CHAPTER 1

INTRODUCTION

INTRODUCTION ABOUT FINANCE

Finance is one of the major elements that activate the overall growth of the economy.
Finance is the life blood of economic activity. A well - knit financial system directly contributes to
the growth of the economy. An efficient financial system calls for the efficient performance of
institution, financial instruments and financial markets.

Finance which acts as the lifeblood in the modern business types is one of the most important
consideration for an entrepreneur-company. While Implementing, expanding, diversifying,
modernizing or rehabilitating any project the meaning of finance is better understood. In this section
we have covered finance related information and the process of managing the same.

Finance is a science of managing money and other assets. It is the process of channelization
of funds in the form of invested capital, credits, or loans to those economic agents who are in need of
funds for productive investments or otherwise. E.g. On one hand, the consumers, business firms, and
governments need funds for making their expenditures, pay their debts, or complete other
transactions. On the other hand, savers accumulate funds in the form of savings deposits, pensions,
insurance claims, and savings or loan shares, etc which becomes a source of investment funds. Here,
finance comes to the fore by channeling these savings into proper channels of investment,
In general, finance is that business activity which is concerned with acquisition and Conservation of
capital funds in meeting financial needs and over all objectives of a business entrepreneur.
 “Finance is the common denominator for a vast range of corporate ., projects and the major
part of any corporate plan must be expressed in financial terms”.

The main reasons a business needs finance are to:

• Start a business
• Finance expansions to production capacity
• To develop and market new products
• To enter new markets
• Take-over or acquisition
• Moving to new premises
• To pay for the day to day running of business

REVIEW OF LITERATURE

MEANING OF WORKING CAPITAL

Working capital refer to that part of total capital which is used for carrying out the routine or
regular business operation. In other words, it is the amount of funds used for financing the day-to
day operation. In short, it is the capital with which the business is worked over.
Thus, the capital invested and locked up in various current assets , such as stocks of raw material,
work in progress , stocks of finished goods account receivable and cash and bank balances
constitutes the working capital.

Working capital may be regarded as life blood of a business. Its effective provision can do
much to ensure the success of a business while its in provision can do much to ensure the success of
a business while its in efficient management can lead not only to loss of profits but also to the
ultimate downfall of what otherwise might be considered as a promising concerns.
> According to shoo-in, “Working Capital is the amount of funds necessary to cover the cost of
operating the enterprise”. Working Capital is also known as Revolving or Circulating Capital.

> According to Genesterberg, “Circulating Capital means current assets of a company that are
changed in the ordinary cause of business from one to another form. Example: From cash to
inventory, inventories to bills receivable and bills receivable to cash.

Concept of working capital

There are five concepts of working capital :-

o Gross Working Capital

o Net Working Capital
o Negative working capital
o Permanent working capital
o Variable working capital

On the basis of the components or items comprised in working capital, working capital can be
classified into the following types:

Gross Working capital: Simply called as working capital, refers to the firms investment in current
assets. Current assets which can be converted in to cash with in the accounting year (or operating
cycle) and includes cash, short term securities, debtors, Bills receivable and stock (inventory) .
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 with in a
year and include creditors, Bills payable and outsider’s expenses.

Negative working capital or working capital deficit: means the excess of current liabilities over
the current assets. It accurse when the current liabilities exceed the current assets

Permanent working capital or fixed working capital: refer to the minimum amount of investment
in current assets required throughout the year for carrying out the business. In other words , it is the
amount of working capital which remains in the business permanently in one form or other.

Variable working capital or fluctuating working capital: refer to the amount of working capital
which goes on fluctuating or changing from time to time with the change in the volume of business
activities.
Ratio’s :
The term ratio simply means one number expressed in terms of another. It describes in

mathematical terms the quantitative relationship that exists between two numbers.

NEED FOR WORKING CAPITAL

Every business undertaking requires funds for two purposes, investments in fixed assets &
investment in current assets.

Funds required for investing in inventory, debtors & other current assets keep changing in
shape & volume. Company has some cash in the beginning; this cash may be the source of raw
material, keeping the labour cost & other overheads. These three combined would generate work in
progress, which will be converted into finished goods on the completion of the production process
into debtors & when the debtor pay, the firm may generate cash. Working capital is needed for
sustaining (i.e., maintaining) the sales activities. If adequate working capital is not maintain for this
period ,the firm will not be able to sustain or maintain the sales , since it may not be in a position to
purchase raw material and pay wages and other expenses ands produce the goods required for the
sales.

NATURE OF WORKING CAPITAL

In ordinary parlance, Working Capital is taken to be the fund available for meeting day-to-
day requirements of enterprises. It cannot be denied that a part of the fixed or permanent capital is
invested in assets, which are kept in the business or for a long period for the purpose of earning
profit. These are usually known as fixed assets viz. Land & buildings, plant & machinery, furniture
& fitting & intangibles like goodwill, patents, trademarks & long-term investment.

Another part of permanent capital left in the business for supporting the day-to-day normal
operation is known as the “Working Capital”. This Working Capital generates the important element
of cost viz. Material, wages & expenses. These cost usually lead to production & sales in case of
manufacturing concerns & sales alone in others. These costs occur gradually in a flow & do not
come into being abruptly at a given moment.

Hence the initial investment of cash as working capital for this specific purpose has to be
continued until the sales revenue commences flowing in substantially & in a regular way. From this
stage the business is found to acquire a momentum of its own. The flow of revenue is expected to
continue to replace the cost lost in its day-to-day out flow for the generation of the revenue
mentioned above.

SOURCE OF WORKING CAPITAL

The financial manager is always interested in obtaining the working capital at the right time,
at a reasonable cost and at the best possible favorable terms. A part of the working capital
investment are permanent investments is fixed assets. The following is snapshot of various source of
working capital.
Sources of working capital divided into two

• Long -term
• Short –term

Sources of long term working capital

• Issue of shares

• Floating of debentures

• Ploughing back of profit

• Loans

• Public deposit

Sources of short-term working capital

Internal sources

• Depreciation

• Taxation

• Accured expenses

External sources

• Trade credit

• Credit papers

• Bank credit
• Customer’s credit

• Govt. Assistances

• Loans from director

• Security of employees

WORKING CAPITAL CYCLE:-

The working capital of a concern goes on changing in shape and volume. For Instance, a
concern may have some cash in the beginning. The cash may be used by the concern for the purpose
of purchase of raw material, payment of wages and other expenses’. These elements of cost or items
of expenses, raw material , wages and overheads , will result in work- in-progress during the process
of manufacture. On the in compilation of the production process, the work- in –progress becomes
finished goods.

Meaning
The length of time involved in this cycle of conversion of cash into raw material, raw
material into work-in progress, work-in-progress into finished goods, finished goods into debtors and
debtors into cash again is called the operating cycle or working capital cycle of the firm, in other
words, it is period between the date raw material are purchased and the date the sale proceeds of
finished goods are realized by concern.

INTER-DEPENDENCE AMOUNG COMPONENTS OF WORKING CAPITAL

OPERATING CYCLE :

A company starting with cash purchase raw materials, components etc., on a cash or credit
basis. These materials will be converted into finished goods after undergoing various stages of work-
in-process. For this purpose the company has to make payments towards wages, salaries and
manufacturing costs. Payments to suppliers have to be made on purchases in the case of cash
purchases and on the expiry of the credit purchases. Further, the company has to meet other
operating costs such as selling and distribution costs, general administration costs and non-operating
costs described as financial costs (interest on borrowed capital). In case the company sells its
finished goods on cash basis, it will pass through one more stage, viz, accounts receivable and gets
back cash along with profit on expiry of credit period. Once again the cash will be used for the
purchase of materials and / or payments to suppliers and the whole cycle is termed as working
capital or operating cycle repeats itself. This process indicates the dependents of each stage or
components of working capital on its previous stage or component.

WORKING CAPITAL MANAGEMENT

Introduction

Working capital management is one of the most important aspects of financial management.
It forms a major function of the finance manager.

Meaning :

Working capital management means management or administrating of all aspect of working capital,
i.e., currents assets and currents liabilities.

In other words of Smith, “working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and the inter-relationship that exists
between them”.

BASIC OBJECTIVE OF WORKING CAPITAL MANAGEMENT :

The basic objective of working capital management is to manage the firm’s working capital
(i.e., currents assets and currents liabilities) in such a way that a satisfactory level of working capital
(i.e., neither excessive nor inadequate working capital) is maintained. This is necessary because, if
the working capital is excessive or large, the liquidity position of the firm would, no doubt, improve,
but its profitability would be adversely affected, as funds would remain idle. Conversely, if the
working capital is too small, the, profitability of the firm may improve, but the liquidity position of
the firm would be adversely affected.
Advantages of working capital:

• It helps the business concern in maintaining the goodwill.

• It can arrange loans from banks and others on easy and favorable terms.
• It enables a concern to face business crisis in emergencies such as depression.
• It creates an environment of security, confidence, and over all efficiency in a business.
• It helps in maintaining solvency of the business.

Disadvantages of working capital:

• Rate of return on investments also fall with the shortage of working capital.

• Excess working capital may result into over all inefficiency in organization.

• Excess working capital means idle funds which earn no profits.

• Inadequate working capital can not pay its short term liabilities in time.

CHAPTER 2

PROFILE OF THE COMPANY (BHEL)

BHEL was founded in 1950s. The first plant of BHEL was set up at Bhopal in 1956, which

signaled the beginning of the Heavy Electrical Industry in India. In before 1960 three more major

plants were set up at Haridwar, Hyderabad and Trichy.

Its operations are organized around three business sectors: Power, Industry - including

Transmission, Transportation, Telecommunication & Renewable Energy - and Overseas Business.

Today, BHEL has a wide-spread network comprising 14 manufacturing divisions, 8 service centres,

4 power sector regional centres, 18 regional offices, and a large number of project sites spread all

over India and abroad. Its registered and corporate office is situated at New Delhi.

BHEL has a well recognized track record of performance making profits continuously since

1971-72 and paying dividends since 1976-77. BHEL manufactures over 180 products under thirty

major groups.

The quality and reliability of its products is due to the emphasis on design, engineering and

manufacturing to international standards best acquiring and adopting some of the best technologies

from leading companies in the world together with technologies developed in its own R&D centers.

QUALITY CERTIFICATION :

BHEL has acquired certifications from both ISO 9000 & ISO 14000 standards for its

operations and has also adopted the concepts of total quality management. BHEL has adopted

occupational health and safety standards as per OHSAS 18001. The major units of BHEL have

already acquired the ISO 14001 certification.

The company’s inherit potential coupled with its strong performance over the years has

resulted in it being chosen as one of the “Navratna” status.

PRODUCT RANGE

 THERMAL POWER PLANTS

 GAS BASED POWER PLANTS

 HYDRO POWER PLANTS

 DG POWER PLANTS

 INDUSTRIAL PLANTS
  INDUSTRIAL SETS

 BOILERS

 BOILERS AUXILIARIES like as Fan, Air-pre Heaters, Gravimetric Feeders etc.,

 HEAT EXCHANGERS AND PRESSURE VESSELS

 POWER STATION CONTROL EQUIPMENTS

 SWITCHGEARS

 BUS DUCTS

 INSULATORS

POWER GENERATION :

Power Generation sector consists of thermal, gas, hydro and nuclear plant oriented sectors.

Though BHEL supplied sets account logs nil till 1969-70, it rises to 62,051 MV or 65% of the total

installed capacity of 95377 MV in the country.

BHEL has the capability of turning power projects from concept to commissioning. With its

technology, it has the ability to produce thermal sets with super critical parameters unto 1000 MV

unit rating and gas turbine- generator sets of upto 240 MV units rating.

POWER PROJECTS IN SOUTH ZONE

Amarkanatak TPS - 1 x 210 MW

APGENCO - Pulichinthala 4X30 MW HEP Supervision of E&C

Bellary TPS - 1 x 500 MW

BELLARY TPS UNIT 2 - 500 MW

BHAVINI -NPCIL - KALPAKKAM 1X500 Mwe

Bhushan Steel and Strips Limited

JINDAL INDIA THERMAL POWER LTD 2x600 MW BTG

Kalwakurthy Lift Irrigation Scheme Stage I - 5x30MW

Koil sagar Lift Irrigation Project - IVRCL Infrastructures & Projects

KRISHNAPATNAM - APPDCL 2X800 MW SG

Kudankulam- 2 x 1000 MWe NPCIL

Neyveli Lignite Corporation Limited -Neyveli TPS: 2X250MW

NTPC - Simhadri 2X500 MW SG with ESP and auxiliaries

SILKROAD SUGAR PVT LTD - 1xFr 6 GTG - E & C

Sriram Sagar Hydro Electric Project – Stage – II

Sterilite Industries - 2x80 MW BTG

Surana Power Ltd - 2 x 210MW Thermal Power Project,

Yeramaras Thermal Power Station of RPCL - 2 X 800 MW

Power Sector in Northern Region :

Bhel Power Sector Northern region is one of these four regions. It is mainly involved in
Erection, testing and commissioning of power plants in the states of J&K, Himachal, Uttaranchal,
Punjab, Haryana, Rajasthan and Uttar Pradesh and National Capital Territory of Delhi. While the
project sites located in hill states comprise of Hydro Power Plants ranging upto single units of 250
MW those in the other states comprise mainly of thermal sets of ratings ranging upto 500 MW.
Region is also involved in execution of Nuclear power plants and gas based power plants. Besides
this we also provide our valuable customers with after sales services through our regional service
centres located at Chandigarh, Noida and Varanasi. These centres provide a wide range of high-tech
services to our customers like renovation, modernization, uprating, overhauling, residual life
assessments and life extension etc.
Overall Achievements:

a) To make the most part of the high-ash content coal used in India, BHIL supplies

circulating fluidized bed combustion boilers to both thermal and combined cycle power plants.

b) The company manufactures 235 MV nuclear turbine-generator sets and obtains a

production of 500 MV in these sets.

c) Custom made hydro sets of Francis, Pelton and Kaplan types for different head-discharge

combinations are also engineered and manufactured by BHEL.

d) Until now, the company had placed orders for more than 1000 utility sets of thermal,

hydro, gas and nuclear plants. This is based on contemporary technology comparable to the best in

the world. It is also internally competitive.

