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The study of working capital management

The study of working capital management



The study of working capital management

The study of working capital management



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    The study of working capital management The study of working capital management Document Transcript

    • Projectsformba.blogspot.com A Report on SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN INTERNATIONAL BUSINESS Working Capital ManagementProjectsformba.blogspot.com 1
    • Projectsformba.blogspot.com PREFACE As a matter of fact every management student has to undergopractical training in an approved business or organization for not less thansix weeks normally in the summer vacation under the guidance ofProfessional managers, as to become aware of the real life businesssituations and the environment. To fulfill the said objective I was sent to the BHEL, Jhansi for my “Onthe Job” practical Training by our Training Coordinator. The duration of mytraining was from ………………………………………... During this period I visitedvarious departments of BHEL, Jhansi to study their process of functioning &organization and also doing a project on “The study of Working CapitalManagement” to know the procedure of working Capital Management inBHEL.Projectsformba.blogspot.com 2
    • Projectsformba.blogspot.com ACKNOWLEDGEMENT We offer our gratitude to all those who have spent their precioustime, expressed keen interest and given continued encouragementthroughout the study enabled the successful completion of my “ON THEJOB” practical training in BHEL, Jhansi.Special thanks are due to our project coordinator …………………… (AccountsOfficer) for his inspiring guidance, valuable help and angelic support forthe completion of our project in “WORKING CAPITAL MANAGEMENT INBHEL, Jhansi”.We would like to extend our gratitude to the management and staff ofBHEL, Jhansi for their co-operation during our training.Projectsformba.blogspot.com 3
    • Projectsformba.blogspot.com TABLE OF CONTENTS1. INTRODUCTION (i) BHEL as a whole (ii) BHEL, JHANSI2. DEPARTMENTATON IN BHEL, JHANSI3. FINANCE DEPARTMENT IN BHEL, JHANSI4. INTRODUCTION OF WORKING CAPITAL5. CASH MANAGEMENT (i) Introduction (ii) Cash management in BHEL, Jhansi6. RECEIVABLE MANAGEMENT (i) Introduction (ii) Receivable management in BHEL, Jhansi7. INVENTORY MANAGEMENT (i) Introduction (ii) Inventory management in BHEL, Jhansi8. ANALYSIS OF WORKING CAPITALProjectsformba.blogspot.com 4
    • Projectsformba.blogspot.com BHARAT HEAVY ELECTRICALSA Brief Introduction In the post Independence era when India was moving towardsindustrialization the major thrust of the govt. was in the core sector andthis sector was given to the public sector. With this objective, HeavyElectricals (I) Limited was setup in Bhopal in August, 1956 with a view toreach self sufficiency in the industrial product and power equipment. Thisplant was setup under technical collaboration of M/s AEI, U.K. Three more plants were subsequently setup Tiruchy, Hyderabad andHaridwar with Soviet and Czechoslovakian assistance in May 1965, Dec1965 and Jan 1967 respectively. As there was need for an integratedapproach for the development of power equipment to be manufactured inIndia, Heavy Electronics Ltd. Bhopal was merged into BHEL in 1974. BHEL has now become the largest Engineering and ManufacturingCompany. Its headquarters is located at Delhi and there are 14manufacturing units.Projectsformba.blogspot.com 5
    • Projectsformba.blogspot.com BHEL OBJECTIVES A dynamic is one which keeps its aim high adopts itself quickly tochanging environment. So here we are in BHEL.The objectives of the company have been redefined in the corporate planfor the 90’s.BUSINESS MISSION • To maintain leading position as supplier of quality equipment, systems and services in the field of conversion, transmission, utilization and conversion of energy for application in the areas of electric power, transportation, oil & gas explorations and industries.Utilize company’s capabilities and resources to extend business into alliedareas and other priority sector of the economy like defense,communication and electronics.GROWTH • To ensure a steady growth by enhancing the competitive edge of BHEL in existing business new areas and international market so as to fulfill national expectation from BHEL.Projectsformba.blogspot.com 6
    • Projectsformba.blogspot.comPROFITABILITY • To provide a reasonable and adequate return on capital employed, primarily through improvement in operational, efficiency, capacity utilization and productivity and generate adequate internal resources to finance the company’s growth.FOCUS • To build a high degree of customer confidence by providing increased value for his money though International standards of product quality performance and superior customer service.PEOPLE ORIENTATION • To enable each employees to achieve his potential, improve his capabilities perceive his role and responsibilities and participate and contribute to the growth and success of the company. • To invest in human resources and continuously and alive to there need.TECHNOLOGY • To achieve technological excellence in operation by development of indigenous technologies and efficient absorption and adoption of imparted technologies to suit business and priorities and provide competitive advantage to the company.IMAGE • To fulfill the expectation which stakes holders like government as owner. Employees, customers and the country at large have from BHEL.Projectsformba.blogspot.com 7
    • Projectsformba.blogspot.com BUSINESS AREASBHEL covers a wide area of business. These areas are mentioned below.POWER Provide a gamut of equipment for Thermal, Hydro and NuclearPower Plants. Range includes products and systems for the powergeneration, transmission and utilization.TRANSMISSIONBHEL is manufacturing transmission equipments for all voltage ratingincluding the 400 KV class transformers switch gears, control and relaypanel, insulators, capacitors and other substation equipments.INDUSTRYOffers a comprehensive range of electrical, electronic and mechanicalequipment for a host of industries fertilizers, petrochemicals, refineries,paper, sugar, rubber, cement, coal, steel, aluminum and mining.TRANSPORTATIONBHEL offers a variety of transportation equipment to meet the growingneeds of country. 65% of Indian Railways are equipped with BHELmanufactured traction equipment. Underground metro also runs on drivesand control supplied by BHEL.Projectsformba.blogspot.com 8
    • Projectsformba.blogspot.com BHEL has taken up the manufacturing of locomotive to provide apollution free transportation. BHEL also offers a battery operatedpassenger van to Delhi Government.OIL AND GASEquipment for oil and gas exploration and transportation is manufacturedby BHEL. The range covers super deep drill rigs with matching draw worksand hosting equipment.NON CONVENTIONALBHEL is playing a vital role in helping to harness the vest renewable sourcesof solar, wind and biogas energy. BHEL has supplied several water heatingsystem, windmills generators and photo voltaic system.TELE COMMUNICATIONBHEL has entered the field of telecom with electronics PABX system basedon indigenous technology from C-DOT.MANUFACTURING TECHNOLOGIESBHEL has 14 manufacturing plants, which are spread different parts of thecountry having unique manufacturing and testing facilities, CNC machines,turbine blade shape system, system bener, 8000-ton hydraulic press,heavy-duty lathe mailing machines and many more are available.Projectsformba.blogspot.com 9
