued and due on
-Post shipment credit
-Govt. credit
-State Govt. loans
-Credits for assets taken n lease
-Financial institutions and others
-Foreign financial institutions
-Public deposits
SPONTANEOUS FINANCING:-
Spontaneous financing refers to the automatic sources of short term funds arising
in the normal course of a business. Trade Credit and outstanding expenses
are examples of spontaneous financing.
A firm is expected to utilize these sources of finances to the fullest extent. The
real choice of financing current assets, once the spontaneous sources of financing
have been fully utilized, is between the long term and short term sources of
finances.
Needs and Objectives for Working Capital
Every business needs some amount of working capital. The needs for working
capital, arises due to time gap between production and realization of cash from
sales. There is an operating cycle involved in sales and realization of cash.
There are time gaps in purchase of raw material and production, production
and sales, and realization of cash.
Thus, working capital is needed for the following purposes: -
For the purchase of raw material, component and spares.
To pay wages and salaries.
To incur day- to- day expenses and overhead costs such as fuel, power and
office expenses etc.
To meet the selling costs such as packing, advertising etc.
T provide credit facilities to the customers.

T maintain the inventories of raw material, work in progress, store, spares,
and
finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as new concern, as a growing and
one,

which has attained maturity. A new concern requires a lot of funds to meets its initial
requirement such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for working capital
depends upon the size of the company and the ambition of its promoters. Greater
the size of the business unit, generally will be the requirement of the working
capital. The requirement of the working capital goes n increasing with the growth
and
expansion of the business until its gains maturity. At maturity, the amount of
working capital required is called normal working capital.
IMPORTANCE OF WORKING CAPITAL
1. Time devoted to working capital management:-
The largest portion of financial managers time is devoted to day to day

internal operation the firm. This may be appropriately sum up under the heading
"WORKING CAPITAL MANAGEMENT".
2. Investment in current assets:
Current assets represent more than half of the total assets of a business
firm.
Because they represent largest investment and because this investment tends
to relatively volatile, current assets are worthy for the financial managers
careful attention.
3. Importance for small firm:-
Current assets are similarly important for the financial managers of small
firm. Further small firm are relatively limited access to the long term markets,
it must
53
necessarily rely on the trade credit and short term bank loan , both of net effect on
net working capital by increased current liabilities.
F.AcTPRP_PfTPRPAININP.T11_Vv.P.RicINP..cAPITA .R.Q.VIRPM.P.N.T
NATURE OF BUSINESS:
PRODUCTION POLICY:
LENGTH OF PRODUCTION CYCLE:
CREDIT POLICY:
WORKING CAPITAL CYCLE:

The speed with which the working cycle completes one cycle determines
the requirements of working capital. Longer the cycle larger is the
requirement of
1
working capital.
DEBTORS
FINISHED
CASH
nrtnne
RAW WORK IN
DPIIrIRPQC
RIATPRIA I
Figure 4: working Capital Cycle

W
O
R
K
I
NG CAPITAL MANAGEMENT
54
Working Equity &i
Loans
Capital
Cycle Payables
C%oriedds
etc . Inventory
Receivables
Sales
Figure 5 : Working Capital Cycle
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.
55
he you ... Then ...
Collect receivables You release cash

(debtors) faster from the cycle
Collect receivables Your receivables
(debtors) slower soak up cash
Get better credit (in terms You increase
of duration or amount) your cash
from suppliers resources
RATE OF GROWTH AND EXPANSION OF BUSINESS:
BUSINESS FLUCTUATION:
EARNING CAPACITY AND DIVIDEND POLICY:
PRICE LEVEL CHANGES:
AVAILABILITY OF RAW MATERIAL:
OTHER FACTOR:
a) perating efficiency b) Management ability
c) Irregularities of supply d) Import policy
e) Asset structure f) Importance of labor
g) Seasonal Variations
56
MANAGEMENT OF WORKING CAPITAL
Management of working capital means management of all aspects of current

assets
and current liabilities. Basically, "Working capital management
is
concerned with the problems that arise in attempting to manage
the current assets, current liabilities and the inter relationship
that exist between them".
Financial management should determine the quantum and structure of
current assets. It should also see that current assets are financed from the
proper sources. Management should also see that current liabilities are paid in
time, while managing the working capital.
The main objective of working capital management is to manage current assets

and current liabilities in a manner so that working capital can be kept in a
satisfactory level. It is also taken in to account that the working capital
should be neither excessive nor inadequate. The amount of current assets should
be adequate to pay the current liabilities in time and adequate security
margin can be maintained. Accordingly, proper balance among the different
constituents of current assets is maintained so that no current has more than
require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the

business significantly. Management should, therefore, maintain proper balance
among these factors while managing working capital. If the quantum of working
capital is more, it will increase liquidity, but decrease profitability and risk. If
working capital relatively declines, it will decrease liquidity but cause an increase
in profitability and risk. If business wants to earn more profit, it will have to
bear higher risk. Risk means inability f the firm to pay current liabilities in time.
W
O
57
Working capital management is three dimensional in nature: -
1) It concerned with the formulation. It of policies with regard to profitability,

liquidity
and risk.
2) It is concerned with the decisions about the composition and level of
current
assets.
3) It is concerned with the decisions about the composition and level of
current
liabilities.
Policies regarding to
Profitability, Liquidity and Risk
Composition of Composition of W
O
level of level of R
K
Current assets current liabilities I
N
G
C
Figure 6: Dimensions of Working Capital
A
P
I
T
A
L
M
A
N
A
G
E
M
ENT
58
Wpfw
HARIDwAR
To maintain the optimum level of working capital in such a big organization

is really a challenging task. The three basic components that determine the
level of working capital in any organization are: -
Cash
Debtors ,B/R
Inventory.
On the basis of our research in the BHEL Hard war, these basic
components are managed in the organisation, in the under mentioned
manner.
Particulars 2003-04 2004-05 2005-06 2006-07

2007-08
Current Assets
Cash and Bank Balance 10 9 9 111 5
Sundry Debtors 55866 48552 64709 91067

123091
Inventory 39214 58976 69798 67627

65365
Loans and Advances 5581 5299 5152 9156

11651
TOTAL 100671 112836 139668 167961

200112
Current Liabilities
Sundry Creditors 13953 16205 16674 21570

33545
Advances from customer 45214 55048 61889 94345

128554
Other Liabilities 8457 9250 12370 14307
23956
Provisions 14572 18887 19990 19834

23348
TOTAL 82196 99390 110923 150056

209403
59
Net working capital 18475 13446 28745 17905 -
9291
Turnover 97432 140697 164059 210494

