An Analysis of Working Capital Management at BHEL


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An Analysis of Working Capital Management at BHEL

  1. 1. Executive Summary ................................................................................................. 3 CHAPTER 1 ............................................................................................................... 5 INDUSTRY AND COMPANY OVERVIEW................................................................. 5 Chapter 1................................................................................................................... 6 The Industry and Company Overview .................................................................... 6 Industry Overview: ................................................................................................ 6 Global Scenario..................................................................................................... 7 Indian Scenario ..................................................................................................... 9 Company Overview ............................................................................................. 11 Main manufacturing facilities............................................................................. 14 Products: ............................................................................................................. 14 SWOT Analysis ................................................................................................... 18 Key Players in the Market................................................................................... 20 Chapter 2................................................................................................................. 21 INTRODUCTION TO THE PROJECT ...................................................................... 21 INTRODUCTION TO THE PROJECT ...................................................................... 22 Statement of Problem ......................................................................................... 22 Background of the research topic: .................................................................... 22 Review of literature in the Area of Study .......................................................... 23 Working Capital Financing at BHEL-EDN: ........................................................ 24 Working Capital Management Practices: .......................................................... 28 CHAPTER-3 ............................................................................................................. 31 DESIGN OF THE STUDY ........................................................................................ 31 Objectives of the study ...................................................................................... 32 OPERATIONAL DEFINITIONS OF THE CONCEPTS IN THE AREA OF STUDY: .............................................................................................................................. 32 RESEARCH METHODOLOGY ............................................................................ 42 Scope of the study: ............................................................................................. 42 Research Design ................................................................................................. 42 Plan of Analysis .................................................................................................. 43 Limitation of the Study ....................................................................................... 44 Chapter 4................................................................................................................. 45
  2. 2. Analysis and Interpretation ................................................................................... 45 Analysis and Interpretation ................................................................................... 46 WORKING CAPITAL MANAGEMENT ................................................................. 47 Trend Analysis .................................................................................................... 64 CHAPTER 5 ............................................................................................................. 66 FINDINGS AND SUGGESTIONS ............................................................................ 66 FINDINGS:............................................................................................................ 67 Suggestions ........................................................................................................ 68 Conclusion: ......................................................................................................... 69 Annexure................................................................................................................. 70
  3. 3. Executive Summary In a perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of production would not vary with the quantity produced. Borrowing and lending rates shall be same. Capital, labour and product market shall be perfectly competitive and would reflect all available information, thus in such an environment, there would be no advantage for investing in short term assets. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed, there are spreads between the borrowings and lending rates for investments and financing of equal risks. Similarly each organization is faced with its own limits on the production capacity and technologies it can employ. There are fixed as well as variable costs associated with production of goods. In other words, the markets in which real firm operated are not perfectly competitive. These real world circumstances introduce problem’s which require the necessity of maintaining working capital. For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial input in future at reasonable price. This may necessitate the holding of inventory. Similarly an organization may be faced with an uncertainty regarding the level of its future cash flows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of reserve of short term marketable securities, again a short term capital asset. In the management of working capital the time factor is not a crucial decision if the size of such assets is large, the liquidity position would improve, but profitability would be adversely affected because of idle funds. Conversely, if the holdings of such assets are relatively small, the overall profitability will increase, but it adversely affected on the liquidity position and makes the firm more risky. So the working capital management should aim at striking a balance such that there is an optimum amount of short term assets. The project explains in detail the concepts of working capital management which serves as a platform for the study conducted. Various ratios have been taken out on
  4. 4. the basis of the data so as to find out the trends of components of working capital at BHEL EDN. This analysis studies the different techniques used by BHEL to manage THEIR Working Capital and the effectiveness of these. A company like BHEL is expected to have a good management of its Working Capital. Working Capital of a company is the difference between its current assets and the current liabilities. It includes the company’s debtors, bank/cash, creditors, inventory, outstanding and other miscellaneous expenses. Each of these needs to be managed separately so as to have a control over the liquidity of business. Management of Working Capital includes various sub-components at the operational level of the company which directly affect the level of Working Capital. These include study of Letter of Credit, Bill Discounting, Factoring through Receivable Purchases, Channel Financing, and Overdraft management. Proper Working Capital Management depends on how well these sub-components are handled. The company needs to overcome the shortcomings in this respect.
  6. 6. Chapter 1 The Industry and Company Overview Industry Overview: The Electrical Equipment Industry consists of companies that make a range of products for a diverse customer base. This sector is fragmented, but there are a few members that lay claim to a sizable portion of sales. Products include electrical motors, commercial and industrial lighting fixtures, heating, ventilation and air conditioning systems and components, and, among others, electrical power equipment, Operating structures involve high fixed costs. Too, copper, aluminium and steel are essential raw materials used in the manufacture of products. The industry spans all corners of the world, and it is subject to the influence of the macroeconomic cycle. Equipment companies primarily serve the mature markets of North America and Europe, but they have found growth venues in the emerging world. Expansive global coverage helps to smooth the effects of the broader business cycle. Capable management is required to oversee long distribution networks and far flung operations. In recent years, companies have established more overseas brick-andmortar facilities, which have allowed them to better serve local markets economically and limit the negative impact of foreign currency exchange. Emerging nations have provided an impetus for growth and low-cost labour, production and land. The electrical equipment manufacturing companies manufacture the range of products required, that is mostly used in almost 90 % of world’s power and energy sector. The products range from circuits to control equipments to power generating volts and other small and medium components, which are directly used in nuclear power plants as well as electrical appliances.
  7. 7. Global Scenario The global competition in this sector is very tough and India is currently a marginal player in the global context. India’s exports do not even constitute 1% of global exports of electrical equipment. Most Indian manufacturers have not focussed on developing a long term strategy for exporting their products. The domestic industry has doubled, or even tripled in some cases, its capacities over last 7-8 years in anticipation of the huge demand arising out of government’s plan for adding substantial capacities in electricity generation, transmission and distribution sectors. The industry now has a diversified, mature and strong manufacturing base, with robust supply chain, fully equipped to meet domestic demand / capacity addition; but in absence of the anticipated demand the industry is suffering from over capacity leading to cut-throat competition in domestic market. Therefore, exports should be looked at seriously by Indian companies as a significant opportunity for growth. Indian products have a rugged performance design to meet the nation’s tough network demand. Technology wise also, Indian products can compete globally. But, where we lose out in the global market broadly is on the price front, especially vis-àvis China. Chinese products in many segments of this sector enjoy significant price advantage because of the export subsidies extended by their government to their manufacturers. Additionally, the Chinese Government also provides very soft long term loans and aid to many countries to buy Chinese products. Also, China has entered into several free trade agreements with different countries across the globe on account of which Chinese products enjoy duty free or preferential access in these countries. But, the Indian electrical equipment industry is also witnessing an emerging global reputation for sourcing of base products and components and is slowly but surely establishing a global footprint by building Brand India. The global electrical equipment market includes the global electrical components and equipment market, and the global heavy electrical equipment market. The global electrical components and equipment market is deemed to be the revenues accruing to companies from the sale of electric power cables and wires and electrical switchgear. The market does not include electronic components or equipment classified in the heavy electrical equipment sub-industry. The global heavy electrical equipment market is deemed to be the revenues accrued by manufacturers from the production of power-generating equipment and other heavy electrical equipment,
