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Working capital managemnt


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Working capital managemnt

  1. 1. DECLARATION I hereby declare that the study entitled “WORKINGCAPITAL MANAGEMENT” in the context of “HEEP B.H.E.L.”being submitted by me in the partial fulfillment of the requirementfor the award of POST GRADUATE DIPLOMA INMANAGEMENT is a record of my own work. The study wasconducted at finance department HEEP, B.H.E.L. The matterembodied in this project report has not been submitted to any otheruniversity or institution for the award of degree. This project is myoriginal work and it has not been presented earlier in this manner.This information is purely of academic interest.Date:Madhu SinghWORKING CAPITAL MANAGEMENT 1
  2. 2. DECLARATION It is certified that above statement made by the candidate iscorrect to the best of my knowledge. Prof. R. S. Yadav Director, FIMS, LucknowWORKING CAPITAL MANAGEMENT 2
  3. 3. PREFACE "No learning can be complete without practicing" The conceptual knowledge acquired by management studentsis best manifested in the projects and training they undergo. As a partof curriculum of P.G.D.M., I have got a chance to undergo practicaltraining in HEEP (B.H.E.L.) Haridwar. The present project gives aperfect vent to my understanding of the financial management speciallythe most modern concept of “Economic Value Added” and organizationbehaviour. The project report entitled “WORKING CAPITALMANAGEMENT” is based on theme of BHEL Haridwar performanceon the basis of economic value addition made by the BHEL in the last 5years. The report will provide all the information regarding theWORKING CAPITAL MANAGEMENT and their importance inHEAVY ELECTRICAL EQUIPMENT PLANT – B.H.E.L.,HARIDWAR. I also hope that this report will be beneficial for thestudents, academician and Managers those who are related to this topic. WORKING CAPITAL MANAGEMENT 3
  4. 4. ACKNOWLEDGEMENT I express my sincere thanks to the Management of HEEP(Heavy Electrical Equipment Plant) of BHEL, Ranipur, and HaridwarUnit for giving me an opportunity to gain exposure on matter related toProject under the esteem guidance of Mr. S.K.Arya (Sr.AccountsOfficer). I hereby take this opportunity to put on records my sincerethanks to Mr. S.K.Arya under the light of whose able guidance I couldcomplete this project in an effective and successful manner. I am also indebted to Mr. Subhash Malik (Accounts officer )for their valuable informations and inputs, which added dimensionsand meaning to my project. I am also thankful to the rest of the staff of the SALES section& CASH section for their valuable suggestion and cooperation toachieve the task. WORKING CAPITAL MANAGEMENT 4
  5. 5. With sincere thanksMadhu Singh CONTENTS B.H.E.L. - AN OVERVIEW………………………….. ……….07 B.H.E.L. - HARDWAR UNIT…………………….…. ………..12 WORKING CAPITAL MANAGEMENT…………….. ……..27 • Meaning Of Working Capital Management • Classification Of Working Capital Management • Needs & Objectives Of Working Capital Management • Importance Of Working Capital Management • Factors Determining The Working Capital Requirement • Working Capital Management in B.H.E.L. • Management Of Components Of Working Capital  Debtors Management  Inventory Management  Cash Management  Cash Flow StatementWORKING CAPITAL MANAGEMENT 5
  6. 6. SUGGESTIONS………………………………………………..65CONCLUSION………………………………………………...66ANNEXURES………………………………………………….67BIBLIOGRAPHY………………………………………...……73WORKING CAPITAL MANAGEMENT 6
  7. 7. B.H.E.L. A CORPORATE GIANT Established in the late 50s BHARAT HEAVY ELECTRICALS LIMITED (BHEL)is a name which is recognized across the industrial world. It is one of the largest engineeringand manufacturing enterprises in INDIA and is one of the leading international companies inthe power field. BHEL offers a wide spectrum of products and services for core sectors likepower transmission, industrial transportation, oil and gas, telecommunication etc. Besidessupply of non-conventional energy systems. It has also embarked into other areas includingdefense and civil aviation. A dynamic 63000 strong team embodies the BHEL philosophyexcellence through continuous striving for state of the art technology. With cooperateheadquarters in NEW DELHI, fourteen manufacturing units, a wide spread regional servicesnetwork and projects sites all over India and even abroad, BHEL is Indias industrialambassador to the world with export presence in more than 50 countries. BHELs range of services extent from project feasibility studies to after sales services,successfully meeting diverse needs through turnkey capability. BHEL has had a consistent track record of growth, performance and profitability. TheWorld Bank in its report on the Indian Public Sectors, has described BHEL as “one of themost efficient enterprises in the industrial sector, at par with international standards ofefficiency". BHEL has acquired ISO 9000 certificate for most of its operations and has takenup Total Quality Management (TQM). WORKING CAPITAL MANAGEMENT 7
  8. 8. All the major units/divisions of BHEL have been upgraded to the latest ISO-9001:2000 version quality standard certification for quality management. All the majorunits/divisions of BHEL have been awarded ISO-14001 certification for environmentalmanagement systems and OHSAS-18001 certification for occupational health and safetymanagement systems. BHEL occupies an all-important niche as evident by its ranking by CII amongst topeight PSUs based on financial performance. Recently in survey conducted by business India,BHEL has been rated as seventh Best Employer in India. B.H.E.L. IN INTERNATIONAL BUSINESS BHEL has, over the years, established its references in over 60 countries of the world.These references encompass almost the entire range of BHEL products and services, coveringThermal, Hydro and Gas based turnkey power projects, substation projects, and rehabilitationprojects; besides a wide variety of products like: Transformers, Compressors, Valves and Oilfield equipment, Electrostatic Precipitators, Insulators, Heat Exchangers, Switchgears,Castings and Forgings etc. Some of the major successes achieved by BHEL have been in Gas-based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka,China, Kazakhstan; Thermal Power Projects in Cyprus, Malta, Libya, Egypt, Indonesia,Thailand, Malaysia; Hydro power plants in New Zealand, Malaysia, Azerbaijan, Bhutan,Nepal, Taiwan and Substation projects & equipment in various countries. Execution of theseoverseas projects has also provided BHEL the experience of working with world-renownedConsulting Organizations and Inspection Agencies. The Company has been successful inmeeting demanding requirements International markets, in terms of complexity of the worksas well as technological, quality and other requirements viz. HSE requirement, financingpackage, associated O&M services to name a few. BHEL has proved its capability to WORKING CAPITAL MANAGEMENT 8
  9. 9. undertake projects on fast-track basis. BHEL has also established its versatility to successfullymeet the other varying needs of various sectors, be it captive power, utility power generationor for the oil flexibility to exhibited adaptability by manufacturing and supplying intermediateproducts. B.H.E.L. IN INDIA # REGIONAL OFFICES (POWER SECTORS) *********************************** 1. NEW DELHI (NORTHERN REGION) 2. CALCUTTA (EASTERN REGION) 3. NAGPUR (WESTERN REGION) 4. CHENNAI (SOUTHERN REGION) # BUSSINESS OFFICES ******************* 1. BANGLORE 2. BARODA 3. BHUBANESHWAR 4. MUMBAI 5. CALCUTTA 6. CHANDIGARH 7. GUWAHATI 8. JABALPUR 9. JAIPUR 10. LUCKNOW 11. CHENNAI 12. NEW DELHI 13. PATNA 14. RANCHI 15. SECUNDRABAD # MANUFACTURING UNITS *********************** 1. BANGALORE 2. BHOPAL WORKING CAPITAL MANAGEMENT 9
  10. 10. 3. GOINDWAL 4. HARIDWAR 5. HYDERABAD 6. JAGDISHPUR 7. JHANSI 8. RUDRAPUR 9. RANIPET 10. TIRUCHIRAPALLY# SERVICE CENTRES ****************** 1. BANGLORE 2. BARODA 3. CALCUTTA 4. CHANDIGARH 5. SECUNDRABAD 6. NEW DELHI 7. NAGPUR 8. PATNA 9. VARANASIMAJOR MILE STONES1975 Job Redesign concept launched for FIRST time in India.1978 Well documented Suggestion Scheme launched.1982 Launched Productivity Movement & Quality Circle.1993 Concept of ISO 9001 quality System.1995 Adopted EFQM model of TQM for achieving Business Excellence.1997 BHEL one of the 9 PSE’s declared “Navratna” by Govt. of India.1997 National Productivity Award for HEEP by the President of India.1998 Certificate of Merit by National Productivity Council for Outstanding Performance for 2 nd consecutive year. 1998 Accreditation of U stamp. 1999 Accreditation of R Stamp from National Board of Boiler and Pressure Vessel Inspector, USA. 1999 AD-Merkblatt HPO Recertification by RWTUV for Gas Turbine Combustion Chambers. 1999 INSAAN Award for Excellence in Suggestion for 9 th consecutive year. 1999 Launching of 5s concept.WORKING CAPITAL MANAGEMENT 10
  11. 11. 1999 PCRI recognized as Environmental Lab by Haryana State Board for Preventionand Control of Pollution. 1999 Accreditation of ISO 14001-Enviornment management system 2000 CII Site Visit for CII-EXIM Business Excellence Award-2000 2001 Top Management TQM Workshop at Rishikesh and HRDC. 2001 INSAAN Award for excellence in Suggestion for 11th consecutive year. 2001 Launching of QTM & RCA at HEEP Hardwar by CMD. 2002 Launching of delivery Index, Turnover Index and Manufacturing Index. 2002 JBE Workshop of Apex TQM Group at Tehri to evolve Business policy 2003 Commendation for Strong Commitment to Excel in CII-EXIM Bank Award. 2004 Commendation for Significant Achievement in CII-EXIM Bank Award. 2005 Award given by Institute of Cost and Works Accountants of India for "Excellent Work in the field of Management Accounting and Cost Concepts". B.H.E.L., HARIDWARWORKING CAPITAL MANAGEMENT 11
  13. 13. Ultra modern blade shop at BHEL’s Haridwar plantWORKING CAPITAL MANAGEMENT 13
  15. 15. HEAVY ELECTRICAL EQUIPMENT PLANT, HARDWAR The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of the major manufacturing plants of BHEL. The core business of HEEP includes design and manufacture of large steam and gas turbines, turbo generators, hydro turbines and generators, hydro turbines and generators, large AC/DC motors and so on. Heavy Electrical Equipment Plant, Hardwar of this Multi-unit corporation with 7467 strong highly skilled technicians, engineers, specialists and professional experts is the symbol of Indo Soviet and Indo German Collaboration. It is one of the four major manufacturing units of the BHEL. With turnover of 164059 lacks and PBT of Rs.32489 lacks HEEP added 3000 MW of power to the National grid during 2005-06. HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW, Hydro Sets up to HT Runner dia 6300mm, associated Apparatus Control gears, AC& DC Electrical machines and large size Gas Turbine of 60-200 MW. HEEP Hardwar contributes about 44% of India’s total installed capacity for power generation with total capacity of Thermal, Nuclear & Hydro Sets of over 45000MW currently working at a Plant Load Factor of 76% and Operational Availability of 86%. In spite of acute recession in economy, BHEL Hardwar received recent orders for Mejia-5&6, Sipat, Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, and Dholpur. HISTORICAL PROFILE The construction of heavy electrical equipment Plant commenced in Oct.”1963” afterindo - soviet technical co-operation agreement in Sept.”1959”The first product to roll out from theplant was an electric motor in January 1967.This was followed by first 100 MW Steam Turbine inDec.1969and first 100MW Turbo Generator in August 1971.The plant’s “break even” was achievedin March 1974.BHEL went in for technical collaboration with M/s Siemens, Germany to undertakedesign and manufacture to large size thermal sets up to a unit rating of 1000 MW in the year1976.First 200 MWTG set was commissioned at Obra in 1977. The continuum of technological advancement subsequently saw the commissioning of500 MW TG Set in 1984 .The technical cooperation of Gas Turbine manufacture was also signedwith M/s Siemens Germany.First 150 MW ISO rating gas Turbine was exported to Germany in 15
  16. 16. Feb”1995”.Our 250 MW thermal set up at Dahanu Plant of BSES made a history by continuousoperation for over 150 days and notching up a record plant load factor greater than 100%. COMPANY PROFILE BHEL is Indias largest engineering company and one of its kinds in this part of thehemisphere. It manufactures a wide range of state of the art power generation equipment andsystems besides equipment for industry, transmission, defense, telecommunication and oil business.The first plant of BHEL was set up in Bhopal in 1956, which signaled the dawn of the heavyelectrical industry in India. In the early 60s three more major plants were set up in Hardwar,Hyderabad and Tiruchirapalli. The company now has 14 manufacturing divisions, 10 servicescenters and power sectors regional centers besides project sites spread all over India and alsoabroad to provide prompt and effective service to customers. BHELs business broadly coversconversions, transmission, utilizations and conservation of energy in core sectors of economy thatfulfill vital infrastructure needs of the country. Its product have established an enviable reputationof high quality and reliability, which is largely due to emphasizes placed all along on contemporarysome of the best technologies of the world from the leading companies in U.S.A., EUROPE, andJAPAN together with technologies from its own R&D centers technologies B.H.E.L. hasconsistently upgraded its design and manufacturing facilities to international standards by acquiringand assimilating. “In-line with Company’s Vision, Mission and values, we dedicate ourselves to sustainedgrowth with increasing positive Economic Value Addition and Customer focused businessleadership in the Power and Industry Sector. VISION A WORLD-CLASS ENGINEERING ENTERPRISE COMMITTED TO ENHANCINGSTAKEHOLDER VALUE. MISSION TO BE AN INDIAN MULTINATIONAL ENGINEERING ENTERPRISE PROVIDING TOTALBUSINESS SOLUTIONS THROUGH QUALITY PRODUCTS, SYSTEM AND SERVICES INTHE FIELDS OF ENERGY, TRANSPORTATION, INDUSTRY, INFRASTRUCTURE ANDOTHER POTENTIAL AREAS. 16
  17. 17. VALUES• ZEAL TO EXCEL AND ZEST FOR CHANGE• FOSTER LEARNING, CREATIVITY AND TEAMWORK.• RESPECT FOR DIGNITY AND POTENTIAL OF INDIVIDUALS.• LOYALTY AND PRIDE IN THE COMPANY.• INTEGRITY AND FAIRNESS IN ALL MATTERS.• STRICT ADHERENCE TO COMMITMENTS.DIVISIONS OF BHELThere are 20 Divisions of BHEL, they are as follows:1. HEEP, Haridwar2. HPEP, Hyderabad3. HPBP, Tiruchy4. SSTP & MHD, Tiruchy5. CFFP, Haridwar6. BHEL, Jhansi7. BHEL, Bhopal8. EPD, Bangalore9. ISG, Bangalore10. ED, Bangalore11. BAP, Ranipet12. IP, Jagdishpur13. IOD, New Delhi14. COTT, Hyderabad15. IS, New Delhi16. CFP, Rudrapur17. HERP, Varanasi18. Regional Operations Division ARP, New Delhi19. TPG, Bhopal20. Power Group (Four Regions and PEM)MAJOR COMPETITORS OF BHEL1. Ansaldo Italy2. Asea Brown Boueri Switzerland 17
  18. 18. 3. Beehtel USA4. Block & Neatch USA5. CNMI & EC China6. Costain U.K.7. Electrim Poland8. Energostio Russia9. Electro Consult Italy10. Franco Tosi France11. Fuji Japan12. GEC Alsthom U.K.13. General Electric USA14. Hitachi Japan15. LMZ Russia16. Mitsubishi Japan17. Mitsui Japan18. NEI U.K.19. Raytheon USA20. Rolls Royce Germany21. Sanghai Electric Co. ChinaRECENT ACHIEVEMENTS OF BHEL1. BHELs R&D ops contribute Rs 1,151 cr to turnover in 2005-06 [May 19 2006]2. BHEL to manufacture 800 mw thermal sets [Apr 14 2006]3. BHEL inks agreement with IIT Madras for new courses [Apr 25 2006]4. BHEL secures Rs 80 cr export order from EETC [May 10 2006]5. BHEL net profit up 62 pc (the tribune, 3 June 2006).6. Workers’ participation in management yields savings at BHEL, HardwarCORPORATE CITIZEN HEEP Hardwars Strategic plans and its policy & strategy are commensurate with BHELCorporate / strategic Plan . As first PSU to adopt Corporate Planning as a process . Boardmeetings for long –range development , BHEL has always guided other PSU’s in their Corporateplanning process .Board meeting , monthly Management Committee meetings, Annual RevenueBudget exercise , Mid term reviews , Apex TQ council reviews, Personnel Heads Meet, Quality 18
  19. 19. Heads Meet , Technology Meets , Product committees meetings, Inter-Unit Quality Circle Meetsetc. are the some of crore strengths of BHEL Corporation’s vast network.KEY CUSTOMERS AND SUPPLIERS HEEP’s customer profile ranges from State Electricity Boards,Government Powerutilities like NTPC, NPC, NHPC to IPPs like Reliance Energy. HEEP has also supplied GasTurbine sets to overseas customers in Libya & Iraq. Power Sector Regions of BHEL are its keyinternal customers. In view of expected market scenario,BHEL has strategically decided thatHEEP will concentrate on coal based Higher Rating Thermal Sets for domestic market to fulfilthe country’s vision of adding 107,000 MW capacity to achieve ‘Power on Demand’ by 2012.Our key customer, NTPC has drawn up plan for capacity addition of 20,000MW by 2012. HEEPhas planned for execution of 34,619MW by 2012. FAVOURABLE BUSINESS ENVIRONMENT Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus, thedemand for thermal sets will remain high. Central Electricity Authority (CEA) is the guidingauthority for Power Sector strategies in our country. BHEL representatives, along withrepresentatives from various domestic customers, are an integral part of various committeesformed by CEA. This enables us to guide and understand the market requirements and futurechallenges. To meet the 11th Five Year Plan target of adding 61,000MW, CEA has plannedaddition of 23 nos. standardized 500MW sets for faster project execution and cost reduction.BHEL, including HEEP, is a part of this process. CEA has standardized for the next capacity of800MW sets and has asked BHEL to prepare itself for manufacturing and supply in the 11th FiveYear Plan. BHEL has tied up with Siemens for upgradation of technology. Further CEA’s stresson R&M of ageing Power Plants is also providing business opportunity to unit.MAJOR CHALLENGES 19
  20. 20. The favorable business scenario has given the unit a major challenge of establishing Power Infrastructure of the country in close co-ordination with its key customers. HEEP has committed itself to meet the country’s requirements. To cater to the needs of higher rating sets of 800MW, HEEP has collaboration with Siemens. STRATEGIC CHALLENGES • Key Business • Cycle time reduction • State of the art technology • Cost reduction • Operational • Timely delivery • Material cost reduction • Productivity improvement • Effective utilization of machines • Human Resource • Motivation of employees • Skill & Knowledge management OVERVIEW OF FINANCE FUNCTIONS Role of finance function :- Finance function is the backbone of any organization. The finance function plays a verycritical role in the maximization of shareholders who provide the funds to the company. Thisobjective is being achieved by the finance department, which provides the carious information onthe financial parameters such as cash flows, profitability, cost and margin, assets, working capitaland shareholder value for the purpose of efficient utilization of resources resulting in betterprofitability of the company. 20