INDUSTRIAL SECTOR

Industry

BHEL is a major contributor of equipment and system to industries. Its major contributions

are cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc.

The range of systems and equipment supplied includes captive power plants, DG power

plants, high-speed industrial drive turbines, electrical machines, pumps, valves etc.

Transportation

Most of the trains operated by the Indian railways, including the metro in Calcutta, are

equipped with BHEL’s traction electrics and traction control equipment. The company also supplies

electric locomotives to Indian railways and diesel shunting locomotives to various industries.
 The company have supplied 5000/4600 DC locomotives to Indian railways. Battery powered

road vehicles are also manufactured by the company.

Telecommunication

BHEL also give importance to telecommunication sector by way of small, medium and large

switching systems.

Renewable energy

Technologies used by BHEL for discovering non-conventional and renewable sources of

energy include, wind electric generators, solar-power based water pumps, lighting and beating

systems.

International operations

BHEL has been established in over 50 counties of the world. Its knowledge is known from

the United States in the West to the New Zealand in the far East.

BHEL in these countries covers turnkey power projects of thermal, hydro and gas based type

besides a wide variety of products like Switchgear, transformers and heat exchangers.

BHEL has contributed over 1100 MV of boiler capacity to Malaysia. Besides this, they have

also achieved successes in Oman, Saudi Arabia, Libya, Greece, Egypt, SriLanka etc.

Their development in overseas has also provided BHEL, the experience of working with

world renewed consulting organizations and inspection agencies.

The demanding requirements of both domestic and international markets have been dealt

successfully by BHEL. In terms of difficult works as well as technological, quality and other

requirements like financing package, extended warrantees have proven its capabilities.

The company has also been successful in meeting varying needs of the industry like captive

power plants, utility power generation or for the oil sector requirements.
 BHEL possesses large amount of flexibility to interface and change international companies

for large projects. The company also exhibits adaptability by manufacturing and supplying

intermediate products, like steam generator pressure parts.

BHEL can be compared with the original equipment manufactures by its success in the area

of rehabilitation and life extension of power projects.

BHEL’S Vision

BHEL’S vision is to become a world class innovation and competitive and profitable

engineering enterprise providing total business solutions.

Mission

It is 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.

Values:

1. Zeal to excel and zest for change.

2. Integrity and fairness in all matters.

3. Respect for dignity and potential individuals.

4. Strict adherence to commitments.

5. Ensure speed of response.

6. Foster learning, creativity and team work.

7. Loyalty and pride of the company.

Opportunities and threats

World

Investments made in the electricity sector have been lowered in recent years by foreign

electricity venture as foreign direct investment in the developing world. This is one of the parts of

the sluggish state of the global economy and because of unsatisfactory financial performance of

many acquisitions in the electric power sector.

These changes in the environment have led to a cautious approach by developers and it’s harder to

get off the new projects from the ground. Some countries have modified their plans because of the

change in restructuring electricity market and reforms.

The total worldwide order of booking has been lowered leading to aggressive marketing by

major global power plant equipment manufacturing players, who have been undergoing a phase of

consolidation.

Though there has been a decrease in overall orders in the recent times, many developing

nations are planning to expand their electricity infrastructure for the forthcoming years.

Number of promising market for new power equipment are found in South- East Asian

countries, Middle-East and Gulf cooperation council( GCC) countries.

Moreover, BHEL has the global opportunity for servicing of generating machinery as well as

distributing generation in the developing countries

Positioning for the future

BHEL has finalized a new corporate plan with the title “strategic plan 2007” and steps are

taken to start the iniatives. The company has also revised the vision, mission and values statements,

which are suitably adjusted and with remodification to reflect it’s current aspuations.
 In corporate line the company aims to accelerate the growth with suitable strategies and focus

area the core strengths of the and company are

1) To strengthen and extend the core business of power generation power, power

transmission, transportation and industrial systems and products.

2) Areas like water management pollution control and waste management, port handling

systems, simulators [power and process], energy conservation systems, LNG terminals are newly

entered

3) To enter into continuous revenue stream business like power generation and transmission

and distribution.

BHEL, TRICHY UNIT

BHEL, Trichy unit was established in 1963 and is situated in Trichy- Tanjore highway road

around 20km from Trichy Central Bus Stand. 12,000 employees are working in this organization on

permanent basis and around 4000 employees are working on contract basis. It has an area of 2,

50,000 sq. meters and consists of a major unit namely.

BHEL Trichy ,a major manufacturing unit of BHEL family, is an ISO9001,14001 and

OHASAS 18001 company also well on its journey towards TQM. The product profile includes,

1. High Pressure Boiler Plant (HPBP)

2. Seamless Steel Tube Plant (SSTP)

3. Combined Cycle Demonstration Plant (CCDP)

Boiler Auxiliaries plant of Ranipet and piping centre of Madras (Chennai) and Goinwal come

under the control of Trichy Unit.

Product profile of BHEL, Trichy

o Steam Generators for Power Generation and

o Industrial Applications

o Heat Recovery Steam Generators

o Industrial Boilers

o Atmosphere and Circulating Fluidized bed

o Combustion Boilers

o Nuclear Steam Generators and Reactors

o Pressure Vessels

o Hear Exchange

o Seamless Steel Tubes

o Studded tubes

o Serrated fin. Tubes

o Piping systems

o Columns

o Valves

o Boiler Auxiliaries

o Wind Electric Generators

Finance Department Of BHEL, Trichy

The following are the important operations of finance department of BHEL, Trichy.

 Sales Accounting

 Purchase Approvals
  Budgets

 Legal – Excise, Sales Tax, Income Tax & Customs

 Costing

 Pay Roll

 Internal Audit

 Foreign Trade- Imports, Exports

 System

 Cash and Bank

RATIO ANALYSIS

INTRODUCTION:

Ratio Analysis is a powerful tool o financial analysis. Alexander Hall first presented it in
1991 in Federal Reserve Bulletin. Ratio Analysis is a process of comparison of one figure against
other, which makes a ratio and the appraisal of the ratios of the ratios to make proper analysis about
the strengths and weakness of the firm’s operations. The term ratio refers to the numerical or
quantitative relationship between two accounting figures. Ratio analysis of financial statements
stands for the process of determining and presenting the relationship of items and group of items in
the statements.

Ratio analysis can be used both in trend analysis and static analysis. A creditor would like to
know the ability of the company, to meet its current obligation and therefore would think of current
and liquidity ratio and trend of receivable.

Major tool of financial are thus ratio analysis and Funds Flow analysis.Financial analysis is
the process of identifying the financial strength and weakness of the firm by properly establishing
relationship between the items of the balance sheet and the profit account
 The financial analyst may use ratio in two ways. First he may compare a present ratio with
the ratio of the past few years and project ratio of the next year or so. This will indicate the trend in
relation that particular financial aspect of the enterprise. Another method of using ratios for financial
analysis is to compare a financial ratio for the company with for industry as a whole, or for other, the
firm’s ability to meet its current obligation. It measures the firm’s liquidity. The greater the ratio, the
greater the firms liquidity and vice-versa.

