2. A
Summer Internship Report
“Analyzing the Budgeting and Budgetary Control Process followed at
Bharat Electronics Limited, Ghaziabad”
Bharat Electronics Limited,
A Govt. of India (Min. of Defense) Enterprise
P.O. Bharat Nagar -201010
Ghaziabad (U.P.) India
(2nd
April 2012 – 26th
May 2012)
Completed in the partial fulfillment of the requirement of MBA Program at
Institute Of Management, NIRMA University
Submitted by:
Gaurav Rathi – 111118 (2012-13)
Organizational Guide: Submitted to:
Mr. A.K. Chaubey Prof. Devesh Baid
(BEL Mentor) (Faculty Mentor)
3. Acknowledgement
I am thankful to Bharat Electronics Ltd., Ghaziabad for giving me an opportunity to have my
first corporate experience as Management Trainee by doing such a project with one of the
manufacturer of advanced electronic products for the Indian Armed Forces, which has given me
full support and guidance in all my activities and made my learning very gratifying.
It would be difficult to complete this project without the continuous support and guidance of my
project guide Mr. A.K. Chaubey, AGM-Accounts (Budget & Compilation). I am also thankful
to Mr. H.C. Pant, Mr. Rajeev Dave and Miss Anjna for their continuous effort in the success
of the project.
Apart from this I would like to thank all Staff members and workers who have given their
precious time and share their experiences for the betterment of my project.
I hereby extend my deepest gratitude to Prof. Devesh Baid, Faculty, Institute of Management,
Nirma University who has given me moral support and guidance throughout the completion of
project. His experience and knowledge brings various kinds of learning from my project.
- Gaurav Rathi
4. Executive Summary
Bharat Electronics Limited has grown into India’s foremost defence electronics Company, a
Navratna Public Sector Unit under the ministry of defence. It was established in 1954. BEL has
more than 360 products in its range from small components costing a rupee to huge equipment
costing about Rs.60 crores catering the needs of Army, Navy, Air force, Paramilitary, Police,
Doordarshan. Starting with a single unit at Bangalore BEL now has nine units spread across the
country.
BEL’s Budget and Compilation Department is following the general guidelines of Budgeting and
Budgeting Control process which was issued in 1995 by the Board of the Company. After that no
new guidelines regarding budgeting is being issued. A detailed analysis regarding Capital
Budgeting process is done and came up with few recommendations.
One of the factors that determine the long term prospects of any company is the quality of the
project in which the company’s funds are committed. The project which yield good returns, help
in increasing the wealth and growth of the company. This project assesses the financial viability
of the projects that the Company is thinking of to invest. Two projects are being assessed using
the formats that are being used uniformly. The sensitivity analysis of one of the viable project is
also done.
BEL has undertaken implementation of SAP across all the Units / Offices. Implementation of
SAP R/3 at all Units and Offices of BEL were completed in a phased manner by July 2008. I also
got my hands on SAP application of finance department. I was assigned the work of giving
Internal Order Number to the files that came to the Section.
5. Table of Contents
Sr. No. Particulars Page No.
PART A: PROFILE OF THE ORGANISATION
1.1 Origin of the Organization 1
1.2 Organization size 2
1.3 Vision and Mission 5
1.4 7-S framework 8
1.5 Competitive position in Industry 12
1.6 SWOT Analysis 14
1.7 Future Strategic Plans of Organization 15
1.8 Nine Manufacturing Units Of BEL 16
PART B: THE PROJECT WORK
2.1 Budgeting and Budgeting Control 19
2.2 Budgeting Process 19
2.3 Time Frame for the preparation of Budgets 20
2.4 Responsibility for preparing the Budget 20
2.5 Capital Budget 20
2.6 Basic Tenets in Budgeting 23
2.7 Capital Budget Flowchart 24
2.8 Various formats 26
2.9 Assessing the Project viability 31
2.10 Sensitivity Analysis 39
2.11 Working on SAP 40
2.12 Recommendations 44
PART C: LEARNING FROM THE SUMMER TRAINING
3.1 Learning 46
References 47
Appendix A 48
Appendix B 49
6.
7. Page | 1
1.1 ORIGIN OF THE ORGANIZATION:
From a humble beginning to a NAVRATNA COMPANY, BEL is a PSU, under Ministry of
Defence, Government of India established in 1954. BEL has more than 360 products in its range
from small components costing a rupee to huge equipment costing about Rs. 60 crore [1]
. Starting
with a single unit at Bangalore BEL now has nine units spread across the country. Nearly 80-
85% of the company’s annual sales turnover accrues from products sold to defence services the
balance from civilian customers. With over four decades of manufacturing experience Bharat
Electronics Limited has pioneered the professional electronics movement in India. With
continuous up gradation of technology, commitment to quality and constant innovation, BEL has
grown into a multi product, multi unit and multi-technology company.
The company’s dividend payment has been continuously increasing and the company paid a
dividend of 170% for the year 2009-10. During the year 2001-02, BEL earned the distinction of
becoming the first Defence PSU to acquire operational MINIRATNA CATEGORY-I status.
This enhanced status will provide BEL certain operational autonomy in the areas of capital
investment, establishment of Joint Ventures etc. BEL has been got NAVRATNA status in
JUNE-2009. BEL has state- of- the art infrastructure and a highly trained workforce at its 9 units.
Nearly 85% of company’s annual sales turnover accrues from products sold to the defence
services.