  21. 21. The various activities undertaken by the finance department achieve the aforesaidobjectives, may be summarized as follows- • Maintenance of account books, cost records. • Preparation of salary bills and other related payment to employees: PP, bonus, TA, departmental advances of PF accounts etc. • Preparation of Profit & Loss a/c and Balance Sheet. • Generation of various MIRs for management use: MIRs relating to turnover, profitability,cash requirements, inventory. • Coordination with company auditors, Govt. auditors, cost auditors and tax auditors. • Decisions relating to purchase and sales. • Investment decisions: capital investment decisions and working capital managementdecisions. • Financing decisions: decisions relating to financing-mix or capital structure or leverage. • Dividend policy decisions. COST SECTION:- Cost- section of the company is divided into following two sections viz, PRODUCT COST & CENTRAL COST and these deals with the following functions: - (i) Determination of periodic profits including inventory valuation. (ii) Determination of pricing policy of the company. (iii) Work related to capital expenditures of the company. (iv) Developing variance Management Information report for different parts of management for purpose of cost control and reduction. (v) Valuation of work in progress and finished goods. (vi) Interaction with management of top management link for achieving cost control and cost reduction and thereby improving bottom line of the company. (vii) Preparation of cost sheet of different product and their analysis for future planning. SALES SECTION:- Sales accounts section will deal mainly with the following items:- (i) Scrutiny and vetting of estimates / quotation for sale of products / services, wherever financial concurrence is required. (ii) Scrutiny and vetting of agreements for sales of products and services (iii) Invoicing for sale / advance or progressive payment / erection income and other. 21
  22. 22. (iv) Maintenance of subsidiary records like sales journals / sales daybook, sundry debtors ledgers, advances from customer ledger etc. (v) Payments, recovery and accounting of sales tax, excise duty. (vi) Accounting of claims on carriers/ insurance companies for missing items / damages on outward consignments. (vii) Scrutiny, payments and accounting of bills of carriers and insurers and other miscellaneous claims relating to the outwards consignments. (viii) Calculation and scrutiny of data for payments of royalties to the collaborators. (ix) Review and reconciliation as well as follow up of recovery of outstanding dues from the customers in coordination with the commercial department. STORES SECTION:- For the convenience of performance of various functions it is divided in to further threesections which are as follows: - a) Stores bills. b) Stores review. c) Foreign payment. They deal mainly with the following items of works: (i)Payment of supplier’s bills including bills for advances -indigenous and foreign. (ii)Pricing of stores receipt vouchers including fixed assets vouchers and fixed assets receipt vouchers. (iii)Maintenance of accounts of advances to suppliers, claims recoverable, claims for short suppliers, rejections and rectifications of materials and sundry creditors. (iv)Opening of letter of credit and arranging payments to foreign suppliers under foreign credit /differed payment agreements. (v)Payment of bills for ocean freight, port trust dues, custom duty, local agents commission and clearing agents bills, transit insurance bills, bills of contractors for transport /handling etc. and accounting of such payments are made at regional offices. (vi)Maintenance of accounts of material issued on loan and materials issued to subcontractors. (vii)Keeping account of earnest money and security deposits received from tender and suppliers. (viii)Adjustment of stores in transit to be made at the close of the year. PAYROLL SECTION:- 22
  23. 23. This section deals mainly with the following functions: (i) Preparation of monthly wage bills. (ii) All account work related to personal payments and discloses profit and loss account of the company. (iii) Dealing with income tax authority with regard to personal taxation of employee. (iv) Dealing with other statutory authority such as P.F. Commissioner, ESI (employee state insurance). (v) To ensure correct payment of salary and wages and other benefits to employees in,telephone and miscellaneous payments. (vi) Preparation of monthly wage bills. (vii) All account work related to personal payments and discloses profit and loss account of the company. (viii) Dealing with income tax authority with regard to personal taxation of employee. (ix) Dealing with other statutory authority such as P.F. Commissioner, ESI (employee state insurance). WORKS SECTION:- Works section of the company is dealing with the following functions: (i) Payments of contractor’s bills including bills for advance. (ii) Maintenance of accounts of contractors with regard to security deposits, earnest money, progressive payments. (iii) 215 maintenance of accounts of materials issued on loans to contractors. (iv) All accounting work related to capital expenditure in progress on erection of plant & machinery and building. (v) All other miscellaneous work relating to hiring of various facilities. 23
  24. 24. STRENGTH (S): -• Low cost producer of quality equipment due to cheap labour and fully depreciated plants.• Flexible manufacturing set up.• Entry barrier due to high replacement cost of its manufacturing facilities.WEAKNESSES (W): -• High working capital requirement due to its exposure to cash starved SEBs (State electricity boards) and High WIP.• Inability to provide project financing.OPPORTUNITIES (O): -• High-expected growth in power sectors (7000 MW/p.a.needs to be added)• High growth forecast in India’s index of industrial production would increase demand for industrial equipment such as motors and compressors.THREATS (T): -• Technical suppliers are becoming competitors with the opening up of the Indian economy. 24
  25. 25. • Fall in global power equipment prices can affect profitability.OBJECTIVE OF THE STUDY :-• To analyse the working capital management of BHEL Hardware unitThe sub objective of the project include- o To calculate & analyze the working capital, debtors, inventory and cash management of the company. o To analyze the various five years ratios, cash flow statements and balance sheet of the company.Limitations of the study :-• The data is collected on secondary basis.• The time was short to cover the whole information.• The management was reluctant in providing there data as they where only for office use. B.H.E.L., HARIDWAR 25
  26. 26. OBJECTIVE OF RESEARCH The main idea behind the research is to study the objectives of the research design and toensure that data collected is relevant to the objectives. The main aim thus to research is to find outthe truth, which is hidden, and which has not been discovered as The purpose of research is todiscover an answer to question through the application of specific procedures. 26
  27. 27. RESEARCH METHODOLOGY Research methodology is a way to systematically solve the problem. In it researchergenerally adopt studying the research problem along with logic behind them. It is necessary for theresearcher to know not only the research method/ techniques but also the methodology. When we talk of research methodology, we not only talk of research method but alsoconsider the logic behind the method we use in context of our research study and explain why weare not using others. So the research result is capable of being evaluated either by the researcherhimself or by others. RESEARCH PROCESS Identify the problem Set the objective Develop the Research Plan Data collection Analysis of Data 27
  28. 28. Finding (results) All these steps are done systematically as one by one to find out the results. The first step in theresearch process is to identify the problem and set objective carefully and agree on the researchobjective. The second step to research process is to develop the most efficient research plan for gatheringthe needed information. Designing the research plan call for gathering the primary data, secondarydata, or both, research instruments, sampling plan & contacts methods The next step in the research process is data collection. It is most expensive and most prone toerror. Data collection methods are rapidly improving, thanks to modern computer and telecommunication. The forth step in research process is to analyze the collected data. In this step researcher tabulatethe data and develop the frequency distribution. The last step in the research process is that the researchers present their findings to the relevantparties. The researcher should present the major findings that are pertinent to major marketingdecision facing management. Research methodology constitute of research method. The methodology which I have adopted in my report: Research methodology is a way to systematically solve the research problem. Collection of data:- Collection of data is one of the important aspects of research methodology. This consists ofgathering the data from various sources. Secondary data:- Data is important to collect the necessary information. Data may be of two types: primary andsecondary data. 28