  8. 8. including power turbines, heavy electrical machinery intended for fixed-use and large electrical systems. Any currency conversions used in this report are at constant 2011 annual average exchange rate. The global electrical equipment market grew by 4.4% in 2011 to reach a value of $202.0 billion, representing a compound annual growth rate of 1.1% for the period spanning 2007-2011.Power Cables sales proved the most lucrative for the global electrical equipment market in 2011, with total revenues of $62.6 billion, equivalent to 31% of the market's overall value. The performance of the market is forecast to accelerate, with an anticipated CAGR of 4.7% for the five-year period 2011 - 2016, which is expected to drive the market to a value of $254.7 billion by the end of 2016
  9. 9. Indian Scenario Indian Electrical Equipment Manufacturing industry has been growing over the years. India was ranked among top 10 manufacturing industry by US. The Indian market this year has experienced a fall of 11 % revenue this is due to the Mirroring problems in the power sector. The industry saw a 10.5% fall during the quarter ending December 2012 compared to the corresponding period of FY12. Though almost all sub-sectors decelerated during the third quarter, only transformers and capacitors were able to arrest their declining trend to some extent. Power cable and energy meter sectors were hit the most during Q3 FY13. The situation of the T&D sector is turning extremely grim and the Government needs to tackle the situation on a war-footing, failing which it will become difficult for many players to survive in the business. The industry is reeling under the twin onslaught of the slowdown in the country’s power sector, which has depressed domestic demand, and the rapidly escalating imports of electrical equipment. Both of which have resulted in gross under-utilisation of the manufacturing capacity for electrical equipment in the country. The delays in project and order finalisation due to precarious financial health of state distribution utilities, coupled with uncertainty and credit crunch and high borrowing costs for private sector buyers, has led to this grim situation. The cash flow position of equipment manufacturers is under tremendous pressure as it is facing underutilization of capacities. Indian electrical equipment manufacturing industry is facing a huge threat from the new entrants in the market. These competitors are basically emerged in Middle East and had occupied all over Asia and global markets. These competitors are giving the cut throat competition to the Indian manufacturers. They are technologically advanced and are successful in grabbing the orders from different countries. Indian government itself is one among such customers to the Competitors. The Government of India usually gives orders to Indian PSU’s for equipments used in Defence, Shipping, Nuclear power plants and other core sector of the country i.e. transmission and renewable energy . Nowadays Government is ignoring the Indian Electrical Equipment Manufacturers, the main reason could be the lack of funds and
  10. 10. the new entrants can manufacture the same equipments for much cheaper costs in less time. The country may face a huge set back because of one such mistake by the Government. Due to the Sluggish demand and higher imports it has resulted in the electrical equipment industry registering a negative growth of 8 per cent in FY13 The negative growth of this magnitude has been witnessed for the first time in the last 10 years. In FY12, the industry registered a growth of 6.6 per cent and was facing massive project execution delays, mostly by the state-run transmission and distribution companies and an unprecedented credit squeeze due to economic slowdown. The electrical equipment manufacturing industry requires the focused attention of the government to protect our interests by providing us a level playing field that would equip the industry to fight imports. Slackening demand in the power sector, continuous rise in imports of electrical equipment, especially in China and South Korea and an absence of a level playing field is threatening the existence of the Indian players.
  11. 11. Company Overview Bharat Heavy Electricals Limited (BHEL) is an Indian state-owned integrated power plant equipment manufacturer and operates as engineering and manufacturing company based in New Delhi, India. BHEL was established in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.It is one of the only 7 mega Public Sector Undertakings (PSUs) of India clubbed under the esteemed 'Maharatna' status. On 1 February 2013, the Government of India granted Maharatna status to Bharat Heavy Electricals Limited. It is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional offices, eight service centres, eight overseas offices and 15 regional centres and currently operates at more than 150 project sites across India and abroad. Most of its manufacturing units and other entities have been accredited to Quality Management Systems (ISO 9001:2008), Environmental Management Systems (ISO 14001:2004) and Occupational Health & Safety Management Systems (OHSAS 18001:2007). It is the 7th largest power equipment manufacturer in the world. In the year 2011, it was ranked ninth most innovative company in the world by US business magazine Forbes. BHEL is the only Indian Engineering company on the list, which contains online retail firm Amazon at the second position with Apple and Google at fifth and seventh positions, respectively. It is also placed at 4th place in Forbes Asia's Fabulous 50 List of 2010. BHEL has a share of 59% in India’s total installed generating capacity contributing 69% (approx.) to the total power generated from utility sets (excluding nonconventional capacity) as of March 31, 2012. The company has been exporting its power and industry segment products and services for over 40 years. BHEL’s global references are spread across 75 countries. The cumulative overseas installed capacity of BHEL manufactured power plants exceeds 9,000 MW across 21
  12. 12. countries including Malaysia, Oman, Iraq, the UAE, Bhutan, Egypt and New Zealand. Its physical exports range from turnkey projects to after sales services. The company's Corporate R&D division at Hyderabad leads BHEL's research efforts in a number of areas of importance to its product range. Research and Product Development (RPD) centres at all its manufacturing divisions play a complementary role. BHEL has introduced, in the recent past, several state of the art products. Commercialisation of products and systems developed by way of in-house Research and Development contributed Rs.95, 120 Million corresponding to around 19.3% of the company's total turnover in 2011-12. In 2011-12, BHEL filed 351 patents and copyrights, enhancing the company's intellectual capital to 1,786 patents and copyrights filed, which are in productive use in the company's business. The company established four new Centres of Excellence, taking the total tally to 13. Significantly, BHEL is one of the only four Indian companies and the only Indian Public Sector Enterprise figuring in 'The Global Innovation 1000' of Booz & Co., a list of 1,000 publicly traded companies which are the biggest spenders on R&D in the world. The company boasts of a dedicated team of highly skilled and committed workforce of 49,390 employees. BHEL works along a pre-determined CSR Scheme and its Mission Statement on CSR is "Be a Committed Corporate Citizen, alive towards its Corporate Social Responsibility". BHEL's contributions towards Corporate Social Responsibility till date include adoption of villages, free medical camps/charitable dispensaries, schools for the underprivileged and handicapped children, ban on child labour, disaster/natural calamity aid, employment for the differently able, widow resettlement, employment for ex-serviceman, irrigation using treated sewage, pollution checking camps, plantation of millions of trees, energy saving and conservation of natural resources through environmental management. As part of social commitment, BHEL provides financial assistance to various NGOs/Trusts/Social Welfare Societies that are engaged in social welfare activities throughout the country. 56 villages having nearly 80,000 inhabitants have been adopted. In June 2012, BHEL commissioned 250 MW power generating unit at Harduaganj in Uttar Pradesh. This would add six million units of electricity on a daily basis.
  13. 13. Vision: A World-class engineering enterprise committed to enhancing stakeholder value. Mission: To be an multinational Engineering Enterprise providing Total business solutions through quality products, systems and services in the fields of Energy, Transportation, Industry, infrastructure and other potential areas. Values:  Meeting communications made to external and internal customers.  Faster learning, creativity and speed of response.  Respect for dignity and potential of individuals.  Loyalty and pride in the company.  Zeal to Excel.  Integrity and fairness in all matters. Major Achievements of BHEL Acquired certifications for Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001). BHEL becomes the first PSU to win the CII-Exim Business Excellence Prize. Installed equipment for over 90,000 MW of power generation. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminium, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 km Railway network. Supplied over one million Valves to Power Plants and other Industries. Space panels supplied for ISRO. Supply of defence products.
  14. 14. Main manufacturing facilities Bhopal (Madhya Pradesh) Ranipur, Haridwar (Uttarakhand) Hyderabad (Andhra Pradesh) Jhansi (Uttar Pradesh) Tiruchirapalli(Tamil Nadu) Ranipet (Tamil Nadu) Bangalore (Karnataka) Jagdishpur (Uttar Pradesh) Goindwal (Punjab) Bharat Heavy Plates and Vessels Limited (Vizag) ASSCP Gurgaon. Besides these manufacturing units there are four power sectors which undertake EPC contract from various customers. The Research and Development arm of BHEL is situated in Hyderabad and two repair shops are at HERP (Heavy Equipment Repair Plant), Varanasi and EMRP (Electric machines repair plant) Mumbai. Products: Steam turbine Gas turbine Steam Generators HRSG- Heat recovery steam generator Locomotives Circuit Breakers Pumps Motors Generators ESP - Electrostatic precipitator Pulverisers Oil field equipments Valves Boiler drum
  15. 15. Headers Economizer Water wall panel Super heater Re-heaters Heat exchangers Pressure vessels Armed recovery vehicle Wind mill Fan (mechanical) Super rapid gun mount Non-conventional energy – Solar Hydro Turbine Besides manufacturing these products, BHEL also takes up the onsite erection, commissioning and testing of these equipments. BHEL EDN (Bangalore) BHEL Electronics Division (EDN) along with Electronic Systems Division situated in Bangalore is a leading supplier of new Generation Power Plant Automation and Control Systems. The Electronics Division has also emerged as a leading player in the field of power transmission and distribution, industry, transportation and nonconventional energy sources. The state of the art equipment and systems manufactured, meet the demanding requirements of both the national and International markets in terms of technical specification and quality. The Division has established references both in India and overseas by successful installation of Power Plant Automation and Photovoltaic systems. Besides providing unified solutions for various control system applications, the Division proudly holds the largest market share for Power Plant Automation systems in India.
