A

Project Report

On

"AN ANALYSIS OF WORKING CAPITAL MANAGEMENT OF

NHPC"

A report submitted to Dr. VSIPS as a partial fulfillment of Master in Business

Administration (MBA)

Submitted to: Submitted By:

Mr. S.K. AWASTHI, GHANSHYAM VERMA
Finance manager, Roll No: 960770023
CPS-II Chamba (HP) Batch: 2009-011

Dr. Virendra Swarup Institute of Professional Studies

Affiliated to UPTU, Lucknow
337, K-Block, Kidwai Nagar, Kanpur
(0512)2611997, www.vsipskanpur.com

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 ACKNOWLEDGEMENT
I dedicate this page to convey my deepest and heart-felt appreciation for all those people
who have purposefully and inadvertently assisted me in this project. Without their
thoughtfulness, the satisfactory completion of this project would not have been possible.
First of all, I would express my sincere regard to Mr. S.K. Awasthi (finance manager
CPS2) for giving me a chance to pursue my project in NHPC. I would also like to express
my deep regards to Mr. M.P MEENA (LIBRARIAN). For giving me an opportunity to do
this project in Chamera Power station2 Chamba under his guidance. I sincerely thank him
for being my project guide and for his guidance, valuable suggestions and time which
proved to be of immense importance to me. Also I would express my deep regards for Mrs.
Aparna Shukla (Faculty Guide) without whom I would not have been able to pursue this
project. I am very much thankful for her involvement at every stage of this project and
extending maximum possible help.
Finally I am thankful to all the Members of NHPC. And Faculty of Dr. VSIPS Kanpur for
their support and encouragement which I have received during the course of time.
I hope that I will receive the same kind of guidance, valuable suggestions, motivation and
support from everyone I have mentioned above in future also.

Ghanshyam Verma

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 DECLARATION

I hereby declare that this project report entitled as “An analysis of the Working Capital
Management in NHPC”, submitted to, Dr. Virendra Swarup Institute Of Professional
Studies, Kanpur, UPTU in partial fulfillment of the requirement of MBA is a bona fide work
done by me and it was not submitted to any other university or institution previously.

The project work is original & the conclusions drawn are based on the data & information
collected by me.

GHANSHYAM VERMA

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 Table of Contents

Executive Summary 6
Chapter 1: 7-13
• Introduction
8
• Objectives of the Study
9-11
• Methodology
12-13
○ Formulation of Hypothesis
○ Sources of Data
○ Methods of data collection
○ Instrument Used
○ Tools and Techniques of analysis
○ Limitation of study
Chapter 2: Literature Review
• Industry Overview
15-25
• Company Overview
26-30
Chapter 3: About the Project 31-71
○ Working capital
○ Meaning & concept

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 ○ Significance of working capital
○ Working capital cycle
○ Measurement of working capital
○ Managing various components of working capital

Chapter 4: Analysis of working capital 72 -91

○ Analysis of trend in current assets
○ Management of various important
○ Aspect of working capital
Chapter 6: Suggestions/ Recommendations 92-93
Conclusion 94-95
Bibliography 96
Appendix/ Annexure 97-104

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 EXECUTIVE SUMMARY
Working Capital Management is usually concerned with the administration of all the current
assets and current liabilities. Working capital management policies have a great impact on
the firm's profitability, liquidity and its structural health of the organization. Managing
working capital is having strategic importance in maintaining liquidity and improving
financial position of any industry therefore we have to strike a balance between risk and
profitability. Efficient management of working capital aims at solvency, profitability etc.
Management of working capital is an essential task of the financial manager. He has to
ensure that the amount of working capital available with his concern is neither too large nor
too small for its requirement. Both excessive and inadequate working capital positions are
undesirable and dangerous from the firm points of view. Excessive working capital means
ideal funds which earns no profit for the firm. On the other hand paucity of working capital
may lead to a situation where the firm may not able to meet its liabilities. Thus proper
management and analysis of working capital is highly crucial for all kind of business which
is clearly highlighted in the present study. It is the job of the financial manager to estimate
the requirements of working capital carefully and determine the optimum level of
investment in working capital.
Further the present study related to National Hydroelectric Power Corporation Ltd. which
came into existence on Nov.1975. The mission of National Hydroelectric Power Corporation
Ltd. is to harness the vast hydro, tidal, wind, geo-thermal and gas potential of the country to
produce cheap/pollution free and inexhaustible power. In its existence of over 25 years, it
has become the single largest organization for Hydro Power development in India. The
organization has capabilities to carry out all activities from conceptualization to
commissioning of hydroelectric projects. National Hydroelectric Power Corporation Ltd. is

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schedule ‘An’ Enterprise having an authorized capital of Rs. 7000 Cores and investment
base of Rs. 10000 Cores at present.

Chapter 1:
1.1: Introduction
1.2: Objectives of the Study
1.3: Methodology
 Formulation of Hypothesis
 Sources of Data
 The Area Of Work
 Methods of data collection
 Tools and Techniques of analysis

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 INTRODUCTION

In India, electricity is produced in various sector hydro, tidal, winds, geothermal &gas
potential. NHPC is the power organization in the field of hydro sector. It was established in
7th November 1975.NHPC is a schedule ‘an’ enterprise of the government of India. With an
authorized share capital of Rs. 15,000 crore and an investment base of about Rs. 25,000
crore. NHPC is ranked as a premier organization in the country for development of
hydropower. NHPC is among the TOP TEN companies in the country in terms of
investment. A credited with ISO-9001:2000 &ISO-14001:2004 certificates for its quality
system & environment concerns. NHPC Corporate office is in FARIDABAD. The saga of
NHPC is replete with many challenges. To begin with NHPC took over three most difficult
& almost abandoned projects in geologically weak Himalayan Ranges from the erstwhile
central hydroelectric projects Control Board. These projects were the 180MW Baira Siul in
Himachal Pradesh, 105 MW Loktak in Manipur & the 345 MW Salal Stage-1 in J&K. The
initial mandate given to the corporation to complete these three projects were fulfilled with
the commissioning of Baira Siul in 1981, Loktak in 1983 & Salal Stage-1 in1987.The
successful completion of these projects in most difficult areas & their operation is a
testimony to NHPC’s success.
So far, NHPC has completed 12 projects with a total installed capacity of 5175 MW which
includes 1000MW.Indira Sager project &520 MW Omkareshwar

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Project through Narmada Hydroelectric Development Corporation Ltd. (NHDC)-a joint
Venture of NHPC with government of Madhya Pradesh. Besides this; NHPC has
commissioned the 14.1 MW Devi hat projects in Nepal, 60MW Kurichu project in Bhutan,
5.25 MW Kalpong project in Andaman & Nicobar Islands &4MW Sippi projects in
Arunachal Pradesh as deposit work. At present 12 projects with a total installed capacity of
5132MW are under execution.

OBJECTIVE OF STUDY
In the present study working capital management in NHPC Ltd. has been analyzed to draw
some conclusion on the management of working capital, utilization of funds, liquidity
position and managing various individual components of current assets and current
liabilities.
In present study attention is given on the role of working capital management for achieving
the overall financial objective and corporate goal. Working capital management is an
important and integral part of financial management as short term survival is a pre-requisite
to long term sources. Further the role of working capital management cannot be over
emphasized on account of trade off between profitability and risk. Liquidity and profitability
are two contradictory and conflicting objectives which must be achieved to be ensured by
the modern finance manager. The key strategies and consideration is ensuring tradeoff
between profitability and liquidity of working capital management. On the whole basic
ingredients of working capital management are overviews of working capital management
as a whole and efficient management of individual current assets. Further working capital
has considerable impact on profitability. Though there is a considerable on the context of
academic debate about the impact of working capital on the profitability of a firm one school
of thought argues that only fixed capital plays a vital role in profit generating process. The

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other school of tough argues that unless there is a minimum level of investment in working
capital which provides a promising vehicle for increasing output and sales, profitability
cannot be maintained. Thus working capital acts as an explanatory variable in the profit
function of a company. In this sense a firm’s profitability is determined in part by way its
working capital managed. An efficient management of working capital can do much to
ensure the success of an enterprise while its inefficient management can lead to loss of
profit. Further capital resources are scarce & limited by virtue of its nature. Being limited in
nature it arrests the pace of development. An effective utilization of capital resources is the
vital aspect of our development policy and urgent to accelerate the pace of development.
Unfortunately in our country, industries do not make best use of financial resources. The
earlier emphasis is based only on long term financial decision making. However it is seen
that inefficient management of short term financial decision making (i.e.) working capital
management has caused many business to fail and in many cases has arrest their growth.
Lack of an efficient and effective utilization of working capital either does not permit a
business enterprise to earn plausible rate of return on capital employed on compel it to
sustain continual losses. The need for skilled working capital management thus becomes
greater in recent years. In view of the above the present study devoted to working capital
management may be quite rewarding one. Further sample unit taken into consideration in the
present study is a public sector undertaking. In general the PSU have not always given
enough attention to the problems of working capital planning. The assured availability of
even current finance through budgetary support makes them lax. Not only there working
capital policies in determinate planned levels of individual current assets are not always
subjected to rigorous exercises.
The present study also points out that a very important reason for slow progress of the
organization is inefficiency in working capital management. Moreover the study also
indicates the factors responsible for slow progress of hydro power development in India and
some measures for solution to those problems & constraints. It is worthy to mention here
that the vast hydropower resources in our country are yet to be tapped.
In the context of the above discussion the objectives of the present study are mentioned
below specifically.

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1. To have some clear idea about various aspects of working capital management (i.e.)
concept of working capital, role and importance of working capital, concept of working
capital cycle, working capital forecasting, dimensions of working capital management,
determinant of working capital etc.
2. To have some concept about various aspects of cash management (i.e.) objective of cash
management, motives for holding cash, determining optimum cash balance, techniques of
cash management , cash turnover ratio etc.
3. To have some idea about different aspects of receivable management and credit policy.
4. To have some concept on aspect of inventory management(e.g.) various type of inventory,
determining optimum inventory, technique of inventory management, such as ABC,VCD,
FSN analysis , inventory turnover ratio & opportunities on inventory management.
5. To analysis the working capital position of sample unit.
6. To know the efficiency of working capital management through analysis of various
working capital ratio, trend analysis, growth of net working capital etc.
7. To analyses the impact of working capital on liquidity and profitability.
8. To analysis the various factors responsible for slow progress of hydro power industry in
India. And the solution of these problem .
9. To study the constraints of the sample unit and remedies to overcome them.
10. To study the future prospects of sample unit and hydropower industry as well.
11. To assess / comments on the overall working capital management of the sample unit.
The scope of the study restricted to FIVE years on the present case.

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 RESEARCH METHODOLOGY
The present study is based on secondary data. Further the data are mainly based on the
published financial statement of the sample unit. Besides other financial statement and
different published material are also referred for the purpose of study. Trend analysis, ratio
analysis, patterns of investment on current assets & liabilities etc. are used as a part of
methodology of the study. Beside all these measures some statistical measures like
arithmetic average, rank correlation, measures of variability etc. used to confirm the result of

the study.

THE RESEARCH PROBLEM

The problem formulation is the first step to a successful research process. The summer
training undertaken the problem of analyzing the working capital management of the.
Company and to find out the ratio analysis of company.
THE RESEARCH DESIGN
The research design used in the project is Descriptive Research. The investigation is carried
upon the working capital in NHPC in Chambba. The reason for choosing this design is to
get responses from the company’s Balance sheet.
Methods of data collection
In a nutshell the methods and techniques used to carry out the study are:-
a) Ratio analysis

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b) Trend analysis
c) Chart and Diagram
d) Correlation Analysis
e) Books Personal consultation
THE AREA OF WORK
The Office work is conducted in the NHPC in finance departments.
Tools and Techniques of analysis
The analytical tools used are mostly graphical in nature which include

• Ratio Analysis

• Tables showing percentage

LIMITATION OF THE STUDY

Every study has some limitations mainly in term of scope, period, number of samples
considered method techniques used and data collected for the study etc. The present study
also has some limitations from various angles.

Some of limitations are mentioned below:-

(1) The study is mainly based on published data only. The data are collected from various
financial statements annual accounts to use topic in various magazines, journals and
newspapers. Since the study is based on the secondary data, it contains all the limitations
that are inherited to secondary data (e.g.) limitation of condensed financial statement etc.

(2) The period of the study is restricted to twelve years only. Thus the limitation of
restriction in period also inherited to the study.

(3) The scope of sample is restricted to one unit (i.e.) NHPC Ltd. only. Thus the limitation
of small sample also applied to the study.

(4) Various limitations of ratio analysis different in opinion of accounting concept, basis of
comparison etc. is also part of the limitation

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• Chapter 2: Literature Review
Industry Overview
Company Overview

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 INDUSTRY OVERVIW
A land of congenital dimensions blessed by the monsoon the snow capped hills and rich
river valleys. India is a veritable fountainhead of hydropower. India has an identified
hydropower potential estimated at 84044 MW at 60 % load factor, the bulk potential of
which still remains untapped. National Hydroelectric power corporation Ltd. the pioneer
organization in hydro sector trying its best to tap the vast untapped Hydel recourses.
National hydroelectric power corporation was set up in 1975. In its existence of over 28
years, NHPC has become the single largest leading tape all the activities from
conceptualization to commissioning in relation to setting of hydro projects. N.H.P.C. is a
schedule ‘an’ enterprises of the government of India with an authorized capital of Rs. 15000
crores. NHPC is among the top companies in the country in terms of investment N.H.P.C
has been granted ISO-9001 and ISO-14001 certificates for its quality system. A land of
continental dimensions blessed by the monsoon the snow capped Himalayas and rich river
valleys; India is a veritable fountain head of Hydropower. India has an identified hydro
power potential estimated at 84044 MW at 60% load factor, the bulk potentialofwhich still

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remains untapped. National Hydroelectric Power Corporation Ltd. (NHPC), the pioneer
organization in Hydro sector trying its best to tapped the vast untapped hydel resources.
NATIONAL hydroelectric power Corporation was set up in 1975. In its existence of over 30
years, NHPC has become the single largest leading organization for hydro power
development in India with capabilities to undertake all the activities from conceptualization
to Commissioning in relation to setting of hydro projects.NHPC is a schedule ‘A’ Enterprise
of the Government of India with an authorized share capital of Rs.15000/- crores. With an
investment base of over Rs.14000 crores, NHPC is among the top ten companies in the
country in terms of investment. NHPC has been granted ISO-9001 certificates for its quality
system. Power is the basic input for overall growth and development of any nation. It is an
essential ingredient for improving the standard of living and is measured with the power
consumption. The per capita electricity consumption of approximately 314 KWh in our
country is one of the lowest in the world and is in sharp contrast with the average
consumption in the developed countries, which is over 5000 KWh. In spite of the fact that
India is a monsoon blessed country of continental dimensions, crowned in north by snowy
mountains, ringed in the center by the vast Deccan Plateau and garlanded by world’s largest
number of dams, is facing crisis, perhaps due to lack of foresightedness in planning. The
hydro power technology is well developed with proven overall efficiency of about 90%
compared to 35% for thermal station, 32 to 34% for gas turbine and 42 to 44% for combined
cycle plants. An ideal ratio of 60:40 thermal-hydro power mixes has dwindled down
presently to approximately 75:25.Hydropower projects can be divided into Major Hydro
Power Projects and Small Hydro Power Projects. It is relevant to divide the small hydro
potential in two distinct categories.
Category- I: Schemes in hilly regions characterized by utilization of comparatively small
discharges and high heads.
Category- II: Schemes in plains characterized by comparatively high discharges and small
heads.
Sizes of Hydropower Plants

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Facilities range in size from large power plants that supply many consumers with electricity
to small and micro plants that individuals operate for their own energy needs or to sell power
to utilities.