A ratio can be defined as a numerical relationship between two numbers expressed in terms
of (a) proportion (b) rate (c) percentage. It is also define as a financial tool to determine an interpret
numerical relationship based on financial statement yardstick that provides a measure of relation
ship between two variable or figures.

Meaning and Importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of
financial condition, efficiency and profitability of business. Here ratio analysis id useful from
following objects.

1. Short term and long term planning

2. Measurement and evaluation of financial performance

3. Stud of financial trends

4. Decision making for investment and operations

5. Diagnosis of financial ills

6. providing valuable insight into firms financial position or picture

ADVANTAGES& DISADVANTAGES OF RATIO ANALYSIS :

Advantages:

The following are the main advantages derived of ratio analysis, which are obtained from the
financial statement via Profit & Loss Account and Balance Sheet.

a) The analysis helps to grasp the relationship between various items in the financial statements.
b) They are useful in pointing out the trends in important items and thus help the management to
forecast
c) With the help of ratios, inter firm comparison made to evolve future market strategies.
d) Out of ratio analysis standard ratios are computed and comparison of actual with standards reveals
the variances. This helps the management to take corrective action.
e) The communication of that has happened between two accounting the dates are revealed effective
action.
f) Simple assessments of liquidity, solvency profitability efficiency of the firm are indicted by ratio
analysis. Ratios meet comparisons much more valid.

Disadvantages:

Ratio analysis is to calculate and easy to understand and such statistical calculation
stimulation thinking and develop understanding. But there are certain drawbacks and dangers they
are.

i) There is a trendy to use to ratio analysis profusely.

ii) Accumulation of mass data obscured rather than clarifies relationship.
iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and product unit.(for
example) one firm may purchase the asset at lower price with a higher return and another firm
witch purchase the asset at asset at higher price will have a lower return)

2. Both the inter period and inter firm comparison are affected by price level changes. A change in
price level can affect the validity of ratios calculated for different time period.

3. Unless varies terms like group profit, operating profit, net profit, current asset, current liability
etc., are properly define, comparison between two variables become meaningless.
4. Ratios are simple to understand and easy to calculate. The analyst should not take decision
should not take decision on a single ratio. He has to take several ratios into consideration.

STANDARDS OF COMPARISION:

1. Ratios calculated from the past financial statements of the same firm.
2. Ratio developed using the projected or perform financial statement of the same firm
3. Ratios of some selected firm especially the most progressive and successful, at the same point of
time.
4. Ratios of the industry to which the firm belongs.

IMPORTANCE OF RATIO ANALYSIS

In the preceding discussion in the form, we have illustrated the compulsion and implication of
important ratios that can be calculated from the Balance Sheet and Profit & Loss account of a firm.
As a tool of financial management, they are of crucial significance. The importance of ratio analysis
lies in the fact and enables the drawing of inferences regarding the performance of a firm. Ration
analysis is a relevant in assessing the performance of a firm in respect of the following aspect.
CAUSTION IN USING RATIOS:

1. It is difficult to decide on the proper bases of comparison.

2. The comparison rendered difficult because of difference in situation of two companies or of one-
company for different years.

3. The price level change make the interpretation of ratios invalid

4. The difference in the definition of items in the balance sheet and Profit & Loss statement make the
interpretation of ratios difficult.

5. The ratios calculated at a point of time are less informative and defective as they suffer from sort
term changes.

6. The ratios are generally calculated from the past financial statement and thus are no indicators of
future.

LIQUIDITY Vs PROFITABILITY
INTRODUCTION:-
Financial analysis is the process of identifying the financial strengths and weakness of the
firm by properly establishing relationship between the items of the balance sheet and profit loss
account. Management should particularly interest in knowing financial strengths and weakness of
the firm to make their best use and to be able to spot out financial weakness of the firm to take a
suitable corrective actions.
Financial analysis is the starting point of making plans, before using any sophisticated
forecasting and planning procedures.
 Major tools of financial analysis are ratio analysis and funds flow analysis. Financial analysis
is the process of identifying the financial strengths and weakness of the firm by properly establishing
relationship between the items of the balance sheet and the profit and loss account.

Meaning and importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of
financial condition, efficiency and profitability of business. Here ratio analysis is useful from
following objectives.

1. Short term and long term planning.

2. Measurement and evaluation of financial performance.
3. Study of financial trends.
4. Decision making for investment and operations.
5. Diagnosis of financial ills.
6. Providing valuable insight into firm’s financial position or picture.

Type of Ratios :

1. Current Ratio
2. Quick Ratio
3. Cash Ratio
4. Net Profit Ratio
5. Debtors Turnover Ratio
6. Debt Collection Period
7. Creditors Turnover Ratio
8. Debt Payment Period
9. Inventory Turnover Ratio
10. Working Capital Turnover Ratio
11. Cash Turnover Ratio
12. Cash to Current Assets Ratio
1. CURRENT RATIO

It is relationship between firm’s current assets and current liability.

Current assets

Current ratio = _______________________________

Current liability

2. QUICK RATIO

It is relationship between liquid assets and current liabilities.

Liquid assets

Quick ratio = _________________________

Liquid Liabilities

3. CASH RATIO

It is relationship between cash and current liabilities.

Cash

Cash ratio = _______________________

Current liabilities

4. DEBTOR’S TURNOVER RATIO

It indicates the number time debtors turned over each year. Generally the higher value

of debtor’s turnover shows high efficiency to manage the credit management.

Total sales
 Debtors turnover ratio = ______________________________

Debtors

5. DEBT COLLECTION PERIOD

It indicates the speed with which debts are collected.

Days/months in a year

Debt collection period = _______________________________

Debtor’s turnover ratio

6. CREDITORS TURNOVER RATIO

The ratio shows on an average the number of times creditors turned over during the

year.

Credit purchase

Creditors turnover ratio = ________________________

Average creditors

7. DEBT PAYMENT PERIOD

Creditor’s turnover ratio indicates the number of days taken by the firm, to pay the

debtors to creditors.

Days/months in a year

Debt payment period = _______________________________

Creditor’s turnover ratio

8. INVENTORY TURNOVER RATIO

It indicates the inventories turning into receivables through sales.

Sales
 Inventory turnover ratio =__________________________

Inventory

9. INVENTORY HOLDING PERIOD

It indicates duration of holding inventories in stores.

Days/months in a year

Inventory holding ratio = ______________________________

Inventory turnover ratio

10. INVENTORY TO CURRENT ASSETS RATIO

This ratio explains about the proportion of inventory in the current assets .

Inventory

Inventory to Current Assets ratio = ______________________________ x 100

Current Assets

11. WORKING CAPITAL TURNOVER RATIO

This ratio explains the relationship between sales and working capital.

Net sales

Working capital turnover ratio = ______________________________

Net working capital

12. CASH TURNOVER RATIO

 It is the relationship between sales and cash.

Sales

Cash turnover ratio =

Cash balance

13. CASH TO CURRENT ASSETS RATIO

This ratio establishes the relationship between the cash and the current assets.

Cash

Cash ratio = _______________________

Current Assets

14. Gross Profit Ratio

This ratio is very important in ration analysis. This ratio founds company can obtain
profit on production or not.

Gross Profit

Gross profit Ratio =

Total Sales

15. Net Profit Ratio

 This ratio is also very important in ration analysis. This ratio founds company can
obtain profit on overall expenses or not.

Net Profit

Net Profit Ratio =

Total Sales

2.9 ARTICLES

Miss. Mohanapriya, M.B.A, in her research on “Working capital management of Tanjore co-

operative milk supply society Ltd.” Which is the partial fulfillment of the requirements for the

award of her degree submitted to Bharathidasan University, in the year November – 2003. Outlined

the following objectives and findings.

Her Objectives were:

 Know the project of Co-operative milk supply society.

 Analysis the short term liquidity position of the study unit during the period 96-97 to 2000-

01.

 Analysis and evaluate working capital management.

Her Findings were:

 The size of current assets has increased during the study period.

 During the study period the working capital turnover ratio were 210.51;

 194.60; 45.44 and 11.86 times respectively the higher ratios in the 2 year 1997-98 and 98-99

indicates sufficient amount of working capital and effective utilizations of working capital.
  The cash turnover ratio is to be increasing times.

Miss. Abiramisundhari, in her research on “Working capital management of TSRM

Limited Trichy”. Which is the partial fulfillment of the requirements for the award of her M.Com

degree submitted to Bharathidasan University, in the year November – 2003. Outlined the following

objectives and findings.

Her Objectives were:

 To study the importance of W/c management for a concern.

 To assess the proportion of the components of W/c of TSRM Ltd, Trichy.

 To suggest measures to increases the efficiency of W/c management of TSRM Ltd,

Trichy.

Her Findings were:

 The company has been taken for sufficient care for the maintenance of adequate

accounting period.

 The proportion of net W/c to total assets showed on increasing trend through out the

five years.

 The over all performance of receivables management showed a satisfactory position

throughout the past 5 years.

Mr. Kamaraj, M, Phil, in his research on “Working capital management of Dalmia Cement

Limited Trichy”. Which is the partial fulfillment of the requirements for the award of her degree

submitted to Bharathidasan University, in the year November – 2003. Outlined the following

objectives and findings.

His Objectives were:

 To know the Financial Performance of Dalmia Cement.

 To examine the practice follow into Management of cash.

 To know the techniques of Inventory Management in D.C.B.C.

His Findings were:

 Raw Material Consumption over the study period in terms of quantity and value has showed

an incise trend.

 Operating ratio is considered to be yardstick of operating efficiently of the concern.

 The concern has show dormant and fast moving inventories during the 5 years a study period.

 Performance of the co should be judged on the basis of return on equity capital. It is

satisfactory positive

Mr. Kushagra Dabur, in his research on “Working capital management of Kotak Mahindra
Life Insurance Company”. Which is the partial fulfillment of the requirements for the award of her
degree submitted to Amity University, Uttar Pradesh, in the year February – 2006. Outlined the
following objectives and findings:

His Objectives were:

 To meet the cash disbursement needs (payment schedule);

 To minimize funds committed to cash balances.
 The present study is limited to one Co., i.e. Kotak Mahindra Life Insurance, and covers a
period from 2003 and 2006 due to limitation of time and accessibility to data base.
 The authenticity of the suggestions and recommendations depend upon the rationality of the
data provided to me.

His Findings were:

 The relative growth rate of short term trade credit and value industrial production.
 The relative growth rates of short term trade credit & inventories with industry & trade.
 The diversion of short-term credit for fixed asset acquisition & for lower and Investments.
 The incidence or multiple financing,
 The elongation of credit period.

RESEARCH METHODOLOGY

It is purely and simply the framework or a plans for the study that guides the collection and
analysis of data. Research is the scientific way to solve the problem and it’s increasingly used to
improve market potential. This involves exploring the possible methods, one by one, and arriving at
the best solution, considering the resources at the disposal of research.

4.2 PRIMARY DATA

The primary data is collected by observation by the researcher of the functioning of the unit.

4.3 SECONDARY DATA

It is derived from the annual reports, magazines, web sites and the internal auditing books of
BHEL.

4.4 TOOLS OF ANALYSIS

The researcher used tools to analysis the financial performance of the firm. They are
1. Ratio analysis
2. Trend analysis

4.5 SCOPE OF THE STUDY

 The main scope of the study is to evaluate, analyze and understand the current assets
management and to know the influence of the components of working capital on sales in the year
2005 – 2006 to 2009 – 2010.

4.6 PERIOD OF THE STUDY

The study analysis, “the financial performance of Bharath Heavy Electrical Ltd” covers the
financial years from 2005-2010 consequently.

DATA ANALYSIS AND INTERPRETATION

TABLE – 1

STATEMENT SHOWING CURRENT RATIO

Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10
CURRENT 1633078 2106400 2770400 3690107 4293481
ASSETS
CURRENT 1032002 1442000 2002230 2833290 3244172
LIABILITIES
CURRENT 1.58 1.46 1.38 1.30 1.32
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
Current ratio during the year 2005-2006 was 1.58 and its come down in 1.46 at 2006-2007
and its again decreased 2007–2008 and 2008-09 and its slightly increased in 1.32 at 2009-10. The
standard norm for this ratio is 2:1 required.
 CHART – 1

CURRENT RATIO

current ratio
1.8
1.6
1.4
PERCENTAGE

1.2
1
0.8
0.6
0.4
0.2
0
2005-06 2006-07 2007-08 2008-09 2009-10
YEARS
 TABLE –2
STATEMENT SHOWING QUICK RATIO
Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10
LIQUID 1258640 1684600 2216978 2906405 3369935
ASSETS
LIQUID 1032002 1442000 2002230 2833290 3244172
LIABILITIES

LIQUID 1.22 1.17 1.10 1.03 1.04

RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The quick ratio in the year 2005-2006 was 1.22 and its decreased 0.04% at 2006 and 2007
(1.17) and in 2007-2008 get decreased 0.06% (1.10) and 2008-2009 get decreased 0.063% (1.03)
and its get increase in slightly on 2009-2010 at 0.001%(1.04). The standard norm for this ratio is
1:1, means for every 1 rupee of current liability, company must have 1 rupee of quick assets.
 CHART –2
LIQUID RATIO

1.25
1.2
PERCENTAGE

1.15
1.1
1.05
1
0.95
0.9
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10
YEARS

STATEMENT SHOWING CASH RATIO

CASH MANAGEMENT

Introduction:
Cash management is one of the key areas of working capital management. Cash is the liquid current
asset. The main duty of the finance manager is to provide adequate cash to all segments of the
organization. The important reason for maintaining cash balances is the transaction motive. A firm
enters into variety of transactions to accomplish its objectives which have to be paid for in the form
of cash.
Meaning of cash:
The term “cash” with reference to cash management used in two senses. In a narrower sense
it includes coins, currency notes, cheques, bank drafts held by a firm. n a broader sense it also
includes “near-cash assets” such as marketable securities and time deposits with banks.

Objectives of cash management:

There are two basic objectives of cash management. They are-

 To meet the cash disbursement needs as per the payment schedule.

 To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash management involves the following four basic problems.