  16. 16. Their Presence Power Plant and Industries: Advanced control & automation equipment and systems for power plants & process industries. Transmission and Distribution: Providing solutions for improving the efficiency, quality of power and system stability. Transportation: IGBT based Traction Drive Systems for Locomotives. Defence: Simulation systems and Controls for Naval Ships Non-Conventional Energy: Photovoltaic Cells, Modules, MW size Power Plants, Space Grade Solar Panels, Space Batteries and provide system level solutions. Product excellence, commitment to Quality, relentless efforts and unwavering commitment to in-house solutions, along with Technical collaborations with international leaders, strategic investment in new ultra modern facilities and capacity expansion, have been the main factors for the rapid growth of the Division. Certifications ISO 9001: Quality systems and procedures ISO 14001: Environment Management System Certification OHSAS 18001: Occupational Health and Safety Assessment Series. ISO 27001: Information Security Management System( ISMS) Standard. BHEL EDN has the technical expertise to meet the stringent requirement of overseas market and has successfully installed equipment meeting international standards, in more than 40 countries across the globe.
  17. 17. THE Products manufactured at BHEL EDN includes 1. Automation and Control Systems Steam Generator Steam Turbine Controls Boiler Feed Pump Drive Turbine Control Station Control and Instrumentation / DCS Offsite/ off base Controls/ Balance of plant Controls Hydro Power Plant Control System. Gas Turbine Control System Nuclear Power Plant Turbine & Secondary Cycle Control System. 2. Power Electronics Systems Excitation System AC Drive System Static Starters Induction Heating Equipment 3. Transmission System Controls 4. Traction Drive Systems 5. Power Semiconductor Devices 6. Solar Photovoltaic 7. Defence Electronics. 8. Software System Solutions.
  18. 18. SWOT Analysis STRENGTHS: PSU, Brand name and well known for its Quality. Well established units and skilled labour force. Its innovation and integrity. International certifications The only company recognized in international market, with Apple and Google. It is well known for its Quality and assurance High operational efficiency. All the units are controlled by the Head Office A 0 debt company. WEAKNESSES: It is well known for its quality because of which the cost involved in manufacturing goods are high, resulting in high pricing of goods. As it is ISO certified organization, it has to strictly adhere to the rules and regulation laid by the parliament PSU, President is Supreme, his actions are final.
  19. 19. OPPORTUNITIES: Global demand is high, its overseas operations has given more opportunities to make their mark. Exposure to new technology gives an opportunity for every individual to learn something new. Innovation is the key for success, the filing of new patents every year makes them unique and explore further. THREATS: New competitors have entered the market. The goods offered by them are much cheaper and they carry most advanced technology Increase is imports of goods by the Government.
  20. 20. Key Players in the Market Larsen & Toubro Limited L&T is an Indian multinational conglomerate with business interests in technology, engineering, construction and manufacturing. It is one of the largest and most respected companies in India's private sector with a turnover of US$ 13.5 billion in 2012. It has a dominant presence in India's infrastructure, power, hydrocarbon, machinery, shipbuilding and railway sectors. In addition to this, L&T continues to grow its global footprint, with offices and manufacturing facilities in multiple countries. Its customers include global majors in over 30 countries. Chart showing the Sales, Market capitalization and Net Profit of Key Players in Electrical Equipment Manufacturing Industry. 100000 90000 80000 70000 60000 Sales 50000 Market capital 40000 Net Profit 30000 20000 10000 0 Larsen BHEL ADANI PORTS SIEMENS From the above chart we can conclude that Bhel stands second in the Market in terms of sales, Net Profit and Market Capitalization.
  22. 22. INTRODUCTION TO THE PROJECT Statement of Problem An Analysis of working capital management is undertaken to understand the policy and practices used in managing short term requirements at BHEL EDN. Because for a manufacturing Industry ,it is very important to manage their Working Capital because, too much or too less Working Capital affects the company drastically, as one process results in another, it is a cycle where if one component is affected it results in changes in another components of working capital. Work In Progress Finished goods Raw Materials Trade debtors Sundry Creditors Cash Background of the research topic: Working capital management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Thus this involves managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. The dynamic business environment demands a framework for an efficient working capital management system in order to be more competitive.
  23. 23. Every business concern aims at having adequate or optimal amount of working capital to run its business operations. Both excess as well as shortage of working capital situations are bad for any business. Too much of working capital means that large sum of money is tied up in accounts receivable and inventory and inadequate working capital can adversely affect the production and business operation, which is more dangerous. Review of literature in the Area of Study Mehmet Sen EDA ORUC 2005 19: In the study “Relationship between the efficiency of working capital management and company size”, As it is known one of the reasons which causes change in working capital from one period to another is the change in management efficiency will affect the change in working capital in increase or decrease from one period to another. In this study the effect of change in management efficiency in working capital management in to the change in working capital is compared by company size and the sector. Dubey 2008: Working capital in a firm generally arises out of four basic factors like sales volume, technological changes, seasonal, cyclical changes and policies of the firm. The strength of the firm is dependent on the working capital but the in fact the working capital itself is dependent on the level of sales volume of the firm. The firm requires current assets to support and maintain operational and functional operations. Thachapilly 2009: “Working capital management manages flow of funds” 2009, describes that Working capital is the cash needed to carry on operations during the cash conversion cycle, i.e. the days from paying for raw materials to collecting cash from customers. Raw materials and operating supplies must be bought and stored to uninterrupted production. Wages, salaries, utility charges and incidentals must be paid for converting the materials into finished goods. Customers should be allowed a credit period that is standard in the business. Only at the end of the cycle does cash flow in again.
  24. 24. Working Capital Financing at BHEL-EDN: BHEL-EDN uses external sources for financing its working capital. External sources: a) Trade credit: The major external source of working capital financing at BHELEDN is trade credit. Approximate 30% of the financing is done using trade credit. This always has been a popular source because the company has always proved it creditworthiness. b) Advances: generally 10% of the order value is taken as advance from the customer which work as good pool of financing working capital. It is used to purchase raw materials and also utilized for other operating expenses. It is to be noted BHEL being a very cash rich company it is not dependent on any kind of bank financing or government assistance for financing of its working capital. The working capital requirement is financed by the corporate office. Analysis of the current policies related to management of individual component of working capital Handling Receivables: Handling receivables can result in a better cash position and liquidity for the firm and is truer in case of big organizations like one under study i.e. BHEL electronics division, who can least afford a slow payment from the debtors, which may have a crippling effect on the business. This has been rightly said that if you don't manage debtors, they will begin to manage your business as the company will gradually lose control due to reduced cash flow and, of course, could experience an increased incidence of bad debt. An analysis of the existing policy of BHEL-EDN related to receivables management reveals some important points that need to be considered for effective management of receivables; these are a) Credit policy:- BHEL- EDN has a liberal credit policy which tend to push turnover and attract more customers. But this is accompanied by higher incidence of bad debt, very large investment in accounts receivable.
