A project on working capital management in bhel

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A project on working capital management in bhel

  1. 1. Projectsformba.blogspot.comCHAPTER 1INTRODUCTIONINTRODUCTION ABOUT FINANCE Finance is one of the major elements that activate the overall growth of the economy.Finance is the life blood of economic activity. A well - knit financial system directly contributes tothe growth of the economy. An efficient financial system calls for the efficient performance ofinstitution, financial instruments and financial markets. Finance which acts as the lifeblood in the modern business types is one of the most importantconsideration for an entrepreneur-company. While Implementing, expanding, diversifying,modernizing or rehabilitating any project the meaning of finance is better understood. In this sectionwe have covered finance related information and the process of managing the same. Finance is a science of managing money and other assets. It is the process of channelizationof funds in the form of invested capital, credits, or loans to those economic agents who are in need offunds for productive investments or otherwise. E.g. On one hand, the consumers, business firms, andgovernments need funds for making their expenditures, pay their debts, or complete othertransactions. On the other hand, savers accumulate funds in the form of savings deposits, pensions,insurance claims, and savings or loan shares, etc which becomes a source of investment funds. Here,finance comes to the fore by channeling these savings into proper channels of investment,In general, finance is that business activity which is concerned with acquisition and Conservation ofcapital funds in meeting financial needs and over all objectives of a business entrepreneur.Projectsformba.blogspot.com
  2. 2. Projectsformba.blogspot.com “Finance is the common denominator for a vast range of corporate ., projects and the majorpart of any corporate plan must be expressed in financial terms”.The main reasons a business needs finance are to:• Start a business• Finance expansions to production capacity• To develop and market new products• To enter new markets• Take-over or acquisition• Moving to new premises• To pay for the day to day running of business REVIEW OF LITERATUREMEANING OF WORKING CAPITAL Working capital refer to that part of total capital which is used for carrying out the routine orregular business operation. In other words, it is the amount of funds used for financing the day-today operation. In short, it is the capital with which the business is worked over.Thus, the capital invested and locked up in various current assets , such as stocks of raw material,work in progress , stocks of finished goods account receivable and cash and bank balancesconstitutes the working capital. Working capital may be regarded as life blood of a business. Its effective provision can domuch to ensure the success of a business while its in provision can do much to ensure the success ofa business while its in efficient management can lead not only to loss of profits but also to theultimate downfall of what otherwise might be considered as a promising concerns.Projectsformba.blogspot.com
  3. 3. Projectsformba.blogspot.com> According to shoo-in, “Working Capital is the amount of funds necessary to cover the cost ofoperating the enterprise”. Working Capital is also known as Revolving or Circulating Capital.> According to Genesterberg, “Circulating Capital means current assets of a company that arechanged in the ordinary cause of business from one to another form. Example: From cash toinventory, inventories to bills receivable and bills receivable to cash.Concept of working capitalThere are five concepts of working capital :-o Gross Working Capitalo Net Working Capitalo Negative working capitalo Permanent working capitalo Variable working capitalOn the basis of the components or items comprised in working capital, working capital can beclassified into the following types:Gross Working capital: Simply called as working capital, refers to the firms investment in currentassets. Current assets which can be converted in to cash with in the accounting year (or operatingcycle) and includes cash, short term securities, debtors, Bills receivable and stock (inventory) .Projectsformba.blogspot.com
  4. 4. Projectsformba.blogspot.comNet Working Capital: Refers to the difference between current assets and current liabilities.Current liabilities are those claims of outsiders, which are expected to mature for payment with in ayear and include creditors, Bills payable and outsider’s expenses.Negative working capital or working capital deficit: means the excess of current liabilities overthe current assets. It accurse when the current liabilities exceed the current assetsPermanent working capital or fixed working capital: refer to the minimum amount of investmentin current assets required throughout the year for carrying out the business. In other words , it is theamount of working capital which remains in the business permanently in one form or other.Variable working capital or fluctuating working capital: refer to the amount of working capitalwhich goes on fluctuating or changing from time to time with the change in the volume of businessactivities.Ratio’s : The term ratio simply means one number expressed in terms of another. It describes inmathematical terms the quantitative relationship that exists between two numbers.NEED FOR WORKING CAPITAL Every business undertaking requires funds for two purposes, investments in fixed assets &investment in current assets. Funds required for investing in inventory, debtors & other current assets keep changing inshape & volume. Company has some cash in the beginning; this cash may be the source of rawmaterial, keeping the labour cost & other overheads. These three combined would generate work inprogress, which will be converted into finished goods on the completion of the production processinto debtors & when the debtor pay, the firm may generate cash. Working capital is needed forsustaining (i.e., maintaining) the sales activities. If adequate working capital is not maintain for thisProjectsformba.blogspot.com
  5. 5. Projectsformba.blogspot.comperiod ,the firm will not be able to sustain or maintain the sales , since it may not be in a position topurchase raw material and pay wages and other expenses ands produce the goods required for thesales.NATURE OF WORKING CAPITAL In ordinary parlance, Working Capital is taken to be the fund available for meeting day-to-day requirements of enterprises. It cannot be denied that a part of the fixed or permanent capital isinvested in assets, which are kept in the business or for a long period for the purpose of earningprofit. These are usually known as fixed assets viz. Land & buildings, plant & machinery, furniture& fitting & intangibles like goodwill, patents, trademarks & long-term investment. Another part of permanent capital left in the business for supporting the day-to-day normaloperation is known as the “Working Capital”. This Working Capital generates the important elementof cost viz. Material, wages & expenses. These cost usually lead to production & sales in case ofmanufacturing concerns & sales alone in others. These costs occur gradually in a flow & do notcome into being abruptly at a given moment. Hence the initial investment of cash as working capital for this specific purpose has to becontinued until the sales revenue commences flowing in substantially & in a regular way. From thisstage the business is found to acquire a momentum of its own. The flow of revenue is expected tocontinue to replace the cost lost in its day-to-day out flow for the generation of the revenuementioned above.SOURCE OF WORKING CAPITAL The financial manager is always interested in obtaining the working capital at the right time,at a reasonable cost and at the best possible favorable terms. A part of the working capitalinvestment are permanent investments is fixed assets. The following is snapshot of various source ofworking capital.Projectsformba.blogspot.com
  6. 6. Projectsformba.blogspot.comSources of working capital divided into two• Long -term• Short –termSources of long term working capital• Issue of shares• Floating of debentures• Ploughing back of profit• Loans• Public depositSources of short-term working capitalInternal sources• Depreciation• Taxation• Accured expensesExternal sources• Trade credit• Credit papers• Bank creditProjectsformba.blogspot.com