In a hydroelectric plant, electricity is produced through the force of moving water. A water
wheel turns the generator. The generator has two main components: a rotating magnet called
the "rotor" which turns inside stationary coils of copper wire called the "stator." When the
rotor rotates through the magnetic field, it generates a flow of current through the copper
coils of the stator .Hydropower plants capture the kinetic energy of falling water to generate
electricity. A turbine and a generator convert the energy from the water to mechanical and
then electrical energy. The turbines and generators are installed either in or adjacent to dams,
or use pipelines (penstocks) to carry the pressured water below the dam or diversion
structure to the powerhouse. Hydropower projects are generally operated in a run-of-river,
peaking, or storage mode. Run-of-river projects use the natural flow of the river and produce
relatively little change in the stream channel and stream flow. A peaking project impounds
and releases water when the energy is needed. A storage project extensively impounds and
stores water during high-flow periods to augment the water available during low-flow
periods, allowing the flow releases and power production to be more constant. Many
projects combine the modes. The power capacity of a hydropower plant is primary,

The function of two variables:

(1) Flow rate expressed in cubic feet per second (ft3/s), and (2) The hydraulic head, which
is the elevation difference the water falls in passing through the plant. Project design may
concentrate on either of these variables or both.
In old Hindu religious book, it was mentioned that, “there is no life in the Universe without
the presence of water and water is essential for existence of life”. God has provided land,
water and minerals as natural resources to us for development as well as conservation. Water
being life supporting to the mankind, it has to be used optimally in any country. As it is
known that water covers, more than 70% of the global surface, but only 3% of the water
available is fresh water, which is essential for human survival as balance 97% of the water
available is salt.

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Rivers has been the source of water since time immemorial and their basins were the centers
of early human settlements. Historical documents indicate that communities settled along the
rivers ‘Nile’ and ‘Indus’ and their life was closely linked with rivers for obtaining food,
health and protection. In Egypt irrigation projects were launched, spreading network of
canals carrying water to the fields and reclaimed thousands of arable acres.
NHPC Ltd. leading and pioneer organization in the field of hydropower in India basically a
capital intensive construction industry. The objective being to generate clean & pollution
free power at optimum cost. Power is regarded as the foundation pillar and corner stone of
the industry on which the super structure of other industries are to build up. All kinds of
industries including transportation, communication as well as service industries cannot be
run without aid of power. Power is the basic input just like oxygen for human body to run
industries. Presently India is facing acute shortage of power. In the present scenario India
has to largely depend upon hydropower as the coal based thermal power is going to be
exhausted in near future. Further in thermal power system only one form of energy
converted into another form, which can be utilized for some other purpose. Moreover
thermal based power station is not free from pollution. In coming future day the role of
hydropower is quite significant from India’s point of view so far as path of industrial
development is concerned. In other words, hydro power projects are few inherited
advantages than other source of energy. They are:-

i) A renewal source of energy.

ii) It saves scarce fuel reserves.
iii) None polluting and investment friendly.
iv) Long life.
v) Cost of generation, operation and maintenance is quite lower than other source of
energy.
vi) Other benefits like irrigation, flood control, drinking water supply, navigation,
recreation, tourism and fish culture gained from hydro project.
vii) Development of backward areas due to nature of hydro projects.
In the nutshell growth of hydropower in India has strategic importance from many angles.
All efforts from all sectors of economy must be made to attain the objective of growth of

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hydropower. Moreover NHPC being the pioneered organization in this sector has to play a
vital role in near future to attain the nation’s objectives of maximizing the hydropower
development. Hence the study of NHPC Ltd. on the direction of working capital
management is quite helpful for future growth of the organization, growth of hydropower
development and attaining the rapid pace of industrialization and to attain the nation
objective.
HISTORY OF HYDROPOWER
Simple water wheels have been used already in ancient times to relieve man of some forms
of hard manual labor. Water power was probably first mentioned by the Greeks, around
4000 B.C. Greeks used hydro power to turn water wheels for grinding wheat into flour as
well. Much later, but long before the advent of the steam engine, the art of building large
water-wheels and the use of considerable power capacities was highly developed. The use of
this natural energy resource became even easier and more widespread with the invention of
the water turbine in the early 1800’s and hydropower was quickly adapted from mechanical
uses, such as gristmill, to spinning a generator to produce electricity. The first small
industries emerged soon after in many regions of Europe and North America, powered by
water turbines.
In later years, when cheap oil became available worldwide, interest in hydropower was lost
to a great extent in many areas, but today the situation is different again. Governments,
policy-makers, funding and lending agencies, institutions and individuals take a growing
interest. This led -and still does -to the reassessment of many projects once found not
feasible; the identification of new sites and potentials, and a number of other activities
related to hydro development.
Waterwheels were already in use in different countries of world including Indus Valley
domain hundreds of years BC, as a replacement for human and Animal Power. But it was
until the discovery of the dynamo electric principle in the latter half of 19 th Century and the
resulting rapid development of high voltage technology that it became feasible to use water
power to produce electrical energy. The earth’s supply of water is inexhaustible if not
unlimited. The cycle of nature, kept in motion by sun’s energy, makes water continuously
available.

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Water constantly moves through a vast global cycle, in which it evaporates (due to the
activity of the Sun) from oceans, seas and other water reservoirs, forms clouds, precipitates
as rain or snow, then flows back to the ocean. The energy of this water cycle, which is
driven by the sun, is tapped most efficiently with hydropower. The use of water to generate
mechanical power is a very old practice. A flowing stream can make a paddle turn, but a
waterfall can spin a blade fast enough to generate electricity. The real key in the magnitude
of waterpower is the physical height difference achieved between source and sink - the
distance through which the water falls. Another method of harnessing water’s energy
includes utilization of the temperature of ocean water in a thermal transfer process, waves
and tidal power. The waves are a direct result of wind, which itself is cause by uneven
heating of the ground and oceans by the Sun. Of the several types of hydropower, only the
origin of the tides is not related to the Sun. The gravitational pull of the moon is responsible
for the tides, which vary in magnitude by location according to latitude and geography.
When considered as a whole, the energy locked within Earth’s water cycle and ocean waves
is extremely large, but harnessing this energy has proved to be exceedingly difficult. There
are many different ways to harness the energy in water. The most common way of capturing
this energy is hydroelectric power, electricity created by falling water.

The principal advantages of using hydropower are its large renewable domestic resource
base, the absence of polluting emissions during operation, its capability in some cases to
respond quickly to utility load demands, and it’s very low operating costs. Hydroelectric
projects also include beneficial effects such as recreation in reservoirs or in tail water below
dams. Disadvantages can include high initial capital cost and potential site-specific and
cumulative environmental impacts.

NHPC –AN OVERVIEW

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• Year of establishment
• Authorized share capital
• Asset value
• Projects completed
• Manpower
• Projects commissioned
On deposit/ turnkey basis
• Projects under construction
• Total installed capacity
• Net Profit (2009-10)
(2009-10)
Overall generated capacity
(2009-10)
: 1975
: Rs15, 000 cr.
: Rs.25, 000 cr.
: 12(4665 MW)
: 13,114
: 2 (74.1 MW)
: 12(5132 MW)
: 4665MW
: Rs. 925 cr.
: Rs. 1012 cr.
: 13048.76 Mus

SCENARIO OF HYDRO POWER DEVELOPMENT

Electric power is the core sector of the economy of any nation and vital for economic growth
and improvement in the quality of life of the people. The per capita consumption of
electricity is often regarded as index of development. Further hydropower is more superior
to other source of electric power due to its various inherited advantages. Unfortunately the

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 present per capita consumption of electric energy in India is approx 324 KW as against
normal figure of 8,000 KW of developed countries. The vast hydel resources of India are yet
to be tapped . As per the reassessment of the hydro potential carried out by CEA India’s
economically exploitable hydro potential is 84044 MW at 60% load factor which will yield
an annual energy of 442 billion units of electricity. However a bulk portion of the potential
is not yet tapped.The scenario of hydropower development in India shares a gloomy picture
though country’s journey for hydropower development was commenced in 1897 with
commissioning of a hydropower with an installed capacity of a 130 KW. Till independence
India’s hydropower generation was in
The order of 508 MW being 37.3 % of total power generation of the country. After
achievement of independence there was a tremendous development in the growth of
hydropower as many mega projects like Chakra Nan gal, Kaunda, and Konya etc. were
developed. The share of hydropower was 50.6 % in the year of 1963. Unfortunately there
was a continuous decline in the hydropower after 1963 and the share of hydropower is only
21 % (approx.) as on today. The following are some tables showing the potential and status
of development of hydropower in India.
Basin wise hydropower potential and development:-

Basin MW at 60% load factors

Ganga 10715.00
Central Indian River System 2740.00
Great Brahamputra 34920.00
Great Indus 19988.00
Western Flowing River of 6149.00
Southern India
Eastern Flowing River of Southern 9532.00
India
Total 84044.00

Table 1.2
The regions wise hydro potential and development:-

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Region/ Potential assessed at Potential developed in Potential
State 60% load factor MW at 60% load factor developed in
( MW) %age.
Northern 30155.00 4567.00 15.14
Western 5679.00 1845.00 32.49
Southern 10763.00 5779.00 53.69
Eastern 5590.00 1369.00 24.49
North- 31857.00 389.00 1.22
Eastern
Total 84044.00 13949.00 16.60

From the above two tables it is quite clear that north eastern region and Brahamputra river
basin though have vast hydropower potential only 1.04% of such vast potential is tapped. In
other words 98.6% of such potential is yet to be harnessed. Thus proper attention must be
given by central govt., state govt. and private agencies for development of hydropower.
North east region which can be quite helpful in solving the acute shortage of hydropower in
India as well as making the regional development in that region . Many countries in the
world including some small undeveloped countries are able to harness their vast hydel
resources. The following table explains the scenario of hydropower development of such
country

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Thus India is quite lacking in harnessing the hydel power resources in comparison to other
countries of the world as indicated in the above table. Further the country is facing acute shortage
power. As per 15th power survey committee the peak load of all India requirements by end of ninth
and tenth plan would be 95757 MW and 130944 MW respectively for which the installed capacity
would have to be of the order of 143000 MW and 190000 MW respectively. Thus in terms of
supply and demand there is a huge gap which has to be filled up and hydropower sector is to play a
very crucial role in this regards. It is because, all other source of energy are exhaustible in nature.
The core / major issues creating obstacles in the path of hydropower development are explained
below:-

1. Unavailability of infrastructure facilities in remote hilly areas for immediate starting of hydel
projects.
2. Lack of availability of funds for construction of mega hydro projects.
3. Land acquisition and rehabilitation problems.
4. Various government clearances like forest-clearance, environment clearance etc.
5. Interstate aspects.
6. Law and order and contractual problems
7. Non collection of revenue and problem relating to SEB.
8. Tariff determination problem.
9. Manpower problem.
10. Lack of availability of indigenous technology and machinery.
11. Geological surprises.
In spite of various limitations problems & constraints hydropower has tremendous prospectus in a
country like India facing acute power crisis. The nation has to explore the vast hydel resources to
achieve its pace of industrial progress, as all other source of power are more expensive and pollute
and exhaustible in nature. The sample unit (i.e.) NHPC Ltd. alone planning to add 30000 MW to
its existing generation capacity within next 10 years. Over all country’s power development has
been planned to achieve 40000 MW in next ten years.

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Benefits of Hydro Power

Hydropower has several inherent advantages, which make it the most preferred form of electric
power. These are as follows:

It is a renewable source of energy thus saves scarce fuel reserves. The fact that the supply
of water is constantly renewed at no cost to us makes the use of its potential and kinetic energy a
clear choice.

These do not pose any air or thermal pollution nor produce any green house gases. It is
non-polluting and hence environment friendly.

It is a reliable energy source with approx. 90% availability.

Long life- the first hydro project completed in 1897 is still in operation. Normal life is 50
years with the possibility of further life extension with minimal renovation.

Hydel power generating systems are cheapest and offer least expensive environmentally cleanest
technologies for electricity generation. Cost of generation and cost of operation and maintenance
are lower than the other sources of energy.

Ability to start and stop quickly and instantaneous load acceptance/ rejection make it suitable to
meet peak demand and for enhancing system reliability and stability. It stabilizes the grid power by
increasing system reliability.

Have higher efficiency (about 95% to 98%) compared to thermal (35%) and gas (42% to 43% in
case of combined cycle and 28% to 30% in case of open cycle).

Cost of generation is free from inflationary effects after the initial installation.

Waterpower yields great ecological and economic benefits. Storage based hydro schemes often
provide attendant benefits of irrigation, flood control, drinking water supply, navigation, recreation
etc.

3
Being labour intensive, provide employment opportunities. Being located in remote regions, lead
to development of interior areas, (road/ rail communication, telecommunication, medical facilities,
industries, better standard of living).Hydropower results in creating lots of other benefits like boost
to tourism, up gradation of social parameters etc.

Disadvantages
• High initial capital cost
• Potential site-specific and cumulative environmental impacts.
• Potential environmental impacts of hydropower projects include altered flow gimes below
storage reservoirs or within diverted stream reaches
• Water quality degradation
• Mortality of fish that pass through hydroelectric turbines
• Blockage of upstream fish migration
• Flooding of terrestrial ecosystems by new impoundments.
• However, in many cases, proper design and operation of hydropower projects can mitigate
these impacts. Hydroelectric projects also include beneficial effects such as recreation in
reservoirs or in tail waters below dams
CORPORATE MISSION
To achieve international standards of excellence in all aspects of hydro power and
diversified business.
To execute and operate projects in a cost effective, environment friendly and socio-
economically responsive manner.
To foster competent trained and multi-disciplinary human capital.
To continually develop state-of-the-art technologies thru innovative R&D and adopt best
practices.
To adopt the best practices of corporate governance and institutionalize value based
management for a strong corporate identity.
To maximize creation of wealth through generation of internal funds and effective

4
 management of resources.

COMPANY OVERVIEW
Chamera Hydro Electric Project Stage-II

INTRODUCTION

Chamera Hydro Electric Project Stage-II is a 300 MW run of river scheme project envisaged on
the Ravi river in the Chamba district of Himachal Pradesh. It diverts the water from the dam
constructed at Bagga(22 Kms upstream of Chamba on the Chamba-Bharmour Highway) and
generates electricity at the Powerhouse at Jarangla(9 Kms upstream Chamba) and discharges the
water at Karian (4 Kms upstream Chamba). Execution of all the components of the project has
been done on turnkey basis with M/s Jai Prakash Industries Ltd. Various administrative offices,
other related infrastructure and office buildings have been constructed at Karian.The water wheel,
as developed in the early part of 19th century played an important role in converting water power
into mechanical power. With the discovery of conversion of mechanical energy from one place to
another, the concept of hydroelectric power came into existence. Using the power from water
flowing under pressure requires a Hydroelectric Power Station to supply energy.
Flowing water has three forms of energy viz. Kinetic, Potential and Pressure energy. The power
depends upon the mass of the flowing water and its velocity, the latter being the result of the
difference in the water level between points known as “head”. The hydraulic turbine converts this
mechanical energy of water into mechanical power, which is further used to produce electric
power from generators. Hence, the turbine coupled to the generator acts as the prime mover for the
generator.
There are various advantages of hydropower enlisted as follows:

5
➢ A renewable source of energy, saves scarce fuel reserves.
➢ Non-polluting and hence environment friendly.
➢ Longevity; the first hydro electric project completed in 1897 is still in operation.
➢ Cost of generation, operation and maintenance is lower as compared to other sources of
energy.
➢ Ability to start/stop quickly and instantaneous load acceptance/rejection makes it suitable
to meet peak demands and for enhancing system stability and reliability.
➢ Has higher efficiency (over 90%) compared to thermal (35%) and gas (around 50%).
➢ Cost of generation is free from inflationary effect after the initial installation.
➢ Storage based hydro schemes often provide additional benefits of irrigation, flood control,
drinking water supply, navigation, recreation, tourism, pisciculture, etc.
➢ Being located in remote regions leads to development of interior backward areas (education,
medical, road communication, telecommunication, etc.).
GEOLOGY
The project lies within newer Himalayan terrain and is housed within competent metamorphic of
Chamba formation and Dauladhar granites. The Chamba formation consists of varied rock types
viz. greenish grey, phylites/slates, phylitic quartzite. The Dauladhar granites occur as apophasis
within Chamba formation.
ENVIRONMENT
The Environment and Forest clearance for the project was obtained in March 1985 to June 1987
respectively. However, recently fresh Environment Impact Assessment report was prepared
containing Environment Management Plan comprising mitigate measures in the form of
Catchments Area Treatment Plan, Health delivery system, compensatory forestation etc.; about
9700 ha of area will be treated through engineering and biological measures. A mass scale a
forestation program me has been envisaged for the project. A total of 4 lakhs Trees have been
planted. Forestation in an area of 173 hectares has been carried out by the project outside the
project area. Financial implementation of CAT plan would be Rs. 1072 lakhs. In all, about Rs.
1460 lakh is envisaged to be spent on environment conservation.