 Controlling level of cash
 Controlling inflows of cash
 Controlling outflows of cash and
 Optimum investment of surplus cash.
 Determining safety level for cash:
 The finance manager has to take into account the minimum cash balance that the firm must
keep to avoid risk or cost of running out of funds. Such minimum level may be termed as “safety
level of cash”. The finance manager determines the safety level of cash separately both for normal
periods and peak periods. Under both cases he decides about two basic factors. They are-

Desired days of cash:

It means the number of days for which cash balance should be sufficient to cover payments.

Average daily cash flows:

This means average amount of disbursements which will have to be made daily.

Criteria for investment of surplus cash:

In most of the companies there are usually no formal written instructions for investing the
surplus cash. It is left to the discretion and judgment of the finance manager. While exercising such
judgment, he usually takes into consideration the following factors-

Security:
This can be ensured by investing money in securities whose price remains more or less
stable.
Liquidity:
This can be ensured by investing money in short term securities including short term fixed
deposits with banks.

Yield:
Most corporate managers give less emphasis to yield as compared to security and liquidity of
investment. So they prefer short term government securities for investing surplus cash.
Maturity:
It will be advisable to select securities according to their maturities so the finance manager
can maximize the yield as well as maintain the liquidity of investments.

Cash Management in BHEL:

The cash management is carried out in seaways by CTM (Corporate Treasury Management).
CTM is a commonly followed procedure in most of the companies.

Now we see the cash ration / quick ration in bhel

TABLE – 3
Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010
CASH 413398 580900 838600 1031467 979008
CURRENT 1032002 1442000 2002230 2833290 3244172
LIABILITIES

CASH RATIO 0.40 0.40 0.42 0.36 0.30

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
The Cash ratio of BHEL in the 2005-2010 was fluctuation in 2009-2010 it was 0.30 times
and in 2005-2006 it was 0.40 times and 2007-2008 it was reduced to 0.42.
The standard norms of absolute quick ratio are 0.5:1. From the above table the firms not
maintain the sufficient level of quick assets because of the day-to-day expenses .It is fluctuating
between the standard norms for this ratio is 1:2 means for every 2 rupees of current Liabilities,
Company must have 1 rupee of cash and bank balance and marketable securities.
 CHART- 3

CASH RATIO

0.5
0.4
PERCENTAGE 0.3
0.2 CA
0.1
0

CASH
2005 - 2006 - 2007 - 2008 - 2009 -
2006 2007 2008 2009 2010
YEARS

RECEIVABLES MANAGEMENT
Introduction:
Receivables constitute a significant portion of the total assets of the business. When a firm
seller goods or services on credit, the payments are postponed to future dates and receivables are
created. If they sell for cash no receivables created.

Meaning:

Receivable are asset accounts representing amounts owed to the firm as a result of sale of goods or
services in the ordinary course of business.

Purpose of receivables:
Accounts receivables are created because of credit sales. The purpose of receivables is
directly connected with the objectives of making credit sales. The objectives of credit sales are as
follows-

Achieving growth in sales.

Increasing profits.
Meeting competition.

Factors affecting the size of Receivables:

The main factors that affect the size of the receivables are-
Level of sales.
Credit period.
Cash discount.
Costs of maintaining receivables:

The costs with respect to maintenance of receivables are as follows-

Capital costs:
This is because there is a time lag between the sale of goods to customers and the payment by
them. The firm has, therefore to arrange for additional funds to meet its obligations.

Administrative costs:
Firm incur this cost for manufacturing accounts receivables in the form of salaries to the staff
kept for maintaining accounting records relating to customers.

Collection costs:

The firm has to incur costs for collecting the payments from its credit customers.

Defaulting costs:
The firm may not able to recover the over dues because of the inability of customers. Such
debts treated as bad debts.

Receivables management:
Receivables are direct result of credit sale. The main objective of receivables management is
to promote sales and profits until that point is reached where the ROI in further funding of
receivables is less than the cost of funds raised to finance that additional credit (i.e.; cost of capital).
Increase in receivables also increases chances of bad debts. Thus, creation of receivables is
beneficial as well as dangerous. Finally management of accounts receivable means as the process of
making decisions relating to investment of funds in this asset which result in maximizing the over all
return on the investment of the firm.
Receivables management and Ratio Analysis:

Ratio Analysis is one of the important techniques that can be used to check the efficiency with which
receivables management is being managed by a firm. The most important ratios for receivables
management are as follows-

DEBTORS TURNOVER RATIO: -

Debtors constitute an important constituent of current assets and therefore the quality of the
debtors to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtors
are converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm.
The liquidity of firm’s receivables can be examined in two ways they are DTR and Average
Collection Period.

TABLE –4

STATEMENT SHOWING DEBTORS TURNOVER RATIO

Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010
TOTAL 1337403 1723753 1930464 2621233 3286144
SALES
DEBTORS 716806 969582 1197487 1597550 2068875
DEBTOR
TURNOVER 1.87 1.78 1.61 1.64 1.59
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
Debtors constitute an important constituent of current assets and therefore the quality of the
debtors to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtors
are converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm.
The liquidity of firm’s receivables can be examined in two ways they are DTR and Average
Collection Period. .The higher the ratio, the better it is, since it would indicate that debts are being
collected promptly. In the year 2009 - 2010 the debt is 1.59 comparing to the previous year came
downwards.

CHART- 4
DEBTOR TURNOVER RATIO

2
PERCENTAGE 1.8
1.6
1.4
2005 2007 2009 DEBTORS
- -2008 -
2006 2010
YEARS
 DEBT COLLECTION PERIOD

Debtor’s collection period is nothing but the period required to collect the money from the
customers after the credit sales. A speed collection reduces the length of operating cycle and vice
versa.

TABLE – 5
Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

DAYS 365 365 365 365 365
DEBT
TURNOVER 1.87 1.78 1.61 1.64 1.59
RATIO
DEBT
COLLECTION 195 205 227 223 230
PERIOD

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
The debt collection period of BHEL in the 2005-2006 was 195 days and in goes to 2009 -
2010 it was increased in (0.18%) 230 days. Standard Debt Collection Period of a firm is less than 90
days. But, above tables consists of increased of DCP in rapidly.
 CHART – 5
DEBT COLLECTION PERIOD

240
220
No. of Days 200 DTCP
180
160

DTCP
2005 2007 2009
- - -
2006 2008 2010
YEARS
 CREDITORS TURNOVER RATIO

TABLE – 6
Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CREDIT
709940 1018186 1182087 1762005 2067232
PURCHASE
SUPPLIERS /
280409 353895 442400 585285 757980
CREDITORS
CREDITORS
TURNOVER 2.53 2.88 2.67 3.01 2.73
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
The Creditors turnover ratio of BHEL was fluctuating during the year 2005 – 2010. It was
upward in (2008– 2009) was 3.01 times and it was downward in 2009 – 2010 is 2.73 times.
 CHART -6
CREDITORS TURNOVER RATIO

3.2
3
2.8
PERCENTAGE
2.6
2.4
2.2
CTR
2005- 2006

2006 - 2007

2007 - 2008

2008 - 2009

2009 - 2010

YEARS
 TABLE –7

CASH TO CURRENT ASSETS RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CASH 413398 580900 838600 1031467 979008
CURRENT 1633078 2106400 2770400 3690107 4293481
ASSETS
CAS TO
CURRENT
0.25 0.27 0.30 0.28 0.23
ASSETS
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
The Cash to current assets turnover ratio of BHEL was fluctuating during the year 2005 –
2010. It was upward in (2005– 2008) was 0.25 times to 0.30 times and it was downward in 2008 –
2010 is 0.23 times.
 CHART -7
CASH TO CURRENT ASSETS RATIO

