Académique Documents
Professionnel Documents
Culture Documents
Submitted by:
Joseph Bita
REGSTRATION No.-0906107057
2008-2010
Submitted to:
CENTRE FOR IT EDUCATION, BHUBANESWAR
Regd. Office : Janpath, Bhubaneswar – 751022
Submitted TO:
CENTRE FOR IT EDUCATION, BHUBANESWAR
Submitted by:
Joseph Bita
REGISTRATION No.-0906107057
2008-2010
Under the guidance of
Mr. Bibhuti Bhusana Nayak Prof. DEBASIS MOHANTY
Manager(Finance),OPTCL, Bhubaneswar, Orissa
Faculty, CITE,Bhubaneswar
ii
ORISSA POWER TRANSMISSION CORPORATION
LIMITED
Regd. Office : Janpath, bhubaneswar – 751022
(A Govt. of Orissa Undertaking)
CERTIFICATE
Place: Bhubaneswar
Date: Mr. Bibhuti Bhusana Nayak
iii
Prof. DEBASIS MOHANTY
Faculty, CITE, Bhubaneswar
CERTIFICATE
iv
Place: Bhubaneswar
Date: Prof.DEBASIS MOHANTY
DECLARATION
I Mr. Joseph Bita regn No. 0906107057 2nd year MBA student of centre for IT
education ,Bhubaneswar ,do hereby declare that I have under gone the requisite
summer training program at ‘ORISSA POWER TRANSMISSION
CORPORATION LIMITED’ during to on
WORKING CAPITAL MANAGEMENT The report submitted here with to the
institution is product of my own ,not plagiarized and submitted any where else
before.
v
CONTENTS
Page No.
• Acknowledgement vii
• Short recital of the project viii
CHAPTER -1 ……………………………………....1-4
Introduction:
• About working capital management in OPTCL
• And how it is essential for the financial Management of an
Organization.
CHAPTER -2 ……………………………………..5-14
An over view of power scenario:
• (World, India & special reference to orissa)
CHAPTER -3 …………………………………....15-18
Mission, vision & profile of OPTCL:
• OPTCL profile
• Mission
• Vision
• Core objectives
CHAPTER -4 ……………………………………19-53
Review of literature:
• Operating &cash conversion cycle
• Receivable management
• Inventory management
• Cash management
CHAPTER -5 ……………………………………54-56
Objectives & scope of study:
CHAPTER -6 ……………………………………57-73
Information gatherings & Representation:
• Balance sheets of different financial years of OPTCL
• Profit & loss accounts of different financial years of OPTCL
• Cash flow statement
• Other data tables
CHAPTER -7 ……………………………………74-86
vi
Analysis of data & Interpretation
• Ratio analysis
• Analysis of statement showing changes in working capital
• Cash flow statement analysis
• Comparative balance-sheet analysis
CHAPTER -8 ……………………………………87-89
Findings of the study & conclusion,
suggestions & recommendations
• Disclaimer ……………………………………………………………... 90
• Bibliography …………………………………………………………... 91
ACKNOWLEDGEMENT
Sometimes words fall short to show gratitude, the
same happened with me during this project. The immense help
and support received from OPTCL overwhelmed me during the
project. I am thankful to Mr. A. P. Panda, AGM, (HRD) for
providing me training opertunity in OPTCL. I am highly indebted
to Mr. Bibhuti Bhusana Nayak, Manager(Finance), OPTCL,
Bhubaneswar, my corporate guide, who guided me during the
internship period and suggested many issues which has been
taken care in my project work. During my internship, Mr.
Ghanashyam Parida, Sr.Asst. OPTCL helped me a lot and I
am also very much obliged to him. I offer special thanks to my
faculty guide, Prof. Debasis Mohanty, for his continuous
support and guidance through out the project work. I also
specially thanks to Mr. R.N. Sahoo,CITE Bhubaneswar,
whose continuous inspirations, suggestions helped me to
successfully complete the project. I offer thanks to Prof. (Dr.)
vii
S. K. MOHAPATRA, PRINCIPAL CITE Bhubaneswar for
giving me a chance to do my project assignment in OPTCL,
Bhubaneswar. Last but not the least; my heartfelt love and
regards to my parents, whose constant supports and
blessings helped me for completion of this project.
viii
basic concepts about working capital and how it is essential for financial
management of an organization. Chapter-2 focuses on power scenario
of world, India and special reference to Orissa. Chapter-3 represents
Mission and Vision and Core Objectives of the organization. In chapter-
4, major thrust is given for discussion of receivables management,
inventory management and cash management. Chapter-5 represents
the scope and objectives of our study during the project work. The main
objective is to measure the ability of the organization to pay it’s short
term obligations in time through analyzing the different working capital
ratios. Chapter-6 deals with mainly for collection of informations about
financial transactions, balance sheets, profit & loss accounts for the last
three financial years (2005-06, 2006-07, 2007-08) and other relevant
documents related to study. Chapter-7 is the vital parts of my project
work, wherein I carefully analyzed the data and interpreted the same
with my observations. Chapter-8 represents the findings of the study and
suggestions, recommendations for improvement of working capital
management practices in OPTCL.
ix
x
About working capital management
in OPTCL and
INTRODUCTION
1
Working capital is so much in use in common parlance and is so much
misunderstood. Even among the professional managers the controversy and
confusion persist. While an accountant will regard working capital as current
asset minus current liability and call it as net working capital, A finance
manager will consider gross current assets as working capital. Both may be
true, but their concerns differ. The former concern is arithmetical accuracy
trained as he is to tally the two sides of the balance sheet. But the finance
manager’s concern is to find fund for each item of current asset at such cost and
risk that the evolving financial structure remains balanced between the two.
When one asks a production controller: What is working capital? His answer is
very simple and straight forward. To him working capital is the fund needed to
meet the day to day working expenses, i.e. to pay for materials, wages and other
operating expenses. Is there any differences between the statement of an
accountant, finance manager and production controller? In the ultimate analysis,
the later may be true, but according to the accountant or finance manager it is
the very working expenses that get blocked in current assets along the
productive-distributive line of an enterprise and net working capital is that
liquidity which takes care of the working expenses if the line gets extended due
to any reason. There are two concepts of working capital: gross and net. Gross
working capital refers to the firm’s investment in current assets. Current assets
are the assets which can be converted in to cash within an accounting year. Net
working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsider which are expected to
mature for payment within an accounting year. A positive net working capital
will arise when current assets exceeds current liabilities. A negative net
working capital occurs when current liabilities are in excess of current assets.
2
However, the management of working capital is highly essential for every
organization. The basic objective of working capital is to provide adequate
support for the smooth functioning of the normal business operation of a
company. Management of current assets leads to a trade off between
profitability and liquidity. An aggressive approach to working capital
management results in greater profitability but lower liquidity while a
conservative approach results in lower profitability but higher liquidity. Under
moderate approach some liquidity and profitability have to be sacrificed so that
the resultant figures of liquidity and profitability are reasonably satisfactory to
the company. A good financial management practice includes a good
management of its working capital position by maintaining its level of current
assets and liabilities in such a way that there will be a smooth functioning of the
daily business operations of the organization. Now-a-days, it is a great
challenge for the business organizations to manage their working capital in a
profitable way. Not only for the manufacturing industries, but also for the
service industries like banking sectors, telecom industries, supply-chain
industry, power transmission industries and many other industries management
of working capital is highly essential in the current business scenario.
Therefore, the existing study on working capital management of OPTCL is
mainly focused on current asset positions and current liabilities for the
consecutive past three years. On the basis of available financial data of balance
sheets, profit and loss accounts and cash flow statements, analysis has been
made to derive the financial viability of the organization for sustaining future.
Although, the company has made substantial profits during last three years
(2005-06, 2006-07, 2007-08) but the ideal working capital ratio is yet to be
streamlined due to repayment of past loan burdens, implementation of revised
scale of pay and super annuity benefits and delay in recovery of huge pending
3
electricity bills. However, the present assets positions and disbursement of
funds and securing of employees benefits are in safe hands of the company and
the future of organization looks to be bright as far as working capital
management is concerned. The details of analysis, observations and suggestions
etc. are included in various chapters of this project report. The organization can
be a EVA +ve company if the OPTCL management minimizes current
liabilities by curtailment of unnecessary administrative overheads as well as
proper planning and execution of work in time schedule to save money by
increasing the profitability.