  25. 25. b) Credit period: The credit period is 6 months or more. In case of Govt. SEbS and NTPC the credit period has even been years where due to liquidity crunch of this companies it was not possible to recover the amount. Being a PSU BHEL continues to work with these companies even if it has lead a lot current asset to be blocked in Accounts Receivable. c) Cash discount: As the collection is centralized cash discount is also provided by the corporate office to motivate debtors to make prompt payment. But no cash discount is provided by BHEL-EDN since turnkey contracts form major portion of the turnover. d) Collection: BHEL works on the basis of turnkey contracts, so as all units fulfill the required job, no recovery is debt possible, so most of the time BHEL-EDN has to wait a longer period of time to recover the debt. Managing Payables: Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Management of creditors and suppliers is just as important as the management of debtors as it has been pointed out that if you can buy well then you can sell well, but BHEL does not produce standardized products and the vendors are also customer approved. Some of the important points related to creditor’s management are as follows: Purchase of raw material is done using e-tendering and reverse auction basis. The purchasing function is handled separately for the separate plants and divisions of the company. For some of the major items of raw material, company is dependent on a few numbers of the suppliers because of the non availability of the local suppliers of the material. Sometimes purchases happen in anticipation of the demand or order and due to some or the other reasons if the order gets delayed or cancelled, it results in carrying of excess inventory, costing opportunity and carrying cost for the company apart from material purchase cost.
  26. 26. Inventory Management: Managing inventory is a juggling act. On the one hand excessive stocks can place a heavy burden on the cash resources of a business while on the other hand the insufficient stocks can result in lost sales, delays for customers etc. thus the basic challenge is to determine the optimum stock level. Estimation: The requirement of raw material is estimated on the basis of each order, so the estimation is more order specific than time specific. Estimation is also done for any anticipated order and inventory is acquired if there is a chance of hike in the material price. Acquisition: Inventory is acquired using e-tendering or reverse acquisition method to get the best available price. In several occasion the price is fixed with the supplier but the order is received on a later date which helps to reduce the carrying cost. Inventory management technique: The inventory management technique used here is FSND where the stocks are segregated on the basis of their movement speed. Inventory Valuation: The valuation of inventory holds a very important part of inventory management. Inventory is valued at actual/estimated cost or net realizable value whichever is lower Finished goods in Plant and WIP involving hydro and thermal sets including gas based power plants, boilers; boiler auxiliaries, compressor and industrial turbo set are valued at actual/estimated factory cost or 97.5% of the realizable value, whichever is lower. The raw materials, components, loose tools, stores and spares are issued at weighted average cost. The components and other materials purchased/ manufactured against production orders but declared surplus are charged off to revenue residual value based on technical assessment.
  27. 27. Levels of inventory – Minimum, maximum, re-ordering level-MOQ levels of suppliers force hoarding of inventory.-customer approved vendors. Bunching of requirements for raw material amongst bhel units- non customized orders. Sourcing from sister units helps in better utilization, better costs, and better delivery. Development of ancillaries In – house development and commercialization Cash Management: Cash the most liquid asset, is of vital importance to the daily operation of business operations Even though the proportion of cash help in BHEL-EDN is approximately.005%, its efficient management is crucial Budgeting: There are two types of budgeting or forecasting is done, both short term and long term forecasting. The long term forecasting is done for period ranging from 1 to 3 years but short term forecasting is done on monthly, weekly and daily basis. The daily forecasting is sent to the corporate office and the corporate office finances the requirement on daily basis. So every day the work starts with a zero balance in hand. The daily forecasting deals with day to day operational requirement but requirement for any capital expenditure has to be sanctioned by the corporate office.
  28. 28. Method of forecasting: The daily expenditures are taken into consideration for cash forecasting. As for examples: Particulars Period 1. Materials -------- 2. Payment of accounts payable(if any) --------- 3. Miscellaneous cash purchase --------- 4. Employee remuneration ---------- 5.Manufacturing Expenses ---------- 6.General, Administrative and selling --------- expenses 7.Tax --------- Total --------- Cash collection: Cash collection from debtors is done mostly at the head office and it is allocated, but in several occasion the amount is also collected at BHEL-EDN. Working Capital Management Practices: Debtors: The main business is in power sector. Orders are obtained by the Head quarters and distributed to the units. Units manufacture and supplies to the customer. Billing is done by the units/head quarters based on the agreement between the customer and unit like advances, payable on dispatches, payable against material receipt at site, against commissioning etc. Normally advances, and commissioning are done by the head quarters for the project as a whole and for the others it is the units responsibility to bill and collect the same.
  29. 29. Cash management: The cash is maintained centrally. All the deposits are accumulated and transferred to the Corporate Office and the end of the day. Hence there is no opening or closing of Balance in the units. In the same was funds are allocated to the units based on requirements and only memorandum accounts are maintained. The Cheques issued are debited to the Corp Bank at the end of the day. By this the cash operations are fully controlled by the corporate office and outflow is controlled by allocation to the needs. All the payments except very few are through NEFT/RTGS only. Inventory management: The unit is in ERP (SAP) system. Production orders are floated for manufacturing. This in turn triggers the MRP and the requirements are consolidated and indents are generated taking into account the stock, POs placed etc. The Purchase orders are placed with staggered delivery so that the inventory is kept the minimum. All the purchased are backed by orders and as per the internal system, no procurement can be made without the customer order. Non-moving and slow moving stocks are analyzed and action has been taken to liquidate them. Inventory can be classified as Raw Materials : Raw materials are procured by the Materials Management Department , basically, the MM dept has been classified into two groups Indigenous and imports, Indigenous group is engaged in procurement of raw materials through local suppliers and import group buys raw materials from international suppliers. BHEL’S imports 45% raw materials and 55 % are from local suppliers. Work- in- progress: WIP is a long cycle activity were in the goods are held, the Company’s projects are for long term and so does the goods held in WIP . Finished Goods: Finished goods are delivered to the customer on time, incase if they complete the project before the time, it will be stored in the warehouse and shown as sales in the balance sheet.
  30. 30. Sundry Creditors: Once the goods are accepted by the stores after Quality inspection, sundry creditors are generated and they are linked with the vendor invoices and queues for payment. Payments are made as per the due date and as per the queue except for MSME vendors.
  32. 32. Objectives of the study The study is conducted with reference to BHEL [EDN]. The main objective of the study is to have an idea of the practical application of the working capital management whose theoretical aspect is known.  To determine the managerial aspects of working capital in BHEL-EDN.  To understand how efficiently the working capital is being managed in BHELEDN.  To understand the short-term solvency as well as the effectiveness of working capital in the operation of business.  To study the policies and the procedures adopted by BHEL-EDN for managing the various components of working capital.  To comprehensively evaluate the inventory, receivables, creditors and cash Management performances.  To undertake a study of the various sources of working capital financing, employed by BHEL-EDN.  To suggest on the basis of findings, improvements in the management of working capital, at BHEL-EDN. OPERATIONAL DEFINITIONS OF THE CONCEPTS IN THE AREA OF STUDY: Definitions: According to Western and Brigham, “Working capital refers to a firm’s investment in short term assets- cash, short term securities, accounts receivables and inventories”. According to Hoagland, “working capital is descriptive of that capital which is not fixed. But the more common use of the working capital is to consider it as the difference between the book value of the current assets and the current liability.
  33. 33. Types of Working capital TYPES OF WORKING CAPITAL ON THE BASIS OF CONCEPT GROSS WORKING CAPITAL NET WORKING CAPITAL ON THE BASIS OF TIME PERMANENT WORKING CAPITAL TEMPORARY WORKING CAPITAL REGULAR WORKING CAPITAL SEASONAL WORKING CAPITAL RESERVE WORKING CAPITAL SPECIFIC WORKING CAPITAL There are two concepts that are currently accepted about working capital. They are a) Gross working capital concept=Total of current assets b) Net working capital concept=Excess of current assets over current liabilities Gross working capital concept: This thought says that total investment in current assets is the working capital of the company. This concept does not consider current liabilities at all. Reasons given for the concept is 1) When we consider fixed capital as the amount invested in fixed assets. Then the amount invested in current assets should be considered as working capital.
  34. 34. 2) Current asset whatever may be the sources of acquisition, are used in activities related to day to day operations and their forms keep on changing. Therefore they should be considered as working capital. Net working capital It is narrow concept of working capital and according to this, the excess of current assets over current liabilities is called as working capital. This concept lays emphasis on qualitative aspect, which indicates the liquidity position of the concern/enterprise. The reasons for the net working capital method are: 1) THE material thing in the long fun is the surplus of current assets over current liability 2) Financial health can easily be judged by with this concept particularly from the view point of creditors and investors. 3) Excess of current assets over current liabilities represents’ the amount which is not liable to be returned and which can be relied upon to meet any contingency. 4) Intercompany comparison of financial position may be correctly done particularly when both the companies have the same amount of current assets. Components of Working Capital: Current Assets Current Liabilities Cash in hand/bank Bank overdraft Bills receivable Bills Payable Sundry Debtors Sundry Creditors Prepaid expenses Outstanding Expenses Short term investment Advance Taken Inventory Accrued Income
  35. 35. 2. On the basis of Time: On the basis of Time the working capital may be divided in to A) Permanent or Fixed working capital B) Variable or Temporary working capital (A) Permanent or Fixed Working Capital: It represents that part of capital which is permanently locked up in the current assets and carrying out business smoothly. It is permanent in nature and will increase as the size of business expands. In other words current assets required on a continuing basis over the entire year are permanent working capital. Permanent working capital can be further divided into: a) Regular Working Capital b) Reserve Working Capital a)Regular Working Capital: It is the minimum amount of liquid capital needed to keep up the circulation of the capital form cash to inventories to receivables and again to cash. This would include sufficient minimum bank balance to discount all bills, maintain adequate supply of raw materials etc... b) Reserve Working Capital: It is the excess over the needs or regular working capital that should be kept in reserve for contingencies that may arise at any time these contingencies include rising prices business depression strikes special operations such as experiments with new products.
  36. 36. (B)Variable or Temporary Working Capital: Variable Working Capital changes with the increase or decrease in the volume of business. It may be sub-divided into. 1. Seasonal Working Capital 2. Special Working Capital The working capital required to meet the seasonal needs of the industry is known as seasonal working capital. Special working capital is that part of the variable working capital with is required to finance the special operations such as extensive marketing campaigns experiments with the products or methods of production carry of special job etc. Determinants of working capital: 1. Nature and Size of Business 11. Cash requirements 2. Manufacturing cycle 12. Time 3. Business fluctuation 13. Volume of sales 4. Production policy 14. Terms of purchases and sales 5. Firm’s credit policy 15. Inventory turnover 6. Availability credit 16. Inflation 7. Growth of expansion 17. Seasonal fluctuations 8. Profit margin and profit 18. Re payment ability appropriation 9. Price level Changes 10. Operating of efficiency 19. Actives of firm 20. Demand of creditors
  38. 38. Working Capital Management:Working capital management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Thus this involves managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Why Working Capital Management? The dynamic business environment demands a framework for an efficient working capital management system in order to be more competitive. Every business concern aims at having adequate or optimal amount of working capital to run its business operations. Both excess as well as shortage of working capital situations are bad for any business. Too much of working capital means that large sum of money is tied up in accounts receivable and inventory and inadequate working capital can adversely affect the production and business operation, which is more dangerous. Thus the working capital management is required to maintain an optimal working capital with a proper risk and return trade off. This principle is based on the following assumptions: 1. There is direct relationship between risk and profitability -- Higher is the risk, higher is the profitability, while lower is the risk, lower is the profitability. 2. Current assets are less profitable than fixed assets. 3. Short-term funds are less expensive than long-term funds. Working capital meets the short term financial requirement of a business enterprise and ensures flow of fund in the business which is very necessary to maintain business same as the circulation of blood in human body. Poor financial planning or working capital management on the part of any company can lead to the business failure. An active working capital management is an extremely effective way to increase enterprise value by continuously improving cash flow, reducing inventory & resulting capital costs, without sacrificing the business of the company.
  39. 39. Now need is for an integrated roadmap to better working capital management- one that shortens the cash conversion cycle and minimizes capital lockup, which can help the organization to face any favourable and unfavourable economic situation. A successful business functions like an olive tree. Olive trees are remarkable for their survival skills. Deeply rooted in Greek history, their branches crowned the heads of the first Olympic champions. Their longevity is a case study in adaptabilitythey require little water and easily uprooted and replanted. Like the olive tree, a business must weather the elements of any economic climate. Companies must adjust to macro business factors- economic activity, interest rates, stock market valuations, and regulatory changes- over which they have little control. Working capital performance is fundamental to a company’s ability to adapt in a challenging economy, because it is both independent of macroeconomic factors and firmly within an organization’s control. Reducing working capital fuels success by enhancing economic value added, regardless of environmental changes. Thus working capital optimization is a vital component of corporate strategy. Active working capital management is an extremely effective way to increase enterprise value. Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs. In an average company, decreasing working capital by 30% leads to approx. 16% increase in after-tax returns on invested capital. A reduction of time span during which capital is tied up releases liquidity, has a direct impact on the company’s financial position. However return on capital will also increase, balance sheet structures will get optimized and company financial will get improved Dimensions of Working Capital Management-: 1. Estimating Investment in Working Capital 2. Financing of Working Capital 3. Managing Profitability, Risk & Liquidity
  40. 40. Techniques used to forecast the working capital requirement: There are basically 3 approaches used to forecast the working capital requirement. 1. Estimation of components of working capital method. This method is based on the basic definition of working capital, excess of current assets over the current liabilities. In other worked the amount of different constituent of the working capital such as debtors, cash inventories, creditors etc are estimated separately and the total amount of working capital requirement is worked out accordingly. 2. Percent sales method This is the most simple and widely used method in combination with other scientific methods. According to this method a ratio is determined for estimating the future working capital requirement. This is generally based on the past experience of management as the ratio varies from industry to industry. For example if the past experience shows that the amount of working capital has been 20% of sales and projected amount of sales for the next year is Rs. 10 lakhs, the required amount of working capital shall be Rs. 2 lakhs. As seen from above the above method is merely an estimation based on past experience. Their fore a lot depends on the efficiency of decision maker, which may not be correct in all circumstances. This method assumes a linear relationship of working capital and sales, however the relationship can also be curvilinear. 3. Operating cycle approach The need of working capital arises mainly because of them gap between the production of goods and their actual realization after sales. This gap is technically referred as the “operating cycle” or the “cash cycle” of the business. If it were possible to complete the entire job instantaneously, there would be no need for current asset (working capital). Since it is not possible, every business organization is forced to have current asset and hence operating cycle.
  41. 41. Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management. Operating cycle: Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term. Operating cycle takes into consideration the following elements: Accounts Payable, Cash, Accounts Receivables, and Inventory Replacement. The following formula is used for calculating operating cycle Operating cycle = age of inventory + collection period Cash cycle: It is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle. Cash cycle is implemented in the financial assessment of a commercial enterprise. The more the figure is increased, the higher is the period for which the cash of a commercial entity is engaged in commercial activities and is inaccessible for other functions, for instance investments. The cash cycle is interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input. The fundamental formula that is applied for the calculation of cash conversion cycle is as follows: Cash cycle = (Average Stockholding Period) + (Average Receivables Period) –
  42. 42. (Average Payables Period) or Operating cycle – Average Payable Period Here Average Receivables Period (in days) = Accounts Receivable/Average Daily Average Stockholding Period (in days) = Closing Stock/Average Daily Average Payable Period (in days) = Accounts Payable/Average Daily Credit Purchases A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. Instances of such business entities are commonly those companies, which apply JIT or Just in Time techniques, for example Dell, as well as commercial enterprises, which purchase on terms and conditions of longer duration credits and perform sales against cash, for instance Tesco. The more the manufacturing procedure is extended, the higher the amount of cash should be kept engaged in inventories by the company. Likewise, the more time is taken for the clients for the purpose of bill payment, the more is the accounts receivable amount. From another viewpoint, if a company is able to detain the payment for its internal inputs, it can decrease the amount of money required. Put differently, the net working capital is diminished by accounts payable. RESEARCH METHODOLOGY Scope of the study: The scope of this project work is confined to the Working Capital Management Practices at BHEL- EDN Division, the study has been taken to learn in detail the policies and strategies used in maintaining working capital at BHEL EDN, Bangalore. Research Design In view of the objective of the study listed above, a descriptive research design has been adopted. The Data is collected by using 2 sources.