  7. 7. Projectsformba.blogspot.com• Customer’s credit• Govt. Assistances• Loans from director• Security of employeesWORKING CAPITAL CYCLE:- The working capital of a concern goes on changing in shape and volume. For Instance, aconcern may have some cash in the beginning. The cash may be used by the concern for the purposeof purchase of raw material, payment of wages and other expenses’. These elements of cost or itemsof expenses, raw material , wages and overheads , will result in work- in-progress during the processof manufacture. On the in compilation of the production process, the work- in –progress becomesfinished goods.Meaning The length of time involved in this cycle of conversion of cash into raw material, rawmaterial into work-in progress, work-in-progress into finished goods, finished goods into debtors anddebtors into cash again is called the operating cycle or working capital cycle of the firm, in otherwords, it is period between the date raw material are purchased and the date the sale proceeds offinished goods are realized by concern.INTER-DEPENDENCE AMOUNG COMPONENTS OF WORKING CAPITALOPERATING CYCLE : A company starting with cash purchase raw materials, components etc., on a cash or creditbasis. These materials will be converted into finished goods after undergoing various stages of work-in-process. For this purpose the company has to make payments towards wages, salaries andmanufacturing costs. Payments to suppliers have to be made on purchases in the case of cashpurchases and on the expiry of the credit purchases. Further, the company has to meet otheroperating costs such as selling and distribution costs, general administration costs and non-operatingProjectsformba.blogspot.com
  8. 8. Projectsformba.blogspot.comcosts described as financial costs (interest on borrowed capital). In case the company sells itsfinished goods on cash basis, it will pass through one more stage, viz, accounts receivable and getsback cash along with profit on expiry of credit period. Once again the cash will be used for thepurchase of materials and / or payments to suppliers and the whole cycle is termed as workingcapital or operating cycle repeats itself. This process indicates the dependents of each stage orcomponents of working capital on its previous stage or component.WORKING CAPITAL MANAGEMENTIntroduction Working capital management is one of the most important aspects of financial management.It forms a major function of the finance manager.Meaning :Working capital management means management or administrating of all aspect of working capital,i.e., currents assets and currents liabilities.In other words of Smith, “working capital management is concerned with the problems that arise inattempting to manage the current assets, the current liabilities and the inter-relationship that existsbetween them”.BASIC OBJECTIVE OF WORKING CAPITAL MANAGEMENT : The basic objective of working capital management is to manage the firm’s working capital(i.e., currents assets and currents liabilities) in such a way that a satisfactory level of working capital(i.e., neither excessive nor inadequate working capital) is maintained. This is necessary because, ifthe working capital is excessive or large, the liquidity position of the firm would, no doubt, improve,but its profitability would be adversely affected, as funds would remain idle. Conversely, if theworking capital is too small, the, profitability of the firm may improve, but the liquidity position ofthe firm would be adversely affected.Projectsformba.blogspot.com
  9. 9. Projectsformba.blogspot.comAdvantages of working capital:• It helps the business concern in maintaining the goodwill.• It can arrange loans from banks and others on easy and favorable terms.• It enables a concern to face business crisis in emergencies such as depression.• It creates an environment of security, confidence, and over all efficiency in a business.• It helps in maintaining solvency of the business.Disadvantages of working capital: • Rate of return on investments also fall with the shortage of working capital. • Excess working capital may result into over all inefficiency in organization. • Excess working capital means idle funds which earn no profits. • Inadequate working capital can not pay its short term liabilities in time.CHAPTER 2PROFILE OF THE COMPANY (BHEL) BHEL was founded in 1950s. The first plant of BHEL was set up at Bhopal in 1956, whichsignaled the beginning of the Heavy Electrical Industry in India. In before 1960 three more majorplants were set up at Haridwar, Hyderabad and Trichy. Its operations are organized around three business sectors: Power, Industry - includingTransmission, Transportation, Telecommunication & Renewable Energy - and Overseas Business.Projectsformba.blogspot.com
  10. 10. Projectsformba.blogspot.comToday, BHEL has a wide-spread network comprising 14 manufacturing divisions, 8 service centres,4 power sector regional centres, 18 regional offices, and a large number of project sites spread allover India and abroad. Its registered and corporate office is situated at New Delhi. BHEL has a well recognized track record of performance making profits continuously since1971-72 and paying dividends since 1976-77. BHEL manufactures over 180 products under thirtymajor groups. The quality and reliability of its products is due to the emphasis on design, engineering andmanufacturing to international standards best acquiring and adopting some of the best technologiesfrom leading companies in the world together with technologies developed in its own R&D centers.QUALITY CERTIFICATION : BHEL has acquired certifications from both ISO 9000 & ISO 14000 standards for itsoperations and has also adopted the concepts of total quality management. BHEL has adoptedoccupational health and safety standards as per OHSAS 18001. The major units of BHEL havealready acquired the ISO 14001 certification. The company’s inherit potential coupled with its strong performance over the years hasresulted in it being chosen as one of the “Navratna” status.PRODUCT RANGE  THERMAL POWER PLANTS  GAS BASED POWER PLANTS  HYDRO POWER PLANTS  DG POWER PLANTS  INDUSTRIAL PLANTSProjectsformba.blogspot.com
  11. 11. Projectsformba.blogspot.com  INDUSTRIAL SETS  BOILERS  BOILERS AUXILIARIES like as Fan, Air-pre Heaters, Gravimetric Feeders etc.,  HEAT EXCHANGERS AND PRESSURE VESSELS  POWER STATION CONTROL EQUIPMENTS  SWITCHGEARS  BUS DUCTS  INSULATORSPOWER GENERATION : Power Generation sector consists of thermal, gas, hydro and nuclear plant oriented sectors.Though BHEL supplied sets account logs nil till 1969-70, it rises to 62,051 MV or 65% of the totalinstalled capacity of 95377 MV in the country. BHEL has the capability of turning power projects from concept to commissioning. With itstechnology, it has the ability to produce thermal sets with super critical parameters unto 1000 MVunit rating and gas turbine- generator sets of upto 240 MV units rating.POWER PROJECTS IN SOUTH ZONEAmarkanatak TPS - 1 x 210 MWAPGENCO - Pulichinthala 4X30 MW HEP Supervision of E&CBellary TPS - 1 x 500 MWBELLARY TPS UNIT 2 - 500 MWBHAVINI -NPCIL - KALPAKKAM 1X500 MweBhushan Steel and Strips LimitedProjectsformba.blogspot.com
  12. 12. Projectsformba.blogspot.comJINDAL INDIA THERMAL POWER LTD 2x600 MW BTGKalwakurthy Lift Irrigation Scheme Stage I - 5x30MWKoil sagar Lift Irrigation Project - IVRCL Infrastructures & ProjectsKRISHNAPATNAM - APPDCL 2X800 MW SGKudankulam- 2 x 1000 MWe NPCILNeyveli Lignite Corporation Limited -Neyveli TPS: 2X250MWNTPC - Simhadri 2X500 MW SG with ESP and auxiliariesSILKROAD SUGAR PVT LTD - 1xFr 6 GTG - E & CSriram Sagar Hydro Electric Project – Stage – IISterilite Industries - 2x80 MW BTGSurana Power Ltd - 2 x 210MW Thermal Power Project,Yeramaras Thermal Power Station of RPCL - 2 X 800 MWPower Sector in Northern Region : Bhel Power Sector Northern region is one of these four regions. It is mainly involved inErection, testing and commissioning of power plants in the states of J&K, Himachal, Uttaranchal,Punjab, Haryana, Rajasthan and Uttar Pradesh and National Capital Territory of Delhi. While theproject sites located in hill states comprise of Hydro Power Plants ranging upto single units of 250MW those in the other states comprise mainly of thermal sets of ratings ranging upto 500 MW.Region is also involved in execution of Nuclear power plants and gas based power plants. Besidesthis we also provide our valuable customers with after sales services through our regional servicecentres located at Chandigarh, Noida and Varanasi. These centres provide a wide range of high-techservices to our customers like renovation, modernization, uprating, overhauling, residual lifeassessments and life extension etc.Projectsformba.blogspot.com