235096
Table 2: Working Capital in HEEP (In RSI LACS)
Graphical presentation of current assets of the company
Current Assets
Years/Particulars 03-04 04-05 05-06 06-07 07-

08
12
309
Debtors 55866 48552 64709 91067
1
Inventory 39214 58976 69798 67627
65365
MANAGEMENT OF WORKING CAPITAL
Cash 10 9 9 111
5
Loan &
Advances 5581 5299 5152 9156
11651
11283 13966 16796
20011
Total 100671 6 8 1
2
Table 3: Current Assets of HEEP Haridwar
60
Graphical presentation of current assets
140000
120000

100000
- Debtors
80000
-s-
60000
Inventory
a
is
40000
r
A Cash
20000
- Loan
0 X
and
x X
_ _ A
I
A I A I
X advanc
e
x
A
1
2003-04 2004-05 2005-06 2006-07 2007-08
Figure 7 : current assets position in past five years
Focusing on liquidity management
Net working capital is a qualitative concept. it indicates the liquidity position

of the firm and suggests the extent to which working capital needs may be
financed by permanent sources of funds. Current assets should be
sufficiently in excess of current liabilities to constitute a margin or buffer for
maturing obligations within the ordinary operating cycle of a business. In order
to protect their interests, short-term creditors always like a company to
maintain current assets at a higher level than current liabilities. It is a
conventional rule to maintain the level of current assets twice the level of
current liabilities. However, the quality of current assets should be
considered in determining the level of current assets Vis-a -Vis current
liabilities. A weak liquidity position poses a threat to the solvency of the
company and makes it unsafe and unsound. A negative working capital
means a negative liquidity and may prove to be harmful for the
company's reputation.

Excessive liquidity is also bad. It may be due to mismanagement of current assets.
Therefore prompt and timely action should be taken by management to improve
and correct imbalances in the liquidity position of the firm.
Net working capital concept also covers the question of judicious mix of long-term
and short-term funds for financing current assets. For every firm there is a
minimum amount of net working capital, which is permanent. Therefore a
portion of the working capital should be financed with the permanent sources
of funds such as equity, share capital, debentures, long-term debt, preference
share capital or retained earnings. Management must decide the extent to
which current assets should be financed with equity capital or borrowed capital,
Balanced working capital position
The firm should maintain a sound working capital position. it should have
adequate working capital to run its business operations. both excessive and
inadequate working capital positions are dangerous from the firm's point of
view. Excessive working capital means holding costs and idle funds which earn no
profits for the firm. paucity of working capital not only impairs the firm's
profitability but also results in production interruptions and inefficiencies and sales
disruptions.
The dangers of excessive working capital are as follows:
1. It results in unnecessary accumulation of inventories. Thus chances of

inventory mishandling, waste, theft and losses increase.
2. It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely affects
profits.
3. Excessive working capital makes management complacent which

degenerates into managerial inefficiency.
W
O
62
4. Tendencies of accumulating inventories tend to make speculative profits
grow.
This may tend to make dividend policy liberal and difficult to cope with in future
when the firm is unable to make speculative profits.
Inadequate working capital is also bad and has the following dangers
which BHEL might face if inadequate working capital continuous for longer period
of time:
1. It stagnates growth. It becomes difficult for the firm to undertake

profitable
projects for non-availability of working capital funds.
2. It becomes difficult to implement operating plans and achieve the firm's
profit
target.
3. Operating inefficiencies creep in when it becomes difficult even to meet day
to
day commitments.
4. Fixed are not efficiently utilized for the lack of working capital funds. Thus
the
firm's profitability would deteriorate.
5. paucity of working capital funds render the firm unable to avail attractive
credit
opportunities etc,
6. The firm loses its reputation when it is not in a position to honor its short
term
obligations. As a result the firm faces tight credit terms.
Management of BHEL, KEEP should, therefore, maintain the right amount

of working capital on the continuous basis. Only then a proper functioning of
business operations will be ensured. Sound financial and statistical techniques,
supported by judgement, should be used to predict the quantum of working
capital needed at different time periods.
A firm's net working capital position is not only important as an index of liquidity but
it is also used as a measure of the firm's risk. Risk in this regard means
chances of the firm being unable to meet its bligations on due date. The
lender considers a positive networking as a measure of safety. All other things
being equal, the more the networking capital a firm has, the less likely that it
will default in meeting its
63
current financial obligations. Lenders such as commercial banks insist that the
firm
should maintain a minimum net working capital position.
Graphical Representaion Of Working Capital In BHEL
Interpretation
WORKING CAPITAL
991
19475
2003-04
17905
2004-05
2005-06
13446
2006-07
28745
2007-08
Figure 8: Graphical Representation of Working Capital in BHEL HEEP Haridwar
In the above chart, it is clearly visible that the net working capital
has decreased drastically in the past five years as it was in negative in 2007-
08 i.e.
-9291 as compare to other years. It has come down to 13446 Lacs in 2004-05
from 18475 Lacs in 2003-04.But in 2005-06 it has increased which is good
for the company because its turnover has also increased. Moreover if we see
2007-08 year there is a huge turn around in WC, as cash balance has
decreased drastically in comparison to previous year and on the other hand
creditors have also increased .The main reason for working capital to be in
negative is the untimely payment from

debtors. And more over, there is a direct relation between working
capital
requirements with Debtors and Inventory.
There has given reasons to the organization to take certain strategic measures
to manage its Debtors and Inventory.
Following are the measures:
Special task forces were built up from debtors and
Inventory
Management at senior level.

Regular follow up at senior level.
A close contact with the customers.
Proper age- wise analysis of the debtors.
Proper classification between collectible Debtors and bad debts.

Bad debts written off as early as possible after making all efforts for
its
collection.
Product cycle minimized so that cost of the product does not
become
high to the agreed amount because of time factor.
Formation of specific group in each area to identify the
wastage
elements and seek participation of all
Formulation of action plan to eliminatelminimize wastages.
Identification of corrective actions and their implementation.
Working Capital Turnover Ratio
This ratio helps to measure the efficiency of the utilization of the working capital.
It signifies that for an amount of sales, a relative amount of working capital is
needed. This ratio shows the direct relationship between the sales and working
capital.
W.C. Turnover Ratio = Sales! Working Capital
65
YEARS CALCULATION RATIO
2003-04 97432/ 18475 5.27

2004-05 140697/ 13446 10.46
2005-06 164059/ 28145 5.71
2006-07 200864/ 17905 11.22
6
2007-08 2350964 -
Table 4: Calculation of Working Capital Turnover Ratio In HEEP Haridwar
Graphical Presentation of Working Capital Turnover Ratio
WORKING CAPITAL RATIO

15
1
0
0
-5
-10
-15
-20
-25
-30
2003-04 2004-05 2005-06 2008-07 2007-08
sWOR KING CAPITA
5.27 10.46 5.71 11.22 -25.3
RATIO
eWORKING CAPITAL RATIO
Figure 9: Working Capital Ratio of HEEP Haridwar

6
6

Current Assets Turnover Ratio
This ratio indicates the efficiency with which current assets turn into sales. A
higher current assets turnover rate or a lower current assets turnover period is
better. It indicates the efficient use of the funds and the reverse case indicates
reduced lockup of funds in current assets.
C.A. Turnover Ratio = Sales I Current Assets
Years Calculations Ratio
2003-2004 97432 / 100671 0.97:1
2004-2005 140697 /112836 1.25:1
2005-2006 164060 /139668 1.18:1
2006-2007 200864/167961 1.19:1
2007-2008 2350961200112 1.17:1
Table 5: Calculation of Current Assets Turnover Ratio
67
Graphical presentation of current assets turnover ratio
1.4
1
.
2
0.8
0.6
0.4
0
.
2
2003-04 2004.05 2005.06 2006.07 2007.08

YEARS
Figure 10: Graphical Presentation of Current Assets Turnover Ratio
Interpretation
By observing the above ratio we find that current assets turnover

rate increased from 03-04 to 04-05. Then after there was a slight decline in 5-06
and in very next year there was slight increase in it. In 2007-2008 ratios shows
a slight decline but taking into consideration last five years from 03-04 to 07-
08 the company improved its current assets position from 0.97 to 1.17 which
shows that current assets management is improved.
68
R
MANAGEMENT
INTRODUCTION
69
It is very difficult for the organization to sell always on cash basis in
today's
competitive market. In almost every business, we have to sell on credit basis.
The basic objective of management of sundry debtor is to optimize the
return on investment n this asset. It is obvious that if there are large
amounts tied up in sundry debtors, working capital requirement would be
high and consequently interest charges will be high. In such cases, the bad
debts and cost of collection of debts would be high. On the other hand if the credit
policy is very tight, investment in sundry debtors is low but the sale may be
restricted, since the competitors may offer more liberal credit term.
We have limited resources and therefore every resource has its own
opportunity cost. Therefore, the management of sundry debtors is an
important issue and requires proper policies and efficient execution of such
policies. Debtors and cost of debtors have direct relation; cost will increase due
to increase in debtors and vice versa. It depends on the credit sale of concern
and credit period (collection period) allowed to customer. It is in interest of
customer to pay as late as possible, and company whom made sales, would like
to collect their debtor as early as possible. There is a conflict between the two
aspects. Debtor management is the process of finding the equilibrium at which
company agrees to receive its payment without hampering or having any
adverse effect on its sales and customer agree to pay at their economical buying
concept.
Sundry debtor level depends on two measure issues
One is volume of credit sales and another is credit period allowed to customer.
It is the essence of every business that to sale on credit and allow credit period
to the customer in such a competitive market.
Following factors may be considered before allowing credit period to the

customer
Nature of the product

70
Credit worthiness of the customer, which varies from customer to customer.
Quantum of advance received from customers
Credit policy of company, say number of days allowed to customer for

payment
to the customers.
Cost of debtors
Manufacturing cycle time of the product etc.
Debtors Management
There are mainly three aspects of Management of ebtors
1. Credit Policy:
The credit policy is to determine. It involves a tradeoff between the profits
on additional sale that arises due to credit being extended on one hand and the
cost of carrying those debtors and bad debts losses on the other.
2. Credit Analysis
This requires determining as how risky is to advance credit to a particular customer.
3. Control of Receivables
This requires to the firm to follow up debtors and decide about a suitable
credit collection policy. It involves both lying down of credit policy and execution
of such policies.
There is a cost of maintaining receivables, which comprises Cost of: -
The company require additional funds as resources are blocked

in
receivables which involves a cost in the form of interest (loan fund)
r
pportunity cost (own fund).
Administrative cost which includes record keeping, investigation of
credit
worthiness etc.
Collection cost
71
Defaulting cost or Bad debts
DEBTORS MANAGEMENT IN HEEP - HARIDWAR
B.H.E.L Haridwar is engaged in the manufacturing business of heavy

electrical equipments, where cycle time of the product is 18- 24 months and
most of the contracts take approximately 3-5 years to complete. Customers of
B.H.E.L. Hardwar are broadly divided into following categories: -
State electricity board
Power Project
Public Sector Under takings
Railways
Government Departments
Private Sectors
Exports
In most of the contracts, payments of B.H.E.L. Hardwar are made in
following stages:
Payment Terms
Advance from customers:-
72
At the time of dispatch of goods.
At the time of MRC (material receipt at site) Deferred payment

after commissioning of project with certain test
However, the above terms may vary from contract to contract.
Based on the above payment terms, B.H.E.L. Hardwar categories their debtors
into two parts:
Collectible debtors
Deferred debtors
Collectible debtors are those, which are due for payment as on now and there
is no credit time allowed to the customer say payment at the time of dispatch.
Deferred debtors are those, which will become due on the occurrence of
a particular event such as issuing of MRC (material Receipt Certificate) from
customer or completion of contract with certain tests etc.
ANALYSIS OF DEBTORS
Management with the help of certain ratio's
DEBTORS TURNOVER RATIO
Debtor's turnover ratio establishes a relationship between net credit sales