CASH TO CURRENT ASSETS RATIO

0.3
0.25
0.2
PERCENTAGE 0.15
0.1
0.05 C
0
2005-062006-072007-082008-09 2009-
2010
YEARS
 TABLE –8
CASH TURNOVER RATIO
Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010
SALES 1337403 1723753 1930464 2621233 3286144

CASH 413398 580891 838602 1031467 979008

CASH
TURNOVER 3.24 2.97 2.31 2.54 3.36
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
The cash turnover ratio in the years 2005-2010 it was on fluctuating ratios, in the year 2009-
2010 it was increased (0.037%) 3.36.
 CHART –8

CASH TURNOVER RATIO

3.5
3
2.5
PERCENTAGE 2
1.5
1
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10
YEARS
INVENTORY MANAGEMENT

Introduction:

Inventories are stock of the product a company is manufacturing for sale and components.
That makeup the products. The various forms in which inventories exist in a manufacturing
company are: Raw-materials, work-in-process, finished goods.

• Raw-Materials: - Are those basic inputs that are converted into finished products through the
manufacturing process. Raw-materials inventories are those units, which have been
purchased and stored for future production.

• Work-In-Process inventories are semi-manufactured products. The represent products that

need more work before they become finished products for sale.

• Finished Goods inventories are those completely manufactured products, which are ready
for sale. Stocks of raw-materials and work-in-process facilitate production which stock of
finished goods is required for smooth marketing operations. These inventories serve as a link
between production and consumption of goods.

• Stores and spares are also maintained by some firms. This includes office and plant cleaning
materials like soaps, brooms, oil, fuel, light, bulbs etc. These materials do not directly enter
in production. But are necessary for production process.

Need to holding inventory

The question of managing inventories arises only when the company holds inventories. Maintaining
inventories involves tying up of the company's funds and incurrence of storage and handling cost. It
is expensive to maintain inventories, why does company hold inventories? There are three general
motives for holding inventories.

1. Transaction Motive: - Emphasizes the need to maintain inventories to facilitate smooth

production and sales operations.

2. Precautionary motive: - Necessitates holding of inventories to guard against the risk of

unpredictable changes in demand and supply forces and other factors.

3. Speculative motive: - Influences the decision to increase or reduce inventory levels to take
advantages of price influences.

A company should maintain adequate stock of materials for a continuous supply to the
factory for the uninterrupted production. It is not possible for a company to procure raw materials
whenever it is needed. A time lag exists between demand for materials and its supply. Also there
exists uncertainty in procuring raw materials in time on many occasions. The procurement of
materials may be delayed because of such factors as strike, transport disruption or short supply.
Therefore, the firm should maintain sufficient stock of raw materials at a given time to stream line
production.

Objective of Inventory Management

In the context of inventory management the firm is faced with the problem of meeting two
conflicting needs ;
 • To maintain a large size of inventory for sufficient and smooth production and sales
operations.

• To maintain a minimum investment in inventories to maximize profitability.

Both excessive and inadequate inventories are not desirable. These are two dangerous points
within which the firm should operate. The objective of inventory management should be to
determine and maintain optimum level of inventory investment. The optimum level of inventory will
lie between the two danger points of excessive and inadequate inventories.

The firm should always avoid a situation of over investment or under investment in
inventories. The major dangerous of over investment are,

• Unnecessary tie-up of the firms funds losses of profit

• Excessive carrying cost
• Risk of quality

The aim of inventory management thus should be to avoid excessive and inadequate levels of
inventories and to maintain sufficient inventory for smooth production and sales operations. Efforts
should be made to place an order at the right time with the right source to acquire the right quantity
at the right price and quality. An effective inventory management should

• Ensure a continuous supply of raw materials to facilitate uninterrupted production.

• Maintain sufficient stock of raw materials in periods of short supply and anticipate
price changes.

• Maintain sufficient finished goods inventory for smooth sales operations and efficient
customer service.

• Minimize the carrying cost and time.

 • Control investment in inventories and keep it at an optimum level.

Inventory management techniques :

In managing inventories the firm objective should be in consonance with the shareholders'
wealth maximization principle. To achieve this firm should determine the optimum level of
inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control
results in unbalanced inventory and inflexibility-the firm ma sometimes run out of stock and
sometimes may pileup unnecessary stocks. This increases level of investment and makes the firm
unprofitable.

To manage inventories efficiency, answers should be sought to the following two questions.

1) How much should be ordered?

2) When should it be ordered?

The first question how much to order, relates to the problem of determining economic order
quantity (EOQ), and is answered with an analysis of costs of manufacturing certain level of
inventories. The second question when to order arise because of determining the reorder point.

When the order is placed for raw material certain raw material is in transit, such raw material
is called as raw material in transit.

Example –Raw material on over seas.

 The raw material can be transfer from unit to another unit or from one department to another
is called transfer-in –transit. It is nothing but to the transfer of raw material among the inter firm
units of BHEL.

The raw material, which is production process, is called work-in process. The work in
process becomes finished goods inventory. The finished should not be kept for a longer time. They
should be sold off to clear off the entire inventory. However, finished goods inventory is not there
for BHEL, since production is mainly done on customer order and specifications. The raw material
is purchased and the whole process is repeated again which we call it as inventory cycle.

Inventory turnover Ratio:-

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its
products. It is calculated by dividing the cost of goods sold by the average inventory. The average
inventory is the average of open and closing balance of inventory.

TABLE –9
INVENTORY TURNOVER RATIO
Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

SALES 1337403 1723753 1930464 2621233 3286144

INVENTORY 374437 421767 573640 783702 923546

INVENTORY
TURNOVER 3.57 4.09 3.37 3.34 3.56
RATIO
SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
Inventory turnover of BHEL for 2001 – 2006 was fluctuation. in 2001-2002 the
inventory turnover ratio was high up to 3.81 and it was low in 2004-2005 at 3.27.

CHART –9

INVENTORY TURNOVER RATIO

 5

2 2009-10
1 2007-08
0 2005-06
ITR

TABLE –10
INVENTORY HOLDING PERIOD
Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

DAYS / 365 365 365 365 365
MONTH IN
YEAR
INVENTORY
TURNOVER 3.57 4.09 3.37 3.34 3.56
RATIO
INVENTORY
HOLDING 102 89 108 109 103
PERIOD
SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
Inventory holding period of Bhel is varying on every year. In the year of 2005-06 to
2007-08 it’s increased in 0.06% (102 to 108) and 2009-10 it’s decreased by 0.047 %.

CHART –9

INVENTORY HOLDING PERIOD

600

500
2009
400
2008
300 2007
2006
200
2005
100

0
IHP

TABLE-11
WORKING CAPITAL TURNOVER RATIO
 Rs in lakhs
YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010
SALES 1337403 1723753 1930464 2621233 3286144
NET
WORKING 601076 664286 788388 856817 1049309
CAPITAL
WORKING
CAPITAL
2.23 2.59 2.45 3.06 3.13
TURNOVER
RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
Working capital turnover ratio for the year 2009 - 2010 was 3.13 times. It is higher when
comparing the past four years. The working capital management has to improve by more
concentration on collection strategies.