  13. 13. Projectsformba.blogspot.comOverall Achievements: a) To make the most part of the high-ash content coal used in India, BHIL suppliescirculating fluidized bed combustion boilers to both thermal and combined cycle power plants. b) The company manufactures 235 MV nuclear turbine-generator sets and obtains aproduction of 500 MV in these sets. c) Custom made hydro sets of Francis, Pelton and Kaplan types for different head-dischargecombinations are also engineered and manufactured by BHEL. d) Until now, the company had placed orders for more than 1000 utility sets of thermal,hydro, gas and nuclear plants. This is based on contemporary technology comparable to the best inthe world. It is also internally competitive.INDUSTRIAL SECTORIndustry BHEL is a major contributor of equipment and system to industries. Its major contributionsare cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc. The range of systems and equipment supplied includes captive power plants, DG powerplants, high-speed industrial drive turbines, electrical machines, pumps, valves etc.Transportation Most of the trains operated by the Indian railways, including the metro in Calcutta, areequipped with BHEL’s traction electrics and traction control equipment. The company also supplieselectric locomotives to Indian railways and diesel shunting locomotives to various industries.Projectsformba.blogspot.com
  14. 14. Projectsformba.blogspot.com The company have supplied 5000/4600 DC locomotives to Indian railways. Battery poweredroad vehicles are also manufactured by the company.Telecommunication BHEL also give importance to telecommunication sector by way of small, medium and largeswitching systems.Renewable energy Technologies used by BHEL for discovering non-conventional and renewable sources ofenergy include, wind electric generators, solar-power based water pumps, lighting and beatingsystems.International operations BHEL has been established in over 50 counties of the world. Its knowledge is known fromthe United States in the West to the New Zealand in the far East. BHEL in these countries covers turnkey power projects of thermal, hydro and gas based typebesides a wide variety of products like Switchgear, transformers and heat exchangers. BHEL has contributed over 1100 MV of boiler capacity to Malaysia. Besides this, they havealso achieved successes in Oman, Saudi Arabia, Libya, Greece, Egypt, SriLanka etc. Their development in overseas has also provided BHEL, the experience of working withworld renewed consulting organizations and inspection agencies. The demanding requirements of both domestic and international markets have been dealtsuccessfully by BHEL. In terms of difficult works as well as technological, quality and otherrequirements like financing package, extended warrantees have proven its capabilities. The company has also been successful in meeting varying needs of the industry like captivepower plants, utility power generation or for the oil sector requirements.Projectsformba.blogspot.com
  15. 15. Projectsformba.blogspot.com BHEL possesses large amount of flexibility to interface and change international companiesfor large projects. The company also exhibits adaptability by manufacturing and supplyingintermediate products, like steam generator pressure parts. BHEL can be compared with the original equipment manufactures by its success in the areaof rehabilitation and life extension of power projects.BHEL’S Vision BHEL’S vision is to become a world class innovation and competitive and profitableengineering enterprise providing total business solutions.Mission It is an Indian multinational engineering enterprise providing total business solutions throughquality products, systems and services in the fields of energy, industry, transportation infrastructureand other potential areas.Values: 1. Zeal to excel and zest for change. 2. Integrity and fairness in all matters. 3. Respect for dignity and potential individuals. 4. Strict adherence to commitments. 5. Ensure speed of response. 6. Foster learning, creativity and team work. 7. Loyalty and pride of the company.Projectsformba.blogspot.com
  16. 16. Projectsformba.blogspot.comOpportunities and threats World Investments made in the electricity sector have been lowered in recent years by foreignelectricity venture as foreign direct investment in the developing world. This is one of the parts ofthe sluggish state of the global economy and because of unsatisfactory financial performance ofmany acquisitions in the electric power sector.These changes in the environment have led to a cautious approach by developers and it’s harder toget off the new projects from the ground. Some countries have modified their plans because of thechange in restructuring electricity market and reforms. The total worldwide order of booking has been lowered leading to aggressive marketing bymajor global power plant equipment manufacturing players, who have been undergoing a phase ofconsolidation. Though there has been a decrease in overall orders in the recent times, many developingnations are planning to expand their electricity infrastructure for the forthcoming years. Number of promising market for new power equipment are found in South- East Asiancountries, Middle-East and Gulf cooperation council( GCC) countries. Moreover, BHEL has the global opportunity for servicing of generating machinery as well asdistributing generation in the developing countriesPositioning for the future BHEL has finalized a new corporate plan with the title “strategic plan 2007” and steps aretaken to start the iniatives. The company has also revised the vision, mission and values statements,which are suitably adjusted and with remodification to reflect it’s current aspuations.Projectsformba.blogspot.com
  17. 17. Projectsformba.blogspot.com In corporate line the company aims to accelerate the growth with suitable strategies and focusarea the core strengths of the and company are 1) To strengthen and extend the core business of power generation power, powertransmission, transportation and industrial systems and products. 2) Areas like water management pollution control and waste management, port handlingsystems, simulators [power and process], energy conservation systems, LNG terminals are newlyentered 3) To enter into continuous revenue stream business like power generation and transmissionand distribution.BHEL, TRICHY UNIT BHEL, Trichy unit was established in 1963 and is situated in Trichy- Tanjore highway roadaround 20km from Trichy Central Bus Stand. 12,000 employees are working in this organization onpermanent basis and around 4000 employees are working on contract basis. It has an area of 2,50,000 sq. meters and consists of a major unit namely. BHEL Trichy ,a major manufacturing unit of BHEL family, is an ISO9001,14001 andOHASAS 18001 company also well on its journey towards TQM. The product profile includes,1. High Pressure Boiler Plant (HPBP)2. Seamless Steel Tube Plant (SSTP)3. Combined Cycle Demonstration Plant (CCDP) Boiler Auxiliaries plant of Ranipet and piping centre of Madras (Chennai) and Goinwal comeunder the control of Trichy Unit.Projectsformba.blogspot.com
  18. 18. Projectsformba.blogspot.comProduct profile of BHEL, Trichy o Steam Generators for Power Generation and o Industrial Applications o Heat Recovery Steam Generators o Industrial Boilers o Atmosphere and Circulating Fluidized bed o Combustion Boilers o Nuclear Steam Generators and Reactors o Pressure Vessels o Hear Exchange o Seamless Steel Tubes o Studded tubes o Serrated fin. Tubes o Piping systems o Columns o Valves o Boiler Auxiliaries o Wind Electric GeneratorsFinance Department Of BHEL, Trichy The following are the important operations of finance department of BHEL, Trichy.  Sales Accounting  Purchase ApprovalsProjectsformba.blogspot.com
  19. 19. Projectsformba.blogspot.com  Budgets  Legal – Excise, Sales Tax, Income Tax & Customs  Costing  Pay Roll  Internal Audit  Foreign Trade- Imports, Exports  System  Cash and Bank RATIO ANALYSIS INTRODUCTION: Ratio Analysis is a powerful tool o financial analysis. Alexander Hall first presented it in1991 in Federal Reserve Bulletin. Ratio Analysis is a process of comparison of one figure againstother, which makes a ratio and the appraisal of the ratios of the ratios to make proper analysis aboutthe strengths and weakness of the firm’s operations. The term ratio refers to the numerical orquantitative relationship between two accounting figures. Ratio analysis of financial statementsstands for the process of determining and presenting the relationship of items and group of items inthe statements. Ratio analysis can be used both in trend analysis and static analysis. A creditor would like toknow the ability of the company, to meet its current obligation and therefore would think of currentand liquidity ratio and trend of receivable. Major tool of financial are thus ratio analysis and Funds Flow analysis.Financial analysis isthe process of identifying the financial strength and weakness of the firm by properly establishingrelationship between the items of the balance sheet and the profit accountProjectsformba.blogspot.com