BEL achieved exports of US $ 17.77 million in 2008-09 [1]
. To increase exports, the company is
promoting contract manufacturing and tapping business opportunities generated via offset
implementation. The company’s turnover has been on a steady rise. Company achieved a
turnover of Rs.552,969 lakhs in 2010-11 as against Rs.521,977 lakhs in 2009-10, registering a
growth of 5.94 % [2]
. BEL has been making profits continuously for more than four decades and
recording its shareholders with handsome dividends.
8. Page | 2
1.2 Organization Size:
Following table shows the various units of BEL, their establishment year and the number of
employees.
UNITS ESTABLISHED(YEAR) NO. OF EMPLOYEE
Bangalore 1954 5927
Ghaziabad 1974 2596
Pune 1979 328
Machlipatnam 1983 425
Panckula 1985 635
Chennai 1985 245
Kotdwara 1986 618
Hyderabad 1986 421
Navi Mumbai 1986 499
Board of Directors:
Given below is the list of the Wholetime Directors of BEL as per Annual Report of 2010-11 of
the Company.
Wholetime Directors:
1. Mr Ashwani Kumar Datt, Chairman & Managing Director
2. Mr M L Shanmukh, Director (Human Resources)
9. Page | 3
3. Mr H S Bhadoria, Director (Bangalore Complex)
4. Mr I V Sarma, Director (Research & Development)
5. Mr M G Raghuveer, Director (Finance)
6. Mr H N Ramakrishna, Director (Marketing)
7. Mr Anil Kumar, Director (Other Units)
Following table gives the performance highlights of BEL over the period of eight years from
2003-04 to 2010-11.
(Rs. In Lakhs)
Particulars 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Sales & Services 279859 321209 353628 395269 410254 462369 521977 552969
Profit After Tax 31610 44632 58301 71816 82674 74576 72087 86147
Net Worth 122908 157637 202705 257135 321295 378368 432526 498571
No. of
Employees
13038 12390 12262 12357 12371 11961 11545 11180
(Source: Annual Report 2010-11 of BEL)
The CAGR of revenues over the five-year period from the end of 2006-07 to the end of 2010-11
is:
Beginning value: 39,52,69,00,000
Ending value: 55,29,69,00,000
Number of periods: 5 years
10. Page | 4
CAGR (%) 6.95 %
COMPETITORS:
Multinational companies like ITI, ECIL, IL, ALPHA, UTL, Siemens, Fibcom, SCL, INTEL,
Spectronics, Southern Electronics and Ashoka engineering.
CUSTOMERS:
BEL’s Customers include the Army, Navy, Air force, Paramilitary, Police, Doordarshan, All
India Radio, department of Telecommunication.
SUPPLIERS:
SUPPLIER’S NAME LOCATION PRODUCT NAME
MANJIRA MACHINE BUILDERS HYDERABAD AL-FORGINGS
RACHAMALLU FORGINGS HYDERABAD AL-FORGINGS
BAKER GAUGES (I) LTD PUNE AIR GAUGES
JINDAL AL. LTD BANGALORE AL RODS/TUBES
MAHAVEER PLASTICS HYD HYDERABAD ACRYLIC FASB.
BVR BUSINESS FORMS HYDERABAD COMPUTER
STATIONARY
ALLIED ELECTRONICS HYDERABAD CONNECTORS
ZENITH IT LTD HYDERABAD CUTTING TOOL
MFR
11. Page | 5
SRI SRINIVASA ENGG.
INDUSTRIES
HYDERABAD FABRICATION
1.3 VISION, MISSION AND GOALS OF THE ORGANIZATION:
VISION:
“To be a world-class enterprise in professional electronics”
MISSION:
To be a customer focused globally competitive company in defence electronics and in other
chosen areas of professional electronics, through quality, technology and innovation.
VALUES:
Putting customers first.
Working with transparency, honesty & integrity.
Trusting and respecting individuals.
Fostering team work.
Striving to achieve high employee satisfaction.
Encouraging flexibility & innovation.
Endeavoring to fulfill social responsibilities.
Proud of being a part of the organization.
OBJECTIVES:
To be a customer focussed company providing state-of-the-art products & solutions at
competitive prices, meeting the demands of quality, delivery & service.
To generate internal resources for profitable growth.
12. Page | 6
To attain technological leadership in defence electronics through in-house R&D,
partnership with defence/research laboratories & academic institutions.
To give thrust to exports.
To create a facilitating environment for people to realise their full potential through
continuous learning & team work.
To give value for money to customers & create wealth for shareholders.
To constantly benchmark company’s performance with best-in-class internationally.
To raise marketing abilities to global standards.
Company’s Goals:
Business Mission:
To maintain a leading position as suppliers of quality equipment, system and services in the field
of field of Radars, Defence Communications, Telecommunications, Sound and Vision
Broadcasting, Opto-electronics, Solar systems, IT products and Electronic components.. Utilize
companies’ capabilities and resources to expand business into allied areas and other priority
sectors of the economy like defence, communication and electronics.
Growth:
To ensure a steady growth in business so as to fulfill national expectations from BEL and expand
international operations.
Profitability:
To provide a reasonable and adequate return on capital employed, primarily through
improvements in operational efficiency, capacity utilization and productivity and generate
adequate internal resources to finance the company’s growth.
Customer Focus:
13. Page | 7
To build a high level of customer confidence by providing increased value for his money through
international standards of product quality, performance and superior customer services.
People Orientation:
To enable each employee to achieve his potential, improve his capabilities, perceive his role and
responsibilities and participate and contribute positively to the growth and success of the
company, to invest on human resources continuously and to be available to their needs.
Technology:
To achieve technological excellence in operation by development of indigenous
technologies and efficient absorption and adaptation of imported technologies to suit
business needs priorities, and provides a competitive advantage to the company.