  29. 29. Secondary data is one of the parts of research methodology through which information about theproject can be collected. For this research data is collected through internet and various books.Different financial data like annual report, balance sheet, books and bank manual, books and budgetmanual were used. Analysis and interpretation :- Analysis and interpretation of data is the next step of research methodology in this we haveanalyses the working capital and cash management of the company. Through this we were able tofind out the reasons of stock piling and other related issue affecting the working capitalmanagement in the organization. Various graphs, pie chart and table were used to present andinterpret the results. 29
  30. 30. MANAGEMENT OF WORKING CAPITAL Management of working capital means management of all aspects of current assets andcurrent liabilities. Basically, Working capital management is concerned with the problems thatarise in attempting to manage the current assets, current liabilities and the inter relationshipthat exist between them. Financial management should determine the quantum and structure of current assets. Itshould also see that current assets are financed from the proper sources. Management should alsosee that current liabilities are paid in time, while managing the working capital. The main objective of working capital management is to manage current assets andcurrent liabilities in a manner so that working capital can be kept in a satisfactory level. It is alsotaken in to account that the working capital should be neither excessive nor inadequate. The amountof current assets should be adequate to pay the current liabilities in time and adequate securitymargin can be maintained. Accordingly, proper balance among the different constituents of currentassets is maintained so that no current has more than require amount invested in it. Management of working capital affects profitability, risk and liquidity of the businesssignificantly. Management should, therefore, maintain proper balance among these factors whilemanaging working capital. If the quantum of working capital is more, it will increase liquidity, but 30
  31. 31. decrease profitability and risk. If working capital relatively declines, it will decrease liquidity butcause an increase in profitability and risk. If business wants to earn more profit, it will have to bearhigher risk. Risk means inability of the firm to pay current liabilities in time. CLASSIFICATION OF WORKING CAPITAL Working Capital may be classified on two bases: - a) On the basis of Concept: - On the basis of concept, working capital can be classified as:- • Gross Working Capital • Net Working Capital b) On the basis of Time: - On the basis of time, working capital can be classified as:- • Permanent or Fixed Working Capital • Temporary or Variable Working Capital Gross Working Capital :- The Gross Working Capital is the Capital invested in the total current assets of the enterprises.Current assets are those assets, which can be converted into cash within a short period, normally anaccounting year. Gross Working Capital = Total Current Assets Net Working Capital:- The term Net Working Capital refers to the excess of current assets over current liabilities, or say, Net Working Capital = Current Assets – Current Liabilities Net Working Capital can be positive or negative. When the current assets exceed the currentliabilities the working capital is positive and the negative working capital results when the currentliabilities are more than the current assets. Current liabilities are those liabilities, which are 31
  32. 32. intended to be paid in the ordinary course of business within a short period of normally oneaccounting year out of the current assets of the income of the business . The gross working capitalconcept is financial or going concern concept whereas net working capital is an accounting conceptof working capital. Both the concepts have their own merits. The gross concept is sometime preferred to the concept of working capital for the followingreasons: • It enables the enterprise to provide correct amount of working capital at correct time. • Every management is more interested in total current assets with which it has to operate thenthe sources from where it is made available. • It takes into consideration of the fact every increase in the funds of the enterprise wouldincrease its working capital. • The concept is also useful in determining the rate of return on investments in working capital . • The net working capital concept, however, is also important for the following reasons:- i.It is a qualitative concept, which indicates the firm’s ability to meet its operating expensesthe short-term liabilities. ii.It indicates the margin of protection available to short term creditors. iii.It is an indicator of financial soundness of enterprise. iv.It suggests the need of financing a part of working capital requirement out of the permanent sourcesof funds. Permanent or Fixed Working Capital :- Permanent or fixed capital is the minimum amount, which is required to ensure effectiveutilization of fixed facilities and for maintaining the circulation of current assets. Every firm has tomaintain a minimum level of current assets is called permanent or fixed working capital as this partof working capital is permanently blocked in current assets. As the business, grow the requirementof working capital also increases due to increase in current assets. Temporary or Variable Working Capital :- Temporary or variable working capital is the amount of working capital, which is requiredto meet the seasonal demands and some special exigencies. Variable working capital can further beclassified as seasonal working capital and special working capital. The capital required to meet theseasonal need of the enterprise is called the seasonal working capital. Special working capital is 32
  33. 33. that part of working capital which is required to meet special exigencies such as launching ofextensive marketing campaign for conducting research etc. Temporary working capital differs from permanent working capital in the sense that it isrequired for short periods and cannot be permanently employed gainfully in business NEEDS AND OBJECTIVES FOR WORKINGCAPITAL Every business needs some amount of working capital. The needs for working capital,arises due to time gap between production and realization of cash from sales. There is an operatingcycle involved in sales and realization of cash. There are time gaps in purchase of raw material andproduction, production and sales, and realization of cash. Thus, working capital is needed for the following purposes: - • For the purchase of raw material, component and spares. • To pay wages and salaries. • To incur day- to- day expenses and overhead costs such as fuel, power and office expensesetc. • To meet the selling costs such as packing, advertising etc. • To provide credit facilities to the customers. • To maintain the inventories of raw material, work in progress, store, spares, and finishedstock. For studying the need of working capital in a business, one has to study the businessunder varying circumstances such as new concern, as a growing and one, which has attainedmaturity. A new concern requires a lot of funds to meets its initial requirement such as promotionand formation etc. These expenses are called preliminary expenses and are capitalized. The amountneeded for working capital depends upon the size of the company and the ambition of itspromoters. Greater the size of the business unit generally will be the requirement of the workingcapital. The requirement of the working capital goes on increasing with the growth and expansionof the business until its gains maturity. At maturity, the amount of working capital required iscalled normal working capital. 33
  34. 34. IMPORTANCE OF WORKING CAPITAL 1. Time devoted to working capital management:- The largest portion of financial managers time is devoted to day to day internal operation thefirm. This may be appropriately sum up under the heading "WORKING CAPITALMANAGEMENT". 2. Investment in current assets:- Current assets represent more than half of the total assets of a business firm. Because theyrepresent largest investment and because this investment tends to relatively volatile, current assetsare worthy for the financial managers careful attention. 3. Importance for small firm:- Current assets are similarly important for the financial managers of small firm. Further smallfirm are relatively limited access to the long term markets, it must necessarily rely on the tradecredit and short term bank loan, both of net effect on net working capital by increased currentliabilities.FACTORS DETERMINING THE WORKINGCAPITAL REQUIREMENT 1. NATURE OF BUSINESS :- The requirement of working capital is very limited in public utility undertaking such asElectricity, Water Supply and Railways because they offer cash sales only and supply services notproducts and no funds are tied up in inventories and receivables. On the other hand, the trading andfinancial firm requires less investment in fixed assets but have to invest large amounts in currentassets. The manufacturing undertaking requires sizable amount of working capital along with fixedinvestments. 2. PRODUCTION POLICY :- 34
  35. 35. The determination of working capital needs depends upon the production policy of the business.The demand for certain products is seasonal i.e.; such products are purchased in certain months of ayear. For such industries, two types of production policy can be followed. Firstly they can producethe goods in the months of demand or secondly, they produce for the whole year. If the secondalternative were followed, it would mean that until the time of demand finishes, product wouldhave to be kept in stock. It would require additional working capital. 3. LENGTH OF PRODUCTION CYCLE :- The longer the manufacturing time, the raw material and other supplies have to be carried for alonger time in the process with progressive increment of labor and service costs before the finalproduct is obtained. Therefore, working capital is directly proportional to the length of themanufacturing process. 4. RATE OF STOCK TURNOVER :- There is an inverse co-relationship between the quantum of working capital and the velocity orspeed with which the sales are affected. A firm having a higher rate of stock turnover will needlower amount of working capital as compared to a firm having a low rate of turnover. 5. CREDIT POLICY:- Credit policy affects the working capital requirements in two ways: (a) Terms of credit allowed by customer to the firm, (b) Terms of credit available to the firm. A concern that purchases its requirements on credit and sells its product/services on cash requireslesser amount of working capital and vice-versa. 6. WORKING CAPITAL CYCLE :- The speed with which the working cycle completes one cycle determines the requirements ofworking capital. Longer the cycle larger is the requirement of working capital. DEBTORS FINISHED CASH GOODS 35
  36. 36. WORK IN PROGRESS RAW MATERIAL 7. RATE OF GROWTH AND EXPANSION OF BUSINESS : - The larger size businesses require more permanent and variable working capital in comparison tosmall business. If a company is growing, its working capital requirements will also go onincreasing. Thus, the growing concerns require more working capital as compared to the stableindustries. 8. SEASONAL VARIATION : - Generally, during the busy season, a firm requires larger working capital than in the slackseason. 9. BUSINESS FLUCTUATION : - In period of boom, when the business is prosperous, there is a need for larger amount ofworking capital due to rise in sales, rise in prices, optimistic expansion of business etc. On thecontrary in time of depression, the business contracts, sales decline, difficulties are faced incollection from debtors and the firm may have a large amount of working capital idle. 10. EARNING CAPACITY AND DIVIND POLICY :- Some firms have more earning capacity than other due to quality of their products, monopolyconditions, etc. Such firms may generate cash profits from operations and contribute to theirworking capital. The dividend policy also effects the requirement of working capital. A firmmaintaining a steady high rate of cash dividend irrespective of its profit needs more working capitalthan the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 11. PRICE LEVEL CHANGES : - Price level changes also affect working capital needs. If the prices of different goods increase, tomaintain same level of production, more working capital is needed. 36
  37. 37. 12. AVAILABILITY OF RAW MATERIAL : - Availability of raw material on the continuos basis affects the requirement of working capital.There are certain types of raw materials, which are not available regularly. In such a situation firmrequires greater working capital to meet the requirements of production. Some raw materials areavailable in particular season only for example wool, cotton, oil seeds, etc. They have to keepgreater working capital. 13. MAGNITUDE OF PROFIT :- Magnitude of profit is different for different businesses. Nature of product, control on the marketand ability of managers etc. determine the quantum of profit. If the profit margin is high, it willhelp to arrange funds internally, which will also increase the working capital. 14. OTHER FACTOR: - a. Operating efficiency b. Management ability c. Irregularities of supply d. Import policy e. Asset structure f. Importance of laborEXISTING SYSTEM OF WORKING CAPITAL INBHEL, HARIDWAR 37
  38. 38. To maintain the optimum level of working capital in such a big organization is really achallenging task. The three basic components that determine the level of working capital in anyorganization are: - • Cash • Debtors B/R • Inventory. On the basis of our research in the BHEL Hardwar, these basic components are managed in theorganisation, in the under mentioned manner. TABLE OF WORKING CAPITAL (Rs. in Lacs) YEARS 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 PARTICULARS Actual Actual Actual Actual Actual Actual Current Assets Debtors 54076 50904 41417 55866 48552 64709 Inventory 47369 43461 32370 39214 58976 69798 Cash 17 23 527 10 9 9 Loan and Advaces 13367 6573 5730 5581 5299 5152 Total 114829 100962 80044 100671 112836 139668 Current Liabilities Sundry Creditors 18630 19718 15562 13953 16205 16674 Adv.from Customers 27107 33275 29360 45214 55048 61889 Other liabilities 2665 1966 1980 8457 9250 12370 Provisions 15963 16682 14473 14572 18887 19990 Total 64365 71641 61375 82196 99390 110923 Net Working Capital 50463 29320 18668 18475 13446 28745 Turnover 71799 108811 101335 97432 140697 164059 Working Capital to 327D 98D 67D 69D 35D Turnover 38
  39. 39. Working capital to turnover=net working capital/turnover*365D stands for no. of days Graphical Representaion Of Working Capital InBHEL 60000 50463 50000 40000 29320 28745 30000 18668 18475 WORKING 20000 CAPITAL (RS. in 13446 Lacs) 10000 0 2006- 2007- 2008- 2009- 2010- 2011- 2007 2008 2009 2010 11 12 39
  40. 40. Graphical presentation of current assets of thecompany 80000 70000 60000 50000 Debtors 40000 Inventory 30000 Cash 20000 Loan and advance 10000 0 2006- 2007- 2008- 2009- 2010- 2011-12 2007 2008 2009 2010 2011 Interpretation: - If we see from the above table, it can be clearly seen that net working capital has continuouslycome down to 13446 Lacs in 2010-11 from 50463Lacs in 2006-07.But in 2011-12 it is increasedbut it is good for the company because of its turnover is also increased. Moreover if we compareno. of days of net working capital to turnover, it has also comes down to 99 days from 256 day inprevious years. 40
  41. 41. This improvement does not come accidentally but considerable measures have been taken tocontrol working capital in organization There is direct relation of working capital requirement with Debtors and Inventory. Above dataindicates that company has taken certain strategic measures to manage its Debtor and Inventory. Following are the measures: - • Special task forces were built up from debtors and Inventory Management at senior level. • Regular follow up at senior level. • A close contact with the customers. • Proper age- wise analysis of the debtors. • Proper classification between collectible Debtors and bad debts. • Bad debts written off as early as possible after making all efforts for its collection. • Product cycle minimized so that cost of the product does not become high to the agreed amount because of time factor. • Formation of specific group in each area to identify the wastage elements and seek participation of all. • Formulation of action plan to eliminate/minimize wastage. • Identification of corrective actions and their implementation. . 41
  42. 42. INTRODUCTION It is very difficult for the organization to sell always on cash basis in today’s competitivemarket. In almost every business, we have to sell on credit basis. The basic objective ofmanagement of sundry debtor is to optimize the return on investment on this asset. It is obvious thatif there are large amounts tied up in sundry debtors, working capital requirement would be high andconsequently interest charges will be high. In such cases, the bad debts and cost of collection ofdebts would be high. On the other hand if the credit policy is very tight, investment in sundrydebtors is low but the sale may be restricted, since the competitors may offer more liberal creditterm. We have limited resources and therefore every resource has its own opportunity cost. Therefore,the management of sundry debtors is an important issue and requires proper policies and efficientexecution of such policies. Debtors and cost of debtors have direct relation; cost will increase dueto increase in debtors and vice versa. It depends on the credit sale of concern and credit period(collection period) allowed to customer. It is in interest of customer to pay as late as possible, andcompany whom made sales, would like to collect their debtor as early as possible. There is a 42
  43. 43. conflict between the two aspects. Debtor management is the process of finding the equilibrium atwhich company agrees to receive its payment without hampering or having any adverse effect onits sales and customer agree to pay at their economical buying concept. Sundry debtor level depends on two measure issues: - One is volume of credit sales and another is credit period allowed to customer. It is the essence ofevery business that to sale on credit and allow credit period to the customer in such a competitivemarket, following factors may be considered before allowing credit period to the customer: - • Nature of the product • Credit worthiness of the customer, which varies from customer to customer. • Quantum of advance received from customers • Credit policy of company, say number of days allowed to customer for payment to thecustomers. • Cost of debtors • Manufacturing cycle time of the product etc. Debtors Management:- There are mainly three aspects of Management of Debtors 1. Credit Policy: - The credit policy is to determine. It involves a trade off between the profits on additional sale thatarises due to credit being extended on one hand and the cost of carrying those debtors and bad debtslosses on the other. 2. Credit Analysis:- This requires determining as how risky is to advance credit to a particular customer. 43