  20. 20. Projectsformba.blogspot.com The financial analyst may use ratio in two ways. First he may compare a present ratio withthe ratio of the past few years and project ratio of the next year or so. This will indicate the trend inrelation that particular financial aspect of the enterprise. Another method of using ratios for financialanalysis is to compare a financial ratio for the company with for industry as a whole, or for other, thefirm’s ability to meet its current obligation. It measures the firm’s liquidity. The greater the ratio, thegreater the firms liquidity and vice-versa. A ratio can be defined as a numerical relationship between two numbers expressed in termsof (a) proportion (b) rate (c) percentage. It is also define as a financial tool to determine an interpretnumerical relationship based on financial statement yardstick that provides a measure of relationship between two variable or figures.Meaning and Importance: Ratio analysis is concerned to be one of the important financial tools for appraisal offinancial condition, efficiency and profitability of business. Here ratio analysis id useful fromfollowing objects.1. Short term and long term planning2. Measurement and evaluation of financial performance3. Stud of financial trends4. Decision making for investment and operations5. Diagnosis of financial ills6. providing valuable insight into firms financial position or pictureProjectsformba.blogspot.com
  21. 21. Projectsformba.blogspot.comADVANTAGES& DISADVANTAGES OF RATIO ANALYSIS :Advantages: The following are the main advantages derived of ratio analysis, which are obtained from thefinancial statement via Profit & Loss Account and Balance Sheet.a) The analysis helps to grasp the relationship between various items in the financial statements.b) They are useful in pointing out the trends in important items and thus help the management toforecastc) With the help of ratios, inter firm comparison made to evolve future market strategies.d) Out of ratio analysis standard ratios are computed and comparison of actual with standards revealsthe variances. This helps the management to take corrective action.e) The communication of that has happened between two accounting the dates are revealed effectiveaction.f) Simple assessments of liquidity, solvency profitability efficiency of the firm are indicted by ratioanalysis. Ratios meet comparisons much more valid.Disadvantages: Ratio analysis is to calculate and easy to understand and such statistical calculationstimulation thinking and develop understanding. But there are certain drawbacks and dangers theyare.i) There is a trendy to use to ratio analysis profusely.ii) Accumulation of mass data obscured rather than clarifies relationship.Projectsformba.blogspot.com
  22. 22. Projectsformba.blogspot.comiii) Wrong relationship and calculation can lead to wrong conclusion.1. In case of inter firm comparison no two firm are similar in size, age and product unit.(for example) one firm may purchase the asset at lower price with a higher return and another firm witch purchase the asset at asset at higher price will have a lower return)2. Both the inter period and inter firm comparison are affected by price level changes. A change in price level can affect the validity of ratios calculated for different time period.3. Unless varies terms like group profit, operating profit, net profit, current asset, current liability etc., are properly define, comparison between two variables become meaningless. 4. Ratios are simple to understand and easy to calculate. The analyst should not take decision should not take decision on a single ratio. He has to take several ratios into consideration. STANDARDS OF COMPARISION:1. Ratios calculated from the past financial statements of the same firm.2. Ratio developed using the projected or perform financial statement of the same firm3. Ratios of some selected firm especially the most progressive and successful, at the same point of time.4. Ratios of the industry to which the firm belongs.IMPORTANCE OF RATIO ANALYSIS In the preceding discussion in the form, we have illustrated the compulsion and implication ofimportant ratios that can be calculated from the Balance Sheet and Profit & Loss account of a firm.As a tool of financial management, they are of crucial significance. The importance of ratio analysislies in the fact and enables the drawing of inferences regarding the performance of a firm. Rationanalysis is a relevant in assessing the performance of a firm in respect of the following aspect.Projectsformba.blogspot.com
  23. 23. Projectsformba.blogspot.comCAUSTION IN USING RATIOS:1. It is difficult to decide on the proper bases of comparison.2. The comparison rendered difficult because of difference in situation of two companies or of one-company for different years.3. The price level change make the interpretation of ratios invalid4. The difference in the definition of items in the balance sheet and Profit & Loss statement make theinterpretation of ratios difficult.5. The ratios calculated at a point of time are less informative and defective as they suffer from sortterm changes.6. The ratios are generally calculated from the past financial statement and thus are no indicators offuture.LIQUIDITY Vs PROFITABILITYINTRODUCTION:- Financial analysis is the process of identifying the financial strengths and weakness of thefirm by properly establishing relationship between the items of the balance sheet and profit lossaccount. Management should particularly interest in knowing financial strengths and weakness ofthe firm to make their best use and to be able to spot out financial weakness of the firm to take asuitable corrective actions. Financial analysis is the starting point of making plans, before using any sophisticatedforecasting and planning procedures.Projectsformba.blogspot.com
  24. 24. Projectsformba.blogspot.com Major tools of financial analysis are ratio analysis and funds flow analysis. Financial analysisis the process of identifying the financial strengths and weakness of the firm by properly establishingrelationship between the items of the balance sheet and the profit and loss account.Meaning and importance: Ratio analysis is concerned to be one of the important financial tools for appraisal offinancial condition, efficiency and profitability of business. Here ratio analysis is useful fromfollowing objectives.1. Short term and long term planning.2. Measurement and evaluation of financial performance.3. Study of financial trends.4. Decision making for investment and operations.5. Diagnosis of financial ills.6. Providing valuable insight into firm’s financial position or picture.Type of Ratios :1. Current Ratio2. Quick Ratio3. Cash Ratio4. Net Profit Ratio5. Debtors Turnover Ratio6. Debt Collection Period7. Creditors Turnover Ratio8. Debt Payment Period9. Inventory Turnover Ratio10. Working Capital Turnover Ratio11. Cash Turnover Ratio12. Cash to Current Assets RatioProjectsformba.blogspot.com
  25. 25. Projectsformba.blogspot.com 1. CURRENT RATIO It is relationship between firm’s current assets and current liability. Current assets Current ratio = _______________________________ Current liability 2. QUICK RATIO It is relationship between liquid assets and current liabilities. Liquid assets Quick ratio = _________________________ Liquid Liabilities 3. CASH RATIO It is relationship between cash and current liabilities. Cash Cash ratio = _______________________ Current liabilities 4. DEBTOR’S TURNOVER RATIO It indicates the number time debtors turned over each year. Generally the higher value of debtor’s turnover shows high efficiency to manage the credit management. Total salesProjectsformba.blogspot.com
  26. 26. Projectsformba.blogspot.com Debtors turnover ratio = ______________________________ Debtors 5. DEBT COLLECTION PERIOD It indicates the speed with which debts are collected. Days/months in a year Debt collection period = _______________________________ Debtor’s turnover ratio 6. CREDITORS TURNOVER RATIO The ratio shows on an average the number of times creditors turned over during the year. Credit purchase Creditors turnover ratio = ________________________ Average creditors 7. DEBT PAYMENT PERIOD Creditor’s turnover ratio indicates the number of days taken by the firm, to pay the debtors to creditors. Days/months in a year Debt payment period = _______________________________ Creditor’s turnover ratio 8. INVENTORY TURNOVER RATIO It indicates the inventories turning into receivables through sales. SalesProjectsformba.blogspot.com
  27. 27. Projectsformba.blogspot.com Inventory turnover ratio =__________________________ Inventory 9. INVENTORY HOLDING PERIOD It indicates duration of holding inventories in stores. Days/months in a year Inventory holding ratio = ______________________________ Inventory turnover ratio 10. INVENTORY TO CURRENT ASSETS RATIO This ratio explains about the proportion of inventory in the current assets . Inventory Inventory to Current Assets ratio = ______________________________ x 100 Current Assets 11. WORKING CAPITAL TURNOVER RATIO This ratio explains the relationship between sales and working capital. Net sales Working capital turnover ratio = ______________________________ Net working capital 12. CASH TURNOVER RATIOProjectsformba.blogspot.com
  28. 28. Projectsformba.blogspot.com It is the relationship between sales and cash. Sales Cash turnover ratio = Cash balance 13. CASH TO CURRENT ASSETS RATIO This ratio establishes the relationship between the cash and the current assets. Cash Cash ratio = _______________________ Current Assets 14. Gross Profit Ratio This ratio is very important in ration analysis. This ratio founds company can obtain profit on production or not. Gross Profit Gross profit Ratio = Total Sales 15. Net Profit RatioProjectsformba.blogspot.com
  29. 29. Projectsformba.blogspot.com This ratio is also very important in ration analysis. This ratio founds company can obtain profit on overall expenses or not. Net Profit Net Profit Ratio = Total Sales2.9 ARTICLES Miss. Mohanapriya, M.B.A, in her research on “Working capital management of Tanjore co-operative milk supply society Ltd.” Which is the partial fulfillment of the requirements for theaward of her degree submitted to Bharathidasan University, in the year November – 2003. Outlinedthe following objectives and findings.Her Objectives were:  Know the project of Co-operative milk supply society.  Analysis the short term liquidity position of the study unit during the period 96-97 to 2000-01.  Analysis and evaluate working capital management.Her Findings were:  The size of current assets has increased during the study period.  During the study period the working capital turnover ratio were 210.51;  194.60; 45.44 and 11.86 times respectively the higher ratios in the 2 year 1997-98 and 98-99 indicates sufficient amount of working capital and effective utilizations of working capital.  The cash turnover ratio is to be increasing times.Projectsformba.blogspot.com
  30. 30. Projectsformba.blogspot.com Miss. Abiramisundhari, in her research on “Working capital management of TSRMLimited Trichy”. Which is the partial fulfillment of the requirements for the award of her M.Comdegree submitted to Bharathidasan University, in the year November – 2003. Outlined the followingobjectives and findings.Her Objectives were:  To study the importance of W/c management for a concern.  To assess the proportion of the components of W/c of TSRM Ltd, Trichy.  To suggest measures to increases the efficiency of W/c management of TSRM Ltd, Trichy.Her Findings were:  The company has been taken for sufficient care for the maintenance of adequate accounting period.  The proportion of net W/c to total assets showed on increasing trend through out the five years.  The over all performance of receivables management showed a satisfactory position throughout the past 5 years. Mr. Kamaraj, M, Phil, in his research on “Working capital management of Dalmia CementLimited Trichy”. Which is the partial fulfillment of the requirements for the award of her degreesubmitted to Bharathidasan University, in the year November – 2003. Outlined the followingobjectives and findings.His Objectives were:Projectsformba.blogspot.com
  31. 31. Projectsformba.blogspot.com  To know the Financial Performance of Dalmia Cement.  To examine the practice follow into Management of cash.  To know the techniques of Inventory Management in D.C.B.C.His Findings were:  Raw Material Consumption over the study period in terms of quantity and value has showed an incise trend.  Operating ratio is considered to be yardstick of operating efficiently of the concern.  The concern has show dormant and fast moving inventories during the 5 years a study period.  Performance of the co should be judged on the basis of return on equity capital. It is satisfactory positive Mr. Kushagra Dabur, in his research on “Working capital management of Kotak MahindraLife Insurance Company”. Which is the partial fulfillment of the requirements for the award of herdegree submitted to Amity University, Uttar Pradesh, in the year February – 2006. Outlined thefollowing objectives and findings:His Objectives were:  To meet the cash disbursement needs (payment schedule);  To minimize funds committed to cash balances.  The present study is limited to one Co., i.e. Kotak Mahindra Life Insurance, and covers a period from 2003 and 2006 due to limitation of time and accessibility to data base. The authenticity of the suggestions and recommendations depend upon the rationality of thedata provided to me.Projectsformba.blogspot.com
  32. 32. Projectsformba.blogspot.comHis Findings were:  The relative growth rate of short term trade credit and value industrial production.  The relative growth rates of short term trade credit & inventories with industry & trade.  The diversion of short-term credit for fixed asset acquisition & for lower and Investments.  The incidence or multiple financing,  The elongation of credit period.RESEARCH METHODOLOGY It is purely and simply the framework or a plans for the study that guides the collection andanalysis of data. Research is the scientific way to solve the problem and it’s increasingly used toimprove market potential. This involves exploring the possible methods, one by one, and arriving atthe best solution, considering the resources at the disposal of research.4.2 PRIMARY DATA The primary data is collected by observation by the researcher of the functioning of the unit.4.3 SECONDARY DATA It is derived from the annual reports, magazines, web sites and the internal auditing books ofBHEL.4.4 TOOLS OF ANALYSIS The researcher used tools to analysis the financial performance of the firm. They are 1. Ratio analysis 2. Trend analysis4.5 SCOPE OF THE STUDY The main scope of the study is to evaluate, analyze and understand the current assetsmanagement and to know the influence of the components of working capital on sales in the year2005 – 2006 to 2009 – 2010.Projectsformba.blogspot.com
  33. 33. Projectsformba.blogspot.com4.6 PERIOD OF THE STUDY The study analysis, “the financial performance of Bharath Heavy Electrical Ltd” covers thefinancial years from 2005-2010 consequently. DATA ANALYSIS AND INTERPRETATION TABLE – 1 STATEMENT SHOWING CURRENT RATIO Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10 CURRENT 1633078 2106400 2770400 3690107 4293481 ASSETS CURRENT 1032002 1442000 2002230 2833290 3244172 LIABILITIES CURRENT 1.58 1.46 1.38 1.30 1.32 RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION Current ratio during the year 2005-2006 was 1.58 and its come down in 1.46 at 2006-2007and its again decreased 2007–2008 and 2008-09 and its slightly increased in 1.32 at 2009-10. Thestandard norm for this ratio is 2:1 required. CHART – 1Projectsformba.blogspot.com
  34. 34. Projectsformba.blogspot.com CURRENT RATIO current ratio 1.8 1.6 1.4 PERCENTAGE 1.2 1 0.8 0.6 0.4 0.2 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEARS TABLE –2 STATEMENT SHOWING QUICK RATIO Rs in lakhsProjectsformba.blogspot.com
  35. 35. Projectsformba.blogspot.com YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10 LIQUID 1258640 1684600 2216978 2906405 3369935 ASSETS LIQUID 1032002 1442000 2002230 2833290 3244172 LIABILITIES LIQUID 1.22 1.17 1.10 1.03 1.04 RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The quick ratio in the year 2005-2006 was 1.22 and its decreased 0.04% at 2006 and 2007(1.17) and in 2007-2008 get decreased 0.06% (1.10) and 2008-2009 get decreased 0.063% (1.03)and its get increase in slightly on 2009-2010 at 0.001%(1.04). The standard norm for this ratio is1:1, means for every 1 rupee of current liability, company must have 1 rupee of quick assets. CHART –2 LIQUID RATIOProjectsformba.blogspot.com
  36. 36. Projectsformba.blogspot.com 1.25 1.2 PERCENTAGE 1.15 1.1 Liquid 1.05 Ratio 1 0.95 0.9 2005- 2006- 2007- 2008- 2009- 06 07 08 09 10 YEARS STATEMENT SHOWING CASH RATIOCASH MANAGEMENTIntroduction:Projectsformba.blogspot.com
  37. 37. Projectsformba.blogspot.comCash management is one of the key areas of working capital management. Cash is the liquid currentasset. The main duty of the finance manager is to provide adequate cash to all segments of theorganization. The important reason for maintaining cash balances is the transaction motive. A firmenters into variety of transactions to accomplish its objectives which have to be paid for in the formof cash.Meaning of cash: The term “cash” with reference to cash management used in two senses. In a narrower senseit includes coins, currency notes, cheques, bank drafts held by a firm. n a broader sense it alsoincludes “near-cash assets” such as marketable securities and time deposits with banks.Objectives of cash management:There are two basic objectives of cash management. They are-  To meet the cash disbursement needs as per the payment schedule.  To minimize the amount locked up as cash balances.Basic problems in Cash Management:Cash management involves the following four basic problems.  Controlling level of cash  Controlling inflows of cash  Controlling outflows of cash and  Optimum investment of surplus cash.  Determining safety level for cash:Projectsformba.blogspot.com
  38. 38. Projectsformba.blogspot.com The finance manager has to take into account the minimum cash balance that the firm mustkeep to avoid risk or cost of running out of funds. Such minimum level may be termed as “safetylevel of cash”. The finance manager determines the safety level of cash separately both for normalperiods and peak periods. Under both cases he decides about two basic factors. They are-Desired days of cash: It means the number of days for which cash balance should be sufficient to cover payments.Average daily cash flows: This means average amount of disbursements which will have to be made daily.Criteria for investment of surplus cash: In most of the companies there are usually no formal written instructions for investing thesurplus cash. It is left to the discretion and judgment of the finance manager. While exercising suchjudgment, he usually takes into consideration the following factors-Security: This can be ensured by investing money in securities whose price remains more or lessstable.Liquidity: This can be ensured by investing money in short term securities including short term fixeddeposits with banks.Yield: Most corporate managers give less emphasis to yield as compared to security and liquidity ofinvestment. So they prefer short term government securities for investing surplus cash.Maturity:Projectsformba.blogspot.com
  39. 39. Projectsformba.blogspot.com It will be advisable to select securities according to their maturities so the finance managercan maximize the yield as well as maintain the liquidity of investments.Cash Management in BHEL: The cash management is carried out in seaways by CTM (Corporate Treasury Management).CTM is a commonly followed procedure in most of the companies.Now we see the cash ration / quick ration in bhel TABLE – 3 Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 CASH 413398 580900 838600 1031467 979008 CURRENT 1032002 1442000 2002230 2833290 3244172 LIABILITIES CASH RATIO 0.40 0.40 0.42 0.36 0.30SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The Cash ratio of BHEL in the 2005-2010 was fluctuation in 2009-2010 it was 0.30 timesand in 2005-2006 it was 0.40 times and 2007-2008 it was reduced to 0.42. The standard norms of absolute quick ratio are 0.5:1. From the above table the firms notmaintain the sufficient level of quick assets because of the day-to-day expenses .It is fluctuatingbetween the standard norms for this ratio is 1:2 means for every 2 rupees of current Liabilities,Company must have 1 rupee of cash and bank balance and marketable securities.Projectsformba.blogspot.com
  40. 40. Projectsformba.blogspot.com CHART- 3 CASH RATIO 0.5 0.4 PERCENTAGE 0.3 0.2 CASH 0.1 0 CASH 2005 - 2006 - 2007 - 2008 - 2009 - 2006 2007 2008 2009 2010 YEARSRECEIVABLES MANAGEMENTProjectsformba.blogspot.com
  41. 41. Projectsformba.blogspot.comIntroduction: Receivables constitute a significant portion of the total assets of the business. When a firmseller goods or services on credit, the payments are postponed to future dates and receivables arecreated. If they sell for cash no receivables created.Meaning:Receivable are asset accounts representing amounts owed to the firm as a result of sale of goods orservices in the ordinary course of business.Purpose of receivables: Accounts receivables are created because of credit sales. The purpose of receivables isdirectly connected with the objectives of making credit sales. The objectives of credit sales are asfollows-Achieving growth in sales.Increasing profits.Meeting competition.Factors affecting the size of Receivables: The main factors that affect the size of the receivables are- Level of sales. Credit period. Cash discount.Projectsformba.blogspot.com
  42. 42. Projectsformba.blogspot.comCosts of maintaining receivables:The costs with respect to maintenance of receivables are as follows-Capital costs: This is because there is a time lag between the sale of goods to customers and the payment bythem. The firm has, therefore to arrange for additional funds to meet its obligations.Administrative costs: Firm incur this cost for manufacturing accounts receivables in the form of salaries to the staffkept for maintaining accounting records relating to customers.Collection costs: The firm has to incur costs for collecting the payments from its credit customers.Defaulting costs: The firm may not able to recover the over dues because of the inability of customers. Such debts treated as bad debts.Receivables management: Receivables are direct result of credit sale. The main objective of receivables management isto promote sales and profits until that point is reached where the ROI in further funding ofreceivables is less than the cost of funds raised to finance that additional credit (i.e.; cost of capital).Increase in receivables also increases chances of bad debts. Thus, creation of receivables isbeneficial as well as dangerous. Finally management of accounts receivable means as the process ofmaking decisions relating to investment of funds in this asset which result in maximizing the over allreturn on the investment of the firm.Projectsformba.blogspot.com
  43. 43. Projectsformba.blogspot.comReceivables management and Ratio Analysis:Ratio Analysis is one of the important techniques that can be used to check the efficiency with whichreceivables management is being managed by a firm. The most important ratios for receivablesmanagement are as follows-DEBTORS TURNOVER RATIO: - Debtors constitute an important constituent of current assets and therefore the quality of thedebtors to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtorsare converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm.The liquidity of firm’s receivables can be examined in two ways they are DTR and AverageCollection Period. TABLE –4 STATEMENT SHOWING DEBTORS TURNOVER RATIO Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 TOTAL 1337403 1723753 1930464 2621233 3286144 SALES DEBTORS 716806 969582 1197487 1597550 2068875 DEBTOR TURNOVER 1.87 1.78 1.61 1.64 1.59 RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSProjectsformba.blogspot.com
  44. 44. Projectsformba.blogspot.comINTERPRETATION Debtors constitute an important constituent of current assets and therefore the quality of thedebtors to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtorsare converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm.The liquidity of firm’s receivables can be examined in two ways they are DTR and AverageCollection Period. .The higher the ratio, the better it is, since it would indicate that debts are beingcollected promptly. In the year 2009 - 2010 the debt is 1.59 comparing to the previous year camedownwards. CHART- 4 DEBTOR TURNOVER RATIO 2 PERCENTAGE 1.8 1.6 1.4 DEBTORS 2005 2007 2009 - -2008 - 2006 2010 YEARSProjectsformba.blogspot.com
  45. 45. Projectsformba.blogspot.com DEBT COLLECTION PERIOD Debtor’s collection period is nothing but the period required to collect the money from thecustomers after the credit sales. A speed collection reduces the length of operating cycle and viceversa. TABLE – 5 Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 DAYS 365 365 365 365 365 DEBT TURNOVER 1.87 1.78 1.61 1.64 1.59 RATIO DEBT COLLECTION 195 205 227 223 230 PERIODSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The debt collection period of BHEL in the 2005-2006 was 195 days and in goes to 2009 -2010 it was increased in (0.18%) 230 days. Standard Debt Collection Period of a firm is less than 90days. But, above tables consists of increased of DCP in rapidly.Projectsformba.blogspot.com
  46. 46. Projectsformba.blogspot.com CHART – 5 DEBT COLLECTION PERIOD 240 220 No. of Days 200 DTCP 180 160 2005 2007 2009 DTCP - - - 2006 2008 2010 YEARSProjectsformba.blogspot.com
  47. 47. Projectsformba.blogspot.com CREDITORS TURNOVER RATIO TABLE – 6 Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 CREDIT 709940 1018186 1182087 1762005 2067232 PURCHASE SUPPLIERS / 280409 353895 442400 585285 757980 CREDITORS CREDITORS TURNOVER 2.53 2.88 2.67 3.01 2.73 RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The Creditors turnover ratio of BHEL was fluctuating during the year 2005 – 2010. It wasupward in (2008– 2009) was 3.01 times and it was downward in 2009 – 2010 is 2.73 times.Projectsformba.blogspot.com
  48. 48. Projectsformba.blogspot.com CHART -6 CREDITORS TURNOVER RATIO 3.2 3 2.8 PERCENTAGE 2.6 2.4 2.2 CTR 2005- 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010 YEARSProjectsformba.blogspot.com
  49. 49. Projectsformba.blogspot.com TABLE –7 CASH TO CURRENT ASSETS RATIO Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 CASH 413398 580900 838600 1031467 979008 CURRENT 1633078 2106400 2770400 3690107 4293481 ASSETS CAS TO CURRENT 0.25 0.27 0.30 0.28 0.23 ASSETS RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The Cash to current assets turnover ratio of BHEL was fluctuating during the year 2005 –2010. It was upward in (2005– 2008) was 0.25 times to 0.30 times and it was downward in 2008 –2010 is 0.23 times.Projectsformba.blogspot.com
  50. 50. Projectsformba.blogspot.com CHART -7 CASH TO CURRENT ASSETS RATIO CASH TO CURRENT ASSETS RATIO 0.3 0.25 0.2 PERCENTAGE 0.15 0.1 0.05 C.C.A.R 0 2005-062006-072007-082008-09 2009- 2010 YEARSProjectsformba.blogspot.com
  51. 51. Projectsformba.blogspot.com TABLE –8 CASH TURNOVER RATIO Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 SALES 1337403 1723753 1930464 2621233 3286144 CASH 413398 580891 838602 1031467 979008 CASHTURNOVER 3.24 2.97 2.31 2.54 3.36 RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION The cash turnover ratio in the years 2005-2010 it was on fluctuating ratios, in the year2009-2010 it was increased (0.037%) 3.36.Projectsformba.blogspot.com
  52. 52. Projectsformba.blogspot.com CHART –8 CASH TURNOVER RATIO 3.5 3 2.5 PERCENTAGE 2 1.5 1 C.T.R 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEARSProjectsformba.blogspot.com
  53. 53. Projectsformba.blogspot.comINVENTORY MANAGEMENTIntroduction: Inventories are stock of the product a company is manufacturing for sale and components.That makeup the products. The various forms in which inventories exist in a manufacturingcompany are: Raw-materials, work-in-process, finished goods. • Raw-Materials: - Are those basic inputs that are converted into finished products through the manufacturing process. Raw-materials inventories are those units, which have been purchased and stored for future production. • Work-In-Process inventories are semi-manufactured products. The represent products that need more work before they become finished products for sale. • Finished Goods inventories are those completely manufactured products, which are ready for sale. Stocks of raw-materials and work-in-process facilitate production which stock of finished goods is required for smooth marketing operations. These inventories serve as a link between production and consumption of goods. • Stores and spares are also maintained by some firms. This includes office and plant cleaning materials like soaps, brooms, oil, fuel, light, bulbs etc. These materials do not directly enter in production. But are necessary for production process.Need to holding inventoryProjectsformba.blogspot.com
  54. 54. Projectsformba.blogspot.comThe question of managing inventories arises only when the company holds inventories. Maintaininginventories involves tying up of the companys funds and incurrence of storage and handling cost. Itis expensive to maintain inventories, why does company hold inventories? There are three generalmotives for holding inventories. 1. Transaction Motive: - Emphasizes the need to maintain inventories to facilitate smoothproduction and sales operations. 2. Precautionary motive: - Necessitates holding of inventories to guard against the risk ofunpredictable changes in demand and supply forces and other factors. 3. Speculative motive: - Influences the decision to increase or reduce inventory levels to takeadvantages of price influences. A company should maintain adequate stock of materials for a continuous supply to thefactory for the uninterrupted production. It is not possible for a company to procure raw materialswhenever it is needed. A time lag exists between demand for materials and its supply. Also thereexists uncertainty in procuring raw materials in time on many occasions. The procurement ofmaterials may be delayed because of such factors as strike, transport disruption or short supply.Therefore, the firm should maintain sufficient stock of raw materials at a given time to stream lineproduction.Objective of Inventory Management In the context of inventory management the firm is faced with the problem of meeting twoconflicting needs ;Projectsformba.blogspot.com
  55. 55. Projectsformba.blogspot.com • To maintain a large size of inventory for sufficient and smooth production and sales operations. • To maintain a minimum investment in inventories to maximize profitability. Both excessive and inadequate inventories are not desirable. These are two dangerous pointswithin which the firm should operate. The objective of inventory management should be todetermine and maintain optimum level of inventory investment. The optimum level of inventory willlie between the two danger points of excessive and inadequate inventories. The firm should always avoid a situation of over investment or under investment ininventories. The major dangerous of over investment are, • Unnecessary tie-up of the firms funds losses of profit • Excessive carrying cost • Risk of quality The aim of inventory management thus should be to avoid excessive and inadequate levels ofinventories and to maintain sufficient inventory for smooth production and sales operations. Effortsshould be made to place an order at the right time with the right source to acquire the right quantityat the right price and quality. An effective inventory management should • Ensure a continuous supply of raw materials to facilitate uninterrupted production. • Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. • Maintain sufficient finished goods inventory for smooth sales operations and efficient customer service. • Minimize the carrying cost and time.Projectsformba.blogspot.com
  56. 56. Projectsformba.blogspot.com • Control investment in inventories and keep it at an optimum level.Inventory management techniques : In managing inventories the firm objective should be in consonance with the shareholderswealth maximization principle. To achieve this firm should determine the optimum level ofinventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory controlresults in unbalanced inventory and inflexibility-the firm ma sometimes run out of stock andsometimes may pileup unnecessary stocks. This increases level of investment and makes the firmunprofitable.To manage inventories efficiency, answers should be sought to the following two questions.1) How much should be ordered?2) When should it be ordered? The first question how much to order, relates to the problem of determining economic orderquantity (EOQ), and is answered with an analysis of costs of manufacturing certain level ofinventories. The second question when to order arise because of determining the reorder point. When the order is placed for raw material certain raw material is in transit, such raw materialis called as raw material in transit.Example –Raw material on over seas.Projectsformba.blogspot.com
  57. 57. Projectsformba.blogspot.com The raw material can be transfer from unit to another unit or from one department to anotheris called transfer-in –transit. It is nothing but to the transfer of raw material among the inter firmunits of BHEL. The raw material, which is production process, is called work-in process. The work inprocess becomes finished goods inventory. The finished should not be kept for a longer time. Theyshould be sold off to clear off the entire inventory. However, finished goods inventory is not therefor BHEL, since production is mainly done on customer order and specifications. The raw materialis purchased and the whole process is repeated again which we call it as inventory cycle.Inventory turnover Ratio:- Inventory turnover ratio indicates the efficiency of the firm in producing and selling itsproducts. It is calculated by dividing the cost of goods sold by the average inventory. The averageinventory is the average of open and closing balance of inventory. TABLE –9 INVENTORY TURNOVER RATIO Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 SALES 1337403 1723753 1930464 2621233 3286144 INVENTORY 374437 421767 573640 783702 923546 INVENTORY TURNOVER 3.57 4.09 3.37 3.34 3.56 RATIOProjectsformba.blogspot.com
  58. 58. Projectsformba.blogspot.comSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION Inventory turnover of BHEL for 2001 – 2006 was fluctuation. in 2001-2002 theinventory turnover ratio was high up to 3.81 and it was low in 2004-2005 at 3.27. CHART –9 INVENTORY TURNOVER RATIOProjectsformba.blogspot.com
  59. 59. Projectsformba.blogspot.com 5 4 3 2 2009-10 1 2007-08 0 2005-06 ITR TABLE –10 INVENTORY HOLDING PERIOD Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 DAYS / 365 365 365 365 365Projectsformba.blogspot.com
  60. 60. Projectsformba.blogspot.com MONTH IN YEAR INVENTORY TURNOVER 3.57 4.09 3.37 3.34 3.56 RATIO INVENTORY HOLDING 102 89 108 109 103 PERIODProjectsformba.blogspot.com
  61. 61. Projectsformba.blogspot.comSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION Inventory holding period of Bhel is varying on every year. In the year of 2005-06 to2007-08 it’s increased in 0.06% (102 to 108) and 2009-10 it’s decreased by 0.047 %. CHART –9 INVENTORY HOLDING PERIODProjectsformba.blogspot.com
  62. 62. Projectsformba.blogspot.com 600 500 2009-10 400 2008-09 300 2007-08 2006-07 200 2005-06 100 0 IHP TABLE-11 WORKING CAPITAL TURNOVER RATIOProjectsformba.blogspot.com
  63. 63. Projectsformba.blogspot.com Rs in lakhs YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 SALES 1337403 1723753 1930464 2621233 3286144 NET WORKING 601076 664286 788388 856817 1049309 CAPITAL WORKING CAPITAL 2.23 2.59 2.45 3.06 3.13 TURNOVER RATIOSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION Working capital turnover ratio for the year 2009 - 2010 was 3.13 times. It is higher whencomparing the past four years. The working capital management has to improve by moreconcentration on collection strategies. CHART-11Projectsformba.blogspot.com
  64. 64. Projectsformba.blogspot.com WORKING CAPITAL TURNOVER RATIO 3.5 3 2.5 2 PERCENTAGE 1.5 1 WCTR 0.5 0 2005 - 2006 - 2007 - 2008 - 2009 - 06 07 08 09 10 YEARS TABLE –12 WORKING CAPITAL FOR TREND ANALYSIS Rs in lakhsProjectsformba.blogspot.com
  65. 65. Projectsformba.blogspot.com YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010 CURRENT 1633078 2106297 2770472 3690107 4293481 ASSETS CURRENT 1032002 1442011 1982084 2833290 3244172 LIABILITIES WORKING CAPITAL 601076 664286 788388 856817 1049309SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION In this current asset is increasing during the period of study. Current liability is also increasedduring the period of study. And working capital is also increased. CHART – 12 WORKING CAPITAL FOR TREND ANALYSISProjectsformba.blogspot.com
  66. 66. Projectsformba.blogspot.com VALUES 5000000 4500000 4000000 3500000 3000000 CA CL 2500000 WC 2000000 1500000 1000000 500000 0 2005- 2006- 2007- 2008- 2009- 06 07 08 09 10 YEARS TABLE –13 ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL CURRENT ASSETSProjectsformba.blogspot.com
  67. 67. Projectsformba.blogspot.com Rs in lakhs 2005 2006-2 2007-20 2008-20 2009- Particulars -2006 007 08 09 2010 inventories 22.93 20.03 20.71 21.24 21.52 Sundry debtors 43.90 46.03 43.22 43.29 48.18 C& B balance Other assets 25.30 27.58 30.27 27.95 22.80 Loans and advances 0.52 0.95 1.52 0.95 0.95 7.35 5.41 4.28 6.57 6.55 Total 100 100 100 100 100SOURCE: SECONDARY DATAINTERPRETATION In this period 2005 – 2010 Sundry debtors and other current assets was only maintained instable for the period of study. Bhel must be extra care about cash and bank balance in future. In theperiod of 2007-2010 inventory ratios are increased. All about Bhel should be very care and mustmaintain in adequate current assets in future. CHART – 13 ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL GRAPH 13 .1 INVENTORYProjectsformba.blogspot.com
  68. 68. Projectsformba.blogspot.com 23 22.5 22 21.5 21 PERCENTAGE 20.5 20 INVENTORIES 19.5 19 18.5 2005- 2006- 2007- 2008- 2009- 06 07 08 09 10 YEARS GRAPH 13 .2 SUNDRY DEBTORS 49 48 47 46 45 PERCENTAGE 44 43 42 41 40 2005-06 2006-07 2007-08 2008-09 2009-10 YEARS GRAPH 13 .3 CASH AND BANK BALANCESProjectsformba.blogspot.com
  69. 69. Projectsformba.blogspot.com 40 30 PERCENTAGE 20 10 0 CASH & 2005-06 2006-07 2007-08 2008-09 2009-10 BANK YEARS GRAPH 13 .4 OTHER CURRENT ASSETS 2 1.5 PERCENTAGE 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 O.C.A YEARS GRAPH 13 .5 LOANS AND ADVANCESProjectsformba.blogspot.com
  70. 70. Projectsformba.blogspot.com 8 6 PERCENTAGE 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 LOAN & YEARS ADV.GROSS PROFIT RATIO : Gross profit margin shows the company can return income at the gross level.This ratio helps to control inventory usage and production performance and fixing unit priceof goods. TABLE – 14 ANALYSIS OF GROSS PROFIT RATIO Rs in lakhs Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010 Gross Profit / 256435 373607 443039 484885 659065 Profit before tax Total Sales 1337403 1723753 1930464 2621233 3286144 Gross Profit ratio 0.192 0.217 0.230 0.185 0.201 GRAPH 14 - GROSS PROFIT RATIOSProjectsformba.blogspot.com
  71. 71. Projectsformba.blogspot.com 2009-10 2005-06 20% 19% 2008-09 2006-07 18% 21% 2007-08 22%SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION In the analysis of Gross profit ratio Bhel must control production expenses in future.Comparison of 2007-08 to 2009-10 margin profit ratio will goes down in 2 %. Firm will be controlin production cost in next coming years, such as raw material, freight and transport expenses.Otherwise, Bhel must increase in sales unit price.NET PROFIT RATIO:Projectsformba.blogspot.com
  72. 72. Projectsformba.blogspot.com As every business is to earn profit, this ratio is very important because it measures theprofitability of sales. A business may yield high gross income but low net income because ofincreasing operating and non-operating expenses. This situation can easily be detected by calculatingthis ratio. The profits used for this purpose may be profits after/before tax. To obtain this ratio, thefigure of net profits after tax is divided by the figure of net profits after tax is divided by the figure ofsales the ratio is also known as sales margin as we can ascertain with its help the margin which thesales leave later deducting all the expenses. The unit of expression is percentage, as is the case withprofitability ratios. TABLE – 15 ANALYSIS OF NET PROFIT RATIO Rs in lakhs Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010 Net Profit / 167916 241470 285934 313821 431064 Profit after tax Net Sales 1337403 1723753 1930464 2621233 3286144 Net Profit ratio 0.126 0.140 0.148 0.120 0.131 GRAPH 15 NET PROFIT RATIOProjectsformba.blogspot.com
  73. 73. Projectsformba.blogspot.com 0.16 0.14 0.12 % 0.1 0.08 0.06 0.04 0.02 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEARSSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATION In this period of research of study Net profit of the Bhel company goes downwards from2008 – 2010 comparing previous year achievements.Gross Profit to Net Profit Ratio:Projectsformba.blogspot.com
  74. 74. Projectsformba.blogspot.com Analisation of ratio’s G.P. to N.P is very important in every firm. It helps to find out the costof expense increased in production or administrative level and other hand it helps to control inoverall financial expenses. TABLE – 16 ANALYSIS OF G.P. TO N.P RATIO Rs in lakhs Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010 Gross Profit 256435 373607 443039 484885 659065 Net Profit 167916 241470 285934 313821 431064 G.P. - N.P. RATIO 1.53 1.55 1.55 1.55 1.53 GRAPH 16 G.P. TO N.P. RATIO 700000 600000 500000 400000 300000 G.P. 200000 N.P. 100000 % 0 2005-06 % 2006-07 2007-08 2008-09 N.P. 2009-10 G.P. YEARSSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTSINTERPRETATIONProjectsformba.blogspot.com
  75. 75. Projectsformba.blogspot.com In this period of research of study Gross Profit and Net Profit are equal. Bhel control hismarginal and administrative cost in his control. There is no variation and its goes to stable. TREND ANALYSIS Cash and Bank Balances 100 140.52 202.86 249.51 236.82 Other Current Assets 100 236.33 498.33 414.45 481.48 Loans & Advances 100 95.08 98.87 201.99 234.50 Current Liabilities : Liabilities 100 135.08 188.20 265.19 318.17 Provisions 100 166.79 214.54 329.01 292.14Projectsformba.blogspot.com

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