4
(World, India and Special Reference To
Orissa)
5
Power Sector: History/Background
After 1947, all new power generation, transmission and distribution in the
rural sector and the urban centers (which was not served by private utilities)
came under the purview of State and Central government agencies. State
Electricity Boards (SEBs) were formed in all the states.
The Public sector units (PSUs) provided a vital service to the nation in the
post-independence era. From the few transmission and distribution networks
existing at the time of independence, in few urban centers, the PSUs have
established networks covering the entire length and breadth of the country.
Besides, massive rural electrification programs have boosted agricultural
production in a big way. Today, India is self-sufficient in food grains primarily
because of this.
6
WORLD POWER SCENARIO
7
Generation Net (Thousand MU)
2002
Sl.
Country Conventiona Hydro- Nuclear Others Total % Of
No.
l Thermal Electric World
Total
1 United 2730.17 264.33 780.06 92.64 3867.20
States 25.17
2 China 1271.07 271.82 25.17 2.32 1570.38 10.22
3 Japan 646.46 81.55 280.34 27.86 1036.21 6.74
4 Russia 547.55 180.18 134.14 2.82 864.69 5.63
5 Canada 155.17 346.77 71.75 8.47 582.15 3.79
6 Germany 341.60 22.89 156.60 27.54 548.63 3.57
7 India 478.21 63.46 17.76 4.09 563.53 3.67
8 France 49.05 59.96 414.92 5.16 529.09 3.44
9 United 265.47 4.74 83.64 6.30 360.14 2.34
Kingdom
10 Brazil 28.45 283.23 13.84 14.56 340.07 2.21
Total Top 6513.2 1578.93 1978.22 191.76 10262.09 66.80
Ten
Total World 9905.81 2619.10 2546.01 292.15 15363.07 100
%
8
Per capita
Sl. Consumption Net % Of Total World
consumption
No. (Thousand MU) Consumption
(Kwh)
1 United States 3656.49 24.76 12593.69
2 China 1671.23 11.32 1294.03
3 Japan 946.27 6.41 7438.41
4 Russia 811.51 5.50 5612.64
5 Germany 510.37 3.46 6193.96
6 India 519.04 3.51 494.46
7 Canada 520.90 3.53 16173.50
8 France 433.33 2.93 7200.44
9 Brazil 371.44 2.52 2040.50
United
10 346.08 2.34 5758.88
Kingdom
64800.53
66.27
Total Top Ten 9786.66 (55.38 % of World
Total)
Total World 14767.75 100 % 117007.38
9
10 Sweden 16523 2.30
11 Italy 13557 1.88
Total Top Ten 470866 65.41
World Total 719928 100.00
a) Supply Projection:
b) Demand Projection:
The peak demand met was 67,880 MW and the energy availability was
4,67,000 MU against the requirement of 78,037 MW and 5,07,000 MU,
respectively. Thus, there was a shortage of 13 per cent in meeting the peak
demand and 7.8 per cent in energy for 2000-01. A realistic assessment of
energy and peak power requirements is vital for planning and operation of the
electricity system in India. According to the 16th Electric Power Survey (EPS),
the all-India peak demand would be about 85,132, 1,15,705, 1,57,107, and
2,12,725 MW by the end of the Ninth (20001-02), Tenth (2006-07), Eleventh
(2011-12) and Twelfth (2016-17) Five-Year Plan, respectively. The
corresponding energy requirements would be 5,29,013, 7,19,097, 975222, and
1318 644 MU, respectively. Compared to the 15th EPS projections, these are
less by about one per cent in peak demand and seven per cent to eight per cent
in energy requirement.
10
c) Energy Consumption Pattern in India
AT A GLANCE:
12
regulatory supervision is designed to be qualitatively and structurally different
from the command and control exercised by the government so far as the
electricity industry is concerned. The Commission is designed to be an
autonomous authority responsible for regulation of the power sector while
policy-making power continues to be retained by the State Government. The
new regulatory regime is designed to insulate the electricity industry from short
term political decisions and rigid bureaucratic control. It aims at ensuring that
industry operates on commercial lines so that the scarce resources of the state
are available for development. It has been the experience that state owned
industry is utilised for achieving social and political ends such as creating
avenues for employment, and giving subsidy to certain categories of consumers.
This becomes detrimental to the industry resulting in non-availability of
resources for maintenance and expansion, lack of accountability in
performance, poor quality of service, financial sickness of the industry and
unwillingness of private sector to invest in any significant manner. The new
regulatory regime, on the pattern prevalent in USA and UK, is designed to
create clear and transparent rules and procedures for open hearing by which the
Regulatory Commission can monitor and control the essential utility industries
while the interests of all those who participate in it and those who are served by
it can be balanced and protected. As an independent Regulatory OERC, issues
and enforces licenses, determines tariff and charges, monitors financial viability
of operators, sets service standards and monitors compliance, arbitrates in
disputes between licensees, arbitrates in disputes between licensees and
consumers, provides information and advice to the Government, handles
consumer grievances and promotes competition in all sectors of electricity
industry. An independent Regulatory Commission operating in a transparent
manner creates comfort and confidence of investors from private sector by
allaying the apprehension that political and personal considerations may create
an uncertain climate and that the interests of Govt. or selected persons shall not
be unduly favoured.
Functions of the OERC are :
(i) to aid and advise, in matters concerning generation, transmission,
distribution and supply of electricity in the State;
(ii) to regulate the working of licensees and to promote their working in an
efficient, economical and equitable manner;
(iii) to issue licenses in accordance with the provisions of the Reform Act and
determine the conditions to be included in the licenses;
(iv) to promote efficiency, economy and safety in the transmission, distribution
and use of electricity in the State including and in particular in regard to quality,
13
continuity and reliability of service so as to enable all reasonable demands for
electricity to be met;
(v) to regulate the purchase, distribution, supply and utilization of electricity,
the quality of service, the tariff and charges payable keeping in view both the
interest of the consumer as well as the consideration that the supply and
distribution cannot be maintained unless the charges for the electricity supplied
are reasonably levied and duly collected;
(vi) to promote competitiveness and progressively involve the participation of
the private sector, while ensuring a fair deal for the customers;
(vii) to collect data and forecast on the demand for and use of electricity and to
require the licensees to collect such data and make such forecasts;
(viii) to require licensees to formulate perspective plans and schemes in
coordination with others for the promotion of generation, transmission,
distribution and supply of electricity; and
(ix) to undertake all incidental or ancilliary things. The Orissa Electricity
Regulatory Commission has taken up its role earnestly in the aforesaid
historical and legal perspective. The Commission's task is all the more difficult
because there has been no precedent of an independent regulatory Commission
in electricity industry in any of the developing countries in Asia. The
Commission has formulated its rules, regulation and procedure in a tailor-made
manner to suit the economic and industrial development in general, and need of
electricity sector in particular, in the state of Orissa while safeguarding the
interests of all categories of consumers.
14
15
OPTCL PROFILE
ORISSA POWER TRANSMISSION CORPORATION LIMITED (OPTCL),
one of the largest Transmission Utility in the country was incorporated in
March 2004 under the Companies Act, 1956 as a company wholly owned by
the Government of Orissa to undertake the business of transmission and
wheeling of electricity in the State.
16
Board of Directors constituted. They are in turn assisted by a team of
dedicated and experienced professionals in the various fields.
VISION
CORE OBJECTIVE
17
Undertake transmission and wheeling of electricity through intra-State
Transmission system
1. Discharge all functions of planning and coordination relating to
intra State, inter State transmission system with Central Transmission
Utility, State Govt. Generating Companies, Regional Power Board,
Authority, Licensees or other person notified by State Govt. in this
behalf.
2. Ensure development of an efficient and economical system of
intra state and inter State transmission lines for smooth flow of
electricity from generating station s to the load centers.
3. Provide non-discriminatory open access to its transmission
system for use by any licensee or generating company or any consumer
as and when such open access is provided by the State Commission on
payment of transmission charges/surcharge as may be specified by the
State Commission.
4. Exercise supervision and control over the intra-state
transmission system, efficient operation and maintenance of
transmission lines and substations and operate State Load Despatch
Centers to ensure optimum scheduling and despatch of electricity and
to ensure integrated operation of power systems in the State.
5. Restore power at the earliest possible time through deployment of
emergency Restoration system in the event of any Natural Disasters like
super cyclone, flood etc.