    • Projectsformba.blogspot.com ACTIVITY PROFILE OF BHELPOWER SECTOR PROJECTS  Thermal sets and auxiliaries.  Steam generators and auxiliaries.  Industrial fans.  Electrostatic Precipitators.  Air pre-heaters.  Nuclear power equipment.  Hydro sets and auxiliaries.  Motors  Transformers  Rectifiers  Pumps  Heat exchange  Capacitors  Porcelain/Ceramic insulators  Seamless steel tubes  Castings and forgingsProjectsformba.blogspot.com 10
    • Projectsformba.blogspot.comSYSTEM/SERVICES  Turnkey power station  Data acquisition system  Power system  HVDC commissioning system  Erection and commissioning system  Modernization and rehabilitationTRANSPORTATION SECTOR  Diesel electric generators  AC/DC locomotives and loco shunters  Traction system for Railways  Electric trolley busesINDUSTRY SECTOR  Boilers  Valves  T G Sets  Power devices  Solar cells  Photo Voltaic cells  Gas turbines  Off rigsProjectsformba.blogspot.com 11
    • Projectsformba.blogspot.com  Blow out preventers  Wind mills  Control system for electric devicesProjectsformba.blogspot.com 12
    • Projectsformba.blogspot.com BHARAT HEAVY ELECTRICALS LIMITED JHANSI UNITBy the end of 5th five-year plan, it was envisaged by the planningcommission that the demand for power transformer would rise in thecoming years. Anticipating the country’s requirement BHEL decided to setup a new plant, which would manufacture power and other type oftransformers in addition to the capacity available at BHEL, Bhopal. TheBhopal Plant was engaged in manufacturing of transformers of large ratingand Jhansi unit would concentrate on power transformer upto 50 kVA, 132kV Class and other transformers like Instrument Transformers, TractionTransformers for Railway etc. This unit of Jhansi was established around 14 km from the city on theN.H. No. 26 on Jhansi Lalitpur road. It is called second generation plant ofBHEL set up in 1974 at an estimated cost of Rs. 16.22 crores inclusive of Rs.2.1 crores for township. Its foundation was laid by Late Mrs. Indira Gandhithe Prime Minister on 9th January 1974. The commercial production of theunit began in 1976-77 with an output of Rs. 53 Lacs. This plant of BHEL is equipped with the most modern manufacturingprocessing and testing facilities for the manufacture of power, specialtransformer and Instrument transformers, Diesel shunting Locomotivesand AC/DC Locomotives. The layout of the plant is such that it is wellstreamlined to enable smooth material flow from the raw material stagesto finished goods. All the feeder bays have been laid perpendicular to mainassembly bay and each feeder bay raw material smoothly gets convertedto sub assemblies which after inspection are sent to main assembly bay.The raw material that are produced for manufacture are used only afterthorough material testing in the testing lab and with strict quality checks atvarious stages of productions. This unit of BHEL is basically engaged in theproduction and manufacture of transformers of various type and capacitieswith the growing competition in the transformer section, in 1985-88 itunder took the re-powering of diesel, but it took a complete year for theProjectsformba.blogspot.com 13
    • Projectsformba.blogspot.commanufacturing to began. In 1987-88, BHEL has progressed a step further inundertaking the production of AC Locomotives and subsequently it ismanufacturing AC/DC Locomotives also.Projectsformba.blogspot.com 14
    • Projectsformba.blogspot.com SECTIONS OF BHEL JHANSI UNITBHEL has many departments, while production and Administrativedepartments are separate.Broadly speaking BHEL, Jhansi has two production categories.1. Transformer Section2. Loco SectionTRANSFORMER SECTION: In the transformer plant there are ten bays:Bay 0, 1& 2: These are fabrication shops established in 1978 and mainlydeals with fabrication work of transformers and locomotives.Bay 3: It is splitted into two parts, half is the machine shop and thesecond half is for bus duct. Bus duct are used to transformer electricityfrom the generator to transformer.Bay 4: Here is the winding work of the power transformer & drytype transformer carried out.Bay 5: Basically it is core and punch section but in a part of it castresin coil encapsulation plant is situated. The coils of dry type transformerare casted, cut and finally prepared.Bay 6: It is also engaged in two processes, one half is the tractiontransfer assembly.Bay 7: In this bay, the dry transformers are manufactured andvarious types of insulation are prepared to be used in the transformers.Projectsformba.blogspot.com 15
    • Projectsformba.blogspot.comBay 8: This bay was established in the year 1974. It is one of theearliest bays to setup. It is involved in the manufacturing of instruments,transformers like 132 kv and 220 kv voltage/current transformers. ESPtransformers are also manufactured here.Bay 9: This is one of the largest bay in the unit engaged in theassembly of power and rectifier transformers. The time taken for assemblyranges from 4-12 weeks.LOCO SECTIONThe other section, locomotives department is one of the most importantdepartments in factory. It deals with the manufacture and production offollowing types of locomotives.1. AC locomotives2. AC/DC locomotives3. Thryster type locomotives4. Diesel electric locomotives shunting locomotives (DESL)5. Diesel shunting/Engine of various capacities and haulageThe unique modern machines available in Jhansi unit are as follows:• CNC cropping line machines• Vapour phase drying system• Computer ICM 6040 and 6080 and IRISHI 40/20 with graphic facilities.• Bogie frame machining centre• CNC axle turning lathe• Facing and centering machines• Wheel forcing press• CNC pipe bending machinesProjectsformba.blogspot.com 16
    • Projectsformba.blogspot.com PROFILE OF BHEL JHANSI UNIT Products Rating1. Power Transformer Upto 220 kV Class 250 MVA2. Special Transformer Upto 110 kV3. ESP Transformer 100 kV, 1400 mA4. Freight Loco Transformer 3900 to 5400 kVA & 6500 kVA (3 Phase)5. ACEMU Transformer Upto 1000 kVA 25 kV(1 Phase) 1385 kVA (3 Phase)6. Dry Type Transformer Upto 3150 kVA7. Bus-duct Upto 15.75 kV Generating Voltage.8. Instrument Transformer VT & CT upto 220 kV Class.9. Diesel electric Locomotives Upto 2600 HP.10. AC/DC Locomotive 5000 HP.11. Over Head Equipment cum Test Car.Projectsformba.blogspot.com 17