CHART-11
 WORKING CAPITAL TURNOVER RATIO

3.5
3
2.5
2
PERCENTAGE
1.5
1 WC
0.5
0
2005 - 2006 - 2007 - 2008 - 2009 -
06 07 08 09 10
YEARS

TABLE –12

WORKING CAPITAL FOR TREND ANALYSIS

Rs in lakhs
 YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010
CURRENT
1633078 2106297 2770472 3690107 4293481
ASSETS
CURRENT
1032002 1442011 1982084 2833290 3244172
LIABILITIES
WORKING
CAPITAL 601076 664286 788388 856817 1049309

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
In this current asset is increasing during the period of study. Current liability is also increased
during the period of study. And working capital is also increased.

CHART – 12
WORKING CAPITAL FOR TREND ANALYSIS
VALUES
5000000
4500000
4000000
3500000
3000000 CA
CL
2500000 WC
2000000
1500000
1000000
500000
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10
YEARS

TABLE –13
ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL
CURRENT ASSETS
 Rs in lakhs

2005 2006- 2007- 2008- 2009-

Particulars
-2006 2007 2008 2009 2010
inventories 22.93 20.03 20.71 21.24 21.52
Sundry debtors
43.90 46.03 43.22 43.29 48.18
C& B balance
Other assets 25.30 27.58 30.27 27.95 22.80
Loans and advances 0.52 0.95 1.52 0.95 0.95
7.35 5.41 4.28 6.57 6.55
Total 100 100 100 100 100

SOURCE: SECONDARY DATA

INTERPRETATION
In this period 2005 – 2010 Sundry debtors and other current assets was only maintained in
stable for the period of study. Bhel must be extra care about cash and bank balance in future. In the
period of 2007-2010 inventory ratios are increased. All about Bhel should be very care and must
maintain in adequate current assets in future.

CHART – 13
ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL

GRAPH 13 .1 INVENTORY
 23
22.5
22
21.5
21
PERCENTAGE
20.5
20
INVENT
19.5
19
18.5
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10
YEARS
GRAPH 13 .2 SUNDRY DEBTORS

49
48
47
46
45
PERCENTAGE
44
43
42
41
40
2005-06 2006-07 2007-08 2008-09 2009
YEARS
GRAPH 13 .3 CASH AND BANK BALANCES
 40
30
PERCENTAGE 20
10
0
2005-06 2006-07 2007-08 2008-09 2009-10
YEARS

GRAPH 13 .4 OTHER CURRENT ASSETS

2
1.5
PERCENTAGE 1
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10 O.
YEARS

GRAPH 13 .5 LOANS AND ADVANCES

 8
6
PERCENTAGE 4
2
0
2005-06 2006-07 2007-08 2008-09 2009-10
YEARS

GROSS PROFIT RATIO :

Gross profit margin shows the company can return income at the gross level.
This ratio helps to control inventory usage and production performance and fixing unit price
of goods.
TABLE – 14

ANALYSIS OF GROSS PROFIT RATIO

Rs in lakhs
Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010
Gross Profit /
256435 373607 443039 484885 659065
Profit before tax
Total Sales 1337403 1723753 1930464 2621233 3286144
Gross Profit ratio 0.192 0.217 0.230 0.185 0.201

GRAPH 14 - GROSS PROFIT RATIOS

 2009-10 2005-06
20% 19%

2008-09 2006-07
18% 21%

2007-08
22%

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
In the analysis of Gross profit ratio Bhel must control production expenses in future.
Comparison of 2007-08 to 2009-10 margin profit ratio will goes down in 2 %. Firm will be control
in production cost in next coming years, such as raw material, freight and transport expenses.
Otherwise, Bhel must increase in sales unit price.

NET PROFIT RATIO:

 As every business is to earn profit, this ratio is very important because it measures the
profitability of sales. A business may yield high gross income but low net income because of
increasing operating and non-operating expenses. This situation can easily be detected by calculating
this ratio.

The profits used for this purpose may be profits after/before tax. To obtain this ratio, the
figure of net profits after tax is divided by the figure of net profits after tax is divided by the figure of
sales the ratio is also known as sales margin as we can ascertain with its help the margin which the
sales leave later deducting all the expenses. The unit of expression is percentage, as is the case with
profitability ratios.

TABLE – 15

ANALYSIS OF NET PROFIT RATIO

Rs in lakhs

Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010

Net Profit /
167916 241470 285934 313821 431064
Profit after tax
Net Sales 1337403 1723753 1930464 2621233 3286144
Net Profit ratio 0.126 0.140 0.148 0.120 0.131

GRAPH 15 NET PROFIT RATIO

 0.16
0.14
0.12

% 0.1
0.08
0.06
0.04
0.02
0
2005-06 2006-07 2007-08 2008-09 200
YEARS

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION
In this period of research of study Net profit of the Bhel company goes downwards from
2008 – 2010 comparing previous year achievements.

Gross Profit to Net Profit Ratio:

 Analisation of ratio’s G.P. to N.P is very important in every firm. It helps to find out the cost
of expense increased in production or administrative level and other hand it helps to control in
overall financial expenses.

TABLE – 16

ANALYSIS OF G.P. TO N.P RATIO

Rs in lakhs
Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010
Gross Profit 256435 373607 443039 484885 659065
Net Profit 167916 241470 285934 313821 431064
G.P. - N.P. RATIO 1.53 1.55 1.55 1.55 1.53

GRAPH 16 G.P. TO N.P. RATIO

700000
600000
500000
400000
300000
200000
100000
0
2005-06

%
2006-07

2007-08

2008-09

N.P.
2009-10
G.P.

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

YEARS

INTERPRETATION
 In this period of research of study Gross Profit and Net Profit are equal. Bhel control his
marginal and administrative cost in his control. There is no variation and its goes to stable.

TREND ANALYSIS

Particulars 2006 2007 2008 2009 2010

Current Assets :
Inventories / Stock 100 112.64 153.20 209.30 246.65

Debtors
100 135.26 167.06 222.87 288.62
Cash and Bank Balances
100 140.52 202.86 249.51 236.82
Other Current Assets
100 236.33 498.33 414.45 481.48
Loans & Advances
100 95.08 98.87 201.99 234.50
Current Liabilities :
Liabilities
100 135.08 188.20 265.19 318.17

Provisions
100 166.79 214.54 329.01 292.14

INTERPRETATION

Above Table Inventory and debtors goes to growth level in all the years. Loans and
Advances and Other Current assets show high level of improvement in all the years. Cash and Bank
balances are fluctuating ratio in the year 2008 – 2010. Current Liabilities are increasing in all the
years and Provisions are fluctuating in the year 2010 compared to previous years.

ANALYSIS IN LEAST QUARE METHOD

 least squares a method of regression analysis. The line on a graph that best summarizes the
relationship between two variables is the one that ensures that there is the least value of the sum of
the squares of the deviation between the fitted curve and each of the original data points.