18
Operating & cash conversion cycle
Receivables management
Inventory management
Cash management
19
REVIEW OF LITERATURE
Never cross the border
Wisdom says
There is fire beyond the border.
20
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors (accounts
payable), bills payable, and outstanding expenses. Net working capital can be
positive or negative. A positive net working capital will arise when current
assets exceeds current liabilities. A negative working capital occurs when
current liabilities are in excess of current assets.
The two concepts of working capital-gross and net – are not exclusive: rather,
they have equal significance from the management view point.
21
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. How
ever, the quality of current assets should be considered in determining the level
of current assets vis-à-vis current liabilities. A weak liquidity position posses 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 the imbalances in the
liquidity position of the firm.
Purchases paym
23
Raw material conversion period = Raw material inventory
(Raw material consumption)/360
RMCP = RMI×360
RMC
Work in progress conversion period (WIPCP) - It is the average time taken
to complete the semi finished or work-in-progress.
Work-in-progress conversion period = Work-in-progress inventory
(cost of production)/360
WIPCP = WIPI×360
COP
Finished good conversion period (FGCP) - It is the average time taken sell
the finished goods.
Finished goods conversion period = Finished goods inventory
(Cost of goods sold)/360
FGCP = FGI×360
CGS
Debtor conversion period (DCP) - It is the average time taken to convert
debtors in to cash. DCP represents the average collection period.
DCP = debtors × 360
Credit sales
Creditors deferral period (CDP) - it is the average time taken by the firm in
paying its suppliers (creditors).
CDP=Creditors×360
Credit purchases
Net operating cycle (NOC) is the difference between gross operating cycle
and payables deferral period.
Net operating cycle = Gross operating cycle ─ Creditors deferral
period
NOC = GOC ─ CDP
The following table-1 shows the detailed calculation of the components of a
firms operating cycle. Table -2 shows the summary of calculations.
24
Table-1
25
Table -2
26
It is an indication of defective credit policy and slack collection
period. Consequently, higher incidence of bad debts results, which
adversely affect profit.
Excessive working capital makes management complacent which
degenerates in to managerial efficiency.
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 un able to make
speculative profits.
27
RECEIVABLES MANAGEMENT AND
FACTORING
INTRODUCTION
Trade credit arises when a firm sells its products or services on credit and
does not receive cash immediately. It is an essential marketing tool acting as
abridge for movement of goods through production and distribution stages to
customers. A firm grants trade credit to protect its sales from the competitors
and to attract the potential customers to bye its at favourable terms. Trade credit
creates accounts receivable or trade debtors also referred to book (debts in
India) that the firm is expected to collect in the near future. The customers from
whom receivable or book debts have to be collected in the future are called
trade debtors or simply as debtors and represents the firm’s claim or asset.
A credit sale has three characteristics. First, it involves an element of
risk that should be carefully analysed. Case sales are totally risk less but not the
credit sales as the cash payments are yet to be received. Second, it is based on
economic value. To the buyer, the economic value in goods or services passes
immediately at the time of sale, while the seller expects an equivalent value to
be received later on. Third it implies futurity. The buyer will make the cash
payment for goods or services received by him in a future period.
28
the financial manager hardly has any control over these variables. The
percentage of credit sales to total sales is mostly influenced by the nature of
business and industry norms.
There is one way in which the financial manager can affect the volume of credit
sales and collection period and consequently, investment in accounts receivable.
That is through the changes in credit policy. The term credit policy is used to
refer to the combination of three decision variables:
Credit standard, credit terms and collection efforts, on which the financial
manager has influence.
• Credit standards are the criteria to decide the type of customers to whom
goods should be sold on credit. If a firm has more slow paying
customers, its investment in accounts receivable will increase. The firm
will also be exposed to higher risk of default.
• Credit terms specify duration of credit and terms of payment by
customers. Investment in accounts receivable will be high if customers
are allowed extended time period for making payments.
• Collection efforts determine the actual collection period. The lower the
collection period, the lower the investment in accounts receivable and
vice versa.
Marketing tool
Firms use credit policy as a marketing tool for expanding sales. In a declining
market it may be used to maintain the market share. Credit policy helps to retain
old customers and create new customers by weaning them away from
competitors. In a growing market, it is used to increase the firm’s market share.
Under a highly competitive situation or recessionary economic conditions, a
29
firm may loosen its credit policy to maintain sales or to minimize erosion of
sales.
Companies in India feel the necessity of granting credit for the following
reasons:-
30
Is sales maximization the goal of firms credit policy? If it is so the firm
would follow a very lenient credit policy, and would sell on credit to every
one. Firms in practice don’t follow very loose credit policy just to maximize
sales. Sales don’t expand without costs. The firm will have to evaluate its
credit policy in terms of both return and cost of additional costs. Additional
sales should add to the firm’s operating profit. There are three types of costs
involved.
Production and selling costs- These costs increase with expansion of
sales. If sales expand within the existing production capacity, then only the
variable production and selling costs will increase. If capacity is added for
sales expansion resulting from loosening of credit policy, then the
incremental production and selling costs will include both variable and fixed
costs.
The difference between incremental sales revenue and the incremental
production and selling cost is the incremental contribution of the change in
the credit policy. We should note that a tight credit policy means rejection of
certain type of accounts whose credit worthiness is doubtful. This results in
to loss of sales and consequently, loss of contribution. This is an
opportunity loss to the firm. As the firm starts loosening its credit policy, it
accepts all or some of the accounts which the firm had earlier rejected. Thus
the firm will recapture lost sales and thus, lost contribution. The opportunity
cost of lost contribution declines with the loosening of credit policy.
Administrative cost- Two types of administrative cost are involved
when a firm loosens its credit policy. (a) credit investigation and supervision
costs and (b) collection costs. The firm is required to analyze and supervise
large number of accounts when it loosens its credit policy. Similarly, the
firm ill have to intensify its collection efforts to collect outstanding bill from
financially less sound customers. The incremental cost of credit
administration will be nil if the existing credit department without any
additional costs can implement the new credit policy. This will be the case
when the credit department has idle capacity.
Bad debt losses- These arise when the firm is unable to collect its
accounts receivable. The size of the bad debt depends on the quality of
accounts accepted by the firm. This firm tends to sell to customers with
relatively less credit standing when it loosens its credit policy. Some of these
customers delay payments, and some o f them don’t pay at all. As a result
bad debt losses increases. The firm can certainly avoid or minimize these
losses by adopting a very tight credit policy. Is minimization of bad debt
losses a credit policy? If it is so no firm will ever sell on credit to any one. If
31
this happens, then the firm is not availing the opportunity of using credit
policy as a marketing tool for expanding sales, and will incur opportunity
cost in terms of lost contribution. Thus the evaluation of a change in firms
credit policy involves analysis of:
These two costs behave contrary to each other. We can see that as the
firm moves from tight to loose credit policy, the opportunity cost declines
( i.e. the fir recaptures lost sales and thus, lost contribution), but the credit
administration costs and bad debt loses increase( i.e. more accounts have to
be handled which also include bad accounts which ultimately fail to pay).
How should the firm determine its credit policy? The firm’s credit policy
will be determined by the trade-off between opportunity cost and credit
administration costs and bad-debt losses. In the figure, this trade-off occurs
at point ‘A’ where the total opportunity costs of lost contribution and credit
administration costs and bad-debt losses is minimum.
32
Optimum credit policy:
A marginal cost- benefit analysis
The firms operating profit is maximized when total cost is minimized for a
given level of revenue. Credit policy at point ‘A’ in the above figure represents
the maximum operating profit( since total cost is minimum). But it is not
necessarily the optimum credit policy. Optimum credit policy is one which
maximizes the firm’s value. The value of the firm is maximized when the
incremental or marginal rate of return of a investment is equal to the
incremental or marginal cost of the funds used to finance the investment. The
incremental rate of return can be calculated as incremental operating profit
divided by the incremental investment in receivable. The incremental cost of
fund is the rate of return required by the suppliers of funds, given the risk of
investment in accounts receivable. We should note that the required rate of
return is not equal to the borrowing rate. Higher the risk of investment, higher
the required rate of return. As the firm loosens its credit policy, its investment
in accounts receivable becomes more risky because of increase in slow paying
and defaulting accounts. Thus the required rate of return is upward slopping
curve.
In sum we may state that the goal of the firm’s credit policy is to
maximize the value of the fir. To achieve this goal the evaluation of investment
in accounts receivable should involve the following four steps.