    • Projectsformba.blogspot.com GROWTH OF PRODUCTION AND MILESTONESYear Milestone1976-77 Start of Instrument Transformer production.1977-78 Start of Traction Transformer and Power Transformer (upto 132 kV)1978-79 Start of HFTT type freight Loco1979-80 Commissioning of 2,500 kV DG Set (due to server Power Cuts).1980-81 Start of ESP Transformer.1981-82 Start of 220 kV Power Transformer.1982-83 Achieved Break Even.1983-84 Start of Bus-duct1984-85 Start of dry type transformer.1985-86 Re-powering of Diesel Loco Started.1986-87 Start of new Diesel Loco Manufacturing.1987-88 Manufacturing facilities for AC Loco.1988-89 Crossed 100 crore target.1990-91 Successful design and manufacturing of 450 HP 3 Axel Diesel CCI1991-92 Manufacturing of first 2600 HP Diesel for NTPC.1992-93 Successful Design and Development of 5000 HP ThyristorProjectsformba.blogspot.com 18
    • Projectsformba.blogspot.com control Locomotive.1993-94 Unit has been awarded ISO-9001 certificate for quality systems.1994-95 240 MVA Power Transformer Produced first time.1995-96 AC/DC Locomotive first time in India.1996-97 100th Loco Manufactured.1997-98 250 MVA Transformer produced first time.1998-99 Developed overhead equipment test Exported one DESL loco to Malaysia1999-00 DieselProjectsformba.blogspot.com 19
    • Projectsformba.blogspot.com FINANCE DEPARTMENT IN BHEL, JHANSI A sound financial management is the crux of the efficientmanagement of a business enterprise and financial management onscientific and sound lines in a prime consideration of BHEL. TheFinance/Accounts Department of the company controls all the financialoperations. That is directed at improving profitability and internalresources generation through optional utilization of man, material,machines, tools and money. According to its various functions the Finance/ Account Departmentis divided into following sections: - i) Price Store Ledger(PSL) ii) Supply Bill iii) Cash iv) Pay v) Books Budget and MIS vi) Sales vii)Miscellaneous and Revenue viii)Internal Audit ix) Export Incentives, Sales Tax and Income TaxProjectsformba.blogspot.com 20
    • Projectsformba.blogspot.com x) Provident Fund xi) Works xii)Travelling Allowance  Price Store Ledger(PSL) PSL section is entrusted with the job of material pricing anddetermination of material consumption. PSL are used for the materialaccounting as well as their financial accounting. The documents involvedare: - SRV – Store Receipt Voucher MIV – Material Issue Voucher SRN – Store Return Note MTV – Material Transformer Note RCDV – Receipt cum Dispatch VoucherPassing of Bills The Bills Passing process starts after the account section gets thepurchase order, SRV’s and bills from suppliers. The accountant’s sectionthen makes payment.Terms of Payment are of three kinds: –Projectsformba.blogspot.com 21
    • Projectsformba.blogspot.com i) 10% in advance payment ii) 100% after receipt and acceptance iii) Partial advance and the remaining after the receipt and acceptanceForeign Purchase There are certain items, which are to be imported. A license isrequired for such items. The license can be acquired from DGTD. There isalso a provision for forward cover. Cash This section is responsible of banking of all the money worthreceived by the company from the costumers and disbursement of allauthorized payment on behalf of the company to suppliers, contractors inform cheques, cash, drafts, postal orders etc. It is also concerned with payment of salaries, wages and otherpersonal payments of employees. Cash section prepares these statements for management information: - Daily – cash flow > Direction collection of sales. Weekly – Cash inflow > outflow – during weekProjectsformba.blogspot.com 22
    • Projectsformba.blogspot.com Statement of pending bills of cash section status of margin money. Monthly – cash flow forecast for 3 months. Operating result statement. Statement of outstanding letter of credit & bank guarantee. Daily bank transfer statement. Bank reconciliation statement is also prepared. BHEL has centralized cash credit system. Pay Section It is assigned the job of payment of salaries and other personalpayments to employees it looks after provident fund, gratuity and bonusesinsurance facilities extend to employees.Employees leave encashment, official travelling reimbursement and thissection deals other welfare expenses. It is also entrusted with clearance ofmedical claims. Books, Budget and MISProjectsformba.blogspot.com 23
    • Projectsformba.blogspot.com General ledger is the consolidated list of general entries. As soon asthe general voucher is received, the general ledger is prepared. In the general ledger, receipt and expenditure both are recorded.This section prepares section wise and monthly Trial Balance. After the preparation of general ledger and trial balance, P&LAccount and the Balance Sheet are prepared yearly. The Balance sheet isprepared in accordance with the company’s act.Two types of Audits are done by the BHEL: – i) Internal Audit ii) Government Audit Budget Budget is a target setting for operations.There are two types of Budget prepared by BHEL: – 1. Revenue Budget: – It consists of consolidated production programmed &related expenses to carry out that programme. 2. Capital Budget: – It includes the fixed assets. Preparation of budget is done at three levels:Projectsformba.blogspot.com 24
    • Projectsformba.blogspot.com i) Internal Level: – Each department is sent information about the budgeted expenses provided to the department. It is necessary for control. ii) Corporate Level: – Budget of BHEL unit is sent to the corporate office. iii) Government Level: – Budget of BHEL is also sent to Government level. Management Information System Three types of information system are generated in the BHEL: – i) Internal for the Unit ii) For the Corporate Office iii) For Government Every month information is generated regarding allocation offunds on various aspects for each department and is sent to everydepartment. Information is generated mainly for control purpose. Otherinformation generated is: – i) Cash Flow ii) Inventory Level (non moving and slow moving items) iii) Inventory of finished goodsProjectsformba.blogspot.com 25
    • Projectsformba.blogspot.com Cost Section This section is responsible for accounting and reporting of costs. It determines direct labour rates and Engineers rates and overheads recovery factors of manufacturing, engineering, commercial and administration for cost estimation. The cost accounting is done to record and collect cost for work orders and product level information. It prepares material/labour overheads consumption statements. It furnishes cost reports to management about: – 1. Profitability – Product wise/ Order wise. 2. Variance _ Estimated and Actual Cost 3. Performance – Efficiency and operating results Sales Section The accounting of sales is done in this section. The activity of this sectionstarts when the commercial department issues a work order. Work orderpart II (Financial) summarizes the financial terms of the contract. Itcontains the information like the name of customer & consignee,description of goods to be produced and sold, quantity, sales value, termsof delivery and payment, price variation clause, sales tax, excise duty,liquidates damages, Bank guarantee, fight etc. with the part II W.O. details.Apart from that the terms and conditions embodied in W.O. part II asProjectsformba.blogspot.com 26