6
COMPLETION PERIOD
The project completion period was supposed to be 5 years. However, it has been completed in a
record time of a little over 4 years. The project was inaugurated by former Prime Minister Shri
Atal Behari Vajpayee through video conferencing on 9th February, 2004 in the presence of Shri
Anant G. Geete ( Former Union Minister of Power ) , Shrimati Jayawanti Mehta ( Former Union
Minister of State for Power ) and Shri Yoginder Prasad (Chief Managing Director , NHPC ).

CLASSIFICATION OF HYDRO PLANTS

The hydro power plants can be classified in terms of location and topographical features, the
presence or absence of storage, the range of operating head etc.
Classification based on plant capacity:
Micro Hydel plant : less than 5 MW
Medium capacity plant : 5-100 MW
High capacity plant : 101-1000 MW
Super capacity plant : Above 1000 MW
Classification based on construction:
Run off river plant without poundage: A run-off-river plant is one in which a dam is constructed
across a river and the low head thereby created is used to generate power. It is typically a low head
plant and is generally provided with an overflow weir, the power station being an integral part of
the dam structure. These plants thus use water as and when it is available. The capacity of such
plants is very low if the supply of water is not uniform throughout the year.
Run off river plant with poundage: The poundage increases the usefulness of this type of plant.
The main requirement for the plant is that the tailrace should be such that the floods do not raise
the tailrace water level, otherwise the operation will be affected adversely. With poundage it is

7
possible to meet hour-to-hour fluctuations of load throughout the week or longer period depending
upon the size.
Valley-dam plant: The main feature of a valley-dam plant is a dam on the river which creates a
storage reservoir that develops the necessary head required for the turbines. The plant can be used
efficiently throughout the year as it has large storage capacity. Its firm capacity is relatively high.
The main components of a valley-dam plant are:
 The dam with its appurtenant structure like spillways etc.
 The intake with gate, stop logs and racks, etc.
 The penstocks
 The power plant with its components

Diversion canal plant: The characteristic of this plant is that the water of the river is diverted away
from the main channel through a diversion canal known as power canal. These plants are usually
low head or medium head plants. They do not have any storage reservoir. The powerhouse
requirements of pondage are met through a pool called forebay, which is located just before the
plant.
The main components of a diversion canal plant are:
 Diversion Weir
 Diversion canal intake with its auxiliary works
 Bridges of culverts etc. of the diversion canal
 Forebay and its appurtenance
High head diversion plant: The main feature of this plant is the development of high head resulting
from the diversion of water. The main point of difference between high head and low head
diversion plants is the elaborate conveyance system for the high head plants.
SELECTION OF SITE
Preliminary investigations regarding catchments area, average rainfall, ground, gradient, geology
of foundation, availability of raw material for construction work, etc. are required. The important
factors governing the selection are:

8
1. LOCATION OF DAM
From the cost point of view, the smaller the length of dam, the lower will be the cost of
construction. Therefore, the site has to be where the river valley has a neck formation. In order to
have high production capacity, a valley which has a large storage capacity on the upstream of the
proposed dam site is probably the best. It is desirable to locate a dam after the confluence of two
rivers so that advantage of both the valleys to provide larger storage capacity is available.
2. CHOICE OF DAM
The most important consideration in the choice of the dam is safety and economy. Failure of dam
may result in substantial loss of life and property. The proposed dam must satisfy the test of
stability for shock loads which may be due to earthquakes or sudden changes in the reservoir levels
and high floods. The dam should, as far as possible, be close to turbines and should have the
shortest length of conduit.

3. QUANTITY OF WATER AVAILABLE

This can be estimated on the basis of measurement of stream flow over as long a period as
possible. Storage of water is necessary for maintaining continuity of power supply throughout the
year. Sufficient storage of water should be available since rainfall is not uniform throughout the
year and from one year to another.
4. ACCESSIBILITY OF SITE
The site should be accessible from the view point of transportation of man and material, so that the
overall cost for construction of the project is kept low.
5. DISTANCE FROM THE LOAD CENTRE
The distance should be as small as possible so that the cost of transmission of power is minimum.
Availability of construction material and general know how should also be considered in site
selection.

FEATURES

9
Location Deist Chamba in (H.P)
Approach nearest Rail Head Pathankot
Capacity 300 MW (3 *100 MW)
Annual Generation 1499.89 MUs
Project Cost Rs. 1929.57 cr.(completion
Cost)
Beneficiary State Uttranchal, H.P, Haryana,
J&K, Punjab, Rajasthan, &
Chandigarh.
Year of commissioning March 2004

Chapter 3: About the Project

 Working capital
 Meaning & concept
 Significance of working capital
 Working capital cycle

10
 Measurement of working capital
Managing various components of working capital

Meaning and Concept:-

A business undertaking requires funds for two purposes:

(I) to create productive capacities through purchases of fixed assets etc.

(ii) To finance current assets required for day to day running of the business.

Working capital refers to the funds invested in current assets, i.e. investment in stock, sundry
debtors cash and

Other current assets. It may also be defined as “ the capital representing current assets over current
liabilities”. Current assets are essential to use fixed assets profitably. The efficient management of
working capital is an integral part of overall financial management as it has an impact on the

11
objectives of the maximization of the owner’s wealth. Working capital management is usually
concerned with the administration of all the current assets and current liabilities. It is basically
concerned with (a) determining the need for working capital, (b) determining the optimal levels of
investment in various current assets and (c) examining the salient points regarding each element of
working capital. Working capital has two concepts:-

(a) Permanent Working Capital

(b) Temporary Working Capital
Permanent working capital refers to that minimum level of investment in the current assets that is
carried business at all times to carry out minimum level of its activities. It is also referred to as
core current assets. Permanent working capital has certain characteristics such as unlike fixed
assets, it keeps on changing its shape, it never leaves the business, and it grows with the growth in
the size of the business. The concept of permanent working capital remains in the business on long
term basis; it should be financed from long term sources. Temporary working capital refers to that
part of total working capital which is required by a business over and above permanent working
capital. It is also called as variable working capital. Since volume of temporary working capital
keeps on fluctuating from time to time according to the business activities it may be financed from
short term sources. Working capital has two concepts:-
(a) Gross working capital
(b) Net working capital.
Gross working capital refers to the total of all the current assets. It represents the amount of funds
invested in currents assets. Therefore the gross working capital is the capital invested in total
current assets of the enterprises. The constituent of current assets are shown in the part-II of table
3.1. From the management point of view. Gross Working Capital (GWC) deals with the problems
of managing individual current assets. It enables the management to examine the profit earning
capacity of current assets and ensure that the capacity is not less than cost of borrowed fund. On
the other hand Net Working Capital (NWC) refers to excess of current assets over current
liabilities.
Net Working Capital = Current assets – Current liabilities.

12
 PART-I: CURRENT ASSETS

I) Inventories
(a) Raw material
(b) Work in progress
(c) Finished goods
(d) Others- stores & spares

II) Sundry debtors

III) Investments
IV) Loans and advances
V) Bill receivables cash
VI) Cash & bank balance
VII) Accrued Incomes
VIII) Prepaid expenses
PART-II : CURRENT LIABILITIES
I Sundry creditors
II Bills payable
III Short form loans, advances & deposits
IV Bank over draft
V Provisions
VI Outstanding expenses

Table – 3.1

13
 Constituents of CA & CL

The gross working capital concept is based on going concern concept and Net Working Capital is
an accounting concept. These two concepts of working capital are not exclusive. Both of them
have their own merits/ advantages

SIGNIFICANCE OF WORKING CAPITAL

The need and importance of working capital con not be over emphasized. A concern needs of
funds for its day to day running. Working capital management policies have a great effect on the
firm’s profitability, liquidity and its structural health. As pointed out earlier, gross working capital
consists of cash, receivables and inventory. If a firm has relatively high investment in these assets
in comparison to a firm which is transacting the same volume of sale, it will have lower
profitability in comparison to the latter. Therefore, a firm which has high working capital turnover
will have higher profitability. This may require to reduction of investment in working capital but,
if it is reduced disproportionately, it will affect the liquidity aspects of the firm. Generally the
current ratio and the quick ratio indicate liquidity aspects of the firm. If current assets are reduced
beyond limit, the current and quick ratios will be adversely affected leading the firm to poor
liquidity. Therefore it is essential that financial manager lays down such working capital
management policies that a proper balance is struck between profitability and liquidity. In fact
profitability and liquidity are inversely related; when one increases the other decreases. It is
therefore important that the financial manager should chalk out such working capital management
policies in respect of different components of working capital, i.e. cash, receivables, and inventory
so as to ensure higher profitability, proper liquidity and structural health of the organization. The
proper and efficient management of working capital can ensure of all this.

WORKING CAPITAL CYCLE

The Working capital cycle refers to the length of time between the firm’s paying cash for
materials, etc. entering into the production process/stock and the inflow of cash from debtors

14
(Sales) suppose a company has a certain amount of cash. It will need raw materials. Some raw
material available on credit but, cash will be paid out for the other part immediately. Then it has to
pay labor costs and incur factory overheads. These three combined together will constitute work in
progress. After the production cycle is complete, work in progress will get converted into finished
products. The finished product when sold on credit gets converted into sundry debtors. Sundry
debtors will be realized in cash after the expiry of credit period. This cash can again be used for
financing raw materials, work-in-progress, etc. Thus there is a complete cycle from cash to cash
wherein cash gets converted into raw material, work-in-progress, finished goods, debtors and
finally cash again. Short term funds are required to meet the requirements of funds during this time
period. This time period is dependent upon the length of time within which the original cash gets
converted into cash again. This cycle is also known as operating cycle or cash cycle.

The working capital cycle is depicted below:

Cash
Pay Supplier for
Raw Material,
Labour, Overhead
Collection Cash

WIP

Debtors
Finishing
Goods
Dispatch
15
Working capital cycle indicates the length of time between companies’ paying for materials,
entering into stock and cash from sales of finished goods. It can be determined by adding the
number of days required for each stage in the cycle. For example a company holds raw-materials
on an average for 60 days, it gets credit from the supplier for 15 days, production process needs 15
days, finished goods are held for 30 days and 30 days credit is extended to debtors. The total of all
these, 120 days, i.e. 60-15+15+30+30 days is the total working capital cycle.

The determination of working capital cycle helps in the forecast, control and management of
working capital. It indicates the total time lag and the relative significance of its constituent parts.
The duration of working capital cycle may vary depending on the nature of the business.
The working capital cycle consists of the following events which continues

Throughout life of business:

Conversion of cash into raw material
1) Conversion of raw-material into work in progress.
2) Conversion of WIP into finished stock.
3) Conversion of finished stock into accounts receivables through sales and
4) Conversion of accounts receivables into cash.
The duration of the operating cycle for the purpose of estimating working capital is equal to the
sum of the durations of each of above said events, less the credit period allowed by the suppliers.
This cycle continues throughout the life of the business. Thus the operating cycle of a
manufacturing company begins with acquisition of R.M and ends with the collection of receivables
and can be divided into four stages
1. Raw material and store stage
2. Work-in- progress stage
3. Finished goods stage
4. Receivables collection stage.

16
 In the form of an equation, the operating cycle process can be expressed as follows:

Operating cycle = R+W+F+D-C

Where,
R Stand for Raw material period
W Stands for Work in progress
F Stands for finished stock period
D Stands for debtor’s collection period
The various complements of operating cycle may be calculated as shown below:-

Average stock of R.M & stores

R= --------------------------------------------------
Average R.M & stores consumed per day

Average WIP inventory

W= --------------------------------------------------
Average cost of production per day

Average finished stock inventory

F= --------------------------------------------------
Average cost of goods sold per day

Average Book debts

D= --------------------------------------------------
Average credit sales per day

17
 Average Trade creditors
C= --------------------------------------------------

Average credit purchases per day

As time involved in conversion of different stage of operating cycle, so the same ultimately leads
to blocked of capital. This leads to the needs of working capital which is very crucial to sustain the
day to day business activity.

MEASUREMENT OF THE WORKING CAPITAL:-

It is already stated that working capital management is concerned with the maintaining of adequate
level of working capital, financing mix of working capital structure for permanent and temporary
working capital and balance of current assets to fixed assets etc.
The various tools and techniques used to measure and analyses the working capital are:-
(a) Ratio analysis
(b) Funds flow analysis (i.e.) Sources & uses of working capital
(c) Cash flow analysis and cash budget
(a)RATIO ANALYSIS AS A TOOLS OF MEASURING THE
WORKING CAPITAL:-

Ratio analysis can be used as a useful tool to verify the level and composition of working capital,
the extent of liquidity in the assets structure and the efficiency with which the working capital is
used in the business. In a nut shell working capital ratio can be used to analysis these aspects of
working capital management i.e. liquidity efficiency and structural health.
a. (I) RATIOS TO MEASURE THE LIQUIDITY ASPECT OF WORKING CAPITAL
MANAGEMENT: - Liquidity is considered to be the pre-requisite for the very survival of a firm.
Liquidity ratios measure the ability of a firm to meet its short-term obligations and indicate the
short-term financial solvency of a firm. The ratios normally used to measure the liquidity
characteristics of working capital are:–
(a) Current ratio

18
(b) Quick ratio/Acid Test
(c) Super quick ratio.

(a) CURRENT RATIO:-Current ratio may be defined as the relationship between current assets
and current liabilities. It is also known as the working capital ratio. It is used as a general measure
of liquidity. It is computed by dividing the total current assets by total current liabilities.

Current assets

Current Ratio= --------------------------------

Current liabilities

INTERPRETATION OF CURRENT RATIO:-A relatively high current ratio is an indication

that the firm has ability to pay its current obligations as and when they became due. However a
high current ratio is unfavorable from the firm’s point of view due to following reasons.
(a) Slow moving/piling of inventory leading to high carrying cost.
(b) Accumulation of debtors which may lead to bad debt loss of interest etc.
On the other hand, a low current ratio reflects that the liquidity position of a firm is not good and it
may find difficult to pay its current obligation.Thus the higher the current ratio the larger the
amount of rupees available per rupees of current liability, the more the firm’s ability to meet
current obligation and greater the safety of funds of short term creditors and vice- versa. Though
there is no hard and fast rule as a convention the minimum of 2:1 ratio is referred to as rule of
thumb or arbitrary standard of liquidity for a firm. A ratio near to the standard is also considered
satisfactory. However the rule of thumb should not be blindly followed. It is because the current
ratio is a quantitative measure of liquidity rather than a qualitative index. As we are known that
current liabilities are to be paid in full where as the current assets are subject to fall in value in
term of shrinkage obsolete, bad debt etc. More over the properties of various elements/component
of current assets to total current assets also matters, as some current assets are more liquid than
others. For example cash and receivables are more liquid than inventory. In this sense a firm

19
having low current ratio is quite able to pay its short-term obligation having more percentage of
cash & receivable as current assets than the firm having high current ratio with more percentage of
inventory as a part of its current assess.All these leads to analysis the quick or acid test ratio as a
measure of working capital from the liquidity point of view.

(b) QUICK OR ACID TEST RATIO: - This ratio expresses the relationship between quick
assets and current liabilities. The ratio is computed by using following formula.
Quick Assets
Quick Ratio = ----------------------------
Current Liabilities

The components of the quick assets are cash and bank balances, short-term marketable securities,
debtors/ receivable. Thus quick assets exclude inventory and pre-paid expenses from current
assets to determine quick ratio.
The exclusion of inventory is based on the judgment that it is not easily and readily converted into
cash. Prepaid expenses are also excluded based on the reasoning that they are not available to pay
of current debt by virtue of its nature.

INTERPRETATION OF THE RATIO: - Quick ratio is a tight measure of liquidity in

comparison to current ratio. The utility of the ratio based on the fact that it is the best available test
of the liquidity position of a firm and it is widely accepted. Normally a quick ratio of 1:1 is
considered satisfactory from firm’s liquidity point of view. In a true sense acid test ratio provides a
check on liquidity position determined on the basis of the current ratio, more rigorous and
penetrating test of liquidity of a firm. Still the ratio sometimes fail to measure the real position of
liquidity particularly when total current assets includes a very high portion of sundry debtors in its
composition which cannot be easily collected or there is a more chance of bad debts losses. All
these leads to determination of super quick ratio.

20
(c) SUPER QUICK RATIO:-The super quick ratio establishes relationship between super quick
assets and current liabilities. In other words super quick ratio is determined by dividing the super
quick assets by current liabilities.

Super Quick assets

Super Quick Ratio = ------------------------
Current Liabilities

The super quick assets are cash and marketable securities. In this case inventory, prepaid expenses
and debtors are excluded from the current assets to test the liquidity. This is a most rigorous
measure of a firm’s liquidity position. However super quick ratio is treated to be a conservative
approach and is not widely used in practice.

(ii) RATIOS TO ANALYSE EFFICIENCY OF WORKING CAPITAL:-

The various ratios uses to measure the efficiency of working capital are:-
(a) Inventory turnover ratio
(b) Raw material turnover ratio
(c) Work in progress turnover ratio
(d) Finished goods turnover ratio
(e) Debtors turnover ratio
(f) Average collection period
(g) Payables turnover ratio
(h) Cash turnover ratio
(i) Working capital turnover ratio
(j) Current assets turnover rate

21
(a) INVENTORY TURNOVER RATIO:-

Inventory turnover ratio indicates the number of times inventory replaced during a given period
normally a year. The ratio establishes the relationship between costs of goods sold and inventory
level. The inventory or stock turnover ratio satisfies the efficiency of the firm’s inventory
management. It is calculated by dividing the cost of goods sold by the average inventory.
Cost of goods sold
Inventory turnover ratio = ------------------------
Average Inventory

Where
Cost of goods sold = (Opening Inventory + Manufacturing Cost)
– Closing Inventory.
And

Opening Inventory + Closing Inventory

Average Inventory = ------------------------------------------------

2
In the absence of cost of goods sold and inventory data the ratio can be calculated by following
formula:

Sales
-------------------------
Closing Inventory

22
However this approach is not a logical one since sales is based on the market price and closing
inventory is based on the cost. Further inventory figures may be under estimated due to the fact
that normally firm have lower inventory at the end of the year.

INTERPRETATION OF THE RATIO:-

The inventory turnover ratio indicates how quickly the inventory is turning into receivable through
sales. It is a test of efficient inventory management. A high inventory turnover is a better than a
low ratio and implies better inventory management. However a too high ratio needs careful
analysis. It may be the result of a very low-level inventory that results in frequent stock outs and
involve shortage costs. A low-level inventory has also serious implications in terms of firm’s
inability to meet customers’ demand and there may be bottleneck in production. On the other hand
a low ratio indicates unnecessary tie up of funds in inventory or a slow moving / obsolete
inventory. A low-level inventory is quite dangerous for the firm. It is because carrying excessive
inventory involves cost in terms of high carrying cost (i.e.) rent of storage, wastage, scrap,
pilferage, insurance, theft lighting, hearing, opportunity cost of lockup funds and so on. A low
ratio may be the result of inferior quality of goods, deliberate excessive purchase in anticipation of
future price increase, over valuation of stock etc. Thus a very high or low inventory ratio needs
careful analysis and undesirable from the firm’s point of view. To judge whether the ratio of the
firm is satisfactory or not, it should be compared over a period of time or the same can be
compared with industry norms or competitive firms.

(b) RAW MATERIAL TURNOVER RATIO:-

The ratio is computed by dividing the raw material consumed during the year by average balance
of raw materials held during the year.
Raw materials Consumed during the year
Raw material Turn our Ratio= ---------------------------------------------------

23
 Average raw material held.

The ratio reflects the rate of utilization of raw material. A higher turnover ratio indicates higher
utilization of raw material. However a very high ratio is not good from the organization point of
view as the same may lead to bottleneck in production due to stock out of raw material. On the
other hard a low turnover of raw material is an indication of accumulation of inventory.

The efficiency of utilization of raw material can also be judged from raw material holding period
which is determined by dividing the number of days during the year by inventory turn our ratio.
Raw material holding period (in days):-
365
-----------------------------------
Raw material turns over

365 * average R.M

= ------------------------------------------
R.M consumed during the year

Average R.M
= ----------------------------------------

R.M consumed per day

The holding period must not be too high or too low. A high holding period leads to accumulation
of R.M causing high carrying cost in term of shrinkage in values, pilferage, theft ,administrative
cost, were housing charges, lightening, heating etc. whereas too low holding period leads to high
ordering cost and there may be interruption in production process.

(c) WORK IN PROCESS TURN OVER RATIO:-

24
This ratio is calculated by dividing the cost of goods manufactured by average WIP inventory.
Cost of goods manufactured

WIP turnover ratio= ---------------------------------------

Average WIP
A higher turnover ratio indicates lower inventory accumulation and vice versa. Conversion period
can also be determined by dividing the number of days in a year by WIP turnover ratio.

Conversion period :- (in days)

365
-----------------------------------------

WIP turnover ratio

Average WIP inventory

-----------------------------------------------

Cost of goods manufactured per day

(d) FINISHED GOODS TURNOVER RATIO:-

This ratio is calculated by the following formula.

Cost of goods sold

Finished goods Turnover ratio= -------------------------------
Average finished goods

25
 Average finished goods
And finished goods holding period= --------------------------------

Cost of goods sold per day

A high holding period is not good from the organization point of view as the same leads to higher
working capital requirements.

(e) DEBTORS TURN OVER RATIO: -

Debtor turnover ratio is a supplementary measure the liquidity of a firm is mainly computed to
judge the efficiency of firm’s credit policy. The ratio is calculated by dividing the net credit sales
by average debtors. The ratio indicates how quickly debt / receivables are converted into cash.
Net Credit Sales
Debtor Turnover Ratio = -----------------------------
Average Debtors

Net Credit sales = Total credit sales – sales returns

In case of non availability of data in respect of credit sales and average debtors the formula used to
calculate the ratio is

Total sales
-----------------------------

26
 Closing Debtors
However the ratio is not logical one, since the same show an inflate receivable turnover ratio.
INTERPRETATION OF THE RATIO:-

The ratio indicates the speed at which debtors/ receivable are collected. Thus it signifies how many
times receivables are converted into cash in average collection. The shorter the average collection
period, the better the trade credit management. On the other hand a longer the collection period
indicates poor debt management and there is an increasing chance of bad debt and other collection
expenses. However, it is not wise on the part of a firm to have either a very short or a very long
collection period. Long collection period means the firms is adopting a poor credit policy, which
may lead to an increase in the interest cost and increasing bad & doubtful debts. Similarly a very
short collection period may adversely affect the sales volume. The reasonableness of collection
period can be judged in view of the industry norms, competition, trade practice etc.

(f) AVERAGE COLLECTION PERIOD:-

The average collection period ratio is interrelated and dependent upon the debtor’s turnover ratio.
It is determined by dividing the days in a year by debtor’s turnover ratio.

Days in year
Average collection period = -----------------------------
Debtors turnover ratio

Debtors X Days in year

= --------------------------------
Credit sales

27
(g) PAYABLES TURNOVER RATIO:-

Accounts payable forms an important source of spontaneous financing to the firm. The formula
used to calculate payable turnover ratio is mentioned below:-

Annual purchases

Payable turnover ratio= -------------------------------

Average payables

The ratio expresses the number of times accounts payables are converted into purchases during the
year. Normally a higher turnover ratio is preferable to the firm. The average payment period
determined as

365

Average payment period = ------------------------------

Payable turnover ratio

(h) CASH TURNOVER RATIO:

Keeping more cash to maintain liquidity is a loss to the firm as the same can be invested in
profitable assets to earn better return. On the other hand keeping less cash balance may lead to
insolvency. Thus efficient management of cash is quite important from the firm point of view.

28
Cash turnover ratio is an important tool in this regard which can be computed by using following
formula.

Cash operating exp. Day

Cash Turnover Ratio = ------------------------------------

Average cash balance Day.

365
And cash holding period= --------------------------------
Cash turnover ratio.

The ratio can be compared with the ratio of other similar firm competitors and the industry as well.
A (iii) RATIO TO ANALYSE THE STRUCTURE OF WORKING CAPITAL:-

The structural health of working capital can be determined by analyzing the various elements of
current assets and current liabilities over a period of time. The tool used to analyze the structural
health of working capital is known as decomposition analysis. In decomposition analysis spilt and
changes made in different elements of CA and CL has been determined by computing the ratio of
various elements of CA to total CA and various elements of CL to total CL. The various ratios
used to analyze the structural health of working capital are:-

1. Cash/Bank balance to total current assets.

2. Receivables or debtor to total current assets.
3. Inventory to total current assets.
4. Current assets to total assets.
5. Current liabilities to total liabilities.
6. Sundry creditors to total CL.
All these ratio can be computed for different year very easily by dividing for the different elements
of CA with total CA of respective year and different elements of CL with total CL. Simply current

29
assets to total assets ratio can be computed by dividing total CA of different year with total assets
and current liabilities to total liabilities by dividing total CL of different year with total liabilities
of respective years.
(a) FUNDS FLOW ANALYSIS:-

Funds flow analysis provides insight into the movement of funds and helps in understanding the
changes in the structure of assets, liabilities, and owners equity. In funds flow statement two main
financial statements are prepared. They are:-
(a) Statement of changes in working capital
(b) Sources of uses and application of funds
Statement of changes in working capital indicates the increase/decrease on working capital over
the previous year both individual element wise of current assets and current liabilities as well as
overall changes in working capital. Thus this statement provides same meaningful information
about working capital and its requirement
MANAGING VARIOUS COMPONENTS OF WORKING CAPITAL:-
We have already seen that proper management policies are required for the various constituents of
working capital. The goal of working capital management is to manage each of the firm’s current
assets efficiently in order to maintain the firm’s liquidity while not keeping any of the current
assets at too high level. We shall now consider the salient features of management of each element
of working capital separately. The elements of working capital are:-
(a) Cash management
(b) Debtors management
(c) Inventory management

CASH MANAGEMENT:-
Management of Cash is an important function of the finance manager. The modern day business
comprises numerous units spread over geographical areas. It is the duty of the finance manager to
provide adequate cash to each of the units. For the survival of the business, it is absolutely

30
essential that there should be adequate cash. It is the duty of finance manager to have liquidity at
all parts of the organization while managing cash. On the other hand, he is also to ensure that there
are no funds blocked in idle cash. Idle cash resources entail a great deal of cost in terms of interest
charges and in terms of opportunities cost. Hence, the question of cost of idle cash must also be
kept in mind by the finance manager. A cash management scheme therefore, is a delicate balance
between the twin objective of liquidity and cost.

Need for Cash:-

The following three basic considerations in determining the amount of cash of liquidity have been
outlined by Lord Keynes:

(1)Facility in meeting the day-to-day expenses and other payments on the dates. Normally, inflow
of cash from operations should be sufficient for this purpose. But sometimes this inflow may be
temporarily blocked. In such cases, it is only the reserve cash balance that can enable the firm to
make its payments in time. This is Transaction Motive for maintaining liquidity.
(2)Ability to take advantage of profitable opportunities that may present themselves which may be
lost for want of ready cash/settlement. This is the Speculative Motive.
(3)Safety as is typified by the saying that a man has only three friends an old wife, an old dog and
money at bank. This is given the name of precautionary motive. Cash management is one of the
key areas of working capital management. It is the most liquid component of current assets. Cash
plays a vital role so far as daily operation of business enterprise is concerned. The need for cash
arises due to following reasons.
Estimation of Cash Requirements:
The first step in cash management is to be estimating the requirements of cash. For this purpose
cash flow statements and cash budgets are required to be prepared. . The term ‘cash flow’ depicts
the flow of liquid funds as as result of business activities. A cash flow statement records and
reflects the quantum and the nature of inflow and outflow of liquid funds. It can either be a
projected statement which acts as a guideline for management or a record of actual performance

31
analyzing the strength and the weakness of the short term financial position. It is thus a vital tool
for providing data for a number of managerial decisions.
From the conventional Profit and Loss Account, the management does not know its cash position.
It might so happen that, in spite of big profit as revealed by the profit and loss account, the
company may not have sufficient funds to pay even salaries. This is because adequate profits do
not necessarily ensure adequate cash resources. A cash flow statement is actually the summarized
from of cash book in which the actual receipts and payments are sectionalized. It shows the
sources from where the funds were obtained and the uses to which they were put. Sometimes it is
also referred to as ‘how come, where gone’ statement, because it explains how the funds came and
where they have gone.
Cash flow statement can be prepared in the following two ways: (I) show in detail each item of
inflow of cash irrespective of whether it is capital or revenue in nature; or (ii) showing the net
inflows outflows from revenue operations as one consolidated figure and inflows/outflows of
capital nature separately.
The preparation of cash flow statement offers the following advantages:
(1) It tells the management when to plan and for what amount of liquid funds. Profit is not cash,
and an increase in profit is not necessarily a comfortable cash situation. The increased inflow from
profit may have gone into the financing of stocks and debtors or utilized to acquire fixed
Assets or repayment of term liabilities.
(2) It shows the amount of internal accruals; management can assess how much is needed for
increase working capital, and how much can be spared for capital expenditure, etc.
(3) It reveals the estimated availability of cash, so that advance planning of cash utilization
becomes possible.
(4) It reveals the need for additional cash requirements in advance so that negotiations for
obtaining loans could be started in time.
It is because of all these advantages that financial institutions insist on projected cash flow
statements for 5 to 10 years before entertaining loan applications. From the cash flow statement,
the financial institutions try to from an ideal whether the firm to be financed would be able to

32
generate sufficient cash to pay the interest and installments in time after meeting their own need.
Recently, for the same reason, banks have also started insisting on projected cash flow statements
before granting loans for working capital, although the period covered in this case is much shorter.
Cash Budgets for Short Period: Preparation of cash budget month by month would involve making
the following estimated:
a) As regards receipts:
(1) Receipts from debtors:
(2) Cash Sales; and
(3) Any other sources of receipts of cash (say, dividend from a subsidiary company)

B) as regards payments:
(1) Payments to be made for purchases;
(2) Payments to be made for expenses;
(3) Payments that are made periodically but not every month;
(I) Debenture interest;
(ii) Income tax paid in advance;
(iii) Sale tax etc.
(4) Special payments to be made in particular months, for example, dividends to shareholders,
redemption of debentures or repayments of loan, payment for assets acquired, etc.
Some of the points regarding the above are discussed below:
The sales figure is taken from sales budget, which should be adjusted to assess the cash inflow
from sales; this will depend on the credit allowed to the customers in the trade. Also is should be
ascertained from the market whether the customer, actually pay within the credit period allowed
because in certain trades, normally the credit period is extended beyond what is actually allowed as
a matter of policy.
The costs of the production programmed required to feed the budgeted sales are then estimated.
After ascertaining the production programmed, raw material purchases budget, and labour budget,
etc can be prepared and converted into cash flow on the basis of the credit available against them.

33
Separate budgets could then be prepared for salaries, wages and other overheads. The information
about the fixed assets to be acquired would be available from the capital expenditure budget, and
the payment to be made against them would be known from the terms of purchases. Other items
like interest, dividends etc. should also be provided for, keeping in view the past practice and
contractual obligations.

Long-range Cash Forecast:

Long-range cash forecast often resemble the projected sources and application of funds statement.
The following procedure may be adopted to prepare long-range cash forecast:-
(a) Take the cash at bank and in hand in the beginning of the year.
Add-
(ii) (a) trading profit (before tax) expected to be earned;
(b) Depreciation and other development expenses incurred to be written off;
(a) Sale proceed of assets;
(b) Proceeds of fresh issue of shares or debentures; and
(c) Reduction in working capital that is current assets (except cash) less current liabilities.
(ii) Deduct-(a) Dividends to be paid.
(b) Cost of assets to be purchased.
(c) Taxes to be paid.
(d) Debentures or shares to be redeemed.
(e) Increase in working capital.
Systems of Cash Management: A finance manager must control the levels of cash balance at
various points in the organization. This task assumes special importance on account of the fact that
there is generally a tendency amongst divisional managers to keep cash balance in excess of their
needs. Hence, the financial managers must devise a system whereby each division of an
organization retains enough cash to meet its day to day requirements without having surplus
balances on hand. For this, methods have to be employed to (a) speed up the mailing time of

34
payments from customers, (b) reduce the time during which payments received by the firm remain
uncollected and speed up the movement of funds to disbursement banks.
Two very important methods to speed up collection process are (I) Concentration banking and (ii)
lock-box system.

(b) Concentration Banking:

In concentration banking the company establishes a number of strategic collection centers in
different regions instead of a single collection centre at the head office. This system reduces the
period between the times a customer mails in his remittances and the time when they become
spendable funds with the company. Payments received by the different collection centers are
deposited with their respective local banks which in turn transfer all surplus funds to the
concentration bank of the head office. The concentration bank with which the company has its
major bank account is generally located at the headquarters. Concentration banking is one
important and popular way of reducing the size of the float.
(ii) Lock Box system:
Another means to accelerate the flow of funds is a lock box system. With concentration banking,
remittance are received by a collection centre and deposited in the bank after processing. The
purpose of lock box system is to eliminate the time between the receipt of remittances by the
company and the deposit in the bank. A lock box arrangement usually is on regional basis, which a
company chooses according to its billing patterns. Before determining the regions to be used, a
feasibility study is made of the possibilities of cherubs that would be deposited under alternative
plans. In this regard operations research techniques have proved useful in the location of lock box
sites. For example, if a company divides the country into five zones on the basis of feasibility
studies, it might pick up New Delhi for the North, Mumbai for the West, Calcutta for the East,
Chennai for the South and Nagpur for the Centre.
Under this arrangement, the company rents the local post-office box and authorizes its banks at
each of the locations to pick up remittances in the boxes. Customers are billed with instructions to

35
mail their remittance to the lock boxes. The bank picks up the mail several times a day and
deposits the cheques in the company’s account. The company receives a deposit slip and lists all
payments together with any other material in the envelope. This procedure frees the company from
handling and depositing the cheques. The main advantage of lock box system is that cheques are
deposited with the banks sooner and become collected funds sooner than if they were processed by
the company and the time they are actually deposited in the bank is eliminated. The main
drawback of the lock box system is the cost of its operation. The bank provides a number of
services in addition to usual clearing of cheques and requires compensation for them. Since the
cost is almost directly proportional to the number of cheques deposited. Lock box arrangements
are usually not profitable if the average remittance is small. The appropriate rule for deciding
whether or not to use a lock box system or for that matter, concentration banking, is simply to
compare the added cost of the most efficient system with marginal income that can be generated
from the released funds. If costs are less than income, the system is profitable, if not the system is
not a profitable undertaking.
Playing the float: - Besides accelerating collections, an effective control over payments can also
cause faster turnover of cash. This is possible only by making payment on the due date, making
excessive use of draft instead of cherubs. Availability of cash can be maximized by playing the
float. In this, a firm estimates accurately the time when the cherubs issued will be presented for
encashment and thus utilizes the float period to its advantage by issuing more cherubs but having
in the bank account only so much cash balance as will be sufficient to honor those cherubs which
are actually expected to be presented on a particular date.
The exact nature of a cash management system would depend upon the organizational structure of
an enterprise. In a highly centralized organization, the system would be such that the central or
head office controls the inflows and outflows of cash on a routine and daily basis. In a
decentralized form of organization, where the divisions have complete responsibility of conducting
their affairs, it may not be possible and advisable for the central office to exercise a detailed
control over cash inflows and outflows. In such a situation, therefore, certain motivational factors

36
must be built into the system of performance appraisal so that the various managers are impelled to
retain only the optimum balance of cash.
Cash Management in a highly centralized organization:-
A highly centralized organization implies that the decision-making authority tends to concentrate
with the top management at the head office. The head office controls the various divisions closely.
Such a form of organization requires quick and effective information links. Consider the following
case which illustrates a centralized cash management system.
The organization, under reference, is entrusted with the task of providing industrial workers all
over the country insurance cover in case of sickness, maternity, disablement and death. The
scheme is financed mainly by contributions from the employer and employee ate the specified
rates. The organization thus deals with huge amounts of cash and liquid resources. It covers more
than 15.7 million beneficiaries at 314 centers in the country. It has a net work of 529 cash payment
offices which make more than 5.5 million payments on an average in a year. The system of cash
management, therefore, has to take into account all these problems. The centralized cash control
system or concentration banking system in the organization ensures that:
(a) Cash is collected speedily from the various centers, each of which should have optimum
liquidity to meet its needs, and
(b) Cash in excess of requirements is specially invested.
To achieve these objectives, the organization has made the following arrangements:
(a) All collections from workers and their employers during a week are deposited in a special
account in the branch of a nationalized bank which has a net work of branches at all the collection
centers. No collection centers can use any cash out of the collections so made.
(b) Every Monday, the local branches of the bank make a telegraphic transfer of funds collected
during the week to their main office at Delhi.
(c) The main office of the bank works out the total receipts of funds from all over the country and
intimates this figure to the financial controller of the organization. The cash requirements of each
centre are separately worked out through weekly cash budgets. The bank is advised to release the
amount of such weekly requirements at various places in the country. Thus, each centre can draw

37
from the branch of the bank its weekly requirements of cash. In case a centre needs more cash than
was projected in its budgets, it can do so by telegraphically informing the financial controller at
Delhi.
(d)It is obvious that the financial controller at Delhi would, by the mid-week, know his total cash
balance which is the difference between total cash receipts of the previous week of all centers
collected through various branches and total cash expenditure expected for the next week of all
carters. The difference can now be invested in an assortment to spread risk and optimize liquidity
and return.
(e)A special feature of the system is very quick communication which minimizes the float.
Cash Management in a decentralized Organization:
Cash management in a centralized organization is based upon centralized control over cash inflows
and outflows. In a decentralized organization this may not be possible on account of the relatively
independent authority that each divisional manager enjoys. Hence, cash management in such an
organization has different characteristics. Consider the following case of Indian Railway.
In India, the Railway deposits their excess cash with the Reserve Bank of India and gain interest
thereon. In short, in a decentralized organization, the constituent units must be encouraged to keep
their cash requirements at the minimum. This can be achieved through the mechanism of interest5
on periodical balances of various divisions with the head office. Interest may be allowed on
deposits and similarly interest may be charged on withdrawals.

CASH MANAGEMENT MODELS:

In recent years several types of mathematical models have been developed to help determine the
optimum cash balance to be carried by a business organization. The purpose of all these models is
to ensure that cash does not remain idle unnecessarily and the same time the firm is not confronted
with a situation of cash shortage. All these models can be put in two categories-inventory type
models and stochastic models. Inventory type models have been constructed to aid the finance
manager to determine optimum cash balance of his firm; William J. Bohol’s economic order

38
quantity model applies equally to cash management problems. However, in a situation where the
EOQ Model is not applicable, stochastic model of cash management helps in determining the
optimum level of cash balance. It happens when the demand for cash is stochastic and not known
is advance. The Miller-Orr cash management model incorporates stochastic nature of cash flows.
According to this model the net cash flow is completely stochastic. When changes in cash balances
occur randomly the application of control theory serves a useful purpose. The Miller-Orr model is
one of such control limit models. The model is designed to determine the time and size of transfers
between an investment account and cash account. In this model control limits are set for cash
balances. These limits may consist of h as upper limit, z as the return point; and zero as the lower
limit. When the cash balance reaches the upper limit, the transfer of cash equal to h-z is affected in
marketable securities account. When it touches the lower limit, a transfer from marketable
securities account to cash account is made. During the period when cash balance stays between h
& z, i.e. high and low limits no transactions between cash and marketable securities account is
made. The high and low limits of cash balance are set up on the basis of fixed cost associated with
the securities transactions, the opportunity cost of holding cash and the degree of likely
fluctuations in cash balances. These limits satisfy the demands for cash at the lowest possible total
cost.

H
Upper control Limit

Cash Balance (Rs.) Z Return Point

39
 0 TIME Lower control Limit

MILLER-ORR CASH MANAGEMENT MODEL

MANAGEMENT OF SUNDRY DEBTORS

The financial manager has operating responsibility for the management of investment in
receivables. In addition to his role of supervising the administration of credit, the financial
manager is in a particularly, strategic position to contribute to top management decisions relating
to the best credit policies of the firm. In the beginning the financial manager plays an important
role in determination of credit period and deciding the criteria for selection of credit applications.
Once it has been done and the management has determined the role of credit in the package of
goods and services offered, the financial manager has relatively little impact upon the level of
receivables. He may, however limit the amount of receivables by rejecting occasionally credit
applications or he may speed up the conversion of receivable into cash by aggressive collection
policy. But, these activities have smaller effect upon the level of receivables than the initial and
fundamental decision regarding the terms of credit and the overall credit standard laid down by the
firm.

The basic objective of management of sundry debtors is to optimize the return on investment on
this asset. It is obvious that if there are large amounts tied up in sundry debtor, working capital
requirements and consequently interest charges will be high. Also, in such a case, the bad debts
and the cost of collection of debts would be high. On the other hand, if the investment in sundry
debtors is low, the sales may be restricted, since the competitors may offer more liberal credit

40
terms. Therefore, management of sundry debtors is an important issue and requires proper policies
and efficient execution of such policies.

A number of factors determine the size of the investment in receivables. The important factors
are:-

(1) The effect of credit on the volume of sales

(2) Credit Terms
(3) Cash discount
(4) Policies and practices of the firm for selecting credit customers
(5) Paying practices and habits of customers
(6) The firm’s policy and practices of collection
(7) The degree of operating efficiency in the billing, record keeping and adjustment function.
There are basically three aspects of management of sundry debtors. Firstly, the credit policy is to
be determined. This involves a tradeoff between the profits on additional sales that arise to credit
being extended on the one hand and the cost of carrying those debtors and bad debt losses on the
other. The second aspect of management of sundry debtors is credit analysis, whereby the financial
manager determines as to how risky it is to advance credit to a particular party. The third aspect is
follow up of debtors and credit collection. Thus management of sundry debtors involves both
laying down credit policies and execution of such policies.

CREDIT POLICY:-

The credit policy of a firm involves decisions relating to length of the credit period, cash discount
and other special items. These decisions in turn determine investments in sundry debtors, average
collection period and debt losses. Credit policy involves the following considerations:

(a) Credit Period: - What should be the credit period? If the demand of a product is inelastic, the
credit period may be small. However, if product has an elastic demand, the credit period will

41
determine the quantum of sales. The credit period is also dependent on the custom in the industry
and the practice followed by various competitors. The availability of funds and the credit risks
involved also determine the credit period. Another important factor in determining the credit
period is the possibility of bad debts. It is obvious that this possibility will increase, in case the
credit period is too long.

A firm cannot determine the credit period once for all, since the situation in the market keeps on
changing. Also, a firm may have a policy of allowing different credit periods to different
customers.

For the larger number of customers having small dealings a firm may allow general credit since it
may be too costly to distinguish and classify customers.

(c)Discount policy: - Discounts are normally given to speed up the collection of debts. A cash
discount is a means of improving the liquidity of the seller. The rate of discount to be given should
depend upon the cost of carrying debts. It is obvious that a given point of time the firm will carry
debtors amounting to Rs. 50 lakhs. Suppose further that 50% of the customers will pay cash
promptly. It means that Rs. 25 lakhs would now be released on account of the new policy. Suppose
further that the return on investment of the particular firm is 30% it is obvious that the firm will
gain 30% of 25 lakhs (or Rs. 7.5 lakhs) which can be invested in the expansion programmed etc.
Since the firm would spend about Rs. 4.5 lakhs by way of cash discounts it makes an overall gain
of Rs. 3 lakhs. It is obvious that a scheme of cash discounts in such a case would be beneficial to
the concern. Cash discounts are particularly useful where a firm has dealings with government
departments, etc. where payments are usually delayed. In a scheme of cash discounts, there is
likelihood that such department may pay up the amounts more quickly.

(d)Credit Analysis: - Having determined the credit terms, the firm has to evaluate individual
customers in respect of their credit-worthiness and the possibility of bad debts. For this purpose,
the firm has to ascertain credit rating of prospective customers.

42
(e)Credit Rating: - An important task for the financial manager is to rate the various debtors who
seek credit. This involves decisions regarding individual parties as to how much credit can be
extended and for how long. In foreign countries specialized agencies are engaged in the task of
providing rating information regarding individual parties. Dun and Bradstreet is one such source
which reports on the credit-worthiness of various businessmen. The agency lists alphabetically
about 3 million business firms with regard to their estimated financial strength and net worth. The
composite credit appraisal is also given in terms of condensed rating symbols. It is thus quite easy
for a sales manager to judge the credit-worthiness of his customer by just referring to the book.
In India the task of the financial manager is a little more difficult. He has to look into the credit –
worthiness of a party and sanction credit limit only after he is convinced that the party is sound.
This would involve an analysis of the financial status of the party, its reputation and previous
record of meeting commitments.

The credit manager here has to employ a number of sources to obtain credit information. The
following are the important sources:

(1)Trade references: The prospective customer may be required to give two three trade references.
Thus, the customer may give a list of personal acquaintances or some other existing credit-worthy
customers. The credit manager can send a short questionnaire to the references seeking the
relevant information.
(2)Bank references: Sometime the customer is asked to request the banker to provide the required
information. However, bankers in India normally refuse to give detailed and unqualified credit
reference.
(3)Credit bureau reports: In some cases the associations for specific industries maintain credit
bureau which provides useful and authentic credit information for their members.
(4)Past experience: In case of an existing customer, the past experience of his account would be
valuable source of essential data for scrutiny and interpretation. A shrewd manager can look into
the account carefully and try to find out the credit risk involved.
(5)Published financial statements: Sometime the published financial statements can be examined
to see the credit-worthiness of a customer. Further, if a customer’s name appears in the list of

43
approved suppliers of a Government agency like D.G.S. and D or other reputed organization, it can
be taken as a plus point.
(6)Salesman’s interview and reports: First hand information through personal contact can also aid
in judging the credit rating of a customer. Many companies evaluate the credit worthiness of their
customers by consulting salesmen or sales representatives. For proper determination of the limit of
the customer the salesman should also ascertain the potential sales which the customers can affect
to the ultimate customers.
Once credit-worthiness of a client is ascertained, the next question to resolve is to set a limit on the
credit. In all such enquires, the credit manager must be discreet and should always have the interest
or high sales in view.

COSTS ASSOCIATED WITH RECEIVABLES

The various types of costs associated with receivables management are
(a) Collection cost
(b) Capital cost
(a) delinquency cost
(b) Default cost.
(a) Collection Cost: - These are costs incurred in collecting receivables mainly includes costs of
maintaining credit department and expanses involved in acquiring credit information.
(b) Capital Cost: - These are the cost incurred to arrange the funds to be invested in receivables.
Therefore cost on the use of additional capital to support credit sales which alternatively could be
profitably employed elsewhere is a part of the cost extending credit receivables.
(c)Delinquency Cost: - Such costs arise out of the failure of the customers to meet their
obligations. The major components of these types of costs are costs incurred on collection effort
cost of capital legal charges etc.
(d) Default Cost: - Such types of cost mainly includes bad debts.

44
Collection Policy: - Efficient and timely collection of debtors ensures that the bad debt losses are
reduced to the minimum and the average collection period is shorter. If a firm expands more
resources on collection of debts, it is likely to have smaller bad debts. Thus, a firm must work out
the optimum amount that it should spend on collection of debtors. This involves a tradeoff between
the levels of expenditure on the one hand and decreases in bad debt losses and investment in
debtors on the other.
The collection cell of a firm has to work in a manner that it does not create too much resentment
amongst the customers. On the other hand, it has to keep the amount of the outstanding in check.
Hence, it has to work in a very smoother manner and diplomatically. It is important that clear-cut
procedures regarding credit collection are set up. Such procedures must answer questions like the
following:-

(a)How long should a debtor be allowed to exist before collection process is started?
(b)What should be the procedure of follow up defaulting customer? How reminders are to be sent
and how should each successive reminder be drafted?
(c)Should there be collection machinery whereby personal call by company’s representatives are
made?
(d)What should be the procedure for dealing with doubtful accounts? Is legal action to be
instituted? How should the account be handled?
FACTORING SERVICES:-
The entry of factoring in the Indian financial arena perhaps marks the beginning of the end of bank
monopoly in selling working capital credit to business enterprises. Factoring is a debt collection
service which includes buying the receivables of a company and extending credit up to 70-80% of
the invoice value. In effect this would mean financing the sundry debtors and so falls within the
category of working capital finance. Accounts receivable may thus be financed either through the
outright sale of such accounts by the business, or through borrowing with the receivable assigned
as security. The outright sale of accounts receivables known as “factoring” is very much popular
means of short term financing abroad especially in United States and has also gained firm roots in
India during the recent years.

45
It is just a single service, rather a portfolio of complimentary financial services available to clients
i.e. sellers. The sellers are free to avail of any combination of services offered by the factoring
organizations to their individual requirements. Generally, Factoring involves provision of
specialized services relating to credit investigation, sales ledger management. Purchases and
collection of debts, credit protection as well as provisions of finance against receivables and risk
bearing. In factoring accounts receivables are generally sold to a financial Institution who charges
commission and bears the credit risks associated with the accounts receivable purchased by it. Its
operation is very simple. Clients enter into an agreement with the “Factor” working out a factoring
arrangement according to his requirements. The Factor then takes the responsibility of monitoring,
follow up, collection and risk taking and provision of advance. The factor generally fixes up a limit
customer wise for the client. The sellers select various combinations of these functions by
changing provisions in the factoring agreement. The seller may utilize the factor to perform the
credit checking and risk taking functions but not the lending functions. Under this arrangement the
factor checks and approves the invoices.
INVENTORY MANAGEMENT
Inventories constitute a major element of working capital. It is, therefore important that investment
in inventory is properly controlled. The objectives of inventory management are, to a great extent,
similar to the objectives of cash management. Inventory management covers a large number of
problems including fixation of minimum and maximum levels, determining the size of inventory to
be carried, deciding about the issues, receipts and inspection procedures, determining the
economic order quantity, proper storage facilities, keeping check over obsolescence and ensuring
control over movement of inventories. It is therefore important that the financial aspect of
inventories is carefully examined. Like sundry debtors, management of inventories also involves a
tradeoff between the carrying cost and the loss because of reduction in sales pursuant to non-
availability of inventories for an uninterrupted production programmed. Thus, on the one hand, if
inventory are kept at a high level, certain costs are incurred like interest cost on monies blocked in
inventory, cost of shortage, cost of obsolescence and other storage, losses and cost of maintaining
documents concerning the inventories. On the other hand, if inventories are maintained at a low

46
level, there may be interruptions in the production schedule resulting in under-utilization of
capacity and lesser sales. It is therefore, important that inventories are kept at optimum levels and a
constant check is kept on the various inventory levels.
The costs associated with inventory can be classified under following heads:-
• Ordering Cost
• Carrying Cost
• Shortage Cost
Ordering Cost:- Ordering cost is otherwise known as setup cost. It mainly involves cost of
requisitioning, cost of set up and cost of planning in storage.
These costs are fixed for the order placed. The small number of the orders frequently placed leads
to more ordering cost and vice versa. In other words the acquisition cost is inversely related to size
of inventory.
Carrying Cost: - The cost incurred in maintaining and holding inventory is known as carrying
cost. It mainly involves storage cost, tax, depreciation, insurance, maintenance of building, service
cost, insurance cost against fire and theft, detoriation in inventory on account of pilferage,
technological obsolesce, price decline, cost of raising funds and opportunity cost of funds (interest
on capital locked up in inventory).
Shortage Cost: - Such type of cost arises when inventories are short of requirement for
meeting the needs of high costs on commitment with crash procurement, loss an accent of fall in
sales and bottleneck in production.
Management of inventory can be achieved through the use of one or more of the following
techniques:

(1) STOCK LEVELS:

In order to minimize the unnecessary blocking of the capital in the material stock and to avoid
the interruption in the smooth production process certain levels of stocks are to be determined in
advance.
The determination of levels of stock helps in achieving the objectives of the inventory control.
The main stock levels to be determined are:

47
1. Maximum Stock level
2. Minimum Stock level
3. Average Stock level
4. Re-order level
5. Danger level of buffer stock or safety stock level
(1) Maximum Stock Level:-
The stock level above which the stock of any raw material is not allowed to go is called as
maximum stock level. It depends upon the following factors.
1. Rate of consumption
2. Lead time or reorder period
3. Storage capacity
4. Availability of working capital
5. Economic order quantity
6. Carrying cost or holding cost
7. Govt. policy
8. Re-order level
Maximum Stock Level= ROL – (Minimum consumption rate*Minimum lead time) + Re-order
quantity or EOQ
(2) Minimum Stock Level:-
Minimum stock level is the lowest quantity of any raw material which should always remain as
balance in hand i.e. below which the raw material should not be allowed to fall. It depends upon
the following factors:-

1. average rate of consumption

2. average lead time
3. re-order level
It is also called as buffer stock.
Minimum Stock Level = ROL – (Average Consumption Rate*Average Lead
Time)

48
3. Average Stock Level:-The level which is normally carried by the business looking towards the
nature and the requirements of the business.
Average Stock Level= Minimum Stock Level + Maximum Stock Level / 2
OR
Minimum Stock Level + Re – order quantity/2
OR
When no Minimum Stock is maintained
Re – order Quantity / 2

4. Re – Order Level:

The reorder level is that level at which a fresh order should be placed for the purpose of supply of
the raw materials. It depends upon:-

(I) Lead time (ii) Rate of Consumption (iii) EOQ

Max. Consumption Rate * Max. Lead Time
OR
Average Consumption per week * (Min. Stock Expressed in week + Average
Delivery time in week)

OR
Minimum Level + (Average Consumption Rate * Average Lead Time)

4. Danger Or Safety Stock Level:

(i) This is a level fixed usually below the minimum level.

49
(ii) When the stock reaches this level, very urgent action for purchase is indicated. This
presupposes that a minimum level contains a cushion to cover such contingencies.
ROL – (Average Rate of Consumption * Average Lead Time)
OR
Av. Lead Time * (Max. Rate of Consumption – Average Rate of Con.)
OR
Maximum consumption during Av. Lead time – Av. Consumption during Av. Lead time.
6. Economic Order Quantity:-

It is that order quantity lot size which should be purchased by the business so that the inventory
cost of the business becomes minimum. Inventory cost mean order cost and carrying (Holding)
cost.

In the situation when the discount facility on the bulk purchases is also available the inventory cost
also includes the purchasing cost.
At EOQ the total order cost is equal to the total carrying cost. (Where no discount is available)
The EOQ will be calculated as under in the following two situations:-

(1) When discount facility is not available:-

EOQ = 2*A*B
C

Here:-
A = Annual Demand or Consumption.
B = Order Cost per Order.
C = Carrying Cost per Unit per Period. (Annual)

(2) When at discount facility is available:-

50
When at different level of purchase discount facility is available the EOQ is calculated by
preparing following table in which the total cost of Inventory (including purchase cost) is
calculated and the level of purchase at which the total cost is minimum will become EOQ.
(A) Purchase Cost = Annual Demand * Purchase Price per Unit.

(B) Order Cost = Annual Demand

---------------------- * per order cost
Order Quantity

(C) Carrying Cost = Order Quantity

-------------------- *per unit carrying cost per period (annual)
2
(D) Total Inventory Cost= A+ B+ C

PERPETUAL INVENTORY SYSTEM:-

When the materials are in storage the control is affected through what is known as the perpetual
Inventory. Inventory means a list of goods in hand and the term perpetual inventory means a
system of inventory which indicated at all times, the balance of each item of stores in hand.
Thus the two main functions of the perpetual inventory system are:-
First Function Comprises of maintaining
Second Function requires:

51
(a) Bin Cards (Quantitative perpetual inventory)
(b) Stores Ledger (Quantitative Cum Valued perpetual inventory)
(c) Continuous Stock taking
(I) Recording store receipts and issues so as to determine at any time the stock in hand, in quantity
or Value or both without the need for physical count of stock.

(ii) Continuous verification of the physical stock with reference to the balance

Recorded in the stores records.

(A) Bin Card:-

This is containing only quantity details of stock.

(B) Stores Ledger:-

In the Store Ledger the quantities and values both are entered in the receipt, issue, and balance
columns but in Bin Card only quantity are entered.

Additional information as noted in bin cards regarding quantity on order and quantity reserved,
together with their values may also be recorded in the store ledger but the common practice is to
record such transactions only one of the two sets of documents.

Like the bin cards, separate ledger sheets or folios are maintained in the stores ledger for each item
of material.

The sheets are numbered serially and initialed by a responsible official so as to avoid the risk of
removal or loss. In some concerns the store ledger is maintained in bound volumes so as to rule out
the possibility of loss of folios.

Reconciliation of Bin Cards and Store Ledger:-

After posting in the bin cards, the receipt and issue documents are valued and then passed on to the
store ledger clerk for entry in the ledger. Thus, normally there should be no difference between the
balances shown in two sets of records. If there is any difference then it should be reconciled and

52
corrected at regular intervals to make physical stock taking. For this purpose, it is essential to keep
all the postings up to date. If the closing balances on a facilitates automatic reconciliation is to note
the stock balances on all the receipt and issue documents after they have been posted in the bin
cards. At the time of posting these documents in the store ledger, the balances can be tallied, with
the stores ledger balances. This method, however, involves extra work.

(ii) Continuous Physical Stock Verification

The perpetual inventory system is not complete without a systematic procedure of physical
verification of stores. The bin cards and the store ledger record the balance but their correctness
can be verified by means of physical verification only. The books indicate what the balance should
have been where as physical check would reveal what the balance actually is.

ABC ANALYSIS/SELECTIVE INVENTORY CONTROL:-

ABC analysis is a technique whereby high value items are controlled more closely than items of
low value. The items are classified in the various category items according to their usage value.
The following procedure is adopted. Usage value means Qty. X price per unit.

All the items are then re-arranged according to their usage value in a descending order. It would
normally be found that a small number of items add up to a very high value. Thus 5 to 10 percent
of total items may constitute 70 to 85 percent of material cost. Such items are classified as items.
Another 10 to 20 percent of total items may be categorized as B items. The rest i.e. 70 to 85
percent of items, though numerous, will thus from only 5 to 10 percent of the total material cost.
These may be called C items. On the basis of above classification now the control can be exercised
as under:-

Category An items: Top management can exercise close control on these items.

Category B items: Middle level will exercise close control & top management will exercise
occasional control on them.

53
Category C items: General control by the top management & will be closely controlled by floor
Mgt.

Regarding items of Category a different stock levels such as maximum stock level, minimum stock
level etc. will be defined carefully. EOQ will be decided. A close check on the consumption of
these items will also be kept & reporting will continuously be made to top Management.

Besides above the various another techniques uses for the inventory control such as VED analysis,
Aging schedule of inventory etc.

54
Chapter 4: ANALYSIS OF WORKING CAPITAL
 Analysis of trend in current assets
 Management of various important
 Aspect of working capital

55
4.1 INTRODUCTION:
After discussing the concept , importance , determinants and measurement of working capital from
various angles, it is important to know the status of managing the working capital through detail
analysis of various component and aspects of the same . Emphasis has been given to analyse the
working capital position of the sample unit from liquidity risk and profitability point of view over
a period of twelve years in this chapter. For this purpose, trend of current assets and their
components , trend of current liabilities and its components , trend of net working capital, analysis
of various working capital ratios are discussed in this chapter. Further the important dimensions of
working capital management and inventory management also discussed and analysed specifically.
ANALYSIS OF TREND:
The term trend refers to direction of change over a period . the trend clearly reflects the change in
overall financial poison of the organisation in long run. Such a movement/ direction of change may
be positive (improvement on financial position ) or negative declining condition of financial
position). Thus a positive or upward trend shows growth of improvement while negative or
downward trend shows an adverse situation. In financial analysis , role of such direction of change
is quite crucial one.

56
ANALYSIS OF TREND IN CURRENT ASSETS:-

year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CA 2877.5 2532.8 2282.4 2276.2 1394.24 1385.64

The trend of current assets can be well judged from Table- 4.1, 4.2 and 4.3 from different angles.
Tables 4.1 indicate the movement in absolute terms while 4.2 in term of percentage.
The total current assets during the period under analysis (refer to table 4.1) is ranged between Rs.
2877.50 cr. to Rs. 1394.24 cr. with an average of 2110.92 cr. The growth of current shows an
increasing trend over the period.
Looking into the item wise analysis of current assets, it is seen that inventory ranged between Rs.
19.88 cr. to Rs. 53.79 cr. during the period under study. It is significantly increase in 2004-05 and
then again decreasing. The overall trend of inventory showed an increasing trend. However the
inventory constitutes a very small portion of total current assets. From Table 4.2, it is evident that
average inventory constitute only 1.67 % of total current assets for the period.

ANALYSIS OF TREND OF CURRENT LIABILITIES:

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CL 776.6 668.6 732.4 785.3 1282.23 1326.06

57
Looking into table 4.1, it is quite clear that the total current liabilities showed a fluctuating trend
during the period. Total current liability varied between Rs. 776.6 cr. to Rs. 1326.06 cr. with an
average of Rs. 9285.31 cr. The table shows highest increase in 2004-05, 2008-09 and 2009-10

TREND OF NET WORKING CAPITAL :-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net Working
Capital 1470.58 2153.47 1864.2 1550 1490.9 1112.01

The trend of net working capital was fluctuating during the period under analysis . It increased
from Rs. 1470.58 cr. to Rs. 1112.01 cr. during the period with an average of Rs. 1440.19 cr. The
growth of the same was tremendously significant during the year 2005-06 and 2006-07 then it is
decreasing from the year 2009-10.
4.2.4 ANALYSIS OF VARIOUS RATIOS RELATING TO
WORKING CAPITAL

Ratio analysis is a quite useful technique to analyses the composition of working capital extent of
liquidity in current assets and efficiency of working capital. there are three kinds of ratios used to
analyzed the working capital (i.e.) liquidity, efficiency and structural ratios.

58
 Ratios used to measure the liquidity aspects of working capital are current ratio, quick ratio and
super quick ratio.

ANALYSIS OF CURRENT RATIO AS A MEASURE OF LIQUIDITY OF WORKING

CAPITAL

a) Analysis of Current Ratio :-

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
C.R. 3.42 3.97 3.79 3.12 2.9 1.09

As already mentioned in earlier current ratio express the relationship between current aspects and
current liabilities. As a rule of thumb a ratio of 2:1 is assumed to be quite satisfactory. In the
present analysis, the current ratio over the past six years is fluctuating ( the period under review
for the purpose of study) varies between 3.47:1 to 1.09:1 with an average of 2.60:1 (refer to table
4.3) the current ratio is not satisfactory in the year 2005-06, 2006-07 and 2004-05 it decreased
significantly in 2007-08. Since the average ratio is greater than the arbitrary standard of 2:1, the
current ratio of the sample unit is presumed to be quite satisfactory.

b) Analysis of Quick Ratio :-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Q.R. 3.35 3.86 3.65 3 2.82 1.05

59
Quick ratio expresses the relationship between quick assets and current liabilities. The standard
norms of quick ratio are 1:1. In the present analysis from table 4.3, it is clear that the ratio varies
between 3.35:1 to 1.05:1 with an average of 2.52:1. Thus the ratio is quite satisfactory as it is
significantly higher than the standard norms.

c) Analysis of Super Quick Ratio :-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

S.Q.R. 0.92 0.71 0.69 1.27 0.91 0.66

The super quick ratio over the period under study varies between 0.92:1 to .66:1 with an average
of .83:1 ( Table 4.3) .
WORKING CAPITAL RATIO TO ANALYSIS THE EFFICIENCY OF WORKING
CAPITAL
To analysis the efficiency of working capital the following ratios are taken into consideration :-

60
 a) Inventory turnover ratio.
b) Debtors turnover ratio and average collection period.
c) Working capital turnover ratio.
d) Current assets turnover ratio.
e) Current assets to total assets ratio.
Let us analyses the each of the above ratio in details.
a) Analyze of Inventory Turnover Ratio :-
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
I.T.R. 21.79 10.79 10.04 10.09 11.02 13.45

Table 4.5 shows the results of various activity ratios for the past six years. From this table, it is
quite clear that the inventory ratio shown a fluctuating trend. The ratio varies between 21.79 : 1 to
13.45:1 with an average of 12.86:1 which is abnormally high.

b) Analysis of Debtors Turnover Ratio and Average Collection Period :-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

61
 D.T.R. 0.76 0.52 0.6 0.83 0.96 1.42

Debtor’s turnover ratio express the relationship between net credit sales and debtors. It indicates
that how many times the receivable terms to achieve the desired sales from table 4.5. It is crystal
clear that for all the past six years except 2004-05 & 2009-10, the ratio is below 1(one). This is a
highly alarming situation which indicates very poor credit policy or inefficiency on the part of
management managing the receivables. The ratio varies from .76:1 to similarly 1.42:1 with an
average of 0.85:1. The average collection period varies between 526 days to 257 days with an
average of 279 days. In the year of 2009-10, it is the highest being 698 days approximately two
years. This is an indication or very serious and alarming situation which needs careful attention
proper investigation into the matter, continuously monitoring and reviewing to improve the
situation.
c) Working Capital Turnover Ratio (WTR) :-
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
W.C.T.O.R. 0.81 0.5 0.7 0.87 0.89 12.63

This ratio expresses the relationship between working capital and sales. Table 4.7 shows the
working capital turnover ratio for various years for the sample unit. Excluding the year 2005-06 &
2006-07. It is noticed that ratio is below 1. The ratio ranged bet weens 0.81 to 12.63 for the period
under study. The average ratio is 2.73 which indicate that the ratio is not satisfactory from liquidity
point of view.

62
d) Current Assets Turnover Ratio (CATR):-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

C.A.TR 0.57 0.37 0.05 0.06 0.06 0.1

Current assets turnover ratio expresses the relationship between current assets and sales. The ratio
indicates that how many times current assets turns to achieve the desired sales. A low ratio is an
indication of efficiency in management of current assets and vice versa. Looking into table 4.7, the
ratio is always below with an average of 0.20:1. The ratio varies between 0.57 to 0.10 lowest being
in the year of 2006-07

e) Current Assets to Total Assets :-

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
CA. to TA 0.18 0.22 1.88 1.44 1.22 0.7

63
.

The ratio is determined by dividing current assets by total assets. Efficient management of current
assets is highly essential to increase the profitability as only noncurrent assets loans profit. Surplus
funds gain due to efficient management of current assets can be efficiently used in various better
opportunity investment/ profit accruing projects . We have the current average current assets is
10% of total assets which is quite satisfactory.

RATIO TO ANALYSE THE STRUCTURE OF WORKING CAPITAL

The portion of various components of current assets to total currents and portion of various
components of current liabilities to total current liabilities determines the structural health of
working capital. The status of these ratio are expressed in table 4.2. From table 4.2 , it is clear that
the highest portion of current assets is sundry debtors. The next major portion is loans and
advances being 21% approximately in an average over the past six years and next is cash and bank
balance being 5% in average for the period under study. Inventory, constitute WIP and mislenious
current assets constitutes very law portion of total current assets. Looking into the composition of
current liabilities, their current liabilities constitute the major portion of total current liabilities
being 27% in average for the period under study. The next major portion is represented by interest
accrued but not due being 22% (approximately) in average for the past six years. Analysis of the

64
composition of current assets and current liabilities reveals that the portion of sundry debtors must
be reduced and must be converted into cash. Inventory though show a abnormally low position ,
however the situation is not working are as the sample unit belongs to hydro power industry and
the inventory in the present case constitute only construction material only. Loans and advances
position also needs to be reviewed, since it constitute 21% and same must be reduced to some
extent .Average cash balances & needs little improvement only.
Analysis of composition of current liabilities indicated that interest accrued but not due constitute
22% approximately in average. In near future, these may be due for payment. Where the same is to
be paid. As the average cash balance is only 5% only hence finely steps must be taken to collect
the debt to repay that interest. Other current liabilities constitute 27% of total current liabilities
from the details schedule of balance sheet of various years. It is revealed that various factors
attributed to other current liabilities are unspent amount of deposits with various agencies security
deposits and retention money. The status of the same also needs review and it must be reduced to
some extent. Sundry creditors merely constitute 9% in average. The obligation on account of
sundry creditors can be paid early as and when due as the average cash balance is around 5% in
average.

4.3 MANAGEMENT OF VARIOUS IMPORTANT ASPECTS OF WORKING CAPITAL:-

4.3.1 ANALYSIS AND CONTROL OF RECEIVABLE

Likewise cash management, the control of receivable (i.e.) farming, execution & implementation
of credit policies are taken up at corporate level in cash of sample unit. The generation reports are
sent to corporate office by different operating units on daily basis. However the sales data are
based on the monthly statement received from the various regional offices of Power Grid
Corporation of India Ltd. ( PGCIL) . Accordingly the debtors statement is prepared after in respect
of various beneficiaries (i.e.) states and state electricity boards on the basis of such statement by
different projects and units for the project/ unit and at the corporate level for the organization as a

65
whole. Similarly the collections of receivable are normally received by the corporate office in
respect of different projects / units. Accordingly the debtor statement is updated for the
organization as a whole after each such receipt. Further corporate office sends the collection
information to different projects and units in respect of collection of receivables on behalf of such
information projects updated their individual’s debtor statements. Some times (not regularly) the
projects received collection of receivables directly from beneficiaries and accordingly the debtor
statement of the projects is updated to know the balance and same instruction is communicated to
corporate commercial division for necessary action at corporate level. The position of overall
receivable management of the sample unit is showing an unhealthy situation, as shown from
various yardstick and indicators used to measure the status of receivable management. The
receivables are accumulating year to year from table 4.1. It is clearly marked that the receivable
increases from Rs. 2280.90 cr. in the year of 2004-05 to Rs. 450.97 cr. in the year of 2009-10. In
term of percentage the debtors raises from 20.44 % of total current assets to 35.79% The growth
trend of debtors also showed an increasing trend and decreasing after 2004-05( table-4.2) . From
table 4.5 it is also quite clear that the debtor turnover ratio is 0.69:1 and the average collection
period also decreases in recent years. Thus the average collection period is quite satisfactory and at
he same time it suggests that it must be continuous monitoring and reviews. Attractive discounts
must be offered for quick repayment. However the present management is taking some corrective
measures in this regard like deduction of SEB/ states dues from central assistance plan through
ministry of finance. Discounts are also affected for paying the dues within six month of raising the
bill . It is also worthy to mentioned that the sundry debtors in the questions are state govt. and state
electricity board from whom these dues are to be recovered from organization point of view who
may be the debtors, the dues must be recovered to maintain sound liquidity position and to
increase the profitability as well. It is helped that in near future the present management is able to
collect the dues on account of debtors.
4.3 2 ANALYSIS OF INVENTORY MANAGEMENT
Inventory as a part gross working capital has no significant role like receivables in the present due
to nature of industry. The product being electricity can not be stored and raw material being water

66
is without price (except water cuss) period to state govt. and its availability of management. The
inventory constitute in the present case is mainly material used for construction of projects as well
as running and maintenance of generating stations. However due to poor planning sometimes huge
materials are remain surplus after completion of projects, and some of these materials cannot be
used for other projects due to change in technology. Ultimately these inventories are to be sold as
scrap material or to survey off. However as per present policy of the govt. only the materials are to
be purchased after receiving the minimum level or when the material is out of stock. This is quite
good from organizations point of view, so far as inventory management is concerned.
Looking into table 4.1, it is quite clear that inventory increases from Rs. 19.88 cr. to Rs. 53.79 cr.
during the period under study and growth of inventory showed an increasing trend. However as
already indicated inventory constitute only 1.67 % of total current assets in an average. Recently
the present management is taking lot of steps to reduce its inventory costs mainly in term of
carrying costs. For this purpose recently integrated inventory management system(fully
computerized system for inventory management ) is under implementation with the help of Tata
consultancy service ( TCS) group. The inventory turnover ratio is 9.10 times showing healthy
inventory management, as there is no stock out costs.
In the nut shell out of three important dimensions of working capital management (i.e.) cash
management, Bills / receivable management and inventory management ,the analysis suggest that
the organization is doing quite well so far as cash & inventory management is concerned. However
income of receivable management some measures must be taken up to rectify the situation and the
management is remaining the position continuously approaching the central govt. for quick
recovery of the dues.

4.3.3 ANALYSIS OF CASH MANAGEMENT

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
C.T.R. 11.69 9.63 5.96 2.49 2.2 8.11

67
At present the company’s cash management is basically based on the projected cash flow
requirement / projected cash flow statement. Both inflow and outflow of cash has been properly
planned in order to avoid any cash crisis. The cash inflows are centralized which means the
various projects / units are not empowered to receive income from generation sales of energy or
any other source. Any such receipts by the units remitted to corporate office as and when they are
collected in checks / cash.
Similarly, projected cash outflows are prepared by various units and projects on monthly basis and
some are sent to corporate office to draw the monthly limit through bank. After receiving the cash
out flow statement from various projects and units, same are complied at corporate level to
determine the total cash requirement and disbursement for a particular month. However the basis
of projected cash requirement of an unit / project is based on budget of that project/ unit. Thus
without approval plan / budget cash out flow is not possible. It means the cash out flow of a
particular financial year is very much well planned before six month of the commencement of that
year. However there is provision for revised estimate after three month of actual expenditure of
current financial year to adjust any deviation in expenditure. A copy of the Performa budget is also
enclosed herewith on which the cash flow statement is prepared. It is also worthy to mention that
in cash any balance at the end of the month which cannot be spent due to any reason are invariable
remitted to corporate office through bank remittance.
Thus the organization is having a very sound control in its cash management continuous
monitoring, review of budget, expenditure and inflow of cash is maintained by integrated cash
management system at corporate level. At the end of each month different MIS reports are
prepared preferably budget head wise to avoid idle cash and bank balances. A copy of such
Performa is also enclosed for ready reference both in cash of construction and O&M projects.
Moreover the cash turnover ratio of the sample unit varies from 1.31:1 to 8.11:1 during the period
under analysis with an average ratio of 4.82:1. The highest being in the year of 2004-05 and lowest
in the year of 2006-7. The growth of CTR is upward indicating the better management of cash over
the period gradually. However this does not indicate any adverse position from cash / liquidity

68
point of view, because the average cash balance is 5.26 % of total current assets while sundry
creditor is only of total current liability and total current assets is more than of current liability in
average during the period of analysis. Further various tables, charts, diagrams, bar charts, ratio
charts relating to working capital components and working capital ratio are enclosed with this
chapter for ready reference which are the extracts from the various financial statements, annual
accounts etc.

ANALYSIS OF CASH MANAGEMENT

At present the company’s cash management is basically based on the projected cash flow
requirement / projected cash flow statement. Both inflow and outflow of cash has been properly
planned in order to avoid any cash crisis. The cash inflows are centralized which means the
various projects / units are not empowered to receive income from generation sales of energy or
any other source. Any such receipts by the units remitted to corporate office as and when they are
collected in chaques / cash.
Similarly, projected cash outflows are prepared by various units and projects on monthly basis and
some are sent to corporate office to draw the monthly limit through bank. After receiving the cash
out flow statement from various projects and units, same are complied at corporate level to

69
determine the total cash requirement and disbursement for a particular month. However the basis
of projected cash requirement of a unit / project is based on budget of that project/ unit. Thus
without approval plan / budget cash out flow is not possible. It means the cash out flow of a
particular financial year is very much well planned before six month of the commencement of that
year. However there is provision for revised estimate after three month of actual expenditure of
current financial year to adjust any deviation in expenditure. A copy of the preformed budget is
also enclosed herewith on which the cash flow statement is prepared. It is also worthy to mention
that in cash any balance at the end of the month which cannot be spent due to any reason are
invariable remitted to corporate office through bank remittance.
Thus the organization is having a very sound control in its cash management continuous
monitoring, review of budget, expenditure and inflow of cash is maintained by integrated cash
management system at corporate level. At the end of each month different MIS reports are
prepared preferably budget head wise to avoid idle cash and bank balances. A copy of such
preformed is also enclosed for ready reference both in cash of construction and O&M projects.
Moreover the cash turnover ratio of the sample unit varies from 1.31:1 to 8.11:1 during the period
under analysis with an average ratio of 4.82:1. The highest being in the year of 2002-04 and
lowest in the year of 2004-06. The growth of CTR is upward indicating the better management of
cash over the period gradually. However this does not indicate any adverse position from cash /
liquidity point of view, because the average cash balance is 5.26 % of total current assets while
sundry creditor is only of total current liability and total current assets is more than of current
liability in average during the period of analysis. Further various tables, charts, diagrams, bar
charts, ratio charts relating to working capital components and working capital ratio are enclosed
with this chapter for ready reference which are the extracts from the various financial statements,
annual accounts etc.

70
Chapter 5: SUGGESTION / RECOMMENDATIO

The summary of major findings is mentioned below:-

(I) Trend of Gross Working Capital:-

71
Trend of Gross Working Capital (GWC) or total current assets showed an upward trend. The total
investment in current assets increases from Rs. 937.95 crores to Rs. 1394.24 crores during the
period under reviewed. This is a good indication from the smooth running of the day-to-day
operation as well as paying the current obligation points of review. But since 2006-07 it has been
decreased continuously the main factor for this is decrease in sundry debtors.
(II) Trend of Net Working Capital ( NWC) :-
Likewise GWC trend of NWC also showed an increasing trend up to 2007-08 but thereafter it has
decreased year by year. The highest NWC was in the year of 2007-2008 and lowest being in the
year of 2009-10. The factor contributed to decrease is the decrease in sundry debtors considerably
and also increase in sundry creditors and other current liabilities. This must be reviewed and
attempts to reduce the other current liabilities. These attempts shall improve the liquidity position
of organization.
(III) Position of Liquidity or Trend in liquidity :-
Analysis of various liquidity ratios expresses the trend of liquidity over the past twelve years.
Analysis of current ratio reveals that the ratio shown an increasing trend up to 2006-07 but
thereafter it decreased. It was highest in the year of 2008-2009 being 3.97:1 thereafter it has
decreased continuously and comes to 1.09 in 2009-10. This is below the norms. It should be
improve by reducing the other current liabilities and sundry creditors. However current ratio in
many cases does not reveal the real picture of liquidity as the same is quantitative analysis only. It
takes into consideration all the components of current assets (e.g.) inventory and debtors, which
ultimately takes some times for conversion into cash.

(IV) Analysis of the super quick ratio also reveals that the trend is increasing up to 2004-05 but
after that it decreased. It has .71:1 in 2006-07 and then comes to .66:1 except slightly increased in
the year 2008-09 .In the year 2009-10 it is below than the standard norms of 1:1.These leads to
analysis of super quick ratio which is quite relevant in this case.
(V) The results show a gloomy picture in comparison to current & quick ratio. Since super quick
ratio excludes aspects of sundry debtors from the components of current assets in comparison to

72
super quick ratio, hence analysis of sundry debtors needs for the investigation. This aspect is
further summarized and explained in expressing the results of efficiency of working capital used.
(VI) Over all cash management of the sample unit indicates that there is proper maintenance of
records preparation of cash budget in the beginning of the month, proper disbursement procedure,
cash expenditure only against the approval budget, review of cash budget cash flow on day to day
basis no unnecessary tie up of funds etc. All leads to a sound cash management system in case of
sample unit. The cash disbursement for the whole year is planned in the beginning of each
financial year by various projects, units, C.O. offices and corporate office as well as .No capital
expenditure is allowed without approval budget. System norms, steps, rules and conditions are
well designed and laid down for running & maintenance expenditure. In a nutshell cash receipts
and disbursements are well managed.
(VII) Over all receivable management shows a gloomy picture, which indicates inefficiency in
receivable management. However the situation is quite improving due to continuous efforts of
present management. In a nut shell the position of sundry debtors requires more constituent
collection effort, special cell to monitor and review the position incessantly, pressure on various
state electricity department and SEB through central govt. for speed collection of receivable.
EXPECTED CONTRIBUTION FROM THE STUDY

The present study will help the management of the sample unit to take appropriate/ better decisions
in managing the working capital. The study also has some contribution to other interested parties
and other stock holders as better management of working capital leads to improvement in two
important aspects (via) liquidity and profitability . The study can helpful to other similar
organization and enterprises and the industry as a whole as well. The aim and objectives of the
study is to provide right quantum of working capital at right time at right place and from right
source. The most important aspects and contribution from the study are to identify the factors,
elements and components responsible for blockage of funds in W.C. and solutions to such
problems. The study also throws some light towards the factors responsible for slow growth of the
organizations and actions / steps necessary for solutions to those problems.

73
 CONCLUSION
Working capital management is a vital aspect of total financial management as it deals with short-
term investment decision. It is already started in the present the present study that working capital
is to be treated as life blood and controlling nerves center of the business. After analyzing the
various aspects of working capital , it may roughly concluded that the overall working capital
management is quite good over the period of last twelve years on the basis of which we can say
that working capital is managed efficiently in case sample unit. But in recent years it decreases
considerably therefore the efforts have to make to improve this situation. This can easily judges
from the trend of Gross Working Capital (GWC), Networking capital (NWC) and the individual’s
components of current assets and current liabilities. The main objective of working capital
management is to provide right quantum of working capital at right time. So that balance between
liquidity and profitability position can be maintained reasonably without hampering their status.
From the analysis of the present study we may broadly conclude that the liquidity position of the
organization / sample unit is quite sound well balanced and well maintained over the study period.
This was ascertained from the trend of net working capital and various liquidity ratios. At the same
time it is understand that the profitability position of the sample unit is improving rapidly over the
past few years without hampering the liquidity status. This is quite clear of trend of N.P. & profit
ratio.

However the present study suggests that the trend of liquidity is quite improving which includes
large sundry debtors. Sundry debtors are accumulating over the period, which needs some speed
collection efforts. But the debtors are mainly govt. debt and there are little chances of debt on
account of that. Only worrying factors are the corporation is losing opportunity cost of capital on
account of blocked capital tied in sundry debtors.

74
Looking into other two important dimensions of working capital management besides receivable
management, it may roughly conclude that the sample unit is doing well so far as cash
management and inventory management is concerned. So far as the overall growth of the
organization is concerned, the organization has wide scope and opportunities to grow like anything
in recent future. It is mainly due to India is a developing country and facing acute shortage of
power. Accordingly the role of working capital management is also greater on the part of the
management in coming days.

For financing of working capital , the study suggest that the construction projects are to be
completed prior to target which not only reduce cost over runs of income but also the generation
on account of such early completion can be ploughed back as financing the working capital.

The present study on the working capital management of PSU in hydro power has a significant
role for the growth of organization and industry as a whole. NHPC Ltd. is a pioneer organization
in the field of hydropower in India. It generates the pollution free electricity with minimum cost.
Further in the present economic scenario high importance has been given to hydro power due to its
inherited advantages and other forms of power are exhaustible in nature.

75
 (6). Bibliography

Websites:
http://search.nrel.gov/query.html?
col=eren&qc=eren&qm=1&si=0&ht=147982353&ct=741214436
http://connect.in.com
http://www.google.co.in/#hl=en&source=hp&q=nhpc&aq=f&aqi=g4g-s1g4g-
s1&aql=&oq=&gs_rfai=&fp=9b6eac6c91f48023
http://www.nhpcindia.com/English/Scripts/PressRelease.aspx?VId=197

Books & newspaper:-

Financial management (khan and Jain)
Financial management (I.M.Pandey)
Financial management (Kuchal S.C.)

76
CHPTER-7.

Annexure
Balance sheet and Ratio Table
2004-2005 TO 2009-2010

77
POSITION OF CURRENT ASSETS AND CURRENT LIABILITIES
(RS.IN.LAKHS.)Table
4.1 4.1

78
S.
PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
( A)CURRENT
ASSETS
1
Interest accrued but not
due on i investment 15450 1188.46

Inventories 8300 9040 8370 6410 5379 4915 4835.38

Const. WIP 21420 180 110 1050 2658 4287 2721.15

Sundry Debtors 228090 198250 127150 149380 49896 45097 99728.54

Cash &Bank Balances 11170 22060 54170 60230 17437 31168 20299.38

Other Current Assets 2690 5480 13570 7630 40173 8520 6916.77

Loans & advances 16080 18270 24870 2920 23881 29127 28703.54

Sub Total(A) 287750 253280 228240 227620 139424 138564 164393.23

(B)CURRENT
2
LIABILITIE

Sundry Creditors 10420 10660 25860 18970 29419 27081 12341.31

Interest accrued but not
due 11240 10230 8030 3870 7755 7289 11732.69

Other Current Liabilities 39730 11170 7720 14140 49017 30900 21685.15

Provisions 16270 34800 31630 41550 42032 67336 20738.00

Sub Total(B) 77660 66860 73240 78530 128223 132606 42778.22

NET CURRENT ASSETS
3
(NWC) 210090 186420 155000 149090 11201 5958 84997.78

TABLE- 4.2

POSITION OF CURRENT ASSETS AND CURRENT LIABILITIES IN %

79
S. 2009-
PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 AVEAVRAGE

1 CURRENT ASSETS

Interest accrued but not

due on investment 11.15

Inventories 2.88 3.57 3.67 2.82 3.86 3.55 1.67

Const. WIP 7.44 0.07 0.05 0.46 1.91 3.09 0.85

Sundry Debtors 79.27 78.27 55.71 65.63 35.79 32.55 36.98

Cash &Bank Balances 3.88 8.71 23.73 26.46 12.51 22.49 5.26

Other Current Assets 0.94 2.16 5.95 3.35 28.81 6.15 0.87

Loans & advances 5.59 7.21 10.9 1.28 17.13 21.02 21.04

CURRENT
LIABILITIES
2

Sundry Creditors 13.42 15.94 35.31 24.16 22.94 20.42 9.61

Interest accured but not

due 14.47 15.3 10.96 4.93 6.05 5.5 22.54

Other Current
Liabilities 51.16 16.71 10.54 18.01 38.23 23.3 27.06

Provisions 20.95 52.05 43.19 52.91 32.78 50.78 7.46

80
 TABLE -4.3

CALCULATION OF CURRENT, QUICK & SUPER QUICK RATIO (Rs. In Lacs)

2009-
C PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 10 AVERAGE
(A) CURRENT
ASSETS
1 15450

Inventories 8300 9040 8370 6410 5379 4915 2395.50

Const. WIP 21420 180 110 1050 2658 4287 2257.50

Sundry Debtors 228090 198250 127150 149380 49896 45097 60558.17

Cash &Bank Balances 11170 22060 54170 60230 17437 31168 6568.92

Other Current Assets 2690 5480 13570 7630 40173 8520 1212.08

Loans & advances 16080 18270 24870 2920 23881 29127 22839.83

Sub Total(a) 287750 253280 228240 227620 139424 138564 95832

2 (B) CURRENT LIABILITIES

Sundry Creditors 10420 10660 25860 18970 29419 27081 4037.25

Interest accrued but not

due 11240 10230 8030 3870 7755 7289 9612.58

Other Current Liabilities 39730 11170 7720 14140 49017 30900 14080.00

81
 Provisions 16270 34800 31630 41550 42032 67336 4353.83

Sub Total(B) 77660 66860 73240 78530 128223 132606 32083.67

NET CURRENT ASSETS

3
(NWC) 210090 186420 155000 149090 11201 5958 63748.33

4 CURRENT RATIO (CA /CL) 3.71 3.79 3.12 2.9 1.09 1.04 2.06

QUICK RATIO (CA-INV.) /

C5L 3.6 3.65 3 2.82 1.05 1.01 2.01

6 SUPERQUICK RATIO 0.66 0.69 1.27 0.91 0.66 0.90

{CA-(INV.+ DEBTORS ) /
CL}

82
 TABEL4.4

NET PROFIT MARGIN RATIO

(RS.IN
CRORES).

S.N
. PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
1 SALES 1194.40 1075.07 1313.70 1349.60 1324.86 1414.43 1278.68
NET PROFIT
2 AFTER TAXES 305.30 401.20 443.40 470.90 510.50 621.38 458.78
NET PROFIT
3 MARGIN 25.56 37.32 33.75 34.89 38.53 43.93 35.66

TABLE-4.5
Rs. In
Cr.
S.N
. PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
I Net Credit Sales 1194.40 1075.70 1313.70 1349.60 1324.86 1414.43 1278.78
IICost of goods sold 889.10 674.50 870.30 878.70 814.36 793.05 820.00
IIISundry debtors. 1751.80 2363.50 1982.50 1271.50 1493.80 498.96 1560.34
IV Average Debtors. 1563.65 2057.65 2173.00 1627.00 1382.65 996.38 1633.39
V Inventory 42.00 83.00 90.40 83.70 64.10 53.79 69.50
VI Average Inventory 40.80 62.50 86.70 87.05 73.90 58.95 68.32
Debtors Turn Over
VII Ratio(I/IV) 0.76 0.52 0.60 0.83 0.96 1.42 0.85
Average collection
VIII Period(365/VI) 477.84 698.19 603.75 440.02 380.92 257.12 476.31
Inventory Turn Over
IX Ratio(II/VI) 21.79 10.79 10.04 10.09 11.02 13.45 12.86

TABLE-
4.6

83
S.N
. PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
Net profit after
I Taxes 305.30 401.20 443.40 470.90 510.50 621.38 458.78
11257.1 12883.2 20010.0
II Total Assets 0 0 13490.30 15809.80 18615.00 0 15344.23
20077.4
III Capital Employed 7749.86 8877.17 13480.5 15807.8 18613.93 6 14101.12
13229.6
IV Net Worth Capital 5096.60 6134.80 7837.40 9590.60 11106.17 8 8832.54
Return on Assets in
V %( I / II ) 2.71 3.11 3.29 2.98 2.74 3.11 2.99
Return on Capital
Employed in % ( I /
VI III ) 3.94 4.52 7.20 6.02 5.44 6.32 5.57
Return on Share
Holders Equity in %
VII ( I / IV) 5.99 6.54 5.66 4.91 4.60 4.70 5.40

TABLE
-4.7
S.N PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
i Sales 1194.40 1075.70 1313.70 1349.60 1324.86 1414.43 1278.78
11257.1 12883.2 20010.0
ii Total Assets 0 0 13490.30 15809.80 18615.00 0 15344.23
iii Current Assets 2078.6 2877.5 25328 22824 22762 13942.4 14968.75
iv Cash 102.20 111.70 220.60 541.70 602.30 174.37 292.15
v Other Current Assets 208.30 187.70 237.50 384.40 105.50 640.54 293.99
vi Net Working Capital 1470.58 2153.47 1864.20 1550.00 1490.90 112.01 1440.19
Working Capital
Turnover(WTR)
vii (i/vi) 0.81 0.50 0.70 0.87 0.89 12.63 2.73
Current Assets
Turnover(CTSR)
viii ( I /III ) 0.57 0.37 0.05 0.06 0.06 0.10 0.20
Cash Turnover
ix (CTR)( I / IV) 11.69 9.63 5.96 2.49 2.20 8.11 6.68
Misc. Current Asset
x Turnover(MCATR) 5.73 5.73 5.53 3.51 12.56 2.21 5.88
Current Assets To
XI Total Assets(IIII/II) 0.18 0.22 1.88 1.44 1.22 0.70 0.94

84
 NHPC LTD.
SUMMARY OF THE RATIOS
S.N PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
i Current Ratio 3.42 3.97 3.79 3.12 2.90 1.09 3.05
ii Quick Ratio 3.35 3.86 3.65 3.00 2.82 1.05 2.96
iii Super Quick Ratio 0.92 0.71 0.69 1.27 0.91 0.66 0.86
Inventory Turnover
iv Ratio 21.79 10.79 10.04 10.09 11.02 13.45 12.86
Debtors Turnover
v Ratio 0.76 0.52 0.60 0.83 0.96 1.42 0.85
Average Collection
vi Period(ACP) 477.84 698.19 603.75 440.02 380.92 257.12 476.31
Working Capital
vii Turnover(WTR) 0.81 0.50 0.70 0.87 0.89 12.63 2.73
Current Assets
viii Turnover(CTSR) 0.57 0.37 0.05 0.06 0.06 0.10 0.20

85
 Cash Turnover
ix (CTR) 11.69 9.63 5.96 2.49 2.20 8.11 6.68
Misc. Current
Asset
x Turnover(MCATR) 5.73 5.73 5.53 3.51 12.56 2.21 5.88
Current Assets To
Total
XI Assets(CTTR) 0.18 0.22 1.88 1.44 1.22 0.70 0.96
xii Net Profit Margin 25.56 37.32 33.75 34.89 38.53 43.93 35.66
xiii Return On Assets 2.71 3.11 3.29 2.98 2.74 3.11 2.98
Return On Capital
xiv Employed 3.94 4.52 7.20 6.02 5.44 6.32 5.57
Return On
Shareholders
xv Equity 5.99 6.54 5.66 4.91 4.60 4.70 5.39

86