33
Cost and return (%) marginal cost of capital (k)
marginal rate
MONITORING RECEIVABLES
A firm need to continuously monitor and control its receivable to ensure the
success of collection efforts. Two traditional method of evaluating the
management of receivable are average collection period (APC) and aging
schedule. These methods have certain limitations to be useful in monitoring
receivable. A better approach is collection experience matrix.
34
The major limitation of the traditional method is that they are based on
aggregated data and fail to relate outstanding receivables of a period with the
credit sales of the same period. Thus using the traditional method two
analysts can came up with entirely different signals about the status of
receivables if they aggregate sales and receivables data differently. Using
disaggregated data for analyzing collection experience can eliminate this
problem. The key is to relate receivables to sales of the same period. When
sales over a period of time are shown horizontally and associated receivables
vertically in a tabular form, a matrix is constructed. Therefore, this method
of evaluating receivables is called collection experienced matrix. Let us
take an example.
Suppose that the financial manager of affirm is analyzing its
receivables from the credit sales of past six months starting from July to
December. The credit sales of the company are as follows.
Rs in lakh Rs in lakh
July 400 October 220
August 410 November 205
September 370 December 350
From the sales ledger the financial manager gathered out standings
receivables data for each month’s sales. For example he found that for July,
there was a sale of 400 lakh, the out standing receivables during July, august
and September were Rs 330 lakh, Rs 242 lakh, and Rs 80 lakh. Similarly he
ascertained receivables for sales of other months. This information is shown
in table-3.
How do we interpret the information contained in table-3? We can convert
the table to a collection experience matrix by dividing the out standing
receivables in each column by sales amount in that column. This is shown in
table-4, which contains information on the percentage of receivable on the
credit sales from which those receivables have originated. For example for
the sale of July, 82.5 per cent receivables (i.e. 330/400) were outstanding at
the end of July, 60.5 per cent (i.e. 242/400) at the end of august and 20 per
cent (i.e. 80/400) at the end of September. In other words, 17.5 per cent
receivables were paid by the end of July, 39.5 per cent by the end of august
(viz., 39.5-17.5=22 per cent additional receivables were paid in august), 80
per cent by the end of September(viz., 80-39.5=41.5 per cent additional
receivables were paid during September) and remaining receivables were
collected during October so that the balance of book debts became nil at the
end of October. Receivables of other months can also be analyzed in the
35
same way. Thus when we read a column top down, we get an idea of the
manner in which the firm collects a given month’s sales. How well does a
firm collects current months sales? This can be ascertained by reading the
diagonals drawn in table-4. For example the top diagonal shows the manner
in which current month’s sales are collected. The next diagonals shows
receivables one month older and so on. For the firm in our example, we find
the table-4 that about 80 per cent of sales in a given month remain
uncollected by the end of that month. In other words, about 20 per cent of
sales in a given month are collected in the same month. If the percentages
increase as we move down by diagonal, it implies that the firm is unable to
collect its receivables faster. This requires an investigation for appropriate
remedial action.
Table-3
Sales and receivables fro July to December
Rs in lakhs
Month July Aug Sept oct Nov Dec
Sales 400 410 370 220 205 350
Receivables July 330
Aug 242 320
Sept 80 245 320
Oct 0 76 210 162
Nov 0 0 72 120 160
Dec 0 0 0 40 130 285
Table-4
Collection experience matrix
Rs in lakhs
Month July Aug Sept oct Nov Dec
Sales 400 410 370 220 205 350
Receivables (%) July 82.5
Aug 60.5 78.0
Sept 20.0 59.8 86.5
Oct 0 18.5 56.8 73.6
Nov 0 0 19.5 54.5 78.0
Dec 0 0 0 18.2 63.0 81.4
Factoring
36
It is a method of converting a non productive inactive asset (i.e. receivable) in
to a productive asset(cash) by selling receivables to a company that specializes
in their collection and administration. A factor makes the conversion of
receivable in to cash possible.
Factoring services
While purchase of receivable is the fundamental to the functioning of factoring,
the factor provides the following three basic services to the clients:
• Sales ledger administration and credit management.
• Credit collection and protection against default and bad debt losses.
• Financial accommodation against the assigned book debts (receivables).
In developed countries like USA, factors provide many other services. They
include :
• Providing information on prospective buyers.
• Providing financial counselling.
• Assisting the client in managing its liquidity and preventing sickness.
• Financing acquisition of inventories.
• Providing facilities for opening letters of credit by the client etc.
Classification of ratio:
• Liquidity ratio
• Solvency ratio
• Profitability ratio
37
Among these three ratios the liquidity ratio is generally important for the
working capital management. So let us discuss about the liquidity ratio first.
Liquidity ratio- This ratio measures the ability of a business organization to
pay short term obligations in time. The liquidity ratio can be sub classified into
two groups.
Liquidity study
Efficiency study
The liquidity study can be further classified in to three categories.
• Current ratio
• Quick ratio(acid test ratio)
• Absolute liquid ratio
The efficiency study can be further classified in to three categories.
• Inventory turn over ratio(ITR)
• Debtor turn over ratio(DTR)
• Creditors turn over ratio(CTR)
Current ratio
It establishes the relationship between the current assets and current
liabilities.
Mathematically,
Current ratio=current assets/ current liabilities
Rule of thumb: The standard fixed for current ratio is 2:1
The current ratio is a crude measure of liquidity.
Quick ratio(acid test ratio)
It establishes the relationship between liquid asset and current liability.
Mathematically,
Quick ratio=liquid assets /current liabilities
It is the absolute measure of liquidity.
Rule of thumb: The normal standard fixed for the quick ratio is 1:1
It is a rigorous measure of examining the liquidity of a business concern. It’s
other name is also acid test ratio.
Absolute liquid ratio
It establishes the relationship between absolute liquid assets and current
liabilities.
Mathematically,
Absolute liquid ratio=absolute liquid assets/current liability
Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2
A rare measure of liquidity used under certain special circumstances.
38
Inventory turn over ratio(stock velocity)/(ITR)
Measures the relationship between cost of goods sold and the average
inventory during the period.
Mathematically,
ITR=cost of goods sold/average inventory
Or sales / average inventory
Its main objective is to measure the movement of stock. It is an absolute
measure of movement of stock or inventory.
Inventory holding period=365/ITR(days)
39
INVENTORY MANAGEMENT
INTRODUCTION
Inventories constitute the most significant part of current assets of a large
majority of companies in India. On an average, inventories are approximately
60 per cent of current assets in public limited companies in India. Because of
the large size of inventories maintained by firms, a considerable amount of
funds is required to be committed to them. It is, therefore, absolutely imperative
to manage inventories efficiently and effectively in order to avoid un necessary
investment.
40
When should it be ordered?
The answer to the first question is economic ordering quantity(EOQ)
Then what is economic ordering quantity?
It is that quantity of raw materials to be purchased at a time where both
carrying cost and ordering cost are at minimum.
Or The optimum quantity where both ordering cost and carrying cost are
minimum.
Ordering cost- the cost involved to place an order for the purchase of raw
material and to receive the raw materials there to.
Ordering costs include-
• Cost of staff
• Traveling cost
• Inspection cost
• Office costs like- stationary, typing, postage, telephone.
Carrying cost- the cost of keeping the raw materials in the store is termed as
carrying cost.
It includes-
• Cost of capital(interest)
• Cost of storage
• Insurance cost
• Cost of spoilage in handling
Example-
A firms inventory planning period is one year. Annual requirement is 1600
units. The ordering cost per order is assessed as Rs 50.00. the carrying cost is
calculated at Rs 1.00 per unit. The firm can procure the materials in various lots
41
like-1600, 800, 400, 200 and 100 units. Which order quantity is EOQ? Show
the analysis in trial error approach.
Ans .
Carrying cost (c)=Rs 1.00/ units
Ordering cost(o)=Rs 50 / order
Total annual consumption (A)=1600 units
Formula approach
There is a formula for calculation of EOQ
Here in our example the EOQ is 400 units according to the formula
approach also.
Graphical approach
42
Our answer to the second question (When should it be ordered?) is
Reordering point.
Reordering point
Safety stock- It is difficult to predict usage and lead time accurately. The
demand for material may fluctuate from day to day or even week to
week. Similarly the actual delivery time may be different from the
normal lead time. If the actual usage in creases and the delivery of
inventory is delayed, the firm can face a problem of stock out which can
prove to be costly for the firm. Therefore, in order to guard against the
stock out the firm may maintain a safety stock- some minimum or buffer
inventory as cushion against expected increased usage and/ or delay in
delivery time.
43
Optimum production run
The use of the EOQ approach can be extended to production runs to determine
the optimum size of manufacture. Two costs involved are set up cost and
carrying costs. Set up cost includes cost of the following activities: preparing
and processing the stock orders, preparing drawings and specifications, tooling
machines set up, handling machines, tools, equipments and materials, over time
etc. production costs or set up costs will reduce with bulk production runs, but
carrying costs will increase as large stocks of manufactured inventories will be
held. The economic production size will be the one where the total of set up
and carrying costs minimum.
Q Ordering cost
The following equation can be used to determine economic lot size (ELS) or
economic production size.
44
ELS= 2AS
INVENTORY CONTROL SYSTEMS
C
A firm needs an inventory control system to effectively manage its inventory.
There are several inventory control systems in vague in practice. They range
from simple systems to very complicated systems. The nature of business and
Where ‘A’ isthetotal estim
size dictate the choice of an inventory control system. ate
cost , and ‘c’ thecarryin
There are five important practices of inventory control systems:
• Two bin system
• ABC inventory control system
• Just-In-Time (JIT) systems
• Out-sourcing
• Computerized inventory control systems
Two-bin-system
Under this system, the company maintains two bins. Once inventory
in one bin is used, an order is placed, and mean while the firm uses
inventory in the second bin. For a large departmental store that sells
hundreds of items, this system is quite unsatisfactory. The
departmental store will have to maintain a self operating, automatic
computer system for tracking the inventory position of various items
and placing order.
ABC inventory control system.
Large number of firms have to maintain several types of inventories.
It is not desirable to keep the same degree of control on all the items.
The firm should pay maximum attention to those items whose value is
highest. The firm should, therefore, classify the inventories to identify
45
which item should receive the most effort in controlling. The firm
should be selective in it’s approach to control investment in various
types of inventories. This analytical approach is called ABC analysis
and tends to measure the significance of each item of inventories in
terms of its value. The high value items are classified as ‘A’ terms and
would be under the tightest control. ‘C’ items represents relatively
least value and would be under simple control. ‘B’ items fall in
between those two categories and require reasonable attention of
management. The ABC analysis concentrates on important items and
is also known as (control by importance and exception CIE). As the
items are classified in the importance of there relative value, this
approach is also known as proportional value analysis(PVA).
The following steps are involved in implementing the ABC analysis.
Classify the items of inventories , determining the expected se
in unites and the price per unit for each item.
Determine the total value of each item by multiplying the
expected units by its units price.
Rank the item in accordance wit the total value, giving first
rank to the item with highest total value and so on.
Compute the ratios(percentage) of numbers of units of each
item to total units of all items and the ratio of total value of
each item to total value of all items.
Combine items on the basis of their relative value to form three
categories-A,B and C.
Just-In-Time(JIT) systems
Japanese firm popularized just in time(JIT) system in the world. In a JIT system
material or manufactured components and parts arrive to the manufacturing
sites or stores just few hours before they are put to use. The delivery of material
is synchronized with the manufacturing cycle and speed. JIT system eliminates
the necessity of carrying the large inventories, and thus, saves carrying and
other related costs to the manufacturer. The system requires perfect
understanding and co-ordination between the manufacturer and the suppliers in
terms of the timing of delivery and quality of material. Poor quality material or
components could halt the production. The JIT inventory system complements
the total quality management (TQM). The success of the system depends on
how well a company manages its suppliers. The system puts tremendous
pressure on its suppliers. They will have to develop adequate systems and
procedures to satisfactory meet the needs of manufacturers.
Out sourcing
46
A few years ago there was a tendency on the parts of many companies to
manufacture all components in-house. Now more and more companies are
adopting the practice out-sourcing. Out-sourcing is a system of buying parts and
components from out sides rather than manufacturing tem internally. Many
companies develop a single source of supply, and many others help developing
small and middle size suppliers and components that they require.
Computerized inventory control systems
More and more companies, small or large size, are adopting the computerized
system of controlling the inventories A computerized inventory control system
enables a company to easily track large number of inventories. It is a automatic
system of counting inventories, recording withdrawals and revising the balance.
There is an inbuilt system of placing order as the computer notices that the
order point has been reached. The computerized inventories system is inevitable
for large retail stores, which carry thousands of items. The computer
information systems of the buyer and suppliers are linked to each other. As
soon as the supplier’s computer receives an order from the buyer’s system, the
supply process is activated.
CASH MANAGEMENT
Cash and near cash; what is blood to human body, cash is to company. It is like
oil to lubricate the over turning wheels of business; without it the process grinds
to a stop. Cash is an asset which earns only when it is in use. It is the basic input
needed to keep the business running on a continuous basis.
The firms need to hold cash may be attributed to the following three motives.
Transaction motive-The transaction motive requires cash to conduct its
business in the ordinary course. The firm needs cash primarily to make
payments for purchases, wages and salary, other operating expenses, taxes
dividend etc.
Precautionary motive- It is need to hold cash to meet contingencies in the
future. It provides a cushion or buffer to withstand some un expected
emergency. The precautionary amount of cash depends upon the predictability
of cash flows. If cash flows can be predicted with accuracy, less cash will be
maintained for an emergency.
47
Speculative motive- The speculating motive for holding of cash for investing
in profit making opportunities as and when they arise. The opportunities to
make profit may arise when the security prices changes. The firm will hold
cash, when it is expected that interest rate will rise and security price will fall.
Securities can be purchased when the interest rate is expected to fall; the firm
will benefit by subsequent fall in interest rates and increase in security prices.
The firm may also speculate on material prices. If it is expected that the
material’s price will fall, the firm can postpone purchase of materials and make
purchases in future when price actually falls. Some firm may hold cash for
speculative purposes. By and large, business firms do not engage in
speculations. Thus the primary motive to hold cash and marketable securities
are: the transaction and precautionary motives.
48
problems are one and the same. There are certain assumptions that are made in
the model. They are as follows:
1. The firm is able to forecast its cash requirements with certainty and receive a
specific amount at regular intervals.
2. The firm’s cash payments occur uniformly over a period of time i.e. a steady
rate of cash outflows.
3. The opportunity cost of holding cash is known and does not change over
time. Cash holdings incur an opportunity cost in the form of opportunity
foregone.
4. The firm will incur the same transaction cost whenever it converts securities
to cash. Each transaction incurs a fixed and variable cost.
For example, let us assume that the firm sells securities and starts with a cash
balance of C rupees. When the firm spends cash, its cash balance starts
decreasing and reaches zero. The firm again gets back its money by selling
marketable securities. As the cash balance decreases gradually, the average cash
balance will be: C/2. This can be shown in following figure:
Cash balance
The firm incurs a cost known as holding cost for maintaining the cash balance.
It is known as opportunity cost, the return inevitable on the marketable
49
securities. If the opportunity cost is k, then the firm’s holding cost for
maintaining an average cash balance is as follows:
Whenever the firm converts its marketable securities to cash, it incurs a cost
known as transaction cost. Total number of transactions in a particular year will
be total funds required (T), divided by the cash balance (C) i.e. T/C. The
assumption here is that the cost per transaction is constant. If the cost per
transaction is c, then the total transaction cost will be:
The total annual cost of the demand for cash will be:
As the demand for cash, ‘C’ increases, the holding cost will also increase and
the transaction cost will reduce because of a decline in the number of
transactions. Hence, it can be said that there is a relationship between the
holding cost and the transaction cost.
The optimum cash balance, C* is obtained when the total cost is minimum.
With the increase in the cost per transaction and total funds required, the
optimum cash balance will increase. However, with an increase in the
opportunity cost, it will decrease.
50
Limitations of the Baumol model:
1. It does not allow cash flows to fluctuate.
2. Overdraft is not considered.
3. There are uncertainties in the pattern of future cash flows.
Under the model, the firm allows the cash balance to fluctuate between the
upper control limit and the lower control limit, making a purchase and sale of
marketable securities only when one of these limits is reached. The assumption
51
made here is that the net cash flows are normally distributed with a zero value
of mean and a standard deviation. This model provides two control limits - the
upper control limit and the lower control limit as well as a return point. When
the firm’s cash limit fluctuates at random and touches the upper limit, the firm
buys sufficient marketable securities to come back to a normal level of cash
balance i.e. the return point. Similarly, when the firm’s cash flows wander and
touch the lower limit, it sells sufficient marketable securities to bring the cash
balance back to the normal level i.e. the return point.