To determine the role played by various departments for the growth of BEL, which was
found out after carefully examining each department and its role played for growth as a
whole.
To evaluate the performance and financial soundness of the company over last 5 years
through ratios.
14. Page | 8
1.4 Mckinsey 7S Framework for BEL:
Figure 1: The McKinsey 7S Model [3]
1. Strategy:
As part of its new growth strategy, India's largest defense electronics company, Bharat
Electronics Ltd. (BEL), plans to strike joint ventures with foreign companies in the
future. The growth initiatives have been recommended by consulting firm KPMG, which
was hired in 2008 to help BEL compete in the emerging business environment and
restructure itself. Company adopted “Cost Reduction” strategy as one of the Thrust Areas
from late 90s. The cost reduction activities cover all the aspects of the Company viz.
15. Page | 9
production & non - production activities. During 2010-11, 56 Task forces worked on
Cost Reduction in Units / SBUs and achieved a cost reduction of Rs. 20,000 lakhs.
2. Structure:
BEL has defined its organizational structure in terms of Strategic Business units (SBUs).
BEL, Ghaziabad is divided into 3 SBUs. The organization structure of BEL, Ghaziabad is
shown below:
Executive Director
Network Centric
System
(GM)
Radar
(GM)
Central
(GM)
16. Page | 10
3. Systems:
BEL has well - established Internal Control systems and procedures commensurate with
its size and nature of business for achieving effectiveness and efficiency of operations,
reliability of financial reporting and compliance with applicable laws and regulations.
The system comprises well defined organization structure, pre - identified authority levels
and procedures issued by Management covering all vital and important areas of activities,
viz., Budget, Purchase, Material Management, Works, Finance & Accounts, Human
Resources, etc. These procedures are updated from time to time and are subject to strict
compliance. BEL has implemented ERP (SAP) System in all of its manufacturing Units /
Offices. This has further strengthened the Internal Control Systems with it’s in–built
checks and balances at various levels of operations.
GENERAL MANAGER
AGM- PERSONAL
AGM- MARKETING
AGM- PRODUCTION
AGM-PUBLIC RELATIONS
AGM-FINANCE & AUDIT
AGM-CORPORATE PLANNING
SENIOR DGM-QUALITY
AGM-COMPUTER SYSTEMS
17. Page | 11
4. Skills:
The marketing function is being strengthened and marketing executives are imparted
intensive training on marketing skills in a competitive environment. To enhance
marketing skills to compete in a fast changing market, marketing executives are
continuously nominated for a 6-months residential Marketing program at IMI, New
Delhi. The program is focused on providing key marketing knowledge and skills required
for business.
5. Staff:
BEL employed 11,180 persons as on 31st March 2011 as against 11,545 as on 31st
March 2010. Of this, 3,670 were engineers / scientists. Women employees were 2,366 as
on 31st March 2011. A total of 353 executives consisting of engineers, scientists and
other professionals were inducted during the year. In order to address the learning and
organization development needs, various management development programmes as well
as technology programmes were organized through premier training institutions for all
grades of executives
6. Shared Values:
The basic values set down by BEL for each of its members helps to enhance their passion
towards being the best in whatever they do, and this in turn helps the organization in
delivering its promise of providing great value to its customers.
7. Style:
The Company adopted the Total Quality Management (TQM) philosophy in the year
1990 under the acronym “TORQUE” which stands for Total Organizational Quality
Enhancement. TORQUE is based on the premise that the quality of products and services
is not only the responsibility of the production / shop floor personnel, but other support
services also have a role to play in meeting and exceeding customer’s expectations
through supply of quality products and services.
18. Page | 12
1.5 Competitive Position in Industry:
BEL offers products and services in a wide spectrum of technology like Radars, Military
Communications, Naval Systems, Electronic Warfare Systems, Telecommunications, Sound and
Vision Broadcasting, Opto-Electronics, Tank Electronics, Solar Photovoltaic Systems,
Embedded Software and Electronic Components.
Weak
Medium
MediumWeak
Weak
19. Page | 13
Threat of Existing Competitors:
BEL has very few numbers of competitors as it caters the need of Defense Ministry and has
attractiveness on the higher side. Industry growth is fast, fixed cost is high and has good amount
of excess capacity. Hence attractiveness in terms of rivalry among competitors can be given as 3
on the scale of 5.
Barriers to Entry:
Economies of scale of this industry are large and also have the high brand identity. Capacity
requirements are large and the access to technology in this industry is restricted. Government
protection is substantial. Barriers to entry have high attractiveness.
Cost of exit is high and also there are few restrictions from the side of government. Barriers to
exit have low attractiveness.
Bargaining power of customers:
Number of buyers is small. Buyer’s threat of backward integration is low and industry’s threat of
forward integration is also low. Bargaining power of buyers has medium level of attractiveness.
Bargaining power of suppliers:
Number of suppliers is small. Supplier’s threat of forward integration is low whereas industry’s
threat of backward integration is high. Overall bargaining power of suppliers has medium level
of attractiveness.
Threat of Substitute:
The company caters the need of Indian Army, Navy, Air force, Paramilitary, Police and hence
the availability of close substitutes is low.
Industry protection is high and industry regulation is medium. Overall attractiveness of the
industry is nearly medium.
20. Page | 14
The present defense business scenario provides an opportunity as well as a challenge to BEL.
The challenge is to keep pace with technological developments so that state-of-the-art products
can be offered to the Defense customer. The Government’s desire to enhance indigenous
production of defense equipment will provide a bigger opportunity to BEL in its field of
operations.
1.6 SWOT ANALYSIS OF THE ORGANIZATION:
STRENGTH:
1. Clearly defined Vision, Mission, Objectives and Values
2. BEL has got modern manufacturing facilities with test instruments, set up at all units for
manufacture and supply of telecommunication equipment.
3. Research & Development set up with qualified manpower, suitable for technology
development or absorption.
4. Known for quality and reliability of its products.
5. Known for its prompt after sales service.
6. Vast experience in the manufacturing of electronic equipment. The parent unit
established in 1954.
7. Highly trained, professionally qualified manpower trained to deal in the latest
technologies.
8. Well established organizational structure.
9. Well established systems & procedures including ERP
WEAKNESS:
1. The main weakness of BEL is its being owned government of India under ministry of
defence. This makes decision- making slow.
2. BEL has been predominantly in defence sector, which has been monopoly business.
Hence, it does not have experience in managing, a competitive business like
telecommunication, equipment manufacturing.
21. Page | 15
3. Lack of flexibility in manpower management, especially in pay scale, promotion,
recruitment policy. Thus resulting in brain drain.
4. Lack of bold decision making in the area of investment and others due to fear of various
audits, both statutory and government in the mind of management.
OPPORTUNITIES:
1. Growing Defense and Security needs
2. BEL can go for the technology transfer ties up and JV due to liberalization.
3. Various other companies are also modernizing hence creating new market for
telecommunication equipment railway, power sector, oil sector, Defence etc.,
4. Telecommunication Sector has been recognized as one of the important infrastructure
sector essential for the growth of the economy. This is resulting in the availability of
potential market in developing countries.
THREATS:
1. Entry of private sector and MNC in this field is making competition on very tough.
2. Rapid changes in technology
3. Due to overall reduction in import duties, the indigenous manufacturing and direct import
are competitive.
4. Imperfections in the market, leading to price wars and undercutting of prices, resulting in
sustained losses for telecommunication.
1.7 FUTURE OF THE INDUSTRY:
Focused nurturing and monitoring of R&D is one of the top priority tasks at BEL. Allocation of
funds for R&D is being enhanced to cater for the new infrastructure requirements of R&D
divisions and for undertaking many proactive R&D projects. BEL R&D divisions will have
active interactions with DRDO, other Indian public & private design houses, academic
institutions and also with foreign partners for joint development programmes. Planning and
22. Page | 16
monitoring process in R&D is being upgraded in order to improve the product and technology
development cycle times.
BEL and Indian Space Research Organization have entered into an understanding for cooperative
efforts to meet the growing demands of satellite manufacture in India. Satellite Electronics
Payload (Transponders) a major part of any satellite will be manufactured by BEL for integration
with the satellites to be launched by ISRO. BEL has also commenced manufacture and supply of
solar-based mini power plants, the first of which has been installed in a technology foundation in
New Delhi.
1.8 NINE MANUFACTURING UNITS OF BEL:
Figure 2: Manufacturing Units of BEL
I got the privilege to work with one of the units of BEL. I was associated with the Ghaziabad unit
of BEL for two months and did my summer internship.
23. Page | 17
BEL, Ghaziabad:
BEL, Ghaziabad is one of the nine units and is second largest after Bangalore unit. BEL,
Ghaziabad is divided into 3 Strategic Business Units (SBUs). The total turnover of the unit is in
excess of Rs.1000 Crores and number of employees is about 2300. The unit manufactures
Radars, Antenna, Secondary Radars, Command Control Communication & Intelligence (C4I)
products mainly for defense forces.
It also provides integrated communication solution to the Defence forces involving encryption
and secure data transfers. The unit has provided many prestigious products and solution to
Defense, Paramilitary and Police forces. The major equipments supplied in the past include:
1. IRMA Radar
2. INDRA- I & II Radars (low level tracking)
3. Reporter (tactical control radars)
4. Communication Equipments Radios
5. Command & Control Systems
6. Antennas
Major products being currently handled:
1. 3D Central Acquisition Radar
(i.) Rohini- IAF
(ii.) Revathi- Navy
(iii.) 3D TCR- Indian Army
2. LLTR
3. Battlefield Surveillances System
4. Integrated Advanced Command & Control System
5. Antennas for radars of own unit & for BEL-BG
25. Page | 19
2.1 Budgeting and Budgeting Control:
Budget is a plan prepared and approved prior to a defined period of time. Most of the plans
prepared are quantitative in nature. The need for preparation of Budgets is to steer the company
towards its long term objectives by firming up the short term goals in line with the long term
objectives. In order to achieve the short term targets and also to give a thrust to the growth of the
company there is a need to make investments in Plant & Machinery, Test Instruments, Civil
Works and Infrastructure for which an investment plan is to be drawn up.
The investment plan of the Company is laid down in the Capital Budget while the Operating plan
is laid down in the Revenue Budget. The preparation of Budget is only half the job done. The
efficacy of the Budgeting process can best be judged by a system of periodic monitoring.
This helps the Budgeting process in two ways:
(i) To take necessary action in achieving the targets.
(ii) To analyze the reasons for variations and take corrective actions either through
appropriate measures in achieving the targets or revising the basis of budgeting in future.
2.2 Budgeting Process:
The Budgeting process in BEL is a yearly exercise and by convention all Budgets submitted to
the Board of Directors will reflect the plan for three years:
a. Budget Estimate of the next financial year (B.E.),
b. Forecast Estimate for the year after next year (F.C.) and
c. Revised Estimate of the current financial year (R.E.)
It can be seen that there is possibility to revive the Budget estimate of the current financial year.
This flexibility to review the original Budget and make revision may become necessary if there
are any significant changes in either the internal or external environment. Ideally, the changes in
Revised Estimate should be kept to the minimum, since large scale changes defeat the purpose of
preparing the original Budget Estimate itself.
26. Page | 20
2.3 Time Frame for the preparation of Budgets:
The Capital Budget and Revenue Budget proposals from the units should reach corporate office
by end September. The Consolidated Budget is put up to the Board in October/November, so that
Units/Divisions have sufficient time to initiate midterm course corrections, if necessary, for the
current year and also take advance action for achieving targets in the succeeding years [4].
2.4 Responsibility for preparing the Budget:
1. Units/Divisional Heads shall be responsible for the preparation of the budgets. In every
Unit/Division, the Industrial Engineering department shall be responsible for preparation
and submission of Budgets to Unit/Divisional Finance, while in case of multi division
units the Management Services department shall be responsible for this job.
2. Finance departments in the Unit/Divisions shall be responsible for providing information
on expenditure and possible significant variances to the Industrial
Engineering/Management Services Department. This information is to enable the
proposing division to take into account all key factors at the time of preparation of
Budget.
3. Unit Finance shall also be responsible for finalizing the budget after obtaining it from the
Industrial Engineering/Management Services Departments and forwarding it to Corporate
office
4. Corporate Finance shall be responsible for the consolidating the budget and obtaining the
approval of the Board. Once the Board approval is obtained, Corporate Finance shall
communicate the approved budget to the unit. Wherever required, Corporate Finance
shall also be responsible for obtaining Government approvals.
2.5 Capital Budget:
The main function of Financial Management is the efficient utilization of available funds. The
function involves committing funds in long term assets and other profitable activities.
27. Page | 21
Capital Budgeting:
Capital Budgeting involves Company’s decision to invest its current funds in the long term
activities, in anticipation of an expected flow of future benefits. This decision involves additions,
disposals, modifications or replacement of long term fixed assets.
Key features kept in mind while making a Capital investment decision:-
a. In most of the cases the outlay of funds will be heavy
b. The decision to commit funds, once made, is irreversible
c. The benefit from deployment of funds is expected in future years
Outcome of Capital Investments:-
a. Growth in Production/Sales
b. Increase in mechanization which in turn increase productivity
c. Improvement in quality
d. Decrease in rejections/reworks which in turn reduces costs
e. Better utilization of existing infrastructure, facilities and manpower
Proposals are for the following:-
Replacement of plant and machinery
Addition/extensions for raising output
Taking up a new product line
Vertical integration (in-house production rather than purchase from outside)
Fixed assets for R&D activity
Building requirements and civil, mechanical and electrical works for items
Capital Investment fall under three broad categories:-
i. Projects
ii. Augmentation Needs
28. Page | 22
iii. Civil Works
i. Projects:
Identifiable and Computable revenue from the investment proposed and the revenue expenditure
envisaged. Projects are assessed by Internal Rate of Return (IRR).
Project cost estimates should be prepared under various heads such as:-
Plant & Machinery
Test Instruments
Special Tools/Jigs
Civil Works
Utilities
Other Infrastructure
Project of upto Rs.50 Lakhs is approved by Chairman/Managing Director (CMD) while project
above Rs.50 Lakhs is approved by Board [4]. On completion, a completion report is submitted
within 3 months. The completion report is comprised of Actual Expenditure and Sanctioned Cost
which is used to analyze the variance. If the cost over-run is greater than 10% then approval of
the Project Sanctioning authority is required.
ii. Augmentation Needs:
It is for augmenting the existing facilities. It includes:
Modernization and Balancing needs (Addition/Replacement)
Replacement of existing assets either due to technological obsolescence or due to wear
and tear
Additions/Replacements to bolster the Infrastructure needs like furniture, computers, etc.
which cannot be linked to production activity
Items required for Research and Development (R&D)
iii. Civil Works:
29. Page | 23
All the civil works requirements of new buildings/floors either in the Factory or in the Township
are to be listed here.
2.6 Basic Tenets in Budgeting:
Major goal of budgeting is to avoid sub-optimization and since internal resources are
limited, requirements of all the divisions cannot be catered. Attempt has to be made to
identify the best alternatives to invest since this would maximize the returns of the Unit.
Directives issued by the Board in respect of Capital Budgeting:
- Total amount of Capital Investment on Augmentation needs and Civil works
should be restricted to the depreciation figure of the respective unit for the
previous year.
- No restriction on investments for Projects
- Any additional capital investment other than above two has to generate a turnover
of 3 times the capital investment proposed.
- Any spillover expenditure of the previous year will be accounted against the
year’s requirement and will not be allowed in addition to the same.
30. Page | 24
2.7 Capital Budget Flowchart:
Note: (i) UC- Unit Capital
(ii) SD- Supporting Document
(iii) UC 5, 6 & 7 are Independent formats
(Source: Budget Manual, BEL, 1995)
UC 1
Summary of
Capital Budget
UC 2
Proposal on
Projects
UC 3
Proposal on
Augmentation
Needs
UC 4
Proposals on
Civil Works
expenditure
UC 3A
Summary of
Augmentation
needs approved
UC 3B
Summary of
Augmentation
needs to be
SD 3A (i)
P&M approved
SD 3A (ii)
TI approved
SD 3A (iii)
Infrastructure
needs approved
SD 3A (iv)
R&D approved
SD 3B (i)
P&M to be
approved
SD 3B (ii)
TI to be
approved
SD 3B (iii)
Infrastructure
needs to be
approved
SD 3B (iv)
R&D to be
approved
UC 4A
Civil works
approved
UC 4B
Civil works to be
approved
UC 7
Formats for assessing
project viability 7, 7A, 7B,
7C, SD 7(i), 7(ii)
UC 5
Quarterly Cash Flow
UC 6
Justification on Formats
6A, 6B, 6C
31. Page | 25
The requirement of the Unit for Projects, Augmentation Needs and Civil Works are brought out
in different formats. Proposals for Augmentation Needs are in two formats i.) summarizing the
approved items, ii.) summarizing all fresh proposals. Each summary is again supported by
documents separately listing out individual items of Plant & Machinery, Test Instruments,
Infrastructure needs and R&D. Proposal on Civil Works expenditure includes listing out the
approved items and listing out all fresh proposals. Few separate independent formats include:
i.) projection of quarterly cash flow,
ii.) formats of justification for the proposals,
iii.) formats of assessing project viability
This method of organizing the formats is hierarchical in nature and is aimed to bring out the
following:
a. Items of expenditure which ‘spillover’ from previous year’s commitments
b. Items approved in B.E. of current year which requires to be carried forward in R.E. of current
year
c. Items of reappropriation which have to figure in R.E. of current year
d. Fresh proposals for R.E. of current year along with proposals for Budget & Forecast year.
Certain Terms:
a. R.E. (Current year): Stands for the Revised Estimates of the current year for which the original
Budget estimates have been approved in the previous year.
b. B.E. (Next year): Stands for the Budget Estimates of the next financial year which is a set of
fresh proposals. Once approved this forms the basis of all future reference to outsiders including
the Ministry.
c. Forecast (Year after next year): Stands for a set of fresh Budget proposals for the year after
next year and gives only indicative figures. No approval is given for the forecast year.
d. Approved B.E. (Current year): Stands for the original Budget Estimates approved for the
current year. The revised estimates of the current year listed at (a.) above is prepared by a review
of this approval Budget estimates of the current year.
32. Page | 26
e. Opening Commitments: The opening commitments should include all those cases where the
company has placed a formal purchase order on the intended supplier of capital items.
2.8 Various formats used by the Company:
Form UC 1: Format for the summary of Capital Budget proposals
Form UC 2: Format for the details of Budget proposals on all projects including R & D projects
Form UC 3: Format for a summary of the Budget proposals on Augmentation Needs
Form UC 3A: Format to furnish the summarized proposals of approved items under the head
Augmentation Needs
Form UC 3B: Format to furnish the summarized proposals on “To be approved items” under the
head Augmentation Needs
Form UC 4: Format to furnish the summarized proposals on Civil Works
Form UC 4A: Format to furnish the summarized proposals of approved items under the head
Civil Works
Form UC 4B: Format to furnish the summarized proposals on “To be approved items” under the
head Civil Works
Form UC 5: Format to furnish the quarterly cash flow projection for the Budget proposals
Form UC 6A: Format for justifying the need for a capital item under Augmentation need, whose
value exceeds Rs.50 lakhs
33. Page | 27
Form UC 6B: Format for justifying Civil Works, whose value exceeds Rs.50 lakhs in case of
factory works and Rs.20 lakhs in case of township
Form UC 6C: Format for justifying individual items of Augmentation Needs costing more than
Rs.5 lakhs
Form UC 7: Format to give a summary of the project proposals. The format gives at a glance
certain salient features of the proposal
Form UC 7A: Format to arrive at the total capital investment envisaged in the project
Form UC 7B: Format to give the operating estimates of the proposed project
Form UC 7C: Format to arrive at the cash flows for the duration of the project and the resultant
Internal Rate of Return
I have gone through all the formats and they were satisfactory. All the above formats are shown
in Appendix B.
General Guidelines:
The formats are only to aid the proposer to have a uniform basis of working out project viability.
However the quality of selection of the projects will solely depend on the extent of ground work
done prior to putting up a project proposal.
Some salient points:
34. Page | 28
a. Unless indicated otherwise the Debt Equity Ratio for a project may be assumed as 1:1 and the
interest rate for the loan considered will be at the rates applicable from time to time. A two year
moratorium for loan repayment (not for interest payment) may be assumed if the project life is
taken as seven years or more. However, if the project life considered is less than seven years then
the repayment may be taken as equal to the life of the project without considering any
moratorium period.
b. While considering payment on account of TOT the terms of the agreement should be strictly
followed and the benefits of Double taxation agreement relief, wherever applicable, should be
availed. In cases where TOT is incurred much ahead of the commencement of commercial
production i.e. even earlier to year 0, the cash outflow should be shown accordingly while
working out the IRR.
c. The foreign currencies involved and the rate of exchange adopted for all the elements in the
project cost may be indicated. The rate of customs duty adopted which will normally be the
current rate may also be indicated. In respect of civil works the rates of steel, cement assumed
may be indicated.
d. The financial statements may be prepared assuming no escalation in material cost and sale
prices. The Labour rates may be escalated suitably for normal years plus a percentage increase
for the year in which the new wage settlement is due. All other Revenue expenses may be
escalated suitably.
e. In the case of expansion proposals the return on investment may be prepared in one of the two
following ways:
35. Page | 29
Taking only the new investment and the resultant performance. This may be done in
cases where the investment in a new project involves a substantial increase in
capacity and where the costs and benefits can be clearly identified to the new
investment.
Taking the existing as well as the incremental investment in the overall performance
of the project. This may be done in cases of investment in an existing line not
involving a substantial increase in capacity and the costs and benefits cannot be
clearly identified to the new investment.
f. The assumptions made in the preparations of the operating statements, computation of working
capital and estimation of man power should be clearly stated. The man power details should be
department wise as well as break up between direct and indirect man power, executives and non-
executives should be furnished. Redeployment of existing manpower should always be
considered. The extent of sub contracting proposed should also be clearly spelt out. However it
may be noted that sub contracting should be resorted to only when facilities and/or Manpower
are not available within the Unit.
g. Only those projects which yield an IRR of 16% and above would be considered financially
viable. A project whose IRR falls short of this norm is not likely to be put up to the Board unless
justified based on other non economic conditions which should be explained clearly in the
project proposal.
h. In the case of projects involving an outlay of Rs.5 crores or more a sensitivity analysis is to be
given for IRR in respect of the proposed investment. The sensitivity analysis should work out the
IRR based on the following variations:
36. Page | 30
(i) sale price reducing by 5%
(ii) investment going up by 5%
(iii) variable cost going up by 5%
(iv) a combination of all the above three factors
Any project to be recommended must ensure an IRR of atleast 10% under alternatives (i) to (iii)
above and atleast 8% under (iv) [4]
. An investment not meeting these can be proposed only if
there are other strong considerations.
Following table shows the calculation of WACC:
Calculation of Weighted Average Cost of Capital:
Debt/Equity Ratio (D/E) 0.000082 (Source: Annual Report 2010-11, BEL)
Proportion of Equity (we) 0.9999
Proportion of Debt (wd) 0.0001
Cost of Debt (rd) 15% (Source:http://economictimes.indiatimes.com/bharat-
electronics-ltd/ )
Beta (β) 1.04 (Source: http://www.reuters.com/finance/stocks/ )
Risk Free Rate (Rf) 8%
Risk Premium (E(RM) –
Rf)
8.5% (Source: Pablo, J. L. (2011). Market Risk Premium
Used in 56 Countries in 2011. 3.)
37. Page | 31
Cost of Equity (re) 16.84% = Rf + β (E(RM)-Rf)
Tax Rate (t) 30%
WACC (%) 16.84 = we* re + wd * rd * (1-t)
BEL considers only those projects as financially viable which have an IRR of 16% or above. I
calculated the WACC of the BEL and which comes out to be 16.84%. Hence, the norm of the
company regarding project viability can be said to be ok.
2.9 Assessing the Project viability:
One of the factors that determine the long term prospects of any company is the quality of the
project in which the company’s funds are committed. The project which yield good returns, help
in increasing the wealth and growth of the company. To ensure that the projects taken up by the
Units yield good return, it is imperative that a uniform procedure of assessing the viability of a
project is followed. A set of formats have been suggested in which the project viability should be
submitted to corporate office for Scrutiny.
PROJECT 1:-
Details of the project:-
Capital Investment:
(Value in Rs. Lakhs)
P&M 100
TI 2,500
40. Page | 34
Operating Estimates of the Proposed Project:
Viability Statement of the Proposed Project:
Only those projects which yield an IRR of 16% and above are considered financially viable.
Since above project yield an IRR of 36% it is considered as financially viable as per company
norms. The project involves an outlay of more than Rs.5 crores, a sensitivity analysis is to be
given for IRR in respect of the proposed investment.
41. Page | 35
Supporting document:
PROJECT 2:-
Details of the project:-
Capital Investment:
(Value in Rs. Lakhs)
P&M 500
TI 3,200
CW 100
44. Page | 38
Operating Estimates of the Proposed Project:
Viability Statement of the Proposed Project:
Only those projects which yield an IRR of 16% and above are considered financially viable.
Since above project yield an IRR of 12% it is not considered as financially viable as per
company norms.
45. Page | 39
Supporting document:
2.10 Sensitivity Analysis of PROJECT 1:-
Variations Project is considered
viable when IRR>
Calculated IRR
(i) Sale price reducing by 5%: 10% 16%
(ii) Investment going up by 5%: 10% 34%
(iii) Variable cost going up by 5% 10% 27%
46. Page | 40
(iv) A combination of all the above
three factors
8% 14%
As per company guidelines any project to be recommended must ensure an IRR of atleast 10%
under alternatives (i) to (iii) above and atleast 8% under (iv).
Project 1 ensure an IRR of 16%, 34%, and 27% under alternatives (i) to (iii) above and 14%
under (iv) and satisfies the company norms. Hence, project 1 is financially viable.
2.11 Working on SAP:
I also got my hands on SAP application of finance department. I was assigned the work of giving
Internal Order Number to the files that came to the Section. Following is the detail regarding the
SAP implementation that has been done in the company.
SAP Implementation
BEL has undertaken implementation of SAP across all the Units / Offices. Implementation of
SAP R / 3 including Payroll Product Lifecycle Management module at all Units and Offices of
BEL were completed in a phased manner by July 2008 [7]
. A number of improvements, checks
and validations have been incorporated in the system based on user feedback. Pilot
implementation of the following new dimension modules of SAP was done in 2010-11.
Supplier Relationship Management (SRM)
Knowledge Management (C Folders)
Employee Self Service (ESS)
Strategic Enterprise Management (SEM) Consolidation
Business Objects Reporting Tool
Procurement for Public Sector (PPS) module
47. Page | 41
SRM version 5.0 was upgraded to SRM version 7.0 to implement Procurement for Public Sector
(PPS) module. This module facilitates e-procurement with 2 Part Bidding, Accounting of Earnest
Money Deposit, opening of Bids by Tender Opening Committee etc. Customer Relationship
Management (CRM), and Supply Chain Management (SCM) are in final stages of
implementation and testing. Standard SAP package does not cater to several requirements such
as Consignment Receipt Report, Export Documentation etc. These features have been developed
in SAP platform. A number of process improvements such as automation of accounting of inter
unit transactions, bar code for issue and accounting of materials from stores etc. Security
measures, such as, Firewall and Intrusion Prevention Systems have been implemented to secure
Data Centre and DR site which are in BEL’s Intranet. Similarly, security measures, such as, Web
Application Firewall, Reverse Proxy, Firewall, Intrusion Prevention System are under
implementation for secure Internet access by customers and vendors to SRM and CRM servers.
Following were the steps to be followed to create Internal Order Number on the SAP for the files
that came to the Section.
Steps to create Internal Order Number:
ID- 210307TR
PWD- *******
1.) Type ‘KO01’
2.) Order type: B200
3.)
Description: MS NO MU-___ DT __.__.__ Remarks
Company Code: 1300
Business Area: 93__ (last two digit either 10, 20, 30 depending on Cost Centre)
48. Page | 42
Plant: 13__ (last two digit either 10, 20, 30 depending on Cost Centre)
Profit Centre: 1310010
1320010
1330010 (any 1 of these three depending upon Cost Centre)
Responsible C. Ctr.: 13______ (given in the file)
Requesting C. Ctr.: 13______ (same as above)
4.) Go to ‘CONTROL DATA’
- Check the box against ‘STATISCAL ORDER’
- Uncheck the box against ‘PLAN-INTEGRATED ORDER’
- Actual posted C. Ctr.: 13______ (given in the file)
5.) Click on ‘SAVE’ option
6.) Write down the Internal Order number in the file
- I.O. for MS MU- ___ DT __.__.__ - _______ (internal order number generated)
7.) Press ‘Ctrl+N’
8.) Type ‘/NKO22’
9.) Check the Order Number
10.) Enter the Amount from the file. (in the box of Overall and 2012)
11.) Click on ‘SAVE’ option
12.) Press ‘Ctrl+N’
13.) Type ‘/NKO02’
14.) Go to ‘CONTROL DATA’
49. Page | 43
15.) Click on ‘RELEASE’ option
16.) Click on ‘SAVE’ option
50. Page | 44
2.12 Recommendations regarding their Budgeting process:
1. BEL considers only those projects to be financially viable which yield an IRR of 16% and
above. A project whose IRR falls short of this norm is not likely to be put up to the Board unless
justified based on other non economic conditions which should be explained clearly in the
project proposal. Since company has sufficient amount of funds, it can assess the viability of
projects through NPV method also. In case of IRR, the company is not taking up the project if
the IRR of the project is below certain level. It might happen that the project has low IRR but
still has positive NPV. So the company might lose up some profits dropping few projects on the
basis of IRR.
2. According to the company norms, any kind of addition or replacement has to generate a
turnover of 3 times the capital investment proposed. This norm is in practice from a long time.
Company is focusing only on the turnover or profit that they will receive from the addition or
replacement. I feel like the company should not only focus on returns but should also consider
other factors like cost benefit, time benefit, improved quality, etc which might also result due to
this addition or replacement.
3. The budget compilation is done periodically but I will suggest that it should be handy every
time. It should be available at any period of time.
52. Page | 46
Learning:
The concepts, tools, techniques and skills learnt at college helped me during the entire course of
my summer internship. Various techniques of capital budgeting which we studied in Financial
Management was very helpful. Tools like Internal Rate of Return, Net Present Value,
Depreciation methods were very handy during the period of internship. Estimation of project
cash flows which was taught was also used in carrying out the projections. We studied the
Sensitivity analysis to explore the effect of variations on NPV. In my training I learned to use the
Sensitivity Analysis to explore the effect of variations on IRR of the project. Written Analysis
and Communication was quite useful in maintaining proper and effective communication with
my company guides and college mentor. It is in fact helping me right now to prepare this report.
One of the most important learning of the training was that we have to dig out the information.
Nobody was willing to give away the information regarding anything. The most difficult part
was gathering the information. During the training period I got the opportunity to identify the
potential investment opportunities. Reviewing of project is necessary in order to check that the
funds position of the company is satisfactory at the time of implementation.
Overall summer training is an 8 to 10 week of structured programme which is designed to
develop our professional skills. I have greatly enhanced my interpersonal skills and become
much calmer as an individual due to the experiences in my summer internship.
53. Page | 47
References:
1. (n.d.). Retrieved June 10, 2012, from http://www.bel-india.com
2. (2011). Annual Report 2010-11. Bharat Electronics Limited.
3. (n.d.). Retrieved June 28, 2012, from
http://www.mindtools.com/pages/article/newSTR_91.htm
4. Budget Manual, BEL. (1995).
5. Chandra, P. (2011). Financial Management. New Delhi: Tata McGraw Hill Education Pvt.
Ltd., .
6. Horngren, D. F. Cost Accounting: A Managerial Emphasis. Pearson.
7. BEL SAP Implementation. Business Blueprint Controlling
54. Page | 48
Appendix A:
BE: Budget Estimate
BEL: Bharat Electronics Limited
CBU: Completely Build Up
CKD: Completely Knock Down
DRDO: Defence Research and Development Organization
ERP: Enterprise Resource Planning
FC: Forecast Estimate
FM: Frequency Modulation
HF: High Frequency
IC: Integrated Circuits
IM: Indigenously Manufactured
ISRO: Indian Space Research Organization
KW: Kilo Watt
MNC: Multi National Company
PSU: Public Sector Unit
RE: Revised Estimate
R&D: Research and Development
SBU: Strategic Business Unit
SD: Supporting Document
SKD: Semi Knock Down
TOT: Transfer Of Technology
US: United States
VHF: Very High Frequency