  43. 43. Sources of Data: There are two sources of collecting data (of both financial and non-financial in nature). 1) Primary Data 2) Secondary Data Primary Data: The primary data was collected by visiting the Organization and by holding informal discussions with various department heads. Information pertaining to receivables, cash, inventory and creditors as collected from the respective departments in the unit. The following departments provided the details. Finance Department Materials Management Department Public Relations. Secondary Data: Secondary Data was collected from the following sources Annual report Journals and books Research articles Websites Public relations Department Plan of Analysis The data is collected and analyzed and interpreted with the help of ratios related to working capital. Tables and graphs are prepared to compare the performance of the company from one year to another. Ratio Analysis- Focuses on working capital policy, working capital structure and other relevant information.
  44. 44. Limitation of the Study 1. Time restriction was only two months of project work in the organization. 2. The finding and suggestion cannot be generalized. 3. The study covered a wide concept hence wide collection and coverage of information was not easily possible. 4. The companies which are taken for the purpose of comparison may or may not follow the same accounting policies, which BHEL follows; BHEL itself changes its Auditors once in every 4 years. 5. The study is just for 4 years. 6. Working Capital Management analysis are not the only measures in order to analyze the performance of the company.
  45. 45. Chapter 4 Analysis and Interpretation
  46. 46. Analysis and Interpretation The analysis for the Working Capital Management of the BHEL-EDN is done by using the following methods. Ratio analysis is a powerful tool available to analyze the present efficiency of working capital. Ratio analysis involves calculation and interpretation of ratios, which is the relationship between two variables and these variables need to have a logical relationship to each other. There are two approaches used to analyze the ratiosTime series and/or cross sectional approach Time series analysis is concerned with the behaviour of a given ratio over time. This is also called intrafirm or trend analysis. This approach is adopted to find out systematic pattern in the historic behaviour of series that can be used for prediction purposes. This approach is of immense use in evaluating past performance. Cross sectional analysis is concerned with comparing the investigated ratios with certain norms as in a representative firm or an industry average. Ratio analysis can be used by management as a tool to verify the level and composition of working capital held by management in the business as against its operations, the extent of liquidity present in its asset structure as well as financial structure and the efficiency with which working capital is being used in the business. In other words, management can employ ratios to analyze three facts of working capital management, namely, efficiency, liquidity and its structural health.
  47. 47. WORKING CAPITAL MANAGEMENT (Amount in lakh Rs) PARTICULARS 2008-09 2009-10 2010-11 2011-12 Inventories 25254.77 26352.16 26620.90 37893.73 Sundry Debtors 70663.70 84873.88 85470.85 111551.58 Cash and Bank 12.02 20.36 269.87 373.33 3939.97 6299.35 4989.72 4383.82 99870.46 117545.75 117351.34 154202.46 Current Liabilities 79897.17 96299.68 91280.98 95044.32 Provisions 21567.20 14888.70 Total Current Liabilities 101464.37 111188.38 91280.98 95044.32 Net Current Assets (working (1593.91) 6357.37 26070.36 59158.14 CURRENT ASSETS,LOANS AND ADVANCES Other Current Assets Loans and Advances Total Current Assets CURRENT LIABILITIES AND PROVISIONS capital)
  48. 48. (1) Gross Working Capital: - it refers to the firm’s investment in current assets. (Amount in lakh Rs) Particulars 2008-09 2009-10 2010-11 2011-12 Gross Working Capital 99870.46 117545.75 117351.34 154202.46 Gross Working Capital 180000 160000 140000 120000 100000 80000 Gross Working Capital 60000 40000 20000 0 2008-09 2009-10 2010-11 2011-12 The GROSS WORKING CAPITAL determines the firm’s investment in current assets, here in the graph, we can see that, there is an increasing trend in GWC, this is due to huge investments in inventory, as they got huge orders till the year 2011-12, Debtors also form a major reason for investment in Current assets, the major customers to BHEL are government entity, so slow in payments results in more investments in Gross Working Capital.
  49. 49. (2) Net Working Capital: It refers to the excess of current assets over current assets over current liabilities. Net working capital= Current Assets- Current Liabilities Particulars 2008-09 2009-10 2010-11 2011-12 Net working capital (1593.91) 6357.37 26070.36 59158.14 Net working capital 70000 60000 50000 40000 30000 Net working capital 20000 10000 0 -10000 2008-09 2009-10 2010-11 2011-12 The Net Working Capital Determines the Firm’s ability to pay off its current obligations, the year 2008-09 the company had negative WC, and after that there is an increasing trend in the NWC, in the year 2011-12 the Firm has highest NWC, this is because the company had high profits and there liquidity position was high. (3) Inventory Turnover Ratio: This ratio establishes the relationship between the cost of goods sold during a given period and the average stock holding during that period. It indicates the operational and marketing efficiency. It helps in evaluating inventory policy to avoid overstocking. Inventory Turnover Ratio = Sales Average inventory
  50. 50. Particulars 2008-09 2009-10 2010-11 2011-12 Sales 126267.8 145607.14 198388.5 226787.22 Average Inventory 20528.34 25803.47 26486.53 26486.53 Inventory turnover ratio 6.1 5.6 7.4 8.5 Inventory turnover ratio 9 8 7 6 5 Inventory turnover ratio 4 3 2 1 0 2008-09 2009-10 2010-11 2011-12 Inventory Turnover Ratio measures company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity of the inventory. From the graph we can see that the inventory turnover ratio is high in 2008-09 but in the year 2009-10 its comedown, the reason could be, less orders which impacts in less inventory, from 2010-11 to 2011-12, there is an increase which determines the firm has got more orders. Bhel policy is that, they start procuring inventory only once they get orders and only then they stock raw materials, the raw materials in store is only 20% and rest will be procured once they get orders. So the high inventory turnover determines the operating efficiency of the company.
  51. 51. (4) Working Capital Turnover Ratio: indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year and is calculated as follows Working Capital Turnover Ratio= Sales Net working capital Particulars Sales 2008-09 126267.8 Net Working Capital (1593.91) WC turnover Ratio -79.21 2009-10 2010-11 145607.14 6357.37 198388.5 26070.36 22.90 2011-12 226787.22 59158.14 7.6 3.8 WC turnover Ratio 40 20 0 -20 2008-09 2009-10 2010-11 2011-12 WC turnover Ratio -40 -60 -80 -100 The working capital turnover ratio is negative in the year 2008-09 this is due to negative net working capital. It indicates that the firm had insufficient working capital. On the other hand the ratio increased to positive in the next year due to positive working capital. It indicates that there is efficient utilization of working capital. There by in the following years, it has seen the decreasing amount of working capital turnover every year, it shows that the sales has increased thereby, increase in net working capital.
  52. 52. (5) Current Assets Turnover Ratio: This ratio indicates the efficiency with which current assets turns into sales. Current assets turnover ratio= Sales Current assets Particulars 2008-09 2009-10 2010-11 2011-12 Sales 126267.8 145607.14 198388.5 226787.22 Current Assets 99870.46 117545.75 117351.3 154202.46 Current asset 1.26 1.23 1.69 1.47 turnover ratio Current asset turnover ratio 1.8 1.6 1.4 1.2 1 0.8 Current asset turnover ratio 0.6 0.4 0.2 0 2008-09 2009-10 2010-11 2011-12 This ratio indicates, the extent to which current assets are utilized in generating revenue to the company, from the graph we can see that there was moderate ratio in the year 2008-2010 but there has been an increase in the year 2011-12, this is due to high sales and so does the ratio went up, and in the year 2011-12 the current assets has come down, resulting in less current asset turnover ratio.