Cash balance
The lower limit is set by the firm based on its desired minimum safety stock of
cash in hand. The firm should also determine the following factors:
1. An interest rate for marketable securities, (i)
2. A fixed transaction cost for buying and selling marketable securities, (c)
3. The standard deviation if its daily cash flows, (s)
The upper control limits and return path are than calculated by the Miller-Orr
Model as follows:
Distance between the upper limits and lower limits is 3Z.
52
Z = (3/4 × cs2/i) 1/3
If the transaction cost is higher or cash flows shows greater fluctuations, than
the upper limit and lower limit will be far off from each other. As the interest
rate increases, the limits will come closer. There is an inverse relation between
the Z and the interest rate. The upper control limit is three times above the
lower control limits and the return point lies between the upper and lower
limits.
Hence,
Upper Limit = Lower Limit + 3Z
Return Point = Lower Limit + Z
So, the firm holds the average cash balance equal to:
Average Cash Balance = Lower Limit + 4/3 Z
53
54
OBJECTIVES OF STUDY
55
SCOPE OF STUDY
To analyze the objectives and getting fact finding
observations, the present study covered the financial
data analysis, reference of three years balance sheets,
as well as cash flow analysis including taking
personal reference of the guide (organization) to
minutely observe the working capital management
practices in OPTCL. Since, the matter is finance
subject, the scope of study is included to data
reference of company’s records, as well as interaction
of key officials of finance department, dealing with
the matter.
While doing the project assignment, due care
was taken to include factual informations on the basis
of data analysis and interpretations.
To avoid bias and prejudices, the matters were
thoroughly deliberated with organization’s guide and
56
obtained clarifications in many issues while included
the same in the project report.
57
Other data tables
I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000
Reserves and Surplus 4769470319
5370170319 0
2. Loan Funds 0
Secured Loans 6887167330
Unsecured Loans 8759859022
15647026352 0
3. Other Funds
Consumers' Security Deposit 83334
21017280005 0
II. APPLICATION OF FUNDS
1.Fixed Assets
Gross Block 19222030684
Less Accumulated Depreciation 8254276443
Net Block 10967754241 0
Capital Work in Progress 8599224175 0
2. Investments 270550000
3. Current Assets, Loans and
Advances
Stores and Spares 701161072 0
58
Sundry Debtors 1635494618
Cash and Bank Balances 186925346
Other Current Assets 755959781
Loans and Advances 140157178
3419697995 0
Less
Current Liabilities and Provisions
Current Liabilities 1663849985 15132115
Provisions 837699177
2501549162 15132115
Net Current Assets 918148833 -15132115
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 12105692 15132115
(b) Profit and Loss Account 249497064
21017280005 0
I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000 600700000
Reserves and Surplus 5143178990 4769470319
5743878990 5370170319
2. Loan Funds
Secured Loans 6121296584 6887167330
Unsecured Loans 9128121439 8759859022
15249418023 15647026352
3. Other Funds
Consumers' Security Deposit 83334 83334
20993380347 21017280005
II. APPLICATION OF FUNDS
1.Fixed Assets
Gross Block 20664373798 19222030684
Less Accumulated Depreciation 9241049678 8254276443
Net Block 11423324120 10967754241
Capital Work in Progress 8243327667 8599224175
2. Investments 270550000 270550000
3. Current Assets, Loans and
Advances
Stores and Spares 751064690 701161072
Sundry Debtors 798196201 1635494618
Cash and Bank Balances 648276812 186925346
Other Current Assets 628081987 755959781
Loans and Advances 389406739 140157178
3215026429 3419697995
Less
Current Liabilities and Provisions
Current Liabilities 1677146697 1663849985
59
Provisions 830865819 837699177
2508012516 2501549162
Net Current Assets 707013913 918148833
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 9079269 12105692
(b) Profit and Loss Account 340085378 249497064
20993380347 21017280005
60
Other Current Assets
10 652553304 628081987
Loans and Advances
11 143339572 389406739
3106119303 3215026429
Less
Current Liabilities and Provisions
12
Current Liabilities 2055168764 1677146697
Provisions 1304517744 830865819
3359686508 2508012516
Net Current Assets (253567205) 707013913
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 13 6052846 9079269
(b) Profit and Loss Account 492324866 340085378
20122061999 20993380347
Profit & Loss account for the Year Ended March 31, 2006
Rupees
61
Profit & Loss account for the Year Ended March 31, 2007
Rupees
62
Profit & Loss account for the Year Ended March 31, 2008
Rupees
63
Schedule 1- Share Capital Rupees
As at 31.03.2008 As at 31.03.2007
Authorised :
30,00,000 equity shares of Rs.1,000/- each 3,000,000,000 3,000,000,
000
Issued, Subscribed and Paid-up :
6,00,700 Equity shares of Rs. 1,000/- each 600,700,
600,700,000 000
Share Capital Pending Allotment -
Total 600,700,
600,700,000 000
Schedule 2 - Reserves and Surplus
As at 31.03.2008 As at 31.03.2007
Capital Reserve:
1,641,941,
Capital Reserve -Opening Balance 1,641,941,251 251
64
Add:Transferred from P&L A/C during the year 113,626,849 82,485,483
702,281,
836,744,772 636
Staff Welfare Fund
2,097,5
Opening Balance 2,336,768 43
239,2
Adjustments during the year (85,281) 25
2,336,7
2,251,487 68
Other Reserves
223,6
Opening Balance 223,693 93
65
240,347,7
00 -
4,000,00 4,000,000,
Bonds - Government of Orissa 0,000 000
1,820,00 5,820,000,0 1,560,000,
Interest accrued and due 0,000 00 000
780,00 1,245,000,
Bonds - Pension Trust 0,000 000
170,02 950,026,0 112,050,
Interest Accrued and due 6,032 32 000
387,70 315,369,
Loans from others 0,179 620
387,700,1
Interest accrued and due - 79 -
9,058,314,7 9,128,121,
52 439
14,152,916,0 15,249,418
Total 08 ,023
Schedule 6 - Investments
(At Cost) Rupees
As at 31.03.2008 As at 31.03.2007
Unquoted
270,550, 270,550,000
Contigency Reserve Investment 000
(Orissa Govt. Securities)
66
270,550,
Total 000 270,550,000
Schedule 7: Stores and Spares Rupees
As at 31.03.2008 As at
31.03.2007
25,3
Capital Stores and Spares 54,102 26,801,870
285,1
O&M Stores and Spares 40,369 271,201,929
Capital Stores and Spares at 249,8
Site 40,486 237,923,888
207,6
O&M Stores and Spares at Site 54,626 198,352,454
12,3
Other Materials 24,462 19,036,532
Materials Stock Shortage / 59,8
Excess Pending Investigation 08,113 56,957,821
840,122,
158 810,274,494
67
Schedule 9 - Cash and Bank Balances
Rupees
As at 31.03.2008 As at 31.03.2007
Cash
4,106,26
Cash in Hand 4 3,634,008
28,82
Stamps in Hand 4 43,173
Balances with Scheduled Banks
(Including Cheques in hand)
72,114,29
Current Accounts 3 135,541,644
255,000,00
Fixed Deposit Accounts 0 443,577,177
120,865,43
Flexi Deposit 4 -
39,036,55
Remittances in Transit 5 65,751,206
491,151,37
0 648,547,208
(270,18
Less: Provision 7) (270,396)
490,881,18
Total 3 648,276,812
68
Sundry Receivables
Amount Recoverable from 2,102,47
Employees / Ex-Employees 6 2,103,347
47,102,27
Other Receivables 5 56,640,009
51,968,54
Deposits 6 51,470,767
101,173,29
Sub Total 7 110,214,123
Outstanding for a Period 101,173,29
Exceeding 6 Months 7 100,760,079
Outstanding for a Period Less
than 6 Months 9,454,044
101,173,29
7 110,214,123
(55,791,10
Less- Other Provision 7) (55,791,107)
143,339,57
Total 2 389,406,739
Schedule 12 - Current Liabilities
& Provisions Rupees
Current Liabilities As at 31.03.2008 As at 31.03.2007
665,167,98
Sundry Creditors 0 610,322,496
Deposits and Retention from 137,154,49
Suppliers / Contractors 7 125,063,350
Interest Accrued but not Due on 20,582,14
Loans 9 62,733,789
47,24
Liabilities for Wealth Tax 0 37,299
49,09
Electricity Duty Payable 2 212,903
4,454,79
Liabilities for Fringe Benefit Tax 0 2,341,534
1,227,713,01
Other Liabilities 6 876,435,326
- 1,677,146,697
Provisions
1,293,949,52
Pension & Gratuity 1 820,297,596
10,568,22
Others 3 10,568,223
1,304,517,74
4 830,865,819
1,304,517,74
Total 4 2,508,012,516
69
12,105,69
Preliminary Expenses 9,079,269 2
6,052, 3,026,42
Less : Written off During the Year 3,026,423 846 3
6,052, 9,079,26
Total 846 9
Schedule 14 :
Revenue from
Wheeling of
Power
For the year ended 31.03.2008 For the year ended 31.03.2007
Units
Units Wheeled
Wheeled (MU) Revenue (Rs) (MU) Revenue (Rs)
Revenue from
Wheeling Charges 19407.66 3,997,558,798 15662.145 3,553,494,401
Gross Revenue
from Wheeling of
Power 3,997,558,798 3,553,494,401
Net Revenue 3,997,558,798 3,553,494,401
934,60 924,57
Interest on Loans to Staff 8 8
49,425,77 29,614,79
Interest from Banks 5 8
70
208,20
Excess Provision Written Back 209 9
185,026,54 116,776,87
Supervision Charges 3 5
46,716,03 21,087,09
Miscellaneous Receipts 6 0
282,103,17 168,611,55
Total 1 0
71
Professional Charges 11,087,121 4,664,048
Preliminary Expenses Written Off 3,026,423 3,026,423
134,691,16
Other Expenses 6 126,061,744
Provision for Wealth Tax 46,305 36,364
Provisions and Write Off Against Theft of
Materials 2,865,292 4,684,760
Provision for Bad & Doubtful Debt 9,289,278 45,735,910
Provision for Unidentified Assets - 66,359,330
Provision for Obsolete Stock - Stores etc. 11,196,801 2,251,982
- 261,830,681
2,271,782,09
4 1,512,011,385
(50,945,314
Less: Expenses Capitalised ) (88,817,318)
2,220,836,78
Total 0 1,423,194,067
Schedule 17:Interest & Finance Charges
Rupees
For the year
For the year ended
ended 31.03.2008 31.03.2007
Term Loans
Schedule- 18
Net Prior Periods Credit/Charges
For the Year ended 31.03.2008 For the Year ended 31.03.2007
72
2.Interest & 70,723
Finance Charges 9,603,313 27,360,334 17,757,021 273,501,942 ,882 (202,778,060)
3.Depreciation 41,663,274 28,089,984 (13,573,290) 391,784 (391,784)
50,440
4.Others 1,853,470 280,272,440 278,418,970 687,058 ,200 49,753,142
121,164
Total 59,855,465 335,722,758 275,867,293 277,143,281 ,082 (155,979,199)
CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2007
PARTICULARS CURRENT YEAR PREVIOUS YEAR
(2006-2007) (2005-2006)
Amount in (Rs.) Amount in (Rs.)
Cash flow from operating activities:
Profit/loss after tax and exceptional items (90588314) (151116064)
Adjustment for :
Appropriation to reserve & surplus 156253434 32472982
Interest & finance charges 1162312531 1025249710
Depreciation 986773234 952711774
Preliminary expenses W/O 3026423 3026423
Excess provision written back (208209) (14480338)
Interest income (30539376) (26308704)
Provision for wealth tax 36364 37571
Provision /write off against theft materials - 5326605
Operating profit before working capital 2187066087 1826919956
change (A)
Working capital change
Stores and spares (49903618) (100988326)
Sundry debtors 837298417 (1186318464)
Other current assets 127877794 (55102286)
Loan and advances (249249561) 67815838
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Cash generated from investing (838451992) (580258876)
activities (C)
Cash flow from financing activities:
Proceeds from share capital - 700000
Proceeds from secured loan (765870746) 1372868027
Proceeds from unsecured loan (45171657) (1554771938)
Interest paid (744271621) (1461458855)
Cash flow from financing activities (D) (1555314023) (1642662766)
NET CASH GENERATED FROM 461351466 (990461415)
ALL ACTIVITIES (A+B+C+D)
Cash & cash equivalent at the beginning 186925346 1177386761
of the year
Cash and cash equivalent at the end of the 648276812 186925346
year
Ratio analysis
75
Absolute liquid ratio- (Absolute Liquid Asset/Current Liability)
YEAR Absolute Liquid Asset Current Liability Ratio
76
2007-2008 3997558798 (253567205) -15.7
Current Ratio-
From our calculation of Current Ratios of different financial years of
OPTCL, various results can be made.
Rule of thumb- The standard fixed for the current ratio is 2:1
77
Because of increase in administrative overhead expenses, super annuity
benefits and payment of past loan etc. are the major factor for increasing
of current liabilities.
Still it is also nearly in a manageable position and the situation can be
controlled. So more emphasis can be given on these areas to reduce
current liabilities and to increase current assets so that the actual standard
of 2:1 can be achieved.
In addition to, company should make clear cut strategic planning to sell
electricity to major industries at industrial rate to achieve higher revenue.
Quick Ratio-
From the table of Quick Ratios of different years of OPTCL some results
can be drawn.
Rule of thumb- The normal standard fixed for the Quick Ratio is 1:1
The Quick Ratio or the Acid Test Ratio of OPTCL for the financial year
2005-2006 is found to be 1.09:1 and the normal standard for is 1:1. So it
is a good indication. The firm has sufficient liquid assets to meet the
current liabilities.
In the year 2006-2007 it is found that the Quick Ratio is 0.9:1. It is just
below but very near to the normal standard of 1:1. So it is in a
manageable position.
In the year 2007-2008 it is found that the Quick Ratio of OPTCL is 0.8:1
which is just below the normal standard. It is due to a little bit increase in
current liabilities in comparison to that of previous year. Still it is also in
a manageable position and by giving a small effort the normal standard of
1:1 can be achieved.
Rule of thumb- The normal standard fixed for Absolute Liquid Ratio is 1:2
78
The Absolute Liquid Ratio of the firm for the financial year 2005-2006 is
found to be 0.2:1 which is below the normal standard of 1:2 or 0.5:1.
This is due to less cash and bank balances of the organization in
comparison to the Current Liabilities.
In the year 2006-2007 the Absolute Liquid Ratio is found to be 0.4:1.
Though it is just below the normal standard still it is in a manageable
condition. The total absolute liquid asset (cash and bank balances) of this
year has well increased from the previous year.
In the year 2007-2008 the Absolute Liquid Ratio of OPTCL is found to
be 0.3:1 which is just below from the previous year. It is due to a little bit
decrease in cash and bank balances and also a slightly increase in Current
Liabilities. Still it is also in a manageable condition. So some emphasis
can be given to this area to achieve the normal standard.
In the year 2005-2006 the debtor turn over ratio of OPTCL is found to be
2.3 times and the average collection period is 159 days. The debtors turn
over 2.3 times a year and the collection of debtors is 159 days which is a
manageable position still more emphasis can be given to attain a higher
value of debtor turn over and to make the average collection period
shorter.
In the year 2006-2007 the debtor turn over ratio is 2.92 times and the
average collection period is found to be 125 days. This year, there is a
higher value of debtor turn over and a shorter average collection period in
comparison to that of previous year. This is a good indication.
In the year 2007-2008 the debtors turn over ratio is 4.32 times and the
average collection period is 85 days. This year, the value of debtors turn
over is higher than the previous year due to decrease in average debtors
and an increase in net sales. And the average collection period is also
shorter than the previous year’s figure.
Earlier, OPTCL used to collect pending dues directly from consumers for
which, substantial delay in getting payment was attributed to procedural
methods of collection. However, the present average period of collection
is decreased due to involvement of NESCO, SOUTHCO, CESCO,
WESCO etc. for collection of revenue on behalf of OPTCL and the same
has been made through banks.
79
The shorter the average collection period, the better the quality of
debtors, since a short collection period implies the prompt payments by
debtors. So this is a good indication for the organization.
The net working capital ratio for the financial year 2005-2006 is 0.08.
In the year 2006-2007, there is a little bit decrease in this net working
capital ratio to 0.06 from its previous year’s figure of 0.08.
However, in the year 2007-2008, it is decreased to -0.03 due to decrease
in net working capital from previous year’s figure of Rs.707013913 to
current year’s figure (a negative figure) of Rs.(253567205).
80
assets
Loans & advances 389406739 143339572 - 246067167
Total 3215026429 3106119303
Current
liabilities
Current liabilities 1677146697 2055168764 - 378022067
Provisions 830865819 1304517744 - 473651925
Total 2508012516 3359686508
Working capital 707013913 (253567205)
(current assets-
current liabilities)
Net decrease in (960581118)
working capital 960581118
That, the total current asset of the year 2007-2008 is decreased to Rs.
3106119303 from a previous year’s figure of Rs. 3215026429.
The total value of stores and spare is increased from the previous years
figure and the value of sundry debtors is also increased from the previous
years figure.
The cash and bank balances of the organization have a decrease of Rs.
157395629 from the previous years figure. Similarly the figure for loans
and advances is also decreased to Rs. 143339572 from the previous
year’s figure of Rs. 389406739.
The other current assets like prepaid expenses and sundry receivables
have also increased from the previous years figure.
The total current liabilities of the year 2007-2008 is increased to
Rs.3359686508 from a previous year’s figure of Rs.2508012516.
That, the increase for current liabilities is due to increase in the figure of
sundry creditors, deposits and retention from suppliers/contractors,
81
liabilities for wealth tax, liabilities for fringe benefit tax and other
liabilities from the previous year’s figure.
Due to increase in the value of stores and spares, sundry debtors, and
other current assets, there is a sign of increase in working capital.
However, due to a decrease in the figure of cash, bank balances, loan and
advances etc, there is a clear sign of decrease in the working capital.
Due to increase in current liabilities and provisions for pension and
gratuity and retrospective revision of pay, there is a sign of decrease in
working capital.
As per the analysis, it is observed that, the ratio of increase of working
capital is drastically reduced than the previous year’s and the decrease
sign of working capital is Rs.960581118(2007-2008), which has
impacted the steady increase of current working capital & negatively
affected the profitability of the organization.
It is found that the current asset’s figure is decreased from the previous
year’s figure & the current liabilities figure is increased from the
previous year. As a result of which, there is a net decrease (negative
figure) in working capital this financial year (2007-2008).
That, some more emphasis can be given on current assets to increase its
figure and to decrease current liabilities’ figure as a result of which the
figure for working capital can be increased.
82
There is a net cash flow of Rs.1555314023 from the financing activity of
the firm in the year 2006-2007 where as, it is Rs.1642662766 for the year
2005-2006.
That, the net cash flow from its operating, investing and financing
activities for the year 2006-2007 is a positive figure of Rs.461351466
against negative figure of Rs.990461415 for the year 2005-2006.
83
Capital Work in Progress 7221440474 8243327667 (1021887193) (12.39)
2. Investments 270550000 270550000 - -
3. Current Assets, Loans and
Advances
Stores and Spares 766865262 751064690 15800572 2.1
Sundry Debtors 1052479982 798196201 254283781 31.86
Cash and Bank Balances 490881183 648276812 (157395629) (24.28)
Other Current Assets 652553304 628081987 24471317 3.89
Loans and Advances 143339572 389406739 (246067167) (63.19)
3106119303 3215026429 (108907126) (3.38)
Less
Current Liabilities and Provisions
Current Liabilities 2055168764 1677146697 378022067 22.54
Provisions 1304517744 830865819 473651925 57
3359686508 2508012516 851673992 33.96
Net Current Assets (253567205) 707013913 (960581118) (135.8)
4. (a) Miscellaneous Expenditure to
the extent not written off or adjusted (3026423) (33.3)
6052846 9079269
(b) Profit and Loss Account 492324866 340085378 152239488 44.77
20122061999 20993380347 (871318348) (4.15)
By going through the comparative balance sheet table of OPTCL for the two
financial years, the following results can be given.
That, there is a decrease of 3.38% of total current assets in the year 2007-
2008 from the previous year-2006-2007.
Though there is an increase of stores and spares, sundry debtors and other
current assets of 2.1%, 31.86% and 3.89% respectively, there is also a
decrease in cash and bank balances and loans and advances of 24.28%
and 63.19% respectively which leads to decrease in the total current
assets of the year 2007-2008.
There is an increase in current liabilities of 22.54% from the previous
year and also a 57% increase in provisions from the previous year. As a
result of which there is a net increase in current liabilities and provisions
of 33.96% from the previous years figure.
There is a decrease of 12.39% in the capital work in progress in the year
2007-2008.
There is an increase in net block of 8.43% from the previous year.
The total investment for both the years remains the same.
There is a decrease of 4.15% in the sources of the company.
84
The share capital remains same for both the year where as there is a
4.38% increase in reserves and surplus which leads to an increase in total
share holders’ funds by 3.93%.
That, there is a decrease in the net current assets of the company. So
more emphasis can be given on it to increase the value of net current
assets to attain a better position.
The following graph shows the Total amount of Current Assets and Total
amount of Current Liabilities & provisions of different financial years of
OPTCL.
3500000000
3000000000
2500000000
2000000000
1500000000
Current Assets
1000000000
500000000 Current Liabilities &
0 Provisions
2005- 2006- 2007-
2006 2007 2008
The following graphs show the percentage of different items of Current
Assets for different financial years of OPTCL.
85
Loans &
Advances, 4.09% Stores & Spares,
20.51% Stores & Spares
Other Current
Assets, 22.10% Sundry Debtors
Cash & Bank balances
Cash & Bank
Other Current Assets
balances, 5.47%
Sundry Debtors, Loans & Advances
47.83%
Loans &
Advances,
12.11% Stores & Spares,
23.36% Stores & Spares
Other Current Sundry Debtors
Assets, 19.54%
Cash & Bank balances
Other Current Assets
Sundry Debtors,
Cash & Bank Loans & Advances
24.83%
balances,
20.16%
86
Loans &
Advances, 4.62% Stores & Spares,
24.69% Stores & Spares
Other Current
Assets, 21.00% Sundry Debtors
Cash & Bank balances
Cash & Bank Other Current Assets
balances, Sundry Debtors, Loans & Advances
15.81% 33.88%
87
CONCLUSION
On the basis of data analysis on working capital management in
OPTCL, the following conclusions arrived.
Although the company has gross profit for the past three
years(2005-06, 2006-07, 2007-08) but the current liabilities
are increasing, in comparison to current assets position.
Hence, it is an alarming sign for the smooth working capital
management.
The OPTCL manages properly the liquidity position of the
company. During the year 2005-06, the liquidity position was
in a good condition and in 2006-07, it was also satisfactory.
But, in the year 2007-08, the situation of liquidity position
was alarming due to increase in total current liabilities and
decrease in total current assets which led to the decrease in
the net working capital of the company.
During the year 2006-07 and 2007-08, the company’s liquid
assets were satisfactory.
88
However, there was a good indication of reduction in average
collection period of the company during the year 2007-2008
in comparison to previous years (2005-06, 2006-07).
There is also satisfactory net cash flow from the operating,
investing and financing activities of the organization.
Though the net working capital of the company is decreased,
still the company is in a better manageable position and the
company’s present status of maintaining current assets and
current liabilities are satisfactory.
They are managing their cash, funds and debts in a
professional manner.
However, the present financial status of the organization is very good.
By adapting better management practices, the company may attain a
sound financial position in future and able to manage its working
capital efficiently.
SUGGESTIONS & RECOMMENDATIONS
OPTCL is the soul of Orissa’s power transmission and is playing
a pivotal role in making surplus power consumption state through
efficiently administering the system of transmission. For
improvement of organization’s profitability, much emphasis is needed
to improve the better working capital management by decreasing the
current liabilities through reducing of unplanned over head expenses.
In such process, current assets position will be improved through
collection of revenue from power transmission as well as recovery of
past dues from consumers, Govt. and other agencies etc.
The company should give more attention on increasing its collection
of revenue from wheeling of power and should give more emphasis to
curtail unplanned expenses to decreases the loss. Further, the
management should focus on shortening its average collection period
by changing its credit terms and conditions.
By taking the above remedial measures, the organization can be an
EVA+ company with due emphasis on proper way of managing the
working capital.
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DISCLAIMER
90
……………...
BIBLIOGRAPHY
http://ssrn.com/abstract=961614
http://mpra.ub.uni-muenchen.de/4541/
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http://www.optcl.co.in
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