and average trade debtors. The major objective to calculate ratio is to
determine the efficiency with which the trade debtors are managed. We can
easily calculate this ratio with the help of the following formula:
73
YEARS 2003-04 2004-05 2005-06 2006-07 2007-08
Turnover 97432 140697 164060 200864 235096
Average
Debtors 55866 48552 64709 91067 123091
Ratio
1.74 2.89 2.53 2.21 1.9
Graphical presentation of debtor turnover ratio
3.5
ERAT
IO
0.5
0
2003-04 2004-05 2005-06 2006-07 2007-08
YEARS
Figure 11: Graphical Presentation of Debtor Turnover Ratio
74
Interpretation:
It indicates the speed with which the debtors turnover an average each year.
In general a high ratio indicates the shorter collection period which implies
prompt payments by debtors and a low ratio indicates a long collection period
which implies delayed payment by debtors. So we can see from the graph and
the table above that in the last five years the company debtor's turnover ratio has
declined. In 2000-
03 it is the least i.e. 1.74 but it improved in 2004-05 i.e. .2.89. From 2005 to 2008
the debtor turnover ratio has continuously declined. It depicts that how
inefficiently debtors are collected.
AVERAGE COLLECTION PERIO
Average Collection Period = 365 / Debtors Turnover Ratio
YEARS 2003-04 2004-05 2005-06 2006-07 2007-08
Turnover 97432 140697 164060 200864 235096
Average
Debtors 55866 48552 64709 91067 123091
Ratio
1.74 2.89 2.53 2.21 1.9
Average
Collection 210 126 144 165 192
Period
Table 7: Calculation of Average Collection Period In HEEP Haridwar

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Graphical representation of average collection period
AVERAGE COLLECTION PERIOD

250
2
00
co
< 150
u_
100
50
0
2003-04 2004-05 2005-06 2006-07 2007-08
YEARS
Figure 12: Graphical representation of Average Collection Period
Interpretation:
We can check the managerial efficiency with the help of this ratio by the
comparison of average collection period and credit policy of the company form the
table we can clearly see that in the year 2003-04 is 210 days, but in year 2004-05
there was a decrease and it falls down to 126 and from the year 2005-06 there
is constant increase in it. As it was 144 days, 165 days, and 192 days in the year
05-06, 6-07, 07-08 respectively. This indicates that the company is following a
very liberal policy in recent years. If the days are increasing it indicates that the
bad debts are also increasing. It is difficult to lay down a standard collection
period; it depends upon the
76
nature of the business. As a general rule the receivables should not exceed 4 to
5
months of credit sales.
STEPS INVOLVED IN MANAGEMENT OF DEBTS:
The following steps are involved in debtor's management
There should a close contact with the customers.
There should be proper age- wise analysis of the debtors.
There should be proper classification between collectible Debtors and bad debts,
Bad debts should be written of as early as possible after making all efforts
for its
collection
Product cycle should be minimized so that cost of the product should not
become
high to the agreed amount because of time factor.

There must be a provision of discount for early payment of debts by
the
custom ers.
Regular checking of the records of the debtors is essential so as to analysis
the
current position of that organization.
While making a policy, regarding the debtors the point should be considered
that
customer having excellent past record, follow the lenient policy is adopted for
doubtful customers
Manage the working capital according to need as recovering the debt
from
customer as early as possible while, get extension of payment of dues on
the
company of others as suppliers of raw material as late as possible.
77
INVENTORY
MANAGEMENT
78
INVENTORY MANAGEMENT
Introduction
Inventories constitute most significant part of current assets, in most f
the companies in India. T maintain a large size of inventory, a considerable
amount of fund is required. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary investment. A
firm neglecting the management of inventories will be jeopardizing its long-run
profitability and may fail ultimately. It is possible for a company to reduce its
levels of inventories to a considerable degree, e.g.10% to 20%, without any
adverse effect on production and sales, by using inventory planning and
control techniques. The reduction in
'excessive' inventories carries a favorable impact on a company's profitability.
There are at least three motives for holding inventories:

1. To facilitate smooth production and sales operation (transaction motive).
2. To guards against the risk of unpredictable changes in usage rate and
delivery time (precautionary motive).
3. To make advantage of price fluctuations (speculative motive).
OBJECTIVE:
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Inventories represent investment of a firm's funds. The objective of the
inventory
management should be the maximization of the value of the firm. The firm
should therefore consider:
(a) Costs,
(b)
Return, and
(c)
Risk factors in establishing its inventory policy.
Two types of costs are involved in the inventory maintenance:
1-Ordering costs: - Requisition, placing of order, transportation, and staff

services. Ordering costs are fixed per order size increases.
2-Carrying costs: - Warehousing, handling, clerical and staff services,

insurance and taxes. Carrying cost increases.
The firm should minimize the total cost (ordering cost + carrying cost). The
economic order quantity (EOQ) of inventory will occur at a point where the
total cost is minimum. The following formula can be used to determine EOQ:
EOQ= (2AO/C) "1/2 Where, A = Annual requirement.

0 = Per order cost.
C = Per unit carrying cost.
WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH INVENTORY?
The inventory level at which the firm places order to replenish inventory is
called reorder point. It depends on (a) the lead time and (b) the usage rate.
Under perfect certainty about the usage rate, the instantaneous delivery (i.e.
zero lead time, the reorder point will be equal to:
80
Lead-tim e *usage rate +Safety stock.
The firm should strike a trade-off between the marginal rate of return and
marginal cost of funds to determine the level of safety stock.
INVENTORY. ANALYSIS
Altogether the company deals with stock of thousands of items raising a
serious problem of how one can keep control of track of all items also, where it is
necessary to have some extent of control on each and every item. Different types
of analysis each having its own advantages and purpose help in bringing a
particular solution to the control of inventory. The most important of all such
analysis is ABC analysis. The other one -
ABC analysis VED analysis SDT analysis

HML analysis FSN analysis
ABC ANALYSIS
A formal way of classifying inventory items so that important ones will be given
the most attention. Through this analysis the professional inventory manager
will concentrate his efforts on where they will yield the greatest rewards. The
ABC of ABC analysis refers to the classes, A, B and c into which the inventory is
divided. is high value items whose rupee volume typically account for 75-80% of the
value of total inventory while representing only 10-15% of the inventory items.
Class is lesser value items whose rupee volume accounts for 15-20% of the value
of inventory, while representing 15-20% of the inventory items.
81
Class items are low value items whose volume accounts for 10-15% of the
inventory
values but 75-80% of the inventory items.
The same degree of control is not justified for all the three classes of
items. Class [A] requires the greatest attention and class [C] items require
least attention. Class [C] items need no special calculations since they
represent a low inventory investment. The order might be placed once a
year and periodically reviewed once a year, class [B] items are paid more
attention then, proper CODs are developed and semi-annual review of
variables must be done Class [A] items needs direct attention to the
inventory items, EOQ's are to be developed each time an order is placed. The
major concern of an ABC classification is to give direct attention to the
inventory items that represent the largest amount of expenditure. If
inventory levels can be reduced for claim of items it result in a significant
reduction in inventory investment.
ABC INVENTORY CLASSIFICATION:-
Percentage of inventory Category of value of the

total
items classes inventoty(rupee volume in
%)
10 A 75
15 B 15
75 C 10
Table 8: ABC classification
VED ANALYSIS
This analysis specially pertains to the classification of maintenance of

spares denoting the essentiality of blocking spares.
V - Stands for vital - items when out of stock or when not readily
available, completely brings the production a halt.
82
E - is for essential - items without which we can temporarily loose our
production
or disclosure of production occurs within a week.
D - Denotes desirable items - all other items, which are necessary but do
not cause any immediate effect on production.
S.D.E. ANALYSIS
For developing countries and especially where certain items are in scarce
supply. This analysis is very useful.
S - Refers to scarce items, especially imported items and those which are
very much in short supply.
D - Are difficult items which are available in market but not easily
available? E - Items are those which are easily available, most local
items.
HML ANALYSIS
The cost per item is considered for this analysis
(H) High cost items
(M) Medium cost items
(L) Low cost items
Help in bringing controls over consumption at departments level and for storage.
FSN ANALYSIS
Materials are classified as

(F) Fast moving
(5) Slow moving and
(N) Non moving items
The non-moving items are of great importance. It is found that many

companies maintain huge stock of non-moving items and the number of such
items running is thousands. Resulting of non-moving items is to be made to
determine where they could be used or to be disclosed off. The fast and slow
moving classification helps in arrangement of stocks in stores and their
distribution handling methods.
FUNCTION OF INVENTORY CONTROL:
Functions to be performed in the field of Inventory Control are:

1 Setting up norms for carrying Inventory.
2 Determining what items to be stocked.
3 Setting rules for Inventory replenishments.

4 Receiving, storing and issuing inventory items as needed.
5 Maintaining records of inventory quantities and values.
6 Identifying and deposing of slow moving, non-moving, obsolete or
damage
inventories.
7 Furnishing summary information on inventory position for control purposes.
Locations of position responsible for performing each of these functions in

organization structure greatly vary from company to company.
In BHEL Flardwar determination of product material or direct work order
material (what?) to be carried in Inventory is more or less automatic result of
product design formulation and is given in material forecast for a work order.
Indirect materials consumed in manufacturing process such as electrodes, brazing
alloys, tooling etc. are usually given by process engineering or at times by design
departments.
84
Balance great bulk of indirect materials is made up of repair parts and general
supplies.
Responsibility for specific (what?) items to be carried in inventory rests with
Works Engineering, With respect to raw materials and purchased parts,
responsibility for determining (when?) and how much to buy is a sign to relevant
product manufacturing i.e. production planning and material planning groups.
However a strict budgetary control and allocation to specific work order control on
high value items is exercised by Inventory control department organized
separately under Material Management. Purchase department attached to
manufacturing department determines (where?) to buy. Determination of indirect
material (when?) and how much to buy and (where?), is done by central group under
Material Management by consolidating requirements of all
sections and while looking at consumption trends over a Number Years.
Again a strict budgetary control and control on high value items for their allocation
is exercised by Inventory control group. Receiving and storing is done by Central
Stores CSX under Material Management Department. Issuing Inventory is done by
CSX on demand from manufacturing and is controlled by Material Planning. Again
some online checks are proposed to be introduced at raising of Store Issue voucher
stage itself, for high value items so that induction is controlled strictly as per
requirement of production schedule based on lead time for manufacture to keep
WIP inventory under control. Records of Inventory are maintained on a
mainframe computer centrally arranged having shared access from all functions for
their specific use.
Inventory Record Keeping and Related Procedures
How well Inventory records are maintained has a major bearing on the effectiveness
of Inventory control program. Mostly information recorded in B.H.E.L. system is:
Name of the part or material
Short description
Identifying No called Material code
Unit of measurement
Location in store (custody)
85
Bin no.
Opening, received, issue, closing quantity and value these records are maintained
in
an online system on main frame computer user departments have shared access
for
posting and retrieval of information.
There is a system for reserving specific items as customer specific, which is done
by tagging on the item. Posting of withdrawals or issue from inventory is done on
specific authorization by a document called Store Issue voucher.
INVENTORY MANAGEMENT IN BHEL
BHEL produces long production cycle items against the firm orders from
customers. Because of this as well as sizeable imported raw materials and
compulsory bulk purchase of items like steel and copper in line with availability
from SAIL and MMTC, the company has to carry high level of inventories.
TABLE OF INVENTORY MANAGEMENT IN BHEL.HEEP HARIDWAR
2003- 2004- 2005- 2006-

Particulars 2007-08
04 05 06 07
Raw Material & components
5338 10469 11567 10375 10386
Material With Fabricators
155 105 306 395 353
Stores & Spares (INCL.SCRAP)
2092 1594 1848 2989 3061
Material In Transit
3819 3716 9910 8193 9705
Finished Good At Plant
2603 2181 1770 2454 1819
Finished Good With

Customers 0 0 0 0 0
W.I.P
23699 38585 42120 38398 36411
Transfer In Transit 1508 2326 2277 4823 3630
86
TOTAL
39214 58976 69798 67627 65365
Turnover
97432 140697 164060 200864 235096
Average Inventory
,rJi .,)2 49095 64387 68713 66496
Inventory Turnover Ratio
2.72 2.87 2.55 2.92 3.54
Days Of Inventory Holding
134 127 143 125 103
Table 9: Inventory Management in HEEP Haridwar
Inventory Turnover Ratio = Sales 1 Average Inventory
Days of Inventory Holding = 365 1 Inventory Turnover Ratio
py.qpiljc41.m s-Fp15q-Rtgjq- fAay-pfl-RypptpjyTy-m-py 4.fiq
IllventoryTurnoiT r Rat io
4
3.5 3.54
3
2.5
2
.TURNOVER
1.5
RATIO
1
0.5
0
2003-04 2004.05 2005-06 2006-07 2007-08
Years
Figure 13: Graphical representation of days of Inventory Turnover Ratio
87
This ratio indicates the effectiveness and efficiency of the inventory management.
The ratio shows how speedily the inventory turned into account receivables
through sales. The higher the inventory to sales ratio, the more efficiently the
inventory is said to be managed and vice-versa.
By observing the above ratio we find that the company is able to manage the
inventory efficiently as the year progresses. This ratio was lowest as 2.55 in 2005-
06 in last 5 years. And since then it is increasing as the year progresses. In 2007-
08 it is 3.54. The organization should try to maintain the highest on the above
ratio.
Graphical representation
PtdaYP.9t.IPVPMP_r.Y.F.19.10ing.
Days of inventory holding

160
1
4
0
1
2
0
100 103
B
O
6
0
4
0
2
0
0
2003-04 2004-05 2005-06 2006-07' 2007-08
YEARS
Figure 14: Graphical representation of days of inventory Holding
Interpretation
If we see from the above table that the days of inventory holding in the year 2007-
08 has come down to 103 days from 125 days in the previous year. In spite of
increase in turnover i.e. 233169 in 2007-08 from 200864 in the year 2006.07 the
days of
88
inventory holding decreases. This indicates that the company is using
effective
strategy to bring down its inventory level. This makes very less investment
in inventory. It is in the interest of every organization to minimize its inventory
level. Following is the process through which the company can achieve the
optimum inventory level
STANDARD TAKING COMPARISION OF

INVENTORY ACTUAL ACTUAL WITH
LEVEL INVENTORY STANDARD
LEVEL
TAKE ANALYSING REASON OF VARIATION/

CORRECTIVE VARIATION/DEVIATION DEVIATION
ACTIONS
Need of Inventory Management:
Stiff competition, globalization of trade and liberalization.
Achieving, increasing and positive EVA.
Cost reduction.
Energy conservation.
Conservation of natural resources.
Better, work environment.
Improved health and safety.
Enhanced public image.
Graph of Inventory In BHEL

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PITAL MANAGEMENT
89
80
00
0
70
00
0
60
00
0
50000
40000
Amount Of
30000
Inventory
20000
10000
0
2003- 2004-
2005- 2006- 2007-
04 05 06 07 08
Figure 15: Amount of Inventory in HEEP Haridwar
Interpretation
By the graphical representation, we can easily understand that the level of
inventory has come down in 2006-07 and 2007-08. But in 2005-06, 2004-05 it
increases due to large amount of raw material. It comes down because
company takes some effective measures to control the level of inventory. Those
steps are following steps to control its inventory:
Strategiesimeas ures:
Formation of specific group in each area to identify the wastage elements
and
seek participation of all.
Identification of wastage.

Formulation of action plan to eliminate/minimize wastage.
Review of status.
Identification of corrective actions and their implementation.
Highlighting the gains.
Suggestion:
After analyzing the steps taken by the company there are some suggestions
to manage the Inventory
There should proper analysis of requirement of raw material.
Order should be placed according to the lead-time.
Wastage should be avoided.
There should be proper coordination between the Inventory Department
and
Production Department
CASH
MANAGEMENT 91
MANAGEMENT OF CASH
ft is the duty of the finance manager to provide adequate cash to all segments of
the organization. At the same time, he /she has also to ensure that no funds are
blocked in idle cash as this will involve cost in terms of interest to the concern. A
sound cash management scheme has to maintain the twin objective of liquidity and
cost.
Meaning of cash management:
The term cash management refers to the management of cash and 'near cash
assets' while cash includes coins, currency notes, cheques, bank drafts, and
the demand deposits, the near cash assets include marketable securities and
time deposits with banks. Such securities and deposits are easily convertible
into cash.
Motives for Holding Cash
In spite of the fact that cash does not earn any substantial return for the
business, it is held by the concern with the following motives.
1. Transaction motive: A Company enters a variety of business transactions

resulting both inflow and outflow of cash: at times the cash outflow exceed the
cash inflow. In order to meet the business obligations in such situation, it is
necessary to
92
maintain adequate cash balance. Thus, a firm with the motive of making routine
business payments maintains cash balance.
2. Precautionary motive: A firm holds cash balance to meet sudden cash

needs arising out of unexpected contingencies such as floods, strikes,
obsolesces, sharp increase in prices of raw materials, presentation of bills for
payment earlier than expected date. More amounts of cash will be kept by the firm
if there is more
possibility of such contingencies.
3. Speculative motive: BHEL also keeps cash balance to take advantage of

unexpected business opportunities. Such motive is there of speculative
nature.
4. Corn pensation motive: Banks provide certain services to their customers free
of charge. So they usually require the customers to keep minimum cash balance
with them which enables them to earn interest and compensate for the free
services
rendered.
Reasons of cash management:
Cash management involves the following basic problems.
1.. Controlling level of cash: - One of the basic objectives of cash management is
to minimize the level of cash balances with the firm. This objective is sought to
be achieved by means of the following:
- Preparing cash budget: Cash budget is the most important device for
planning and controlling the use of cash. It involves the future receipts and
payments of the firm. On the basis of this information the finance manager
can determine the future cash needs of the firm.
- Providing for unpredictable discrepancies: Cash budget shows
discrepancies between cash receipts and payments on the basis of normal
business activities.

- Availability of alternative source of funds: A firm need not keep large cash
balance if it has arrangements with banks for borrowing money in times
of emergencies.
2. Controlling of cash inflow: In order to prevent fraudulent diversion of cash

receipt and speeding up collections of cash, an adequate control on cash inflow
is necessary. A properly installed internal check system can, to a great extent,
minimize the possibility of fraudulent diversion of cash. Speedier collection of
cash can be made possible by adoption of the following two techniques:
Concentration banking system: it is a system of decentralizing collection

of account receivables. According to this system, BHEL's branch
Offices are authorized to collect the payment from the customers, and deposit in
the local bank accounts; this system facilities fast movement of funds. This system
is good in case of the firms having their spread over a large area.
- Lock box system: This system is more popular in the U.S.A. and is further step in
speeding up collection of cash. This system has been devised to element delay
arising in cash of the concentration banking system on account of a time gap
between actual receipt of cheques by the regional collection centers and its
deposits in the local bank account. Under this system BHEL hires a post office box
and
instruct its customers for there remits to the box. It also reduces the chances of
frauds in the cash collection process and controls the cash inflows better. In order
to avoid the unnecessary pockets of idle funds, the company should maintain
minimum number of bank accounts.
3. Controlling outflows of cash: An efficient control over cash outflows is

equally important for conserving cash and reducing financial requirements. Control
over cash outflows signifies slow disbursement. In order to control the outflows of
cash efficiently, a firm should keep in view the following considerations:
W
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94
- Centralized system for cash payments should be followed as compared to
decentralized system in cash of collections. All payments should be made from
a single control account, i.e., from the central office of the company. However,
the local office of the company may pay local expenses.
- Payment should be made n the due dates neither before nor after. The
company should neither lose cash discount nor its prestige on account of delayed
payments. The company should, there fore, made payments within the terms
offered by the suppliers.
- Playing float, technique should be used by the company for maximizing the
availability of funds. The term 'float' means the account tied up in checks which
have been issued by BHEL but not have been yet been presented for payment by
the
creditors. As a result of a time lag between issue of a cheque and its actual
presentation, the actual bank balance of a firm may be more than the balance
shown in the books. The difference is called 'payment of float'. The longer the
'float period' the greater would be the benefit of the firm.
Tools of cash control
Cash Budget: It is the most significant tool of controlling the use of cash. It
provides a comparison between actual and budgeted cash receipts and
disbursements
locating the points of deviations, if any. The financial manager, after ascertaining
the reasons for deviations between the actual and budgeted figures, can take the
necessary action to remove.
Inflows and outflows of cash: in order to check the change in cash position of
the firm from one period to another, a cash flow statement is prepared. It helps
management in controlling inflows and outflows of cash.
95
Ratio analysis: Ratio analysis is also an important tool of cash control. Different
financial ratios are used for this purpose. These ratios include current ratio,
liquidity ratio, receivables turnover ratio, and inventory turnover ratio and cash
position
ratios.
ANALYSIS OF CASH MANAGEMENT WITH THE HELP

OF
CERTAIN RATIOS
CURRENT RATIO:
This ratio represents a margin of safety for creditors. The higher the current
ratio, greater is the margin of safety; the higher the amount of current assets in
relation to current liabilities, the more the firm's ability to meet its current
obligation. It is the best ratio to find relationship between the current assets and
current liabilities of BHEL. We can easily calculate the current ratio with the
help of the following formula:
Current Ratio = Current Assets / Current Liabilities
Table showing Current Ratio in last five years
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Years Calculations Ratio
2003-
100671/82196 1.2:1
2004
2004-
112836/99390 1.1:1
2005
2005-
139668/110923 1.3:1
2006
2006-
167961/150056 1.12:1
Table: 10 2007
Current Asset
Ratio of HEEP 2007- 200112/209403 0.96:1
Haridwar 2008
ANALYSIS OF CURRENT RATIO
1.4 -
1
.
2
0.8 CURRENT
RATIO
0.6
0.4
0.2
0
2003-04 2004-05 2005-06 2006-07 2007-08
YEARS
Figure 16: Graphical presentation of Current Ratio

Interpretation:
97
As a conventional rule, a current ratio of 2 to 1 or more is considered
satisfactory.
The BHEL organization in the year 2007-08 has the ratio of 0.96:1 which is quite
low the reason being is that its current liabilities are more in comparison to its
current assets this means that there is in sufficient fund with organization to meet
its current obligations. Moreover, as we can see from the above table and graph
the current ratio of BHEL is in 2003-04 is 1.2:1 which is quite low but still it is
able meet its obligation. In 2004-05, the current ratio goes down to 1.1:1 due to
increase in the current liabilities and decrease in current assets as compared to
previous year. In 2005-06 the ratio has raised to 1.3:1 which is highest in last
five years. Ratio increase due to increase in current assets. In 2006-07 the ratio is
1.12:1. It decline because current liabilities are growing at faster rate in
comparison to current assets,
LIQUID RATIO:
This ratio establishes a relationship between quick assets and current liabilities.
The major objective to compute this rati is to measure the ability of the firm to
meet its short-term obligations as and when due without relying upon the
realization stock. We can easily calculate this ratio with the help of the following
formula:
Liquid Ratio= Liquid Assets I current liabilities
2003-
61457/82196
2004
2004-
WORKING CAPIT 53860/99390
2005
2005-
69870/110923
2006 0.74:1 0.67:1
2006-07 98
0.54:1
100334/150056
0.64:1
0.63:1
2007-08
134747/209403
Table: 11 calculation of liquid ratio in HEEP Haridwar
Graphical presentation of liquid ratio:
Liquid Ratio
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0
.
1
2003-04 2004-05 2005-06 2006-07 2007-08
YEARS
Figure 17: Graphical Representation of Liquid Ratio:
99
Interpretation:.
Liquid ratio indicates that what amounts of liquid assets are available for each
rupee of current liability. We know that the liquid ratio of any organization may be
1:1. is considered to be satisfactory. Now comparing the company's position
according to the liquid ratio in 2003-04 the ratio was .74:1 which the best
liquidity position year was for the company. But it decreases to 0.54:1 in 2004-05.
In 05-06. 2006-07 and in 2007-08 the ratios are 0.63:1. 0.67:1 and 0.64:1
respectively. It means that the liquidity position of the company is constantly
decreasing it is due to large amount of current liabilities as compared to liquid
assets and also the number of debtors of the company are increasing. This is not
better from management's point of view. As
more of amount is blocked in the debts and chances of bad debt will increase.
SUMMARY OF FINDINGS
The company is able to reduce its working capital continuously in last five
years
but in the year 2007-08 the working capital has turned in to negative i.e.
-9291
which means that companies current liabilities are in excess of its
current assets .The main reason for working capital to be in negative is the
untimely payment from debtors.
The creditors of the company has increased from 13953 lacs t 33545 lacs
while
the current liabilities f the company has increased which means that company
has adopted a good realization policy.
The increased current liability is about Rs/127207 lacs in just a span of
seven
years .
100
The current ratio of the company in last five years has decreased from 1.2
to
1.12 which revels that company is moving from aggressive working
capital strategy to conservative working capital strategy.
The quick ratio of the company has declined from 0.74 to 0.64 in the span of
five
years.
The latest working capita turnover ratio indicates the inefficiency of utilization
of
fund as it is -25.3.
The current assets turnover ratio has increased from .97 to 1.17 in a span of
five
years which indicates that current assets are efficiently turning into sales.
The debtor's turnover ratio has gone up from 1.74 to 1.9 which shows that
the
company is collecting its debtors efficiently but not as efficiently as it was doing
in
the 2004-05, 2005-06, 2006-07 years because in that time period their ratio
were quite high i.e. 2.89, 2.53, 2.21 respectively.
The average collection period has decreased from 210 days to 192 days
which
shows that the company is collecting its debts speedily but it can improve it
further also by improving it debtor turnover ratio.
The inventory holding period has reduced from 134 to 103 days which shows
that
inventory is turning into finished goods very quickly and the company has
reduced the locking of funds in inventories.
101
The inventory turnover ratio has increased from 2.72 to 3.54 with in a span of
five
years. This shows that company is able to manage inventory efficiently.
SUGGESTIONS
Analysis of financial statements and working capital of organization reveals

many strong and weak points of the organization HEEP-BHEL HARDWAR.
As far as the current ratio of the organization is concerned, it is decreasing in

the recent years. In 2007-08 it is 0.96:1. Although the current ratio of the
company should be 2:1 is considered to be good but this ratio is not too
good for the organization in which cash, inventory & debtors play a significant
role but here in HEEP department all the financial activities and funds
allocations are dealt at the corporate office of BHEL, which is situated at DELHI.
Debtors are also very nominal as NON-BHEL sales constitute 87% approximately.
Hence the organization should
102
try to manage its inventory in best possible manner. By decreasing inventory
and
reduce the un-necessary lock up of funds in inventory the organization can
improve its current ratio.
The current assets turnover has increased from in 0.97 to 1.17 in last five years
but there is a fluctuation in this ratio as in 2004-05 it has gone up to 1.25. So
the company should try to improve this ratio through increase in sales or reduce
the unnecessary lock up of funds in current assets.
There is a increase in current liabilities about 85/127207 lacks in a span of five

years which is not good for the credit of company so the organization should try
to reduce the current liabilities through speedy payment to creditors and reduce
the unnecessary provisions.
There is a big fluctuation in working capital turnover ratio. This ratio was 5.27 in
03-
04 and in 04-05 it suddenly went up to 10.46 and again in 05-06 there is a big
decline in working capital turnover ratio and this ratio come down to 5/1. This
was because the sales did not increase in the same ratio as working capital
increased. So the company should manage the working capital and should
properly estimate for an amount of sales how much working is needed so that the
un-necessary lock up of funds in working capital may not occur.
The amount of cash balance has reduced drastically from RS/ 111 lacks to Rs/ 5
lacks within the span of 1 year. And moreover debtors have also increased at a
faster rate. So the company should made such policies so that cash can be
realized quickly from debtors and thus maintain its liquidity.
Finally, I wish that organization should improve more and more in the coming
years and reach the maximum heights of development.
W
O
R
KI
N
G
C
APITAL MANAGEMENT
103
BIBLOGRAPHY
FINANCIAL MANAGEMENT - I.M. PANDAY
WORKING CAPITAL MANAGEMENT- J.D. AGGARWAL
FINANCIAL MANAGEMENT- SASHI K. GUPTA
104
BHEL HEEP- BALANCE SHEET
BHEL- ANNUAL REPORT
105
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Working Capital Project

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Working Capital Project

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A PROJECT REPORT

WORKING CAPITAL MANAGEMENT OF

BHARAT HEAVY ELECTRICALS

DIRECTORATE OF DISTANCE EDUCATION

would have happened.

It always takes the contribution of lot of people to complete a project. No project

I am thankful to the BHEL for permitting me for making a project in

I am also grateful to Maj.Gen.S S Chahal Director Netaji subash

institute of management sciences and my mentor Prof. P C Chhabra other

teacher at the institute, who helped me, in preparing the project

It is with great sense of gratitude that I submitted my proj ect report.

WORKING CAPITAL MANAGEMENT

TOPICS PAGE NO:

BHEL ,a corporate giant 11

Vision, mission, values 15

Objectives of proposed study. 16

Contribution to various sectors. 19

Collaborations ,competitors and its products 23

BHEL HARIDWAR UNIT, HEEP 28 - 38

Overview of finance functions. 32

WORKING CAPITAL MANAGEMENT 39 - 66

Issues in working capital management. 46

Policies for financing. 48

Needs and objectives for working capital. 50

Existing system of WC in WEEP 57

Current assets turnover ratio. 65

MANAGEMENT OF DIFFERENT COMPONENTS OF WORKING

Debtor management in HEEP. 70

Steps involved in management of debts 75.

Record keeping and related procedures. 83

Inventory management in HEEP. 84

Reasons of cash management. 91

Tools of cash control. 93

Analysis of cash management. 94

Turnover - Rs 33000 Crores

Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED

REGIONAL OFFICES (POWER SECTORS)

1. NEW DELHI (NORTHERN

KOLKATA (EASTERN REGION)

3. NAGPUR (WESTERN REGION)

4. CHENNA1 (SOUTHERN REGION)

1. HEAVY ELECTRICAL EQUIPMENT PLANT, HARIDWAR

2 CENTRAL FOUNDRY FORGE PLANT, HARIDWAR

3. HEAVY POWER EQUIPMENT PLANT, HYDERABAD

4. HIGH PRESSURE BOILER PLANT, TRICHY

5. HEAVY ELECTRICALS PLANT, BHOPAL

6. TRANSFORMER PLANT, JHANSI

7. ELECTRONICS DIVISION, BANGALORE

8. BOILER AUXILIARIES PLANT, RANIPET

9. INDUSTRIAL VALVES PLANT, GOINDWAL

10.ELECTRO-PORCELAINS DIVISION, BANGALORE

11.INSULATOR PLANT, JAGDISHPUR

12.COMPONENT FABRICATION PLANT, RUDRAPUR

13. HEAVY EQUIPMENT REPAIR PLANT, VARANASI

14.ELECTRICAL MACHINE REPAIR PLANT, MUMBAI

To study the Working Capital Concept.

To study the Working Capital Management process in Bharat Heavy

To see whether the company is prepared with enough Working Capital to

To compare the performance of Working Capital for a particular year

To assess Liquidity position, Long term solvency, operational efficiency

Providing suggestions to solve the problems of the company.

To ensure a steady growth by enhancing the competitive edge of

To provide a reasonable and adequate return on capital employed,

To build a high degree of customer confidence by providing increased