  44. 44. 3. Control of Receivables: - This requires to the firm to follow up debtors and decide about a suitable credit collection policy.It involves both lying down of credit policy and execution of such policies. There is a cost of maintaining receivables, which comprises Cost of: - • The company require additional funds as resources are blocked in receivables which involvesa cost in the form of interest (loan fund) or opportunity cost (own fund). • Administrative cost which includes record keeping, investigation of credit worthiness etc. • Collection cost • Defaulting cost or Bad debts DEBTORS MANAGEMENT IN HEEP – HARIDWAR B.H.E.L Hardwar is engaged in the manufacturing business of heavy electrical equipments, wherecycle time of the product is 18- 24 months and most of the contracts take approximately 3-5 yearsto complete. Customers of B.H.E.L. Hardwar are broadly divided into following categories: - • State electricity board • Power Project • Public Sector Under takings 44
  45. 45. • Railways • Government Departments • Private Sectors • Exports In most of the contracts, payments of B.H.E.L. Hardwar are made in following stages: - Payment Terms Advance from customers: - -At the time of dispatch of goods -At the time of MRC (material receipt at site) Deferred payment after Commissioning of project with certain test However, the above terms may vary from contract to contract. Based on the above payment terms, B.H.E.L. Hardwar categories their debtors into two parts: - • Collectible debtors • Deferred debtors Collectible debtors are those, which are due for payment as on now and there is no credit timeallowed to the customer say payment at the time of dispatch. Deferred debtors are those, which will become due on the occurrence of a particular event suchas issuing of MRC (material Receipt Certificate) from customer or completion of contract withcertain tests etc. ANALYSIS OF DEBTORS MANAGEMENT WITH THE HELP OF CERTAIN RATIO’S 45
  46. 46. DEBTORS TURN OVER RATIO:- Debtor’s turn over ratio establishes a relationship between net credit sales and average tradedebtors. The major objective to calculate ratio is to determine the efficiency with which the tradedebtors are managed. We can easily calculate this ratio with the help of the following formula: Debtors turn over ratio =Net credit sales/average debtor ( lacs) YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL Turnover 71799 108811 101336 97432 140697 Average Debtors 55713 52490 46160 48642 52200 Ratio 1.3 2.1 2.2 2.0 2.7 Graphical presentation of debtor turnover ratio 3 2.7 2.5 2.1 2.2 2 2 DEBTOR TURNOVER 1.5 1.3 RATIO 1 0.5 0 2007- 2008- 2009- 2010- 2011- 08 09 10 11 12 YEARS 46
  47. 47. INTERPRETATION: It indicates the speed with which the debtors turnover an average each year. In general a highratio indicates the shorter collection period which implies prompt payments by debtors and a lowratio indicates a long collection period which implies delayed payment by debtors. So we can seefrom the graph and the table above that in the last five years the company is trying to improve thedebtors’ turnover ratio. In 2007-08 it is the least i.e. 1.3 but it again started improving in 2008-092.1:1, in 2009-10 2.4:1,in 2010-11 2:1 & in 2011-13 2.9:1. It depicts that how efficiently debtorsare collected AVERAGE COLLECTION PERIOD:- AVERAGE COLLECTION PERIOD = 365 . Debtors Turnover Year 2007-08 2008-09 2009-10 2010-11 2011-12 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL Turnover 71799 108811 101336 97432 140697 Debtors 55713 52490 46160 48642 52200 Ratio 1.3 2.1 2.2 2.0 2.7 Days of Inventory 281 173 166 183 135 47
  48. 48. Graphical representation of average collection period DEBTOR COLLECTION PERIOD 300 281 250 173 183 NO. OF DAYS 200 166 135 150 100 50 0 2007- 2008- 2009- 2010- 2011- 08 09 10 11 12 YEARS Interpretation We can check the managerial efficiency with the help of this ratio by the comparison of averagecollection period and credit policy of the company form the table we can clearly see that in theyear 2007-08 to 281 days , but in year 2008-09 & 2009-10 there was a decrease and it falls downto 174 & 176 respectively . This indicates that the company was following a very liberal policy in2005-06 & 2006-07 but it improved in the succeeding years. If the days are increasing it indicatesthat the bad debts are also increasing. It is difficult to lay down a standard collection period, itdepends upon the nature of the business. As a general rule the receivables should not exceed 4 to 5months of credit sales. 48
  49. 49. STEPS INVOLVED IN MANAGEMENT OF DEBTS : - The following steps are involved in debtors’ management • There should a close contact with the customers. • There should be proper age- wise analysis of the debtors. • There should be proper classification between collectible Debtors and bad debts. • Bad debts should be written of as early as possible after making all efforts for its collection. • Product cycle should be minimized so that cost of the product should not become high to theagreed amount because of time factor. • There must be a provision of discount for early payment of debts by the customers. • Regular checking of the records of the debtors is essential so as to analysis the currentposition of that organization. • While making a policy, regarding the debtors the point should be considered that customerhaving excellent past record, follow the lenient policy is adopted for doubtful customers Manage the working capital according to need as recovering the debt from customer as early aspossible while, get extension of payment of dues on the company of others as suppliers of rawmaterial as late as possible. CREDIT GRANTING DECISIONS : - CREDIT GRANTING DECISIONS NO GRANT CREDI CREDIT T 49
  50. 50. 50
  51. 51. Introduction Inventories constitute most significant part of current assets, in most of the companies in India.To maintain a large size of inventory, a considerable amount of fund is required. It is, therefore,absolutely imperative to manage inventories efficiently and effectively in order to avoidunnecessary investment. A firm neglecting the management of inventories will be jeopardizing itslong-run profitability and may fail ultimately. It is possible for a company to reduce its levels ofinventories to a considerable degree, e.g.10% to 20%, without any adverse effect on production andsales, by using inventory planning and control techniques. The reduction in ‘excessive’ inventoriescarries a favorable impact on a company’s profitability. There are at least three motives for holding inventories: 1-To facilitate smooth production and sales operation (transaction motive). 2-To guards against the risk of unpredictable changes in usage rate and delivery time(precautionary motive). 3- To make advantage of price fluctuations (speculative motive). OBJECTIVE:- Inventories represent investment of a firm’s funds. The objective of the inventory managementshould be the maximization of the value of the firm. The firm should therefore consider: (a) Costs, (b) Return, and (c) Risk factors in establishing its inventory policy. Two types of costs are involved in the inventory maintenance: 1- Ordering costs : - Requisition, placing of order, transportation, and staff services.Ordering costs are fixed per order size increases. 51
  52. 52. 2- Carrying costs : - Warehousing, handling, clerical and staff services, insurance andtaxes. Carrying cost increases. The firm should minimize the total cost (ordering cost + carrying cost). The economic orderquantity (EOQ) of inventory will occur at a point where the total cost is minimum. The followingformula can be used to determine EOQ: EOQ= (2AO/C) ^1/2 Where, A= Annual requirement. O= Per order cost. C= Per unit carrying cost. WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISHINVENTORY? The inventory level at which the firm places order to replenish inventory is called reorder point. Itdepends on (a) the lead time and (b) the usage rate. Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead time0, thereorder point will be equal to: Lead-time *Usage rate + Safety stock. The firm should strike a trade-off between the marginal rate of return and marginal cost of fundsto determine the level of safety stock. INVENTORY ANALYSIS:- Altogether the company deals with stock of thousands of items raising a serious problem of howone can keep control of track of all items also, where it is necessary to have some extent of controlon each and every item. Different types of analysis each having its own advantages and purposehelp in bringing a particular solution to the control of inventory. The most important of all suchanalysis is ABC analysis. The other one -  ABC analysis  VED analysis 52
  53. 53.  SDT analysis  HML analysis  FSN analysis ABC ANALYSIS A formal way of classifying inventory items so that important ones will be given the mostattention. Through this analysis the professional inventory manager will concentrate his efforts onwhere they will yield the greatest rewards. The ABC of ABC analysis refers to the classes, A, Band c into which the inventory is divided. (A) Are high value items whose rupee volume typically account for 75-80% of the value oftotal inventory while representing only 10-15% of the inventory items. (B) Class is lesser value items whose rupee volume accounts for 15-20% of the value ofinventory, while representing 15-20% of the inventory items. (C) Class items are low value items whose volume accounts for 10-15% of the inventoryvalues but 75-80% of the inventory items. The same degree of control is not justified for all the three classes of items. Class [A] requires thegreatest attention and class [C] items require least attention. Class [C] items need no specialcalculations since they represent a low inventory investment. The order might be placed once a yearand periodically reviewed once a year, class [B] items are paid more attention then, proper CODsare developed and semi annual review of variables must be done. Class [A] items needs direct attention to the inventory items, EOQs are to be developed eachtime an order is placed. The major concern of an ABC classification is to give direct attention to theinventory items that represent the largest amount of expenditure. If inventory levels can be reducedfor claim of items it result in a significant reduction in inventory investment. ABC INVENTORY CLASSIFICATION Percentage of inventory items Category of classes Value of the total inventory (rupee volume in %) 10 A 75 53
  54. 54. 15 B 15 75 C 10 VED ANALYSIS This analysis specially pertains to the classification of maintenance of spares denoting theessentiality of blocking spares. V - Stands for vital - items when out of stock or when not readily available, completely brings theproduction a halt. E - Is for essential - items without which we can temporarily loose our production or disclosureof production occurs with in a week. D - Denotes desirable items - all other items, which are necessary but do not cause any immediateeffect on production. SDE ANALYSIS For developing countries and especially where certain items are in scarce supply. This analysis isvery useful. S - Refers to scarce items, especially imported items and those which are very much in shortsupply. D - Are difficult items which are available in market but not easily available. E - Items are those which are easily available, most local items. HML ANALYSIS The cost per item is considered for this analysis (H) High cost items (M) Medium cost items (L) Low cost items 54
  55. 55. Help in bringing controls over consumption at departments’ level and for storage. FSN ANALYSIS Materials are classified as (F) Fast moving (S) Slow moving and (N) Non moving items The non-moving items are of great importance. It is found that many companies maintain hugestock of non-moving items and the number of such items running is thousands. Resulting of non-moving items is to be made to determine where they could be used or to be disclosed off. The fastand slow moving classification helps in arrangement of stocks in stores and their distributionhandling methods. A manufacturing concern is sure to collapse out, if an adequate supply of raw material, process orcash to meet the wage bill, or capacity to wait for the market for its finished products, orcommercial enterprises or merchandise to sell its vitally good is finished. Working capital thus isthe lifeblood and controlling nerve center of a business. The adequacy of working capitalcontributes a lot to, raising the standing of a corporation because of better items of goodspurchased reduces the cost of production, on account of the receipt of cash discounts, favorablerates of interest on bank loans, etc of company. A sufficient working capital is always in a positionto take the advantage of any favourable opportunity either to purchase raw materials or to execute aspecial order or to wait for better market position in the general market of the mgt. Of a corporationis enhanced by its financial soundness. The ability to meet all reasonable demands for cashinordinate delay is a great psychological factor to improve the all round efficiency of the busy andcreate self-confidence in the press at the helm of affairs in the company. During slump the demandfor Working Capital instead of coming down shoot up of good amount is coated up in theinventories and book debts. Concerns having sample resources can side over that period ofdepression. FUNCTION OF INVENTORY CONTROL Functions to be performed in the field of Inventory Control are: 1 Setting up norms for carrying Inventory. 2 Determining what items to be stocked. 3 Setting rules for Inventory replenishments. 4 Receiving, storing and issuing inventory items as needed. 5 Maintaining records of inventory quantities and values. 6 Identifying and deposing of slow moving, non-moving, obsolete or damage inventories. 7 Furnishing summary information on inventory position for control purposes. 55
  56. 56. Locations of position responsible for performing each of these functions in organization structuregreatly vary from company to company. In BHEL Hardwar determination of product material or direct work order material (what?) to becarried in Inventory is more or less automatic result of product design formulation and is given inmaterial forecast for a work order. Indirect materials consumed in manufacturing process such aselectrodes, brazing alloys, tooling etc. are usually given by process engineering or at times bydesign departments. Balance great bulk of indirect materials is made up of repair parts and general supplies.Responsibility for specific (what?) items to be carried in inventory rests with Works Engineering. With respect to raw materials and purchased parts, responsibility for determining (when?) andhow much to buy is a sign to relevant product manufacturing i.e. production planning and materialplanning groups. However a strict budgetary control and allocation to specific work order controlon high value items is exercised by Inventory control department organized separately underMaterial Management. Purchase department attached to manufacturing department determines(where?) to buy. Determination of indirect material (when?) and how much to buy and (where?), is done by centralgroup under Material Management by consolidating requirements of all sections and while lookingat consumption trends over a No. Years. Again a strict budgetary control and control on high value items for their allocation is exercisedby Inventory control group. Receiving and storing is done by Central Stores CSX under Material Management Department. Issuing Inventory is done by CSX on demand from manufacturing and is controlled by MaterialPlanning. Again some online checks are proposed to be introduced at raising of Store Issue voucherstage itself, for high value items so that induction is controlled strictly as per requirement ofproduction schedule based on lead time for manufacture to keep WIP inventory under control. Records of Inventory are maintained on a main frame computer centrally arranged having sharedaccess from all functions for their specific use. Inventory Record Keeping and Related Procedures How well Inventory records are maintained has a major bearing on the effectiveness of Inventorycontrol program. Mostly information recorded in B.H.E.L. system is: • Name of the part or material 56
  57. 57. • Short description • Identifying No called Material code • Unit of measurement • Location in store (custody) • Bin no. • Opening, received, issue, closing quantity and value. These records are maintained in an online system on main frame computer user departments haveshared access for posting and retrieval of information. There is a system for reserving specific items as customer specific, which is done by tagging onthe item. Posting of withdrawals or issue from inventory is done on specific authorization by a documentcalled Store Issue voucher. B.H.E.L., TIRUCHIRAPALLY 57
  58. 58. INVENTORY MANAGEMENT IN B.H.E.L. BHEL produces long production cycle items against the firm orders from customers.Because of this as well as sizeable imported raw materials and compulsory bulk purchase of itemslike steel and copper in line with availability from SAIL and MMTC, the company has to carry highlevel of inventories. (RS/LACS) YEARS 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 ACT. ACT. ACT. ACT. ACT. ACT. PARTICULARS Raw Material & 9016 10012 7639 5338 10469 11567 components Material with 143 152 99 155 155 306 fabricators Stores & spares 2756 2728 2333 2092 1594 1848 Material in transit 2718 2866 1466 3819 3716 9910 Finished goods at 1050 1300 931 2603 2181 1770 plant W.I.P 30833 25121 18488 23699 38585 42120 Transfer in transit 852 1281 1413 1508 2326 2277 Total 47368 43460 32370 39214 58976 69798 Turnover 71799 108811 101335 97432 140697 164059 Average inventory 37915 35792 49095 64387 Inventory turnover 2.67 2.7 2.87 2.55 Ratio Days of inventory 137D 135D 127D 143Dholding Inventory Turnover Ratio = Sales / Average Inventory Days Of Inventory Holding = 365 / inventory Turnover Ratio 58
  59. 59. Graphical Representation of Days of InventoryHolding DAYS OF INVENTORY HOLDING 250 200 214 NO. OF DAYS 150 152 Days of 135 135 126 inventory 100 holding 50 0 2007- 2008- 2009- 2010- 2011- 08 09 10 11 12 YEARS Interpretation If we see from the above table that the days of inventory holding in the year 2001-02 hascome down to 152 days from 214 days in the previous year. In spite of increase in turnover i.e.108811 in 2008-09 from 71799 in the year 2007-08 the days of inventory holding decreases. Thisindicates that the company is using effective strategy to bring down its inventory level. This makesvery less investment in inventory. It is in the interest of every organization to minimize its inventory level. Following is the process through which the company can achieve the optimum inventory level. STANDARD TAKING COMPARISION OF INVENTORY ACTUAL ACTUAL WITH LEVEL INVENTORY STANDARD LEVEL TAKE ANALYSING REASON VARIATION CORRECTIV OF 59 / E ACTIONS VARIATION/DEVIATIO DEVIATION N
  60. 60. NEED OF INVENTORY MANAGEMENT • Stiff competition, globalization of trade and liberalization. • Achieving, increasing and positive EVA. • Cost reduction. • Energy conservation. • Conservation of natural resources. • Better, work environment. • Improved health and safety. • Enhanced public image. Graph of inventory in BHEL 60000 50000 40000 30000 Inventory in BHEL 20000 10000 0 2007-08 2008-09 2009-2010 2010-11 2011-12 Interpretation By the graphical representation, we can easily understand that the level of inventory iscoming down but in 2011-12 it increases due to large amount of raw material .It comes downbecause company takes some effective measures to control the level of inventory. Those steps arefollowing steps to control its inventory: - STRATEGIES/MEASURES 60
  61. 61. • Formation of specific group in each area to identify the wastage elements and seek participation of all. • Identification of wastage. • Formulation of action plan to eliminate/minimize wastage. • Review of status. • Identification of corrective actions and their implementation. • Highlighting the gains. SUGGESTION: - After analyzing the steps taken by the company there are some suggestions to manage theInventory • There should proper analysis of requirement of raw material. • Order should be placed according to the lead-time. • Wastage should be avoided. There should be proper coordination between the Inventory Department and ProductionDepartment. B.H.E.L. TRANSFORMER 61
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  63. 63. MANAGEMENT OF CASH It is the duty of the finance manager to provide adequate cash to all segments of the organization.At the same time, he /she have also to ensure that no funds are blocking in idle cash as this willinvolve cost in terms of interest to the concern. A sound cash management scheme has to maintainthe twin objective of liquidity and cost. MEANING OF CASH MANAGEMENT The term cash management refers to the management of cash and ‘near cash assets’ while cashincludes coins, currency notes, cheques, bank drafts, and the demand deposits, the near cash assetsinclude marketable securities and time deposits with banks. Such securities and deposits are easilyconvertible into cash. MOTIVES FOR HOLDING CASH In spite of the fact that cash does not earn any substantial return for the business, it is held by theconcern with the following motives. 1. Transaction motive . A Company enters a variety of business transactions resulting bothinflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet thebusiness obligations in such situation, it is necessary to maintain adequate cash balance. Thus, afirm with the motive of making routine business payments maintains cash balance. 63
  64. 64. 2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out ofunexpected contingencies such as floods, strikes, obsolesces, sharp increase in prices of rawmaterials, presentation of bills for payment earlier than expected date. More amounts of cash willbe kept by the firm if there is more possibility of such contingencies. 3. Speculative motive: BHEL also keeps cash balance to take advantage of unexpectedbusiness opportunities. Such motive is there of speculative nature. 4. Compensation motive . Banks provide certain services to their customers free ofcharge. So they usually require the customers to keep minimum cash balance with them whichenables them to earn interest and compensate for the free services rendered. Reasons of cash management :- Cash management involves the following four basic problems. 1. Controlling level of cash. One of the basic objectives of cash management is tominimize the level of cash balances with the firm. This objective is sought to be achieved bymeans of the following: i. Preparing cash budget.: Cash budget is the most important device for planning and controlling the use of cash. It involves the future receipts and payments of the firm. On the basis of this information the finance manager can determine the future cash needs of the firm. ii. Providing for unpredictable discrepancies: Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities. iii. Availability of alternative source of funds: a firm may need not keep large cash balance. If it has arrangements with banks for borrowing money in times of emergencies. 1. Controlling of cash inflow: in order to prevent fraudulent diversion of cash receipt andspeeding up collections of cash, an adequate control on cash inflow is necessary. A properlyinstalled internal check system can, to a great extent, a minimize the possibility of fraudulentdiversion of cash. Speedier collection of cash can be made possible by adoption of the followingtwo techniques: i) Concentration banking system: it is a system of decentralizing collection of accountreceivables. According to this system, BHEL’s branch offices are authorized to collect the paymentfrom the customers, and deposit in the local bank accounts. This system facilities fast movement offunds. This system is good in case of the firms having their spread over a large area. 64
  65. 65. ii) Lock box system: This system is more popular in the U.S.A. and is further step in speeding upcollection of cash. This system has been devised to element delay arising in cash of theconcentration banking system on account of a time gap between actual receipt of cheques by theregional collection centers and its deposits in the local bank account. Under this system BHEL hiresa post office box and instruct its customers for there remits to the box. It also reduces the chancesof frauds in the cash collection process and controls the cash inflows better. In order to avoid theunnecessary pockets of idle funds, the company should maintain minimum number of bankaccounts. 2. Controlling outflows of cash: - an efficient control over cash outflows is equallyimportant for conserving cash and reducing financial requirements. Control over cash outflowssignifies slow disbursement. in order to control the outflows of cash efficiently, a firm should keepin view the following considerations: i) Centralized system for cash payments: should be followed as compared to decentralizedsystem in cash of collections. All payments should be made from a single control account, i.e., fromthe central office of the company. However, the local office of the company may pay localexpenses. ii) Payment should be made on the due dates, neither before nor after. The company shouldneither lose cash discount nor its prestige on account of delayed payments. The company should,there fore, made payments within the terms offered by the suppliers. iii) Playing float, technique should be used by the company for maximizing the availability of funds. The term ‘float’ means the account tied up in checks which have been issued by BHEL but not have been yet been presented for payment by the creditors. As a result of a time lag between issue of a cheque and its actual presentation, the actual bank balance of a firm may be more than the balance shown in the books. The difference is called ‘payment of float’. The longer the ‘float period’ the greater would be the benefit of the firm. TOOLS OF CASH CONTROL 1. Cash Budget: It is the most significant tool of controlling the use of cash. It provides acomparison between actual and budgeted cash receipts and disbursements locating the points ofdeviations, if any. The financial manager, after ascertaining the reasons for deviations between theactual and budgeted figures, can take the necessary action to remove. 65
  66. 66. 2. Inflows and outflows of cash: in order to check the change in cash position of the firmfrom one period to another, a cash flow statement is prepared. It helps management in controllinginflows and outflows of cash. 3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financialratios are used for this purpose. These ratios include current ratio, liquidity ratio, receivablesturnover ratio, and inventory turnover ratio and cash position ratios. ANALYSIS OF CASH MANAGEMENT WITH THE HELP OF CERTAIN RATIOS CURRENT RATIO:- It is the best ratio to find relationship between the current assets and current liabilities of BHEL.We can easily calculate the current ratio with the help of the following formula: Current ratio = current assets/current liabilities years Calculations Ratio 2006-07 114829/64365 1.8 2007-08 100962/71641 1.41 2008-09 80044/61375 1.30 2009-10 100671/82196 1.22 2010-11 112836/99390 1.14 2011-12 139668/110923 1.26 66
  67. 67. ANALYSIS OF CURRENT RATIO 2 1.5 CURRENT RATIO 1 0.5 0 2007-08 2008-09 2009-10 2010-11 2011-12 YEARS Interpretation: - As we know that the current ratio of any company may be 2:1 but according to the U.S.A.Accounting standard any company should maintain a ratio of 1.33:1. Moreover, as we can see fromthe above table the current ratio of BHEL is and in 2007-08 is 1.8:1 which is highest in the last fiveyears. In 2008-09, the current ratio goes down to 1.4:1 due to increase in the current liabilities anddecrease in current assets as compared to previous year. Current assets decrease due to decrease ininventory, which is 46305 in 2007-08 & 42606 in 2008-09. It indicates the ideal stock is less, whichis favorable for the company. It indicates the company is in position to meet its liabilities. In 2009-10 the ratio is going down to1.3:1 due to decrease in current assets and current liabilities. In 2010-11 the ratio is 1.2:1 and in 2011-12 1.1:1 due to increase in current assets and current liabilities LIQUIDITY RATIO:- This ratio establishes a relationship between quick assets and current liabilities. The major objective to compute this ratio is to measure the ability of the firm to meet its short-term obligations as and when due without relying upon the realization stock. We can easily calculate this ratio with the help of the following formula: Liquidity ratio= liquid assets/current liabilities YEARS CALCULATIONS RATIO 2006-2007 67460/64365 1.05 2007-2008 57500/71641 0.80 2008-2009 47674/61375 0.78 2009-2010 61457/82196 0.75 67