  53. 53. (6) Current Ratio: It gives the relationship between current assets and current liabilities and indicates the extent to which short-term creditors are safe in terms of liquidity of the current assets. Higher the value of current ratio, more liquid the firm is and more ability it has to pay its bills but a very high ratio also indicates slackness of management practices and excessive holding of current assets. Particulars 2008-09 2009-10 2010-11 2011-12 Total Current Assets 99870.46 117545.75 117351.3 154202.46 101464.4 111188.38 91280.98 95044.32 0.98 1.05 1.28 1.62 Total Current Liabilities Current Ratio Current Ratio 1.8 1.6 1.4 1.2 1 0.8 Current Ratio 0.6 0.4 0.2 0 2008-09 2009-10 2010-11 2011-12 The ideal current ratio is considered to be 2:1.From the above table it is observed that the ratios from 2008 to 2012 are .98, 1.05, 1.28 and 1.62 which signifies that the company maintains a proper level of current assets as compared to the current liabilities. This indicates that the firm is liquid and has the ability to pay its current obligations in time as and when they are come due. Again the amount of current asset is such efficiently maintained so that not huge amount of investment is blocked in Current Asset, but there is a requirement to increase the current asset or decrease the liability to maintain the current ratio at a satisfactory level. Moreover, the
  54. 54. organization itself is so well managed; it knows the future outlook to invest in current assets. (7) Quick Ratio: It expresses the relationship between quick assets and current liabilities. It is more refined rule to measure the liquidity in an organization. It represents the ability of the company to pay its debts without relying on the sale of its inventories. Quick ratio= Quick Assets Current Liabilities Particulars 2008-09 2009-10 2010-11 2011-12 Quick Assets 74615.69 91193.59 90730.44 116308.73 111188.38 91280.98 95044.32 0.82 0.99 1.22 Total Current Liabilities Quick Ratio 0.73 Quick Ratio 1.4 1.2 1 0.8 0.6 Quick Ratio 0.4 0.2 0 2008-09 2009-10 2010-11 2011-12 The ideal ratio of quick assets is 1:1. But the firm’s Quick ratio is ranging from .73 to 1.22 i.e., from the year 2008-2012. The firm does not pay off the debts based on the sales, because all the projects undertaken are long term and its conversion period ranges to 3-4 years, so it is difficult to rely on sales. So they mostly depend on corporate head office to finance from the advances taken from the customers.
  55. 55. (8) Cash Ratio/Super Quick Ratio: Since Cash is the most liquid asset a financial analyst may examine cash ratio and its equivalent to current liabilities. Trade investors or marketable securities are equivalent of cash; therefore they may be included in the computation of cash ratio. Particulars 2008-09 2009-10 2010-11 2011-12 Cash 12.02 20.36 269.87 373.33 Total Current 101464.4 111188.38 91280.98 95044.32 Liabilities Lack of immediate cash may not matter because it can stretch its payments or borrow money at short notice. If there is immediate requirement of cash, it has to be brought to the notice of Head office and in turn they sanction the cash amount. Since BHEL has centralized cash management system, this ratio for a single division (BHEL-EDN) may not be of much relevance. (9) Break up of Individual current Asset as a % of Total current assets Particulars 2008-09 2009-10 2010-11 2011-12 Inventories 25.28% 22.42% 22.68% 24.57% Sundry Debtors 70.75% 72.2% 72.83% 72.34% Cash & Bank 0.012% 0.017% 0.23% 0.24 3.95% 5.36% 4.25% 2.84% balance Loans & Advances From the above table we can see that the high percentage of current assets in occupied by Debtors, and second highest is by Inventories, as the company is PSU’s the customers are mostly Government entity and they are very slow and lazy in clearing the bills. The major customers are NTPC, Indian Defence, etc. inventories carry a normal % its increase and decrease depends on the number of orders you get.
  56. 56. (10) Debtors Turnover Ratio: this ratio shows the relationship between credit sales and average debtors of a firm. It indicates the speed with which debtors are being collected. The higher the turnover ratio, shorter the average collection period and the better is the trade credit management and the liquidity of the debtors and vice versa. Debtors turnover ratio = Credit Sales Average Debtors Particulars 2008-09 Credit Sales 2009-10 2010-11 2011-12 126267.8 145607.14 198388.5 226787.22 Average Debtors 61490.9 77768.79 85172.37 98511.22 Debtors turnover Ratio 2.05 1.87 2.33 2.3 Debtors turnover Ratio 2.5 2 1.5 Debtors turnover Ratio 1 0.5 0 2008-09 2009-10 2010-11 2011-12 The above graph shows Debtor Turnover Ratio, this indicates that there is less DTR; this determines that the firm is inefficient in collecting bills. This is due to maintain the customers and provide more credit in terms of days. Because customers are mostly Government, State utility undertaking, who mostly delay their payments. This is also a measure to attract and keep customers loyalty.
  57. 57. (11) Creditors Turnover Ratio: this ratio establishes the relationship between credit purchases and the average amount of creditors outstanding during the year. A low turnover ratio reflects liberal credit terms given by the suppliers, while high ratio shows the accounts are to be settled rapidly. This ratio is very important tool for analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit. . Creditors Turnover Ratio = Purchases Average Creditors Particulars 2008-09 2009-10 2010-11 2011-12 Purchases 56400.29 57239.83 50075.85 92934,69 Average Creditors 19815.98 20919.66 27153.55 2.74 1.84 Creditors 2.85 37073.28 2.51 Turnover Ratio Creditors Turnover Ratio 3 2.5 2 1.5 Creditors Turnover Ratio 1 0.5 0 2008-09 2009-10 2010-11 2011-12 The creditor’s turnover ratio is the highest in the year 2008-09 due to increase in purchases. It signifies the credit worthiness of the company. The creditors are being paid promptly. Whereas it is the lowest in the year 2010-11, which is caused by the less credit purchase it signifies that the company is not taking full advantage of the credit facilities provided by the creditors. Also the average creditors are decreased in
  58. 58. the year 2011-12, this is because the company has purchased more amount of raw materials due to increase in orders inflow. (12) Current Assets to Total Assets Ratio: this ratio helps in determining the investment policy adopted by the company. If the level of current assets increases in proportion to the total assets of the firm, the management is said to be more conservative in managing the current assets of the firm. On the other hand lower ratio indicates highly aggressive policy this ratio helps in determining the investment policy adopted by the company. If the level of current assets increases in proportion to the total assets of the firm, the management is said to be more conservative in managing the current assets of the firm. On the other hand lower ratio indicates highly aggressive policy. Particulars 2008-09 Current Assets 2009-10 2010-11 2011-12 99870.46 Current Assets to 117351.3 154202.46 146083.8 Total Assets 117545.75 174024.02 347150 409299.99 0.68 0.67 0.34 0.38 Total Assets Current Assets to Total Assets 0.7 0.6 0.5 0.4 Current Assets to Total Assets 0.3 0.2 0.1 0 2008-09 2009-10 2010-11 2011-12 The ratio has been decreased from 0.68 in 2008-09 to 0.38 in 2011-12. It shows that the company does not hold current assets to meet the immediate demand. This is true because as per the company, the orders are long term and there is sufficient time to make preparations to meet the demand.
  59. 59. (13) Raw Material holding period: This ratio states that how much time (in terms of days) raw materials have to spent in stores before sending to the production department for work-in-progress. Raw material holding period= Average stock of raw materials*365 Raw materials consumed Particulars 2008-09 Raw material 2009-10 2010-11 2011-12 46947.42 56142.44 65083.68 91803.02 20528.34 25803.47 26486.53 32257.32 consumed Average stock of raw materials Raw material 160 168 148 128 holding period Raw material holding period 180 160 140 120 100 Raw material holding period 80 60 40 20 0 2008-09 2009-10 2010-11 2011-12 Raw materials form a life blood of any manufacturing industry, so the higher the raw material holding period, indicates greater ability of company to recover cost incurred in production. Less raw material holding period means increasing warehousing cost and thus less profit. So from the above graph we can see that there is decrease in RMHP in the year 2011-12, this due to the increase in inventory and it also reveals that the company is unable to recover the cost incurred in production.
  60. 60. (14) WIP Conversion Period: This indicates the speed with which the company is converting its work in progress into finished goods. If the work in progress conversion period increase it means the company is taking more time to convert it into finished goods i.e., production is delayed. Lesser the work in progress holding period lesser the blockage of company’s fund in the production process. WIP conversion period= Average stock of work in progress*365 Cost of production Particulars 2008-09 Cost of production Average stock of 2009-10 2010-11 2011-12 61072 71436 75683 117481 20528.34 25872 18566 11879 WIP WIP Conversion 123 132 89 37 period WIP Conversion Period 140 120 100 80 60 WIP turnover period 40 20 0 2008-09 2009-10 2010-11 2011-12 Work in progress is showing an increasing trend from 2008-09 to 2009-10. It shows that the company is taking much time to convert the raw materials into finished goods, when there are fewer orders the company WIP goes slowly. On the other hand the work in progress period is lowest in the year 2011-12, which shows that there is increase in orders. Huge amount of raw materials are processed into the finished goods to meet the requirements of the customer.
  61. 61. (15) Finished goods holding period: this ratio indicates the number of days a firm takes to convert the finished goods inventory into sales. Finished goods holding period= Average stock of finished goods*365 Cost of goods sold Particulars 2008-09 2009-10 2010-11 2011-12 cost of goods sold 72406 84463 105131 139292 average stock of FG 864.97 376.93 1275.76 2700.73 FG Conversion 4 2 4 7 period FG Conversion period 8 7 6 5 4 FG Conversion period 3 2 1 0 2008-09 2009-10 2010-11 2011-12 As we can see that, the graph shows that finished goods conversion period is very less, ie a span of 4 to 7 days, which shows the finished goods are immediately converted to sales. And the firm is efficient in doing so,Because the goods are produced on the basis of orders and well documented agreement.
  62. 62. (16) Debtors Collection Period: this ratio measures how long it takes to collect amounts from debtors. The ratio represents the average number of days, for which a firm has to wait before the receivables are converted into cash. It represents the quality of debtors. The shorter average collection period represents high quality and vice versa. Debtors collection period = 365 Debtors Turnover Ratio Particulars Credit Sales 2008-09 2009-10 2010-11 2011-12 126267.8 145607.14 198388.5 226787.22 Average Debtors 61490.9 77768.79 85172.37 98511.22 Debt collection 178 195 156 158 period Debt collection period 250 200 150 Debt collection period 100 50 0 2008-09 2009-10 2010-11 2011-12 Same as Debtor turnover ratio, the Debt collection period shows the time taken by the company to realize the debt, so from the graph we can see that, in the year 2009-10 was pretty high and the customers took lot of time to settle the payment. But moving to later years it has been consistent to 150 days to 160 days. But industry standard of DCP is 90 days, here we can see, BHEL has doubled the DCP compared to Industry.
  63. 63. (17) Creditors Payment Period: this ratio shows the average time taken by the firm to pay for goods and services purchased. The longer the credit period achieved, the better, because delay in payment means that the operations of the company are being financed interest free by suppliers funds. But, there will be a point beyond which, if they are operating in sellers market, may harm the company due to effect on the credit worthiness of the company. Creditors turnover period= Average Creditors*365 Purchases Particulars 2008-09 2009-10 2010-11 2011-12 56400.29 57239.83 50075.85 92934,69 Average Creditors 19815.98 20919.66 27153.55 Creditors payment 128 Purchases 133 198 37073.28 145 period Creditors payment period 250 200 150 Creditors payment period 100 50 0 2008-09 2009-10 2010-11 2011-12 The creditors are the people from whom the company bought raw materials and other goods. The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditor’s turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. Here Bhel pays off their creditors in a period ranging from 120-150 days, but in the year 2010-11 there was a tremendous
  64. 64. increase in the CPP. But after that year, they are paying their creditors before due date. However a very favourable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. The industry standard average payment is 60 days but BHEL has double the industry average payment period. Trend Analysis: Trend Analysis is a statistical tool to estimate the Sales for the next year. Year Sales 2008-09 126267.8 2009-10 145607.14 2010-11 198388.5 2011-12 226787.22 250000 200000 150000 100000 Sales 50000 0 2008-09 2009-10 2010-11 2011-12 From the above graph we can see that, there is consistent increase in sales volume, which determines the efficiency of BHEL, the way they produce quality
  65. 65. goods well known in the minds of the customers. BHEL’S integrity and innovation has led its customers to repeatedly give orders to BHEL. This may not be the same in future, as we are in the current year 2013-14, the financial position of 2012-13 has not been out. But as per the press release I can analyse and say that, BHEL this year has a decline in its profits, there might be many reasons, but the highlighted reason could be the decline in sales, i.e. not getting orders from the Government. The new entrants in the market, i.e. Chinese and Japanese technology have been making its mark in the market to an huge extent. The technology brought in by them are unique and cost involved is much less, when compared o BHEL. So, to conclude Bhel is very well known in Indian as well as Global markets for its Quality and Innovation. But the same goods which Bhel produces to cost of 300 crores, the competitors/ new entrants are providing it for 150 crores. This can be the huge threat to the Indian Power Sector.
  67. 67. FINDINGS: The Gross Working Capital is increasing every year, this shows that the firms investments in current assets are high. The high amount of Net Working Capital shows, an increase in Sales, there by more profits into the firm. The company’s current ratio and quick ratio shows an increasing trend, which tells us that the company is more efficient in handing the short term requirements. To guard against foreign escalation, it resorts to hedging, it is almost a zero debt company. Study of inventories shows that an increase in inventory turnover ratio which determines the operating efficiency of the company. As company is the manufacture of heavy electrical goods and its major customers are state electricity board telecommunication departments etc…there exists laxness in the collection of debtors. And the company is not so much bothered in collecting from these customers, because of huge orders and customer loyalty. The breakup of individual current asset as a % of total current asset reveals that major chunk of current asset is occupied by Debtors i.e. almost 70%. The company has now been effective in synchronizing of debtor’s turnover ratio with creditor’s turnover ratio. It shows the company is taking full advantage of credit facilities. The enterprise has applied almost all management concepts in achieving it vision. In this direction, it is concentrating on productivity programs and has also identified areas where it has to concentrate. The company’s inventory procurement team is highly efficient, the inventory procurement process is appreciable. Material management department and Finance Department go hand in hand in managing the Working Capital requirement. Raw material ordering process, the delegation of authority starts from the Executive Engineer who has right to order up to 10 lakhs and there wise it goes on until top management, where President is Supreme.
  68. 68. Suggestions: The unit can outsource some of its non-core activities to specialize outside agencies. Such as Customer relation and services. The unit should develop alternate source of supply of materials, wherever permitted, which will in turn, reduce the cost of inventory. The sourcing of material should be at competitive rates and not L1 rates. The unit has better inventory control by focusing on slow and non-moving items. Less control should be on slow moving items and least control on fast moving items. The unit should tie up with financial institutions, for providing the suitable financial package to its customers for non core products. The unit must follow a rigorous system of credit evaluation and set credit standards for its customers as is already done for private players. The unit can obtain contingent commitment from the buyers as part of sales term. Effective follow-up by commercial departments should be made to accelerate the collection process. The unit must move forward to show their competitive advantage, as more and more competitors are entering the market. The company as a whole should address the President, for not the repeated orders for the Government. Being the Government of India. They are themselves ignoring the domestic companies. The companies should implement an aggressive strategy to take up international projects and prove there competitiveness in International market.
  69. 69. Conclusion: It can be concluded that the overall financial performance of the company is reasonably satisfactory. In certain areas the company has to focus more. BHEL-EDN should try to overcome hurdles, especially in the areas of debtors and inventory management. After completing this study, I felt that, in today’s world it is very hard to survive without being able to delight/ satisfy the customers. With the entry of MNCs like ABB, Siemens etc... There is a need for BHEL-EDN to perform better and prove its competitiveness. As BHEL-EDN has stepped into a liberalized marker driven environment there is an urgent need for its managers to function like business, rather than government officials. This is not only needs an attitudinal change on the part of higher officials but also requires whole hearted efforts of all employees. Though company has implemented several management techniques like total quality management, Six-sigma etc... There is a need for sustained and synchronous efforts to achieve such objectives and realize future growth. It appears that BHEL is in a strong position to achieve the vision envisaged by the nation in light of the recent development of JVs in potential areas of development entered into by BHEL.
  70. 70. Annexure
  71. 71. Balance Sheet of BHEL EDN