    • Projectsformba.blogspot.comregard adjustment of advances, deferred debts and calculation of PVC,Excise duty and Sales tax must also be complies with. Sales section submitsthe bills to the customers as desired by Commercial either direct orthrough Financial such as Banks. This Section does the necessary accounting for the bills raised;money collected from customers in form of advance or sale proceeds. Miscellaneous and Revenue Miscellaneous wing of this section deals with the payment ofadvances to employees going on official tours, LTC etc. Payment totransporters, welfare activities, security services, repairs and maintenance,daily wages, furniture, departmental and other petty expenses. The revenue wing of this section with recovery of rent, electricityand water charges for other facilities from the salary of the employees. Internal AuditProjectsformba.blogspot.com 27
    • Projectsformba.blogspot.com BHEL is having its own team of internal auditors, who to unearththe discrepancies in accounting, check periodically the books of accountsas well as schedules forming part of accounts. Export Incentives, Sales Tax and Income Tax This section deals with export procedures of finished goods. It isentrusted to get licenses for export. It is also responsible for claim of dutydraw back and export incentives. This section also looks the import of rawmaterials that forms par to finished good. It also assesses of sales tax, income tax and other matters relatedto custom duty.Projectsformba.blogspot.com 28
    • Projectsformba.blogspot.com INTRODUCTION TO WORKING CAPITAL “Working capital refers to a firm’s investment in short termassets-cash, short term securities, accounts receivable and inventories.” - Weston & Brigham Working capital can be classified either on the basis of its conceptor on the basis of periodicity of its requirement. (I) On the basis of concepts there are two concepts of working capital: - 1. Gross Working Capital 2. Net Working CapitalProjectsformba.blogspot.com 29
    • Projectsformba.blogspot.comGross Working CapitalGross working capital refers to the firm’s investment in current assets.Current assets are assets that can be converted into cash within anaccounting year. Current assets include cash and bank balance, Short-termsecurities, debtors, bills receivables and inventory.The Gross Working Capital concept focuses attention on two aspects ofcurrent assets management. (a) Optimum investment in current assets (b) Financing of current assets.NET WORKING CAPITAL Net working capital refers to the difference between current assetsand current liabilities. Current liabilities are those claims of outsiders,which are expected to mature for payment within an accounting year andinclude bills payable and outstanding expenses. Net working capacityindicates the liquidity position of the firm. Generally net working capacity isreferred to as working capital.Projectsformba.blogspot.com 30
    • Projectsformba.blogspot.com(II) On the basis of requirement – According to Gestenberg, the workingcapital can be classified into permanent or regular working capital andvariable working capital.NEED FOR WORKING CAPITAL A firm required as sufficient amount of working capital to run its day-to-day business. We can hardly find a firm that does not have any amount ofworking capital. But firms differ in their requirement for working capital. Thefirm needs working capital because sales do not convert into cashinstantaneously. There is always a time duration required to convert sales,after the conversion of resources into inventories, into cash. This timeduration is called Operating Cycle of the firm. Firms like BHEL must maintainan adequate amount of working capital because of a long operating cycle.Operating Cycle: - It is clear that working capital is required because ofthe time gap between the sales and their actual realization in cash. Thistime gap is technically termed as “operating cycle” of the business.Funds required investing in inventories, debtors and other current assetskeep on changing shape and volume. Like a company has some cash in thebeginning. This cash may be to the suppliers of raw material, to meetlabour costs and other overheads. These three combined would generateWIP, which will be converted into finished goods on completion ofproduction process. On sale these finished goods gets converted intodebtors and debtors pay, the firm will again have cash. This cash will againused for financing raw materials, WIP, etc. Thus, there is a complete cycleProjectsformba.blogspot.com 31
    • Projectsformba.blogspot.comwhen cash gets converted into raw material, WIP finished goods, debtorsand finally again cash. DEBTORS SALES OPERATING CYCLECASH FINISHED GOODS RAW MATERIAL WORK IN PROGRESS In case of a manufacturing company, the operating cycle is the length oftime necessary to complete the following cycle of events: (i) Conversion of cash into raw material. (ii) Conversion of raw material into work-in-progress. (iii) Conversion of work-in-progress into finished goods. (iv) Conversion of finished goods into accounts receivables, and (v) Conversion of accounts receivables into cash.The operating cycle of manufacturing business can be shows as in thefollowing chart.OBJECTIVES OF WORKING CAPITAL MANAGEMENTProjectsformba.blogspot.com 32
    • Projectsformba.blogspot.com The basic objective of working capital is to provide adequate support for the smooth functioning of normal business operations of a company. The term adequate working capital is subjective depending on management’s attitude towards uncertainity/risk. I. Maintenance of working capital. II. Availability of ample funds at the time of need. SAFETY LIQUIDITY PROFITABILITY CREDIT MGMT. BANK MGMT MINIMIZE TIME MINIMIZE TIME EXCESS CASHACCT RECEIVABLE ACCT PAYABLE MGMTMGMT MINIMIZE TIME OPTIMIZE TIME MEDIA Projectsformba.blogspot.com 33
    • Projectsformba.blogspot.com Goals of Working Capital ManagementWCM: A TRADE-OFF BETWEEN LIQUIDITY AND PROFITABILITY The two important aims of working capital management are to gainprofitability along with liquidity. Liquidity is the firm’s continuous ability tomeet maturing obligations. To ensure liquidity, the firm has to maintain arelatively large investment in current assets holding. But there is a costassociated with maintaining a sound liquidity position. A considerableamount of firm’s profitability will suffer. To achieve higher profitability, thefirm can sacrifice liquidity and maintain a relatively low level of currentassets. If the firm does so, its profitability will improve as fewer funds astied up in the current assets, but its solvency will be threatened andexposed to greater risk.Therefore, firm should maintain its current assets at that level where theliquidity cost is quite low and the firm is also able to achieve adequateprofitability.DETERMINANTS OF WORKING CAPITAL 1. Nature and size of business. 2. Manufacturing cycle. 3. Sales growth. 4. Nature of raw material used. 5. Demand condition. 6. Production policy.Projectsformba.blogspot.com 34
    • Projectsformba.blogspot.com 7. Price level changes. 8. Operating efficiency and performance. 9. Firm’s credit policy. 10.Available of credit. 11.Degree of synchronization among cash inflow and outflows. GUIDELINES AND SOURCES OF FUNDS FOR WORKING CAPITAL REQUIREMENTS OF BHEL 1. CASH CREDIT FROM BANKS The requirements of working capital will be met either from internal resources or borrowings from banks. All the banking transactions have been centralized at Corporate office, New Delhi. The Corporate office will negotiate with consortium of banks for total cash credit required for the company as a whole. 2. WORKING CAPITAL LOAN FROM GOVERNMENT The funds for working capital over and above cash credit limits may also be arranged through government loans. 3. RECEIPTS FROM CUSTOMERSProjectsformba.blogspot.com 35
    • Projectsformba.blogspot.com The bulk of working capital requirements are met from the advances from customers in accordance with the contract condition as approved by the board. The receipts are deposited in the centralized account. 4. FIXED DEPOSITS FROM MEMBERS OF PUBLIC Subject to the approval of the government and Board of Directors, the funds may be raised from public by obtaining fixed deposits under the provisions of the company. 5. PROVISIONS OF THE FUNDS FOR SITE OFFICES Funds required to site offices will be provided by the divisions under which they are functioning and for the purpose. Current accounts will be authorized to be opened with branches of SBI or any other nationalized bank. 6. OTHER SOURCES OF FUNDS (a) Bill rediscounting scheme of IDBI: The scheme was introduced in 1965. The manufacture of indigenous capital equipment can push up the sales of their products by offering to the prospective purchaser deferred payment facilities. The IDBI does not itself discount bill of exchange/promissory notes but rediscounts those discounted by any other approved bankers. (b) Bill market scheme: RBI providing rediscounting facility for bills having maturity of not more than 120 days introduced this scheme. This facility enables the supplier to get the payment for their supplies at a reduced rate of interest. (c) EXPORT PRE-SHIPMENT/POST SHIPMENT CREDITS:Projectsformba.blogspot.com 36
    • Projectsformba.blogspot.com In respect of export orders finance at concessional rates is made available by the banking system on specific conditions. Preshipment finance at a concessional rate is granted for a period of 180 days. Post-shipment finance is available at same concessional rate for maximum period of 90 days. The pre- shipment finance will form part of cash credit granted by banking system to the customers. (d) Other Schemes: - Discounting supply bills can also raise short-term funds. Another scheme related to rising of fund to the extent of 75% or 80% of the value of inventories not required for next few weeks/months by pledging of such inventoried with a banker under a “Key loan or Pledge amount”.Forecasting of Working capital If the working capital is to be estimated for the ensuring year, thenthe current requirement of the assets and the cash flow for the period is tobe estimated. The basic object of forecasting is either to measure the cashposition of the enterprise or to exercise control over the liquidity position ifthe concern. There are many popular methods available for forecasting theworking capital requirements, which follows: - 1) Cash Forecasting Method 2) The Balance Sheet Method 3) The profit & loss adjustment Method 4) Percent of Sales Method 5) The Operating cycle Method 6) Regression Analysis MethodProjectsformba.blogspot.com 37
    • Projectsformba.blogspot.com CASH MANAGEMENTINTRODUCTION Cash is an important current asset for the operation of thebusiness. Cash is the basic input needed to keep the business running on acontinuation basis. It is also the ultimate output realized by selling theservices or product manufactured by the firm. Cash is the most liquid of allthe current assets. Higher cash and bank balance indicate high liquidityposition in lower profitability, as ideal cash fetches no return. Thus a majorfunction of finance manager is t maintain sound cash position.Cash management is concerned with managing of: - (i) Cash flow in and out of the firm.Projectsformba.blogspot.com 38
    • Projectsformba.blogspot.com (ii) Cash flow within the firm. (iii)Cash balance held by the firm at a point of time by financing deficit or investing surplus cash.Objective of Cash Management 1) To meet day to day business requirements. 2) To provide for schedule major payment i.e. Capital expenditure. 3) To face unexpected cash drain. 4) To maintain image of credit worthiness. 5) To size potential opportunities for profitable long-term investments. 6) To meet requirement of bank relationships. Efficient cash management function calls for cash planning,evaluation of cash benefits and cost of policies, sound procedures andpractices and synchronization of cash inflows and outflows. Thus forachieving goals and objectives of cash management, finance manager hasto plan cash needs of the firm followed by cash flow management,determination of optimum level of cash and finally investment of surplus.Factors Affecting Cash Requirement (A)Internal Factors (a) Profit level (b)Dividend and Taxation policy (c) Reserve and surplus (d)Depreciation policy (e)Expansion programmeProjectsformba.blogspot.com 39
    • Projectsformba.blogspot.com (f) Operating efficiency (B) External Factors (a) Fluctuating in marketing interest rates (b)Investment avenues available in market (c) Government economic policies (d)Rules and regulations of RBI and other regulatory bodiesCash Management in B.H.E.L., JhansiIn B.H.E.L., the centralized cash credit system is followed. From 24-07-75 allthe banking transactions of the company have been centralized atcorporate office, New Delhi. Under this system all the sales proceeds of theunits are deposited in a centralized account. This account number isuniversal for all the units of ROD’s. They have to deposit the sales process ifthis account withdraws money from it. Only the corporate office operatesit. For meeting day to day expenses, the units have to prepare theestimates of such expenses, which are then sent to corporate office weeklyor monthly, or both. At unit level, the cash budget is prepared on yearlybasis for estimating the expected cash inflows and outflows. The yearlybudget is broken down into monthly and weekly intervals. The inflows andoutflows and estimated on following basis. The only source of cash inflow for unit is corporate office. The saleproceeds cannot be directly utilized. Based on the above requisitions, thecorporate office allocates the funds. For cash credit, corporate office will negotiate with consortium ofBank for total cash credit required for the company as the whole. Aconsortium deed for hypothecation of stocks and stores of company isexecuted by corporate office. All the information, documents etc. requiredProjectsformba.blogspot.com 40
    • Projectsformba.blogspot.comin this connection will be called for by the corporate office from thedivision. Arrangements have been already been made by the State Bank ofIndia, HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bankfor centralizing total cash credit limits at New Delhi. Under this scheme, the units have finished the required informationunder the following documents. The units will send estimated, monthlycash flow statement to the corporate office by 18th of every month. Based on these cash flow statements, the corporate office willallocate the sub limits will be transferred to the consortium of the bank by25th of the month. The unit can utilize this fund.The actual cash flow statement will be send to corporate office monthly i.e.1st of succeeding month. The units are also required to send the weekly report of daily banktransactions to the corporate office. These reports shows the detail of dailydebit and credit transaction appearing in bankbook of the company,enabling the posting of corporate bankbooks as well as verification of bankstatement received from banks. These reports are sent to corporate officeon1st (showing the transaction from 25th to 30th of the previous month)8th (showing the transaction from 1st to 7th of the current month)16th (Showing the transaction from 8th to 15th of the current month)25th (showing the transaction from 16th to 21st of current month) The units are required to send the comparative statement ofestimated and annual cash flow of the preceding month. This report will besent quarterly after inter-unit reconciliation meeting. The total interestpayable on cash credit availed by corporate office is to be allocated amongthe units in the ratio of utilization of funds. Thus cash forecasting & budgetare the principal tools of cash management. Forecasting helps manager toProjectsformba.blogspot.com 41
    • Projectsformba.blogspot.comknow how much cash will be held in balance, to what extent the firmshould rely on banks financing and how much to invest in marketablesecurities.Advantages of Centralized System 1) Excess cash at various units can be effectively used for various purposes and improvements. 2) Deficit of cash at various units can be sorted out through centralized cash system. 3) Idle cash at various units, may be noted or avoided.Cash Budget in B.H.E.L., Jhansi Cash budget is the most significance device to plan for and controlreceipt and payment. A cash budget is a summary statement of the firmsexpected cash inflows and outflows over a projected time period. InB.H.E.L., cash management is centralized and is controlled directly fromcorporate office, whatever requirement of fund is felt in BHEL, Jhansi it issent to the corporate office and corporate office disburse the fundsaccordingly. Cash budget in BHEL, Jhansi is prepared on the basis of productionschedule, which is prepared after receiving customer’s orders at thebeginning of the year. There are two aspects of cash budget inflow andoutflow. In flow of cash budget is determined on the basis of receiving thecustomer’s orders and preparing production schedule. Outflow isdetermined on the basis of requirement of raw materials, payment of taxesand duties, interest on borrowings etc. Outflow in cash budget isProjectsformba.blogspot.com 42
    • Projectsformba.blogspot.comcategorized into operation and non-operation outflow consist of capitalexpenditure, exchange variations and supplier’s credit. Thus after determining the budgeted estimates of inflow andoutflows, cash budget is prepared at the beginning of the year. Thedistribution of cash is determined on monthly basis in every month of thatyear. In the last quarter of the year cash budget is received and the lastestimates are calculated and fixed. Monitoring of cash budget is donethough management information system. RECEIVABLE MANAGEMENTIntroduction Customers arising from sale of goods or services define the termreceivable as debt owed to the firm in the ordinary course of business.Receivable constitute a substantial position of current assets. Grantingcredit and creating debtors amount to the blocking of firm’s fund. Theinterval between the date of sale and date of payment has to be financedout of working capital. Thus trader’s debtors represent investment. Business firm generally sell goods on credit to facilitate sales. When afirm makes an ordinary sale of goods on services and does not receivepayment, the firm grant trade credit and create accounts receivable thatwould be collected in the future.Projectsformba.blogspot.com 43
    • Projectsformba.blogspot.comCost of Maintaining Receivable The cost associated with the maintenance of account receivables are:1) Capital Cost When a firm maintains receivables, there is a time lag between thesales of good and payments by the customers. Mean while, the firm has topay to the employees and to the suppliers of raw materials. Thesepayments are made by the use of traditional capital which alternativelycould be profitably employed elsewhere.2) Collection Cost These are costs, which the firm has to in for collection of theamounts at the appropriate time from the customers.3) Administrative Cost In the process of maintaining receivable company incurs someadministrative expenses in the form of salaries to clerks who maintainrecords of debtors, expenses on investigating the credit worthiness ofdebtors etc.4) Default Cost When customers make default in payments, not only the collectioneffort has to be increased but the firm may also have to incur losses due tobad debts.Objective of Receivable Management The objective of receivable management is to promote sales andprofits until that point is reached where return on investment in futurefunding of receivables is less than cost of funds raised to finance thatadditional credit.Projectsformba.blogspot.com 44
    • Projectsformba.blogspot.comCredit Policy Credit Policy of a firm can be regarded as a kind of trade-off betweenincreased credit sales leading to increase in profit and the cost of havinglarge amount of fund locked up in the form of receivables and loss due toincidence of bad debts.The variables associated with credit policy are: - (A) Credit Standard (B)Credit Terms (C)Collection EffortsCredit Standards are criteria to decide the type of customers to whomgoods could be sold on credit. Credit Terms specify duration of credit andterms of payment by customers. Collection Efforts determine the actualcollection period. The lower the collection period, the lower is theinvestment in accounts receivable and vice versa.Receivable Management in BHEL, Jhansi The main products of BHEL are heavy industrial goods with longoperating cycle. BHEL grants liberal terms regarding trade credit to lure thepotential customers to buy its product at favorable selling prices. To utilize its excess capacity, BHEL is granting liberal trade creditterms to its customers. The main customers of BHEL are Railways, PowerIndustries and other Private Parties. BHEL has overseas sales also. All the BHEL units are having their commercial department.Commercial department and Regional Operational Divisions (RDOs)primarily carry out the job of recovery from the customers. The salesProjectsformba.blogspot.com 45
    • Projectsformba.blogspot.comsection of finance department also actively takes part in receivablemanagement by preparing and sending invoices and reminders tocustomers at appropriate time. They take track of money received fromcustomers as advances, as against dispatch of finished goods and moneyrecoverable on account of price variation claims and conversion ofdeferred debts into debtors. This monitoring is done work order wise. Theaging schedule of customers also prepared which gives the regardingperiod of outstanding balances. The terms and conditions with the customers are finalized accordingto the credit policy laid down by corporate office BHEL. However deviationsare permitted with the due approval from corporate office. While lying down of credit policy by head office, industry conditionsare taken into consideration. Seeing huge investment in execution of workorder, BHEL demands considerable payment in advance in different phasesof completion of work i.e. erection, installation, commissioning,maintenance etc. Despite all these BHEL is presently facing cash crunchbecause a major chunk of BHEL’s customers consists of governmentbodies, which are very casual in clearance of dues.Projectsformba.blogspot.com 46
    • Projectsformba.blogspot.com INVENTORY MANAGEMENTIntroduction Inventory constitutes the most significant part of the current assetsof the large majorities of the companies in India. On an average,inventories are approximately 60% of current assets in public limitedcompanies in India. Inventories are stock of the product, a company ismanufacturing for sale and components that make up the product. Thevarious forms in which inventories exist in manufacturing company are rawmaterial; work in process and finished goods. The level of above mentioned three kinds of inventories for a firmdepend on the nature of its business. Manufacturing firm will havesubstantially high level of all three kinds of inventories, while a retail orwholesale firm will have a very high level of finished goods inventories andraw material and work in process inventories. In a manufacturing firm the level of inventory depends on theoperating cycle. A manufacturing firm with a long operating cycle has tomaintain a high inventory level.Need to Hold Inventories There are three general motives for holding inventories: -1. Transaction Motives: - Companies hold inventories to facilitate smooth production and sales operation. Company should maintain adequate stock of raw material for a continuous supply to the factory for uninterrupted production and keeping stock of finished goods as the firm cannot immediately when customers demand goods.2. Precautionary Motive: - Firm holds inventories to guard against the risk of unpredictable change in demand and supply of force and otherProjectsformba.blogspot.com 47
    • Projectsformba.blogspot.com factors. Firm may also purchase large quantities of raw material; than needed for desired production and sales level to obtain quantity discount on bulk purchases.3. Speculative Motive: - It influence the decision of the firm to increase or decrease inventory level to take advantage of price fluctuations.Cost Associated with Inventory Holding There are five costs associated with inventory holding. Of these,three are direct costs that are immediately connected to buying andholding goods and other two are indirect costs, which are losses ofrevenues.These costs of holding inventories are: -(1)Material cost(2)Order Cost(3)Carrying Cost(4)Cost of fund tied up in inventory(5)Cost of running out of goodsProjectsformba.blogspot.com 48
    • Projectsformba.blogspot.comObjectives of Inventory Management1. To maintain a large size of inventory for efficient and smooth production and sales operation2. To maintain a minimum investment in inventories to maximize profitability. The effective management of inventory involves a tradeoff betweenhaving too little and much more inventory. The firm should always avoid asituation of over investment or under investment in inventories. The major disadvantages of over investment are: -(i) Unnecessary tide up of firm’s funds and losses of profit.(ii) Excessive carrying cost.(iii) Risk of liquidity.(iv) Physical deterioration of inventory during storage. Maintaining an inadequate level is also dangerous. Theconsequences of the under investment in inventories are: - (i) Production hold ups. (ii) Failure to meet delivery commitment. Thus the aim of inventory management should be to avoid excessiveand inadequate level of inventories and to maintain sufficient inventory forthe smooth production and sales operations. Efforts should be made toplace an order at the right time with right source to acquire the rightquantity ant the right price and quality.Factors Affecting Level of Investment in Inventories: -(1)Seasonal nature of raw material.Projectsformba.blogspot.com 49
    • Projectsformba.blogspot.com(2)Length and technical nature of production process.(3)Style factor in end product.(4)Terms of purchase.(5)Time factor.(6)Supply condition.(7)Loan facilities.(8)Other factors.Inventory Management in BHEL, Jhansi The investment in inventory in production to total is a dominantdeterminant of working capital management. It holds much important incontext of BHEL as it is having a long production cycle where a goodamount of capital is tied up in form of raw material, work in progress andconversion cost. Production planning and control department plays a pivotal role ininventory management. The engineering department plays a supportingrole and provides the requisition regarding technology to be applied andmaterial requires to PPC department. In BHEL the inventory control isperform with following steps: -1. Planning- This is done by PPC department is consultation with purchase,commercial, design and manufacturing department prepares the planningProjectsformba.blogspot.com 50
    • Projectsformba.blogspot.comschedule. This schedule along with information provided by engineeringand design department helps in material planning and inventory control.2. Procurement – The procurement is done by purchase department. It is done withthe assistance of PPC and commercial department for maintaining atradeoff between carrying cost and ordering cost. A single purchase orderis placed for the entire quantity of a specific item and its scattered deliveryover a period of time is received. This method helps in obtaining cash andquantity discounts and saving carrying cost. In case of foreign purchasealso one order is placed for the full requirement of an item and scattereddelivery is opted because variation caused in material cost due tofluctuation in exchange rate is much less than the carrying cost of thematerial which is approximately 25% of the total price.12.Receipt and Custody For the proper inventory control on receipt of material in store,quality control department checks the material as per specification. Thecost section fills details of all the purchase by issuing store receipt voucherand material issue voucher.13.Issue After receiving the material and storing, the management keeps theinformation whether these material are being issued to desireddestination. Full record of every issuing of material is kept for the properinventory control.14.Accounting The record of every transaction regarding the use of material inevery department is kept. These records give the overall view of how andwhere inventories have been used.Projectsformba.blogspot.com 51
    • Projectsformba.blogspot.comMethods Used For Inventory Control In BHEL, planning and control of inventory is done by using twomethods — (i) ABC analysis (ii) Slow moving and non-moving goods analysis. (iii)Budgeting material requirements (iv)Fixation of raw material levels (v) Variety reduction (vi)Codification of materials (vii)Control of work in progress(i) ABC Analysis In case of manufacturing company like BHEL, the number of items ofraw material run into thousands. From the point of view of monitoringinformation for control, it becomes extremely difficult to consider each oneof these items. In this case ABC analysis becomes useful and enables management toconcentrate attention and keeps a close watch on a relatively less numberof items, which account for a high percentage of annual usage value of allitems of inventory. Annual usage value = Annual requirement per unit cost In this analysis, items are categorized into A, B, & C category on the basisof their usage value. The more costly items are classified as ‘A’. Thisrepresents large investments items but is low in number. In BHEL ‘A’Projectsformba.blogspot.com 52
    • Projectsformba.blogspot.comcategory items amounts to 60% of investment in inventory items.Inventory items of average usage are put in B category and these accountsfor 30% of total investment in inventory. Low usage items are pull in Ccategory. It represents 10% of degree of control and accurate planning. Bcategory requires moderate control. As ‘C’ category represents low usagevalue, much importance is to pay on its control. Also the planning andcontrol cost incurred for this category will be greater than their total cost. The advantages of this system are — • Ensures closer control on costly items. • Helps in developing scientific methods of controlling inventories. Clerical costs are reduced and stock is maintained at minimum level. • Helps in achieving the main objective of inventory control at minimum level.(ii) Slow moving and Non-moving goods analysis It is advantageous to compare the turnover of different grades andkinds of materials as a means of detecting stock which does not moveregularly, thus enabling management to avoid keeping capital locked up inundesirable stock. Stock turnover helps in analyzing such items. Cost of material consumed during period Stock turnover = -------------------------------------------------------------- Average stock of raw material during periodStock turnover figures the presence of slow moving stock and helps inkeeping the level of such stock to a low mark.Projectsformba.blogspot.com 53
    • Projectsformba.blogspot.comSlow Moving Stock – Material which have low turnover are classified asslow moving stock. In BHEL, Jhansi an item is regarded as slow moving one,if turnover ratio is less than 10%.Non-Moving Stocks-- These items have no immediate demand but may berequired in future. Here the items, which are not consumed since twoyears, are regarded as non-moving stock or dead inventory. This categoryincludes mainly directly chargeable items. These items having turnover ratio of 10% or more are fast movingitems and such acquire more importance.Documents Used For Inventory Control The various documents used for control of inventory are discussedbelow(i) Store Receipt Voucher This is issued when raw material purchased reaches the store. It isissued by store in charge.(ii) Material Issued Voucher This is an authorization to the storekeeper to issue raw material. Anymaterial ordered for a specific work order will be recorded on MIV detailsof material requisition is entered on the Bin card.(iii)Material Return Note This is an authorization to the storekeeper regarding raw material,finished parts or other stores no longer required by the factory. Thevarious stock records and cost accounts are adjusted in due course fromthe details given on the form.Projectsformba.blogspot.com 54
    • Projectsformba.blogspot.com(iv) Material Transfer Note This is issued when the material booked to one particular order istransferred to another work order.(v) Material is kept in appropriate bin and draws. For each kind of materiala bin card is maintained showing details. A bin card assists the storekeeperto control the stock. The bin card incorporates all information viz. openingbalance of materials, materials ordered, materials allocated and closingbalance of materials. As a result the bin card shows the full cycle ofmaterial like the order of few supplies, allocation of material to jobs,receipt and issued of material, stock in hand and balance available.Projectsformba.blogspot.com 55
    • Projectsformba.blogspot.com ANALYSIS OF WORKING CAPITAL The analysis working capital is primarily a test of short termsolvency. There are dangers in having too little and too much workingcapital.Therefore The financial manager has to be very vigilant all throughout aboutthe trends in the items that make working capital. The questions to be studied and answered in connection with theanalysis of working capital including the following –(i) Is the management utilizing working capital efficiently?(ii) Is the amount of working capital is adequate, excessive and insufficient?(iii) Does the firm have the favorable credit rating?(iv) Is the current financial position improving?Objective of Analysis(i) To maintain adequate working capital at every time.(ii) To minimize the cost of short term finance.(iii) To plant the various sources of short term finance well in advance in case of the need.(iv) TO study the trends in the working capital positions.Projectsformba.blogspot.com 56
    • Projectsformba.blogspot.com(v) To assess the effectiveness of management of current assets.(vi) To maximize the return on investment of equity shareholders. Inventory Valuation: -(i) Inventory is valued at actual/estimated cost or net realizable value, whichever is less.(ii) Finished goods in plant and work in progress involving hydro and thermal sets including gas based power plants, boilers auxiliaries, compressors and industrial turbo sets are valued at actual/estimated factory cost or at 97.5% of the realizable value whichever is lower.(iii) In respect of valuation of finished goods in plant and work in progress, cost means factory cost, actual/estimated factory cost includes excise duty payable on manufactured goods.(iv) In respect of raw material, components, loose tools, stores and spares cost means weighted average cost.(v) The components and other material purchased/manufactured against production order but declared surplus are charged off to revenue retaining residual value based on technical estimates.Projectsformba.blogspot.com 57
    • Projectsformba.blogspot.com BHEL AT A GLANCE Rupees(inmillions) 2006-07 2007-08 CHANGE(%)Turnover 18739 21401 14.2Value added 7182 8323 15.9Employee (Nos.) 42124 43636 3.6Profit before tax 3736 4430 18.6Profit after tax 2415 2859 18.4Dividend 600 746 24.4Dividend Tax 93 127 26.8Retained earnings 1722 1986 15.3Total assets 22280 29352 31.7Net worth 8788 10774 22.6Total Borrowings 89 95 6.3Debt: Equity 0.01 0.01 0.0Per share (In Rupees.):-Net worth 179.5 220.1 22.6-Earnings 49.3 58.4 15.4-Dividend (US $ in million)Turnover 4344 5419 24.8Profit Before Tax 866 1122 29.5Profit After Tax 560 724 29.3Projectsformba.blogspot.com 58