INTRODUCTION OF THE STUDY

Every business needs adequate liquid resources in order to maintain day-to-

day cash flow. It needs enough cash to pay wages and salaries as they fall due and to

pay creditors if it is to keep its workforce and ensure its supplies.

Maintaining adequate working capital is not just important in the short-term.

Sufficient liquidity must be maintained in order to ensure the survival of the

business in the long-term as well.

Even a profitable business may fail if it does not have adequate cash flow to

meet its liabilities as they fall due.

Therefore, when businesses make investment decisions they must not only

consider the financial outlay involved with acquiring the new machine or the new

building, etc, but must also take account of the additional current assets that are

usually involved with any expansion of activity.

Increased production tends to engender a need to hold additional stocks of

raw materials and work in progress. Increased sales usually mean that the level of

debtors will increase. A general increase in the firm’s scale of operations tends to

imply a need for greater levels of cash.

1
 NEED FOR THE STUDY

Working capital is the life blood of the any business, every business requires

funds for mainly two purposes, one for its establishment and other is to carry on its

day-to-day operations. Long-term funds are used to create production facilities

through purchase of fixed assets, such as plant, machinery etc. investments in these

assets represents that part of firm's capital which is blocked on a permanent or fixed

basis and is called fixed capital.

Funds are also needed for the short-term purposes. The firm invests its capital

wealth in fixed assets and current assets. The capital used to finance the business

operations of the firm such as purchasing, producing, and selling is called as working

capital. So the BHEL is maintaining the long term and fixed capital is effective.

OBJECTIVES

 To study the existent system of working capital management in BHEL.

 To examine the feasibility of present system of managing cash,

debtors and inventory in BHEL.

 Suggesting a better way if any for improving management of working

capital.

 To analyze the financial performance of the company, with reference to

its working capital components.

2
 METHODOLOGY

Primary data: Primary data is obtained by having interaction with the personnel

who are working in finance and accounts departments of the organization.

Secondary Data: It has been taken from Annual Reports and the Books and Trade

Journals kept by the Management

 The working capital management mechanism is studied in detail. The

various factors of working capital management arc studied in detail.

 The existing scenario of debtor's management, collection period, cash system,

inventory policies were studied to familiarize with the company polices.

DESIGN OF STUDY:

Working capital management is of vital importance to an organization like

BHEL which deals with its customers like state electricity boards, private

industries and public sectors. Even though its internal resources for

diversification's and for expansion projects supported most of its working capital

requirements, they have designed working capital management by keeping the

nature of the industry and its product life cycle.

The design of study is as follows:

 Streamlining of cash inputs.

 Forecasting of material requirements.

 Keeping the tracks of system of centralize cash collections.

 Existing inventory procurement system for both indigenous nature

and import consignment.

3
 SCOPE OF THE STUDY

 The scope of study is restricted to the following.

 The scope is limited to the operations of BHEL.

 The information obtained from the primary and secondary sources

were limited to BHEL

 The profit and loss A/C, the Balance sheet was of last five years.

 Comparison analysis done in comparison of its sister units.

LIMITATIONS

 The Study is confined to only BHEL Ltd.

 The entire study is based on the financial data that is provided by the

Annual Reports and data kept by the Management.

 Some data used in this project has been obtained orally wherever

written/printed data is not available.

4
CHAPTER-II

PROFILES

5
 PROFILE OF THE COMPANY

BHEL is one of the pioneers in engineering industries in the world. The vital role

played by the BHEL today in the country is the mark of its continuous efforts to

improve the service in the nation by consultancy, manufacturing and offering services

in power sector.

This success story of BHEL however goes back to 1956 when its first plant was set

up in BHOPAL. Three more major plants in HARDWAR, HYDERABAD AND

THRICHIRAPALLI followed this. These plants have been the core of BHEL' s efforts

to grow, diversify, and become one of the most integrated power and industrial

equipment manufacturers in the world. The company now has 14 manufacturing

units, 8 service centers and 4 power sector regional centers, besides project sites spread

all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and

meets the needs of core sector like power, industry, transmission, defense,

telecommunications, oil business etc. Its products have established an enviable

reputation for high quality and reliability. This is due to the emphasis placed all

along on design, engineering and manufacturing to international standards by

acquiring and adopting some of the best technologies developed in its own R&D

centers. BHEL has acquired ISO 9000 certification for quality management and

ISO 14001 certification for environment management. BHEL caters to the needs

of different sectors by designing and manufacturing according to the need of its

clientele in power sector.

6
PRODUCT PROFILE THERMAL POWER PLANT:
Steam turbines, boilers and generators of up to 500 MW capacities to
manufacture boilers and steam turbines with super critical steam cycle parameters and
matching generators up 660MW unit facilities available for 1000MW size.
HYDRO POWER PLANT:
Mini/Micro hydro sets Spherical, butterfly, rotary values and auxiliaries for
hydro station
GAS BASED POWER PLANTS:
Gas turbines and generators up to 260 MW (150) rating Gas turbines based co-
generation and combined cycle system for industry and utility applications
B1OLERS;
Heat recovery steam generators, Pressure vessels, Chemical recovery boilers
for paper industry ranging from capacity of 100 to l00t/day of dry solids.
POWER DEVICES:
High power capacity silicon diodes, Thruster devices and Solar Photovoltaic
Cells.
AVIATION: Light Aircraft.
SYSTEM AND SERVICES: Power generation system Transmission system
Transportation system Industrial system.
PIPING SYSTEM:
Constant load hangers, clamp and hanger components, variable, spring hanger
for power stations up to 850 MW capacities combined cycle plants, industrial boilers
and process industries
PUMPS:
Pumps for various applications to suit utilities unto a capacity of 660 MW.
Boiler feed pumps. Boiler feed booster pumps. Emergency oil pumps. Condensate
pumps.

7
SWITCH GEAR:
Switch of various types for indoor and outdoor application and voltage rating
up to 400 KV. Vacuum circuit breakers. Gas insulators switch gears.
BUS DUCTS:
Bus with associated equipment to suit generator power output of utilities up to
500 MW capacities.
TRANSFORMERS:
Power transformers for voltage up to 400 KV. HVDC transformers and
reactors of up to + or - 500 KV.
CAPACITORS:
Power capacitors for industrial and power systems of up to 250 KVA rating for
application up to 400 KV. Coupling /CVVT capacitors for voltages up to 400 KV.
COMPRESSORS:
Centrifugal compressors of varying size driven by Steam Turbine for industrial
applications handling almost all types of gases.
SECTORS:

Power is the core sector of BHEL and comprises of thermal nuclear, gas.

diesel, and hydro business. BHEL has taken India from a position of total

dependence on overseas sources to complete self-reliance in power sector.

BHEL now has the capability to set up power plants from the concept to

commissioning. Today BHEL accounts for nearly 65% of the total installed

capacity in the country.

BHEL possesses the technology and capability to produce thermal sets with

super critical parameters up to 1000 MW units rating and gas turbine generators

sets up to 240 MW rating. Co-generation and combiner cycle plants have been

introduced to achieve higher plant efficiencies.

8
 BHEL manufactures 235 MW nuclear turbine generator sets and has

commenced production of 500 MW nuclear turbine generator sets.

INDUSTRY SECTOR:

BHEL contributes major capital equipment and systems like captive power

plants centrifugal compressors, drive turbines, heavy castings etc.

TRASM1SS1ON SECTOR:

Equipment for high voltage direct current systems is being supplied for

economic transmission of bulk power over long distances.

OIL SECTOR:

BHEL has been supplying onshore drilling rigs, Christmas tree valves and

wellheads up to a rating of 1000 PSI to ONGC and OIL India. It can also supply

subsea wellheads, super deep drilling rigs, desert rigs and hail rigs.

TRANSPORTATION SECTOR:

Most of the trains in the Indian railways are equipped with BHEL’s traction and traction

control equipment. India's first underground metro at Calcutta runs on drives .and

controls supplied by BHEL.

TELECOMMUNICATION:

BHEL also manufactures MAX -L, MAX- XL system days drawn

DOT technology and has plans to make other ranges of telecommunication

equipment as well.

NCES:

Technologies have been' developed and commercialized for exploiting non-

conventional and renewable sources of energy to serve remote and rural areas.

9
These include polo voltaic cell, solar power based pumps, lighting and heating

system. BHEL has also emerged as a major manufacturer of wind electric

generators up to 250 KW.

INTERNATIONAL OPERATIONS:

BHEL has exported its equipment and services to over 50 countries. In Malaysia,

BHEL has supplied 80% of the Boilers besides several hydro sets and gas turbines.

BHEL equipments are in operation in Malta, Cyprus, Saudi Arabia, Oman, Egypt,

Cyprus, Libya, Greece, Bangladesh, Sri Lanka, Iraq, and Australia etc. BHEL

exports turnkey power projects of thermal, hydro, and gas based types, substation

projects, rehabilitation projects, besides a wide variety of products like insulators,

transformers, valves, motors, traction generators and services for renovation and

modernization and operation power station.

RESEARCH AND DEVELOPMENT:

BHEL is one of the tow companies worldwide involved in development of

Integrated Gasification Combined Cycle (IGCC) technology, which would usher in clean

coal technology. BHEL R&D efforts have produced several new products. Some of the

recent successful R&D products are automated storage retrieval systems, automated

guided vehicles for material transportation, automatic robotic welding systems.

HUMAN RESOURCES DEVELOPMENT:

The greatest strength of BHEL is its highly skilled and committed people.

Every employee is given equal opportunity to develop himself and improve his position.

Continuous training and retaining, a positive work culture and participative style of

management have led to the development of a motivated Work force and enhanced

productivity and quality.

10
COMPANY'S VISION. MISSION AND VALUES VISION

A world class, innovative, competitive and profitable engineering

enterprise providing total business solutions.

MISSION:

To be the leading engineering enterprise providing quality products

systems and services in the field of energy, transportation, industry, infrastructure

and other potential areas.

VALUES

 Meeting commitments made to external & internal customers.

 Foster learning, creativity & speed of response.
 Respect for dignity & potential of Individuals.
 Loyalty and pride in the company.
 Team playing.
 Zeal to excel.
 Integrity and fairness in all matters.
GROWTH:

To ensure a steady growth by enhancing the competitive edge of BHEL in

existing business, new areas and international operation so as to fulfill national

expectations from BHEL.

PROFITABILITY:

To provide a reasonable and adequate return on capital employed, primarily

through improvements in operational efficiency, capacity utilization and

productivity and generate adequate internal resources to finance the companies

growth.

11
CUSTOMER FOCUS:

To build a high degree of confidence by providing increased value for

this money through international standards of product quality, performance and

superior customer service.

PEOPLE ORIENTATION:

To enable each employee to achieve his potential, improve his capabilities,

perceive his role and responsibilities, participate, and contribute positively to the

growth success of the company. To invest in human resources continuously and

be alive to their needs

TECHNOLOGY:

To achieve technology excellence in operations by development of

indigenous technologies to and efficient absorption and adaptation of imported

technologies to .suit business needs and priorities and provide a competitive advantage of

the company.

IMAGE:

To fulfill the expectations which stockholders like government as owner,

employees, customers and the country at large have from BHEL.

OBJECTIVES OF B.H.E.L:

To achieve and maintain1 a leading position as supplies of Quality Equipment,

Systems and services to serve the National & International Markets in the field of

Energy. The areas of interest would be Conversion, Transmission, and Utilization &

Market Leadership.

12
SWOT ANALYSIS

The strengths, weakness, opportunities and threats, which are experienced by

BMK1-as a growing concern, have been summed up in the following lines

STRENGTHS:

 Vast pool of trained manpower.

 Excellent state of all facilities

WEAKNESS:

 Excess manpower.

 System implementation inadequate.

 No financial parlage.

 Inadequate compensation payable to employees.

OPPORTUNITIES:

 Growing power sector machinery.

 Liberalization has opened up the market.

 Navaratna company status.

 Dominate players in domestic market.

 Export potential growing.

THREATS:

 Liberalization -Entry of MNC’s private sector- More compensation.

 MNC' s weaning away good employees with good attractive salaries.

 Govt. Taxation policy- against manufacturing sectors.

 Poor infrastructure.
13
 Dumping of goods.

CHAPETR III

THEORETICAL BACKGROUND ABOUT THE

TOPIC

14
 WORKING CAPITAL MANAGEMENT

Working capital management involves the relationship between a firm's short-

term assets and its short-term liabilities. The goal of working capital management is to

ensure that a firm is able to continue its operations and that it has sufficient ability to

satisfy both maturing short-term debt and upcoming operational expenses. The

management of working capital involves managing inventories, accounts

receivable and payable, and cash. To pay current liabilities as they fall due. This

implies a clearly designed risk policy to determine the required liquidity level.

Why Firms Hold Cash

The finance profession recognizes the three primary reasons offered by

economist John Maynard Keynes to explain why firms hold cash. The three

reasons are for the purpose of speculation, for the purpose of precaution, and for

making transactions. All three of these reasons stem from the need for companies

to possess liquidity.

Speculation

Economist Keynes described this reason for holding cash as

creating the ability for a firm to take advantage of special opportunities that if

acted upon quickly will favor the firm. An example of this would be

purchasing extra inventory at a discount that is greater than the

carrying costs of holding the inventory.

15
Precaution

Holding cash as a precaution serves as an emergency fund for a

firm. If expected cash inflows are not received as expected cash held on a

precautionary basis could be used to satisfy short-term obligations that the cash

inflow may have been bench marked for.

Transaction

Firms are in existence to create products or provide services.

The providing of services and creating of products results in the need for cash

inflows and outflows. Firms hold cash in order to satisfy the cash inflow and

cash outflow needs that they have.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:

(i) Gross Working Capital

(ii) Net Working Capital.

In the broad sense, the term working capital refers to the gross working capital

and represents the amount of funds invested in current assets. Current assets are

those assets, which in the ordinary course of business can be converted into cash

within a short period of normally one accounting year.

In a narrow sense, the term working capital refers to the net working capital. Net

working capital is the excess of current assets over current liabilities.

Working Capital = Current Assets - Current Liabilities

16
 Net working capital may be positive or negative. When the current assets

exceed the current liabilities, the working capital is positive and the negative

working capital results when the current liabilities are more than the current assets.

Current liabilities are those liabilities which are intend to be paid in the ordinary

course of business within a short period or normally one accounting year out of the

current assets or the income of the business.

The gross working capital concept is financial or going concern concept

whereas net working capital is an accounting concept of working capital. These two

concepts of working capital are not exclusive; rather both have their own merits.

Gross concept is very suitable to the company form of organization where there is

divorce between ownership, management and control. The net concept of working

capital may be suitable only for proprietary form of organizations such as sole-trader

or partnership firms. However, it may be made clear that as per the general practice net

working capital is referred to simply as working capital.

TYPES OF WORKING CAPITAL

Working Capital may be classified in two ways:

(a) On the basis of concept.

(b) On the basis of time.

• On the basis of concept, working capital

1. Gross working capital.

2. Net working capital.

17
• On The basis of time, working capital can be further classified into

1. Permanent or fixed working capital.

2. Temporary or variable working capital.

Permanent working capital:

Permanent or fixed working capital is the minimum amount, which is required

to ensure effective utilization of fixed facilities and for maintaining the circulation of

current assets. There is always a minimum

Level of current assets, which is continuously required by the enterprise to

carry out its normal business operations. For example, every firm has to maintain a

minimum level of raw materials, work-in-process, finished goods and cash balance.

This minimum level of current assets is called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is

temporary, fluctuating or variable working capital. This portion of the required working

capital is needed to meet fluctuations in demand consequent upon changes in production

and sales as a result of seasonal changes.

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's

lifeblood and every manager's primary task is to help keep it flowing and to use the

cash flow to generate profits. If a business is operating profitably, then it should, in

theory, generate cash surpluses. If it doesn't generate surpluses, the business will

eventually run out of cash and expire.

The faster a business expands the more cash it will need for working capital

and investment. The cheapest and best sources of cash exist as working capital right within
18
business. Good management of working capital will generate cash will help improve

profits and reduce risks. Bear in mind that the cost of providing credit to customers

and holding stocks can represent a substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash - Inventory

(stocks and work-in-progress) and Receivables (debtors owing you money). The main

sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables)

has two dimensions ...TIME and MONEY. When it comes to managing working capital

TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect

monies due from debtors more quickly) or reduce the amount of money tied up (e.g.

reduce inventory levels relative to sales), the business will generate more cash or it will

need to borrow less money to fund working capital. Therefore, you could reduce the

cost of bank interest or you'll have additional free money available to support

additional sales growth or investment. Similarly, if you can negotiate, improved terms
19
with suppliers e.g. get longer credit or an increased credit limit; you effectively create

free finance to help fund future sales.

IF YOU ... THEN...

Collect receivables (debtors) faster You release cash from the cycle
Collect receivables (debtors) slower Your receivables soak up cash
Get better credit (in terms of duration or amount) You increase your cash resources
from suppliers
Shift inventory (stocks) faster You free up cash
Move inventory (stocks) slower You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers,

plant, vehicles etc. If you do pay cash, remember that this is now longer

available for working capital. Therefore, if cash is tight, consider other ways of

financing capital investment - loans, equity, leasing etc. Similarly, if you pay

dividends or increase drawings, these are cash outflows and. like water flowing

down a plughole, they remove liquidity from the business.

More businesses fail for lack of cash than for want of profit.

ADVANTAGES OF ADEQUATE WORKING CAPITAL

20
 Working capital is the lifeblood and nerve centre of business. Just as

circulation of blood is essential in the human body for maintaining life, working

capital is very essential to maintain the smooth running of a business. No business

can run successfully without an adequate amount of working capital. The main

advantages of maintaining adequate amount of working capital are as follows:

1. Solvency of the business: Adequate working capital helps in maintaining

solvency of the business by providing uninterrupted How of production.

2. Goodwill: sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

3. Easy loans: A concern hacking adequate .working capital, high solvency and good

credit standing can arrange loans from banks and others on easy and favorable terms,

4. Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence it reduces costs.

5. Regular payment of salaries, wages and other day-to-day

commitments company which has ample working capital can make regular payment of

salaries, wages and other day- to-day commitments which raises the morale of its

employees, increases their efficiency, reduces wastage's and costs and enhances

production and profits.

6. Regular supply of raw materials: Sufficient working capital ensures

regular supply of raw materials and continuous production.

7. Ability to face Crisis: Adequate working capital enables a concern to face

business crisis in emergencies such as depression because during such periods,

generally, there is much pressure on working capital.

21
8. High morale: Adequacy of working capital creates an environment of security,

confidence, and high morale and creates overall efficiency in a business.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

Every business concern should have adequate working capital to run. its business

operations. It should have neither redundant or excessive working capital nor inadequate

nor shortage of working capital. Both excessive as well as short working capital positions

are bad for any business.

1. Excessive working capital means idle funds which earn no profits for the business

and hence the business cannot earn a proper rate of return on its investments.

2. When there is redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft, waste and

losses.

3. Excessive working capital implies excessive debtors and detective credit

Policy, which may cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organization.

5. When there is an excessive working capital relation with the banks and other

financial institutions may not be maintained,

6. Due to low rate of return on investments the value of shares may also fall.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1. A concern, which has inadequate working capital, cannot pay its short-term liabilities

in time. Thus it will loose its reputation and shall not be able to get good credit facilities.
22
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.

3. It becomes difficult for the firm to exploit favorable market conditions

and undertake profitable projects due to lack of working capital.

4. The firm cannot pay day-to-day expenses of its operations and it creates

inefficiencies, increases costs and reduces the profits of the business.

5. It becomes impossible to utilize efficiently the fixed assets due to non-

availability of liquid funds.

6. The rate of return on investments also falls with the shortage of working capital.

DETERMINANTS OF WOKING CAPITAL

1. Natures or Character of Business

2. Size of Business/Scale of Operations

3. Production Policy

4. Manufacturing Process

5. Working Capital Cycle

6. Rate of Stock turnover

7. Credit Policy

8. Rate of Growth of Business

9. Earning Capacity and Dividend Policy

MANAGEMENT OF CASH

Cash Management is one of the key areas of working capital management. Cash, the

liquid asset is of vital importance to the daily operation of business firms. Crucial for the

solvency of the business it is referred to as the “life blood of business”. Firm needs cash

to meet the needs of daily transactions, to take advantage of unexpected investment

opportunities. While cash serves these functions, it is an idle resource with an opportunity
23
cost. The liquidity provided by the holding cash is at the expense of profits that could

accrue from alternative investment opportunities. Hence, the firm should plan and control

cash carefully.

OBJECTIVES:

• Bringing the company's cash resources within control as quickly and efficiently as

possible.

• Achieving the optimum conservation and utilization of the funds.

Accomplishing the first goal requires, establishing accurate, timely forecasting and

reporting system, improving cash collections and disbursements and decreasing the

cost of moving funds among affiliates.

Cash management deals with the following:

1. Cash inflows and outflows

2. Cash flows within the firm

3. Cash balances held by the firm at a point of time

Cash Management needs strategies to deal with following various facets

of cash:

CASH PLANNING:

It is a technique to plan and control the use of cash. A projected cash flow statement may

be prepared, based on the present business operations and anticipated future activities. The

cash inflows from various sources may be anticipated and cash outflows will determine

the possible uses of cash.

CASH FORECASTS & BUDGETING:

24
A cash budget is the most important device for the control of receipts and

payment of cash. A cash budget is an estimate of cash receipts and

disbursements during a future period. It is a forecast of expected cash intake and

outlay.

Normally a cash budget consists of

1. Cash collections

2. Cash payments

3. Cash balances

OPTIMUM CASH BALANCE:

A firm has to maintain a minimum amount of cash for settling the dues in

time. By preparing Cash Budget, we determine the optimum cash balance. If a firm

maintains less cash balance then its liquidity position will be weak.

INVESTMENT OF SURPLUS FUNDS:

There are, sometimes, surplus funds with the

companies, which are required after sometime. These

funds can be employed in liquid and risk free securities to

earn some income. There are number of avenues where

these funds can be invested.

Unit 1964 Scheme:

 Ready forwards

 Investment in Marketable Securities

 Bald Financing

25
 MANAGEMENT OF ACCOUNTS RECEIVABLES

Accounts receivables represent an extension of credit to customers, allowing them

a reasonable period, in which to pay for the goods / services which they have

received. The receivables represent an important component of the current assets of

a firm. Firms grant trade credit to customers, because they expect the investment in

receivables to be profitable, either by expanding sales volume or by retaining sales

that otherwise would be lost to competitors. A planned credit-policy can assist

in increasing corporate profitability. When considering relaxing credit terms,

management must weigh up the profits of increased sales with the cost of

additional investment in debtors.

OBJECTIVE:

The objective of receivables management is to promote sales and profits

until that point is reached where the return on investment in further funding of

receivables is less than the cost of funds raised to finance that additional credit.

COSTS:

The major categories of costs associated with the extension of credit

and accounts receivables are:

1. COLLECTION COST:

These costs are administration costs incurred in collecting the

receivables from the customers to whom credit sales have been made.

2. CAPITAL COST:

The increased level of accounts receivable is an investment in assets. They

have to be financed thereby involving a cost. The cost on the use of additional
capital to support, credit sales, which apparently could be profitably employed

elsewhere, are therefore a part of the cost of extending credit or receivables.

3. DELINQUENCY COST:

This is the cost, which arises out of the failure of the customer to meet their

obligations when payment on credit sales becomes due after the expiry of the period of

credit.

4. DEFAULT COST:

Sometimes the firm may not be in a position to recover the dues because of the

inability of the customers, such debts are treated as bad debts and are written off as

they cannot be realized, such costs are known as default costs associated with credit

sales and accounts receivables.

BENEFITS:

The benefits are the increased sales and profits anticipated because of a more

liberal policy. When the firm extends trade credit, the impact of liberal policy is

likely to have two forms. First, it is oriented to sales expansions. In other words, the

increase in sales would be either from the existing customer or from new customers.

Secondly, the extension of credit may be to protect its current sales against emerging

customers. Because of increased sales, the profits of the firm will be increased.

The three crucial decision areas in receivables management are:

CREDIT POLICIES:

The credit policy of a firm providing the framework to determine:

 Whether or not to expend credit to a customer and

 How much credit to expend.

The credit policy decision of a firm has two broad dimensions:

1. Credit standards and

2. Credit analysis.

A firm has to establish and use standards in making credit decisions,

develop appropriate sources of credit information and methods of credit analysis.

CREDIT TERMS:

The second decision area in accounts

receivables management is the credit terms. The

speculations under which goods are sold on credit are

referred to as credit terms.

Credit terms have three components:

A: CREDIT PERIOD: Time duration for which trade

credit is extended.

B: CASH DISCOUNT: The amount which a

customer can take advantage of.

C: CASH DISCOUNT PERIOD: It refers to the

duration during which the discount can be availed of.

COLLECTION POLICIES:

The third area in the account receivable management

is collection policies. These policies cover two

aspects:

1. Degree of effect to collect overdue

2. Type of collection effects.

The collection policy should aim at accelerating

collections from slow payees and reducing bad debt

losses

MANAGEMENTOF INVENTORY

Inventory is the third major

component of current assets. Inventories are stock of

the product a company is manufacturing for sale and

components that make up the product. Every enterprise

needs inventory for smooth running of its activities. It

serves as a link between production and distribution

process.

RAW MATERIALS: Raw materials inventories

are those units, which have been purchased for

converting into finished product through the

manufacturing process.

WORK-IN-PROGRESS: They are semi-

manufactured products. They represent products that

need more work before they become finished products

to sale. It includes raw materials, subcontracting costs

and various manufacturing costs.

FINISHED GOODS: They are those inventories,

which are completely manufactured products, ready for

sale.

OBJECTIVES:

The main objectives of inventory

management are operational and financial. The

operational objective means that the materials and

spares should be available in sufficient quantity so

that work is not interrupted for want of inventory. The

financial objectives means that investments in

inventories should not remain idle and minimum

working capital should be locked in it.

The following are the objectives of the inventory

management:

1. To ensure continuous supply of materials, spares

and finished goods.

2. To avoid both overstocking and under stocking of

inventory.

3. To maintain investments in inventories at the

optimum level as required by the operational and

sales activities.

4. To keep materials cost under control.

5. To eliminate duplication in ordering and replenishing

stocks.
6. To design proper organization for inventory

management.

7. To minimize losses through deterioration, pilferage,

wastages and damages

8. To ensure right quality goods at reasonable

prices.

9. To ensure perpetual inventory controls so that

materials shown in stock ledgers should be

actually lining the stocks.

10. To facilitate furnishing of data for short-term and

long-term planning and control of inventory.

MOTIVES FOR HOLDING INVENTORY:

TRANSACTION MOTIVE:

Every firm has to maintain some fuel of inventory

to meet the day-to-day requirements of sale, production

process, customer demand etc.

PRECAUTIONARY MOTIVE:

The firm should keep some inventory for

unforeseen circumstances also. For example, the fresh

supply of raw materials may not reach the factory due to

strike by the transports or due to natural calamities in a

particular area.

SPECULATIVE MOTIVE: It may be required to

keep some inventory in order to capitalize an opportunity

to make profits Example; sufficient level of inventory

may help the firm to earn profit in case of expected

shortage in the market.

 RATIO ANALYSIS

Ratio analysis is a widely used tool of financial analysis. It is defined as the

systematic use of ratio to interpret the financial statement so that the strengths

and weaknesses of a firm as well as its historical performance and current

financial condition can be determined.

TYPES OF RATIOS

Ratios for the purpose of Working Capital Management can be classified

into two broad categories:

 Liquidity Ratios

 Turnover Ratios.

LIQUIDITY RATIOS

The liquidity ratios measure, the ability of a firm to meet its short-term

obligations and reflect the short-term financial strength/solvency of a firm.

The ratios, which indicate the liquidity of a firm, are:

 Current Ratio

 Acid Test / Quick Ratio

 Cash Ratio
CURRENT RATIO

The current ratio is the ratio of total current assets to total current liabilities.

It is obtained by dividing current assets by current liabilities.

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

The higher the current ratio, the larger the amount of rupees available per

rupee of current liability, the more the firms ability to meet current obligations

and greater the safety of funds of short-term creditors. Thus current ratio, in a

way, is a measure of margin of safety to the creditors.

Although there is no hard and fast rule, conventionally, current ratios of 2:1 i.e., for

every one rupee of current liabilities, there should be two rupees of current assets, are

considered satisfactory.

ACID -TEST OR QUICK RATIO

The Acid test ratio is the ratio between quick assets and current liabilities

and is calculated by dividing the quick assets by the current liabilities. Quick

assets also known as liquid assets represent the liquidity of the line, this implies

the ability of the firm to pay its short-term obligations as and when they become

due. By exclusion of inventory and pre-paid expenses from current assets, we get

quick assets.

QUICK ASSETS
ACID TEST RATIO = CURRENT LIABILITIES
Conventionally, a quick ratio of 1:1 is considered satisfactory. It is

generally thought that if quick assets are equal to current liabilities then the

concern may be able to meet its short-term obligations.

CASH RATIO OR ABSOLUTE LIQUID RATIO

 The cash ratio is the ratio of cash and bank balance to the current

liabilities. This ratio is the most rigorous and conservative test of a firm's liquidity

position. Conventionally, a ratio of 0.5:1 i.e., for every rupee of current liability

there should be 50 paisa of cash and bank balance, which is considered

satisfactory.

CASH & BANK BALANCES

CASH RATIO = CURRENT LIABILITIES

TURNOVER RATIOS

Another way of examining the liquidity is to determine how quickly

certain current assets are converted into cash. The ratios to measure these are

referred to as Turnover Ratios.

Relevant Turnover Ratios are...

 INVENTORY TURNOVER RATIO

 DEBTORS TURNOVER RATIO

 CREDITORS TURNOVER &ATIO

 WORKING CAPITAL TURNOVER RATIO

INVENTORY TURNOVER RATIO

It is computed by dividing the cost of goods sold by the average inventory.

INVENTORY TURN OVER RATIO = COST OF GOODS OLD

AVGERAGE VENTORY
This ratio indicates how fast inventory is sold; A high ratio is good from

the viewpoint of liquidity and vice versa. A low ratio would signify that inventory

does not sell fast and stays in the warehouse for a long time.

DEBTORS TURNOVER RATIO

 It is determined by dividing the net credit

sales by average debtors outstanding during the

year. Thus,

NET CREDIT
SALES
DEBTORS TURNOVER RATIO = AVERAGE
DEBTORS

This ratio measures how rapidly debts are

collected. A high ratio is indicative of shorter time lag

between credit sales and cash collections. A low ratio

shows that debts are not being collected rapidly.

CREDITIORS TURNOVER RATIO

It is determined by dividing the net credit

purchases by average creditors outstanding during the

year. Thus,

NET
CREDIT
PURCHASES
CREDITORS TURNOVERRATIO =
AVERAGE CREDITORS

The ratio indicates the velocity with which the

creditors are turned over in relation to purchases.

Generally, higher the creditors' velocity better it is or

otherwise lower the creditors velocity, less favorable

are the results.

WORKING CAPITAL TURNOVER

RATIO

It is determined by dividing the cost of goods

sold by working capital.

Thus,

COST OF
GOODS SOLD
SOLD WORKING CAPITAL =
WORKING CAPITAL
TURNOVER RATIO

Working capital turnover ratio indicates the

velocity of the utilization of net working capital. This

ratio indicates the number of times the working

capital is turned over in the course of the year this

ratio measures the efficiency with which the working

capital is being used by a firm. A higher ratio

indicates efficient utilization of working capital and a

low ratio indicates otherwise.

 CHAPTER- IV

DATA ANALYSIS

DATA ANALYSIS
 As the inventories, loans and advances and cash balances are decreased in 2008-

09 when compared to 2007-08, therefore the changes in working capital is decreased

in 2007-08 and the total current assets are increased in 2007-08 when compared to

2006-07 there has been increase in working capital since the current assets are more

than current liabilities.

CASH FLOW OF BHEL. HYDERABAD (Rs. Lakhs)

DISCRIPTION 200 4-05 2005-06 2 0 0 6 -0 7 2 0 07 -0 8 2008-09

C A S H IN F L O W :
A d v an ces/P P 22778 19348 13916 16357 29443
D ispa tch es B H E L 23229 9 02 3 29458 13781 32748
D i s p a tc h e s N o n - 78171 104863 114577 1 1 1 843 125412
SUB TOTAL 1241 133234 157951 141981 187603
E x p o rt In c en tiv e s 2816 3886 3870 2481 3275
O ther R eceipts 550 580 502 2370 5M8
D
T oI St aCl RC IaPs hT IIOn fNl o w 2004-05
127544 2005-06 137700 2006-07 162323 2007-08 2008-09
146832 191476
C A S H IN O UFTL OF W L O: W :
A
MdAvTanEces/P R IA LPS : 22778 19348 13916 16357 29443
D
1NispaD . tch
B Hes EL BHEL 2 3 27476 29 95396
02 3 28557 9458 13781
8301 32748
9723
D i s p a tc h e
IN D . N O N B H E L s N o n - 78171
25995 104863
28442 114577
30864 128623
1 1 843 125412
39656
SImUports
B T OGTIF AL 31541 1241 133234
40512 157951
40670 141981
48624 187603
34868
E x p o rt In
C u stom s D u ty c en tiv e s 2
5271 8 1 6 3886
10822 3870
6451 2481
3922 3275
1 08 1 •
O
F Ather
B . SRU eceipts
B CONT 550
1127 580
1065 502
1345 21274
370 5M8
1370
T oOtTa lACL aM s hAITn E f lR
ow IA LS 127544
71410 137700
86237 162323
87887 146832
90744 191476
96430
C A S HnnOelUPTaym
P erso FLO entsW: 23392 31682 27088 18583 20207
M A T
S ales T axE R IA L S : 4366 5410 4194 3910 4735
1N D . BD
E xcise Huty
EL 7 0 47476 9 5396
7770 8557
7587 8301
8368 9723
9900
IN
E xD p e. nNseOs NB H BH E LE L 23228
5995 28442
3961 34 03 86 64 4 28623
4275 39656
3975
Im
E x ports
p e n seG s IFN on BHEL 31541
9453 47902
0512 48 07 16 67 0 48667
8624 34868
9013
C
D uIRstom s D u ty
. Interest 5271
27 10822
57 6451
532 3922
125 1 08 1 •
FCAOB R .P S. U
OB F FC. O InNterest
T 1127
800 1065
1552 1345
2108 1274
(463) 1370
(260)
T O T A LL OMFA O T ETH R IER
ALS 74 18 43 1 05 858334
6237 85 74 85 8 79 943465
0744 96430
47570
P erso nn el P aym ents 23392 31682 27088 18583 20207
T o t a l O u t F l o w 119725 144571 142476 134209 144000
E X PSSales
. T ax 4366 5410 4194 3910 4735
S U R P L U S /(D E F E C IT ) 7 8 1 9 (6871) 19847 12623 47476
E xcise D uty 7049 7770 7587 8368 9900
E x p e n se s B H E L 3228 3961 4364 4275 3975
E x p e n se s N o n B H E L 9453 7902 8716 8667 9013
D IR . Interest 27 57 532 125
C O R P . O F F . In terest 800 1552 2108 (463) (260)
T O T A L O F O TH ER 48315 58334 54589 43465 47570
T otal O u t F low 119725 144571 142476 134209 144000
EXPS.
S U R P L U S /(D E F E C IT ) 7819 (6871) 19847 12623 47476
 INVENTORY OF BHEL, HYDERABAD

DISCRIPTION 2004-05 2005-06 2006-0 7 20 07-08 2008

MATERIAL

Raw material
INVENTORY & 8460 9447 12060 16646 1

Indirect materials 1329 1667 1470 1317 1

Materials in Transit 5394 5534 7131 10262 1
Transfer in Transit 1588 1255 1811 2029 1
Materials 1106 1574 1371 1297 1

withScrap & Others

Fabricators 106 66 55 111 8
Total of 17983 , 19543 23898 31662 3

mat.Production
Inventory
Work In Progress 19694 20201 29779 25812 1
Finished Goods 6195 9048 4669 15320 8
Total of Production 25889 37249 34448 41132 2

Total Inventory
Inventory 56792 58346 72794 6
Turnover No:of days 131937 153205 137838 1

of T.O 157 139 193 133

OPERATING CYCLE OF BHEL

HYDERABAD
 DISCRETION 2004-05 2005-06200 6-07 2 007-08 2008-09
RESOURCES
Funds from 3252 3252 3252 3252 3252
Reserves
CORP. Office & 92857 83839 93293 102496 110026
Inter Unit (3869) 17180 1362 (2066) (3 1 896)

Def. Credit
Balances (NET) 738 573 386
Loans 2764 299 (24!)
TOTAL 95004 104570 98404 104255 81768
UTILISATION

FIXED ASSETS
OF FUNDS
Gross Block
Op. Bal 29404 32037 33057 34825 35711
Additions 263 1020 1767 886 2808
Deletions
Cl. Bal 32037 33057 32824 35711 38519
Less Cum Dep. 23906 25412 26965 28616 30159
Net Block 8131 7645 7859 7095 8360
Capital WIP 883 250 344 1793 2053

TOTAL (A) 9014 7895 8203 8888 92 10505

WORKING

Current assets
CAPITAL
Inventories 43744 56606 58130 72540 63246
Book Debts 84558 84880 85001 81237 82829
Cash/ Bank 845 957 898 1281 473
Loans & 14287 12859 11763 11611 9104
SUB TOTAL (B) 143434 155302 155792 166669 155652
Current Liabilities
Advances 29116 28822 31636 32228 44162

fromSundry Creditors
Customers 19484 22543 29738 27610 20467
Other 4295 4549 2824 2612 7841
PARTICULARS 2004-05 2005-06 2006-07 20 07-08 2008-09
Current Assets
nventory 121 156 138 192 132
debtors 233 235 203 215 173
Cash 2 3 2 3 1
oans & Advances 77 56 51 55 239
Total (A) 433 450 394 465 545

Current Liabilities
Advances from Customers 80 80 75 85 92
Sundry Creditors 105 98 129 130 87
Other liabilities 23 20 12 12 34
3
rovisions 30 23 21 32 26
Total (B) 238 221 237 259 p39

Net Working Capital (A-B) 195 229 157 206 306

Provisions 10843 8376 8931 1197 12520
SUB TOTAL © 63738 64290 73129 7442 84990
NET WORKING CAPITAL (B)- 79696 91012 82663 9224 70662
Def.Rev. Expends. 6294 5663 7538 3125 601
TOTAL 9500 10457 98404 1042 81768
 2004-05 2005-06 2006-07 20 07-08 2008-09
EARNINGS
Sales less returns 4065. 4544. 1184 3397. 3171.7
Despatches made to customers 6387. 7291. 8600. 10457.
Income from external erection 442.8 456.1 526.0 407.3 545

and Revenue
services from works contract : 1.3 0.0 0.0 0.0
Jobs done for internal use ; 56.9 19.2 24.4 75 1 465
Other revenues 611.6 713.2 638.8 797.8 706.9
Accretion/(desertion) to W1P 259,4 1093. (221. 704.5 (1429.

Transfergoods
& finished out to other divisions. '' 2329. 6 905.8 9) 2945. 1378. 8) 3274.3
TOTAL 1415 1502 1576 1536 16772.
OUTGOINGS
Raw materials 6249. 7788. 7629. 6967. 7552.1
Stores & spares 3343. 193.1 209.6 253.0 24.85
Transfer in other divisions 701.7 549.7 876.0 830.1 9723
Employees remuneration & 1686. 3192. 2067. 2069. 2286.8
Mfg. & other expenses 2563. 2665. 2593. 2713. 3439.6
Interest 79.4 167.4 305.4 (25.9 48
Depreciation 150.4 1546 161.7 164.9 165.9
DRE written off 125.9 393.6 546.5 441.2 552.8
Provisions 179.4 (626. 327.4 580.1 (27.4)
Prior period item 8.4
Profit before tax 2065. 545.5 1044. 1368. 1577.3
TOTAL 1415 1502 1576 1536 16772.
Profit before tax 2065. 545.5 1044. 1368. 1577.3
Balance of profit brought 8404. 9283. 8381. 9329: 10249.

LESS:
forward from last year 0 8 6 0 3
A. 1 . Net prior period 0.0 0.0 0.0 0.0 0.0
2, Provision t/fd to unit
a. Taxation 1185.8 1447.3 97.2 447.7 824.3
 PROFIT &LOSS A/C OF BHEL,

HYDERABAD

2004 -05 2005-06 2 0 0 6 -0 7 2 0 07 -0 8 2008-09

CURRENT ASSETS
Inventories 43744 56606 58130 72540 63246
Book Debts 84558 84880 85001 81237 82829
Cash/ Bank Balances 845 957 898 1281 473
Loans & Advances 14287 12859 11763 11611 9104
SUB TOTAL (A) 143434 155302 155792 166669 155652
Current Liabilities
Advance from Customers 29116 28822 31636 32228 44162

Sundry Creditors 19484 22543 29738 27610 20467

Other Liabilities 4295 4549 2824 2612 7841

Provisions 10843 8376 8931 11977 12520

SUB TOTAL (B) 63738 64290 73129 74427 84990
NET WORKING (A-B) 79696 91012 82663 92242 70662

CAPITAL (B)-(C)
 CURRENT RATIO:

(Rs. In Lakhs)

YEAR CURRENT ASSETS CURRENT LIABILITIES RATIO

2004-05 143434 63738 2.25

2005-06 155302 64290 2.41

2006-07 155792 73129 2.13

2007-08 166669 74427 2.23

2008-09 155652 84990 1.83

RATIO

2.5 2.41
2.25 2.23
2.13
2 1.83

1.5
RATIO
1

0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

The ratio is equal to or near to 2:1, i.e., and current assets

double the current liabilities are considered to be

satisfactory. In the context of BHEL, Hyderabad the

current ratio is more than standard. It has always been

 above 2, Thus it is an indication of efficiency of the

firm of maintaining current assets.

QUICK RATIO:

(Rs. in Lakhs)
YEAR QUICKASSETS CURRENT LIABILITIES RATIO

2004-05 99690 63738 1.56

2005-06 98696 64290 1.53

2006-07 97662 73129 1.33
2007-08 94129 74427 1.26
2008-09 92406 84990 1.08

RATIO

1.6 1.56 1.53

1.4 1.33
1.26
1.2 1.08
1
0.8 RATIO
0.6
0.4
0.2
0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:

As a convention Quick Ratio of 1; 1 is considered

satisfactory. From the above we can see that Quick Ratio

for the past five years has been above or equal to "1"

which is good, even though it was decreasing.

 CASH RATIOS:

(Rs. in Lakhs)

YEAR LIQUID CURRENT RATIO

2004-05 ASSESTS
845 LIABILITIES
63738 0.013
2005-06 951 64290 0.014
2006-07 898 73129 0.012
2007-08 1281 74427 0.0 1 7
2008-09 473 84990 0.005

RATIO

0.018 0.017
0.016
0.014
0.014 0.013
0.012
0.012
0.01
0.008 RATIO

0.006 0.005
0.004
0.002
0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

The acceptable norm for this ratio is 50% or 0.5:1 or 1:2.

Though the ratio for 2008-09 has shown a slight increase

i.e., 0.05.
 INVENTORY TURNOVER RATIO :

(Rs. In Lakhs)

YEAR TURNOVER AVG RATIO

2004-05 132265 43744 3.02
INVENTORY
2005-06 131972 56606 2.33
2006-07 153205 58330 2.66
2007-08 137838 72540 1.9
2008-09 1 74490 63246 2.76

RATIO

3.5
3.02
3 2.76
2.66
2.5 2.33

2 1.9
RATIO
1.5

0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

The inventory turnover ratio measures how

quickly the inventory is sold. In 2005-06 there has been a

decrease in the inventory turnover ratio. In these years

inventory has not been sold fast and stayed on the self

for a longer period. In 2007,inventory ratio has

increased, due to the increase in net sales.

 In 2008 the ratio is decreased .But in 2008 the ratio

is increased to 2.76 due to increase in sales.

INVENTOTRY CONVERSION PERIOD:

YEAR NO. OF DAYS IN A 1NVERTORY TURN INV . CONV.

YEAR OVER RATIO PERIOD

2004-05 365 9.7 38

2005-06 365 9.05 40

2006-07 365 2.06 177

2007-08 365 1.89 193

2008-09 365 2.08 175

RATIO

193
200
177 175
180
160
140
120
100
80
60 38 40
40
20
0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:

From the above we can say that the Inventory

Conversion Period has shown a steady increase from

2004-05 to 2007-08, there was a fall in 2008-09.

DEBTORS TURNOVER RATIO: (Rs.

in Lakhs)

YEAR TURNOVER AVG RATIO

2004-05 132265 DEDTORS
78147 1.7
2005-06 131972 84719 1.5
2006-07 153205 84940 1.8
2007-08 137838 83119 1.7
2008-09 1 74490 82033 2.1

RATIO

2.5
2.1
2 1.8
1.7 1.7
1.5
1.5

0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:

The debtor’s turnover ratio of BHEL Hyderabad

had been considerably decreasing from 1.7 in the

accounting year 2005 to l.5 in 2005, which increased to

1.80 in 2007 and again decreased to 1.7 in year 2008. But

in the current year it again drastically increased to 2.1.

AVERAGE COLLECTION PERIOD:

YEAR NO.OF DAYS IN A DEBTORS AVG.

YEAR TURNOVER COLL.
2004-05 365 1.7 214
2005-06 365 1.5 243
2006-07 365 1.8 203
2007-08 365 1.7 215
2008-09 365 2.1 174

243
250
214 215
203
200
174

150

100

50

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

The Average Collection Period i.e., the duration

provided for the collection of debts has been increasing

from 214 days in 2004-05 to 243 days in 2005-06 but it

decreased in 2006-07 to 203 days and again it has

increased to 215 days in the 2007-08 and it decreased to

174 in the financial year 2008-09.

CREDITORS TURNOVER RATIO: (Rs. Lakhs)

YEAR PURCHASES AVG. RATIO

CREDITORS
2004-05 62496 16678 3.75
2005-06 77888 21013.5 3.71
2006-07 76291 26140.5 2.92
2007-08 69672 28674 2.43

2008-09 75521 24038.5 3.14

4 3.75 3.71
3.5 3.14
2.92
3
2.43
2.5

1.5

0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:

Here the Creditors Turnover Ratio was 3.75 in the

year 2004-05 and it decreased to 3.7 in 2005-06 and to 2.9

in 2006-07, and has decreased rapidly to 2.43 in 2007-08,

and it increased to 3.14 in the financial year 2008-09.

AVERAGE PAYMENT PERIOD:

(Days)

YEAR NO. OF DAYS CREDITORS A.P.P

IN A YEAR TURNOVER RATIO

2004-05 365 3.75 97

2005-06 365 3.71 98
2006-07 365 2.92 125

2007-08 365 2.43 150

2008-09 365 3.14 116

160 150

140
125
116
120
97 98
100

80

60

40

20

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

The Average payment Period has steadily

increased from 98 days in 2005-06 to 150 days in 2007-

08, and it decreased to 116 in the financial year 2008-09.

WORKING CAPITAL TURNOVER RATIO:

(Rs. In Lakhs)

YEAR TURNOVER WORKING RATIO

CAPITAL
2004-05 132265 79696 1.65
2005-06 131972 91012 1.45
2006-07 153205 82663 1.85
2007-08 137838 92242 1.49

2008-09 174490 70662 2.46

2.46
2.5

2 1.85
1.65
1.45 1.49
1.5

0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation

A higher Working Capital Turnover Ratio

indicates efficient utilization of working capital. But for

BHEL Hyderabad the ratio has been decreasing from 1.65

in 2004-05 to 1.45 in 2005-06, although it showed a slight

increase of 1.85 in 2006-07 it again decreased to 1.49 in

2007-08 and drastically increased to 2.46 in the current

financial year.
RAW MATERIAL INVENTORY TURNOVER RATIO: (Rs. Lakhs)

YEAR RAW RAW RATIO

MATERIAL MATERIAL
CONSUMERD INVENTORY
2004-05 69099 8461 8.17
2005-06 83287 9446 8.82
2006-07 83866 12060 6.95
2007-08 64672 16647 3.88

2008-09 75521 16350 4.61

10
9
8
7
6
5
4
3
2
1
0

2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:
The Raw Material Inventory Turnover Ratio for

the organization has been increasing at a fast pace from

8.17 in 2004-05 to 8.82 in 2005-06, but in the subsequent

years, there was a decline in the ratios. The ratio of the

current year is 4.61.

WORK-IN-PROCESS INVENTORY TURN OVER RATIOS:

YEAR COST OF WIP RATIO

PRODUCTION INVENTORY
2004-05 107986 19694 5.48
2005-06 119326 20201 5.90
2006-07 132623 29779 4.45
2007-08 118357 25812 4.58
2008-09 151482 18689 8.10

RATIO
9
8
7
6
5
4
3
2
1
0

2004-05 2005-06 2006-07 2007-08 2008-09

 Interpretation:

The Work In Progress Inventory Turnover Ratio has been decreasing from 5.48

in 2004-05 to 5.90 in 2005-06. This has increased and decreased subsequently in the

later years but less in comparison with the financial year 2008-09.

FINISHED GOODS INVENTORY TURNOVER

RATIO: (Rs in Lakhs)

YEAR COST OF FINISHED RATIO

GOODS SOLD GOODS

2004-05 110749 6801.5
INVENTORY 16.3
2005-06 124808 7621.5 16.4
2006-07 139705 6858.5 20.4
2007-08 124418 9994.5 12.4

2008-09 158669 1 1 800 13.4

RATIO

25

20

15

10

0
2004-05 2005-06 2006-07 2007-08 2008-09
 Interpretation

The Finished Goods Inventory Turnover Ratio of BHEL

Hyderabad has been fluctuating in all the five years of the

study made.
 BALANCE SHEET OF BHEL, HYDERABAD (in lakhs)

DISCRETION 2004-05 2005-06 2006-07 2007-08 2008-09

RESOURCES
Funds from CORP. 3252 3252 3252 3252 3252
Reserves & Surplus 92857 83839 93293 102496 110026
Inter Unit Balances (3869) 17180 1362 (2066) (3 1 896)
Def. Credit 738 573 386
Loans 2764 299 (24!)
TOTAL 95004 104570 98404 104255 81768
UTILISATION OF
FIXED ASSETS
Gross Block
Op. Bal 29404 32037 33057 34825 35711
Additions 263 1020 1767 886 2808
Deletions
Cl. Bal 32037 33057 32824 35711 38519
Less Cum Dep. 23906 25412 26965 28616 30159
Net Block 8131 7645 7859 7095 8360
Capital WIP 883 250 344 1793 2053 92
TOTAL (A) 9014 7895 8203 8888 10505
WORKING CAPITAL
Current assets
Inventories 43744 56606 58130 72540 63246
Book Debts 84558 84880 85001 81237 82829
Cash/ Bank Balances 845 957 898 1281 473
Loans & Advances 14287 12859 11763 11611 9104
SUB TOTAL (B) 143434 155302 155792 166669 155652
Current Liabilities
Advances from 29116 28822 31636 32228 44162
Sundry Creditors 19484 22543 29738 27610 20467
Other 4295 4549 2824 2612 7841

Provisions 10843 8376 8931 11977 12520

SUB TOTAL © 63738 64290 73129 74427 84990
NET WORKING 79696 91012 82663 92242 70662
Def.Rev. Expends. 6294 5663 7538 3125 601
TOTAL 95004 104570 98404 104255 81768
b. Dividends 0,0 0.0 0.0 0.0 0.0
c. Others 0.0 0.0 0.0 0.0 0.0
B. Development Rebate Reserve 0.0 0.4 0.0 0.0 0.0
C. Investment Allowance Reserve 0.0 0.0 0.0 0.0 0.0
Balance of profit carried to 9283.8 8381.6 9329.0 10249.3 11002.2

Balance Sheet

2003-04 2003-04 2004-05 2005-05 2006-07

EARNINGS
Sales less returns 4065.7 4544.0 11848.7 3397.8 3171.7
Despatches made to customers 6387.2 7291.3 8600.6 10457.9
Income from external erection and 442.8 456.1 526.0 407.3 545

Revenue
services from works contract : 1.3 0.0 0.0 0.0
Jobs done for internal use 56.9 19.2 24.4 75 1 465
Other revenues 611.6 713.2 638.8 797.8 706.9
Accretion/federation) to W1P & 259,4 1093.6 (221.9) 704.5 (1429.8)

Transfer
finished out to other divisions. ''
goods 2329.4 905.8 2945.7 1378.1 3274.3
TOTAL 14154,3 15023.3 15761.8 15361.3 16772.6
OUTGOINGS
Raw materials 6249.6 7788.8 7629. 1 6967.2 7552.1
Stores & spares 3343.8 193.1 209.6 253.0 24.85
Transfer in other divisions 701.7 549.7 876.0 830.1 9723
Employees remuneration & benefits 1686.2 3192.3 2067.7 2069.3 2286.8
Mfg. & other expenses 2563.9 2665.1 2593.9 2713.3 3439.6
Interest 79.4 167.4 305.4 (25.9) 48
Depreciation 150.4 1546 161.7 164.9 165.9
DRE written off 125.9 393.6 546.5 441.2 552.8
Provisions 179.4 (626.8) 327.4 580.1 (27.4)
Prior period item 8.4
Profit before tax 2065.6 545.5 1044.6 1368.0 1577.3
TOTAL 14154.3 15023.3 15761.8 15361.3 16772.6
Profit before tax 2065.6 545.5 1044.6 1368.0 1577.3
Balance of profit brought forward 8404.0 9283.8 8381.6 9329:0 10249.3

LESS:
from last year
A. 1 . Net prior period 0.0 0.0 0.0 0.0 0.0
2, Provision t/fd to unit
a. Taxation 1185.8 1447.3 97.2 447.7 824.3
 CHAPTER V

FINDINGS, CONCLUSIONS & SUGGESTIONS

FINDINGS:

The findings of the study of Working Capital Management of BHEL

Hyderabad are as follows:

1. The Net Working Capital was Rs. 79696 Lakhs in 2004-05, which increased

to Rs. 91012 Lakhs in 2005-o6hough it decreased in 2006-07 to 82663.

2. Again it increased to 92242 in 2007-08 and then it decreased to 70662 in the year

2008-09.

3. Current Assets have steadily increased from Rs. 143434 Lakhs in 2004-05 to Rs.

155302 Lakhs in 2005-06 and steadily increased so on to 155652 till 2008-09; this is

because the investment in inventory has steadily increased over the past five years-

4. The maintenance of Cash and Bank Balances has been fluctuating.

5. The debtors constitute nearly 50% of the total current assets this shows that

the organization is providing more credit terms to its customers.

6. As the Current Assets increased over the past five years, the Current

Liabilities have also comparably increased from Rs. 63738 Lakhs in 2004-

2005 to Rs. 84990 in 2008-09.

7. The organization is able to maintain both the Current & Quick Ratio above

the standard norms i.e., 2:1 and 1:1.

8. The Inventory Turnover Ratio has been decreasing Iron 3.02 in 2004-05 to 2.33

2005-06, and so on decreasing till 2005-06. This shows that the rate at which the

stock is turned over, during the past five years is becoming lesser and lesser. Thus the

inventory conversion period has been increasing.

9. The Debtors Turnover Ratio has been decreasing in the past five years; this

shows that the debts are not collected promptly. Thus the collection period given
to the customers has increased from 191 days in 2004-05 to 220 days in 2008-

Bharat Heavy Electrical Limited

10. The organization's Creditors Turnover Ratio has also been decreasing because of

the prompt payments made by the organization to the outsiders till 2005-06,and again

it increased to 3.14 in 2008-09 which is also revealed by the Average Payment Period.

11. Though the Working Capital Turnover Ratio is decreasing over the last

four years still the company is maintaining a positive ratio of turnover to

working capital, but it increased to 2.46 in 2008-09.

12. The raw material consumed in the organization has been steadily

increasing from Rs. 56653 Lakhs in 2004-05 to Rs. 83866 Lakhs in 2008-09

but the consumption in the current year has declined to Rs. 77154 Lakhs.

13. The finished goods inventory has always been fluctuating from the past

five years.

15. The turnover of BHEL Hyderabad as compared to the financial year

2004- has been increased to 42225 lakhs, in the current year; this is due to

more production and profits.

 CONLUSSIONS:

1. The net working capital of BHEL is good. But the company's working capital

turnover ratio shows the utilization of working capital is not satisfactory.

2. The liquidity position of the company is satisfactory. Even though the

company's current ratio does not equal the standard norm.

3. BHEL is using the moving average method in valuing the slick. Apart from the

LIFO and FIFO methods can be used for the purpose of the stock valuation.

4. DUEL follows a centralized cash management system but it has some

disadvantages. It is imperative to have perfect condition between the

regional operating divisions in the commercial departments of the BHEL.

4. The turnover of BHEL Hyderabad as compared to the financial year

2004-05 has been increased to 42225 lakhs, in the current year, this is due

to more production and profits.

5. There has been increasing and decreasing rate in the Work in Progress

Inventory Turnover Ratio, which is mainly due to the decrease in the

manufacture cycle time for the last four year and increased from 4.58 in

the year 2006-07 to 8.10 in the Year 2007-08 which shows

increase in manufacture cycle time.

 SUGGESTIONS:

1. It is suggested that the company should concentrate on the management

of current assets and current liabilities more effectively.

2. If sales order increases the High quality position of the company also

improves.

3. By observing the material inventory, there has been a considerable

increase in the raw materials and the components. The inventory should be

reduced to the maximum extent by following procedures like "just- in-time",

import substitution. As far as possible the raw material should be brought as

and when necessary.

Steps also should be taken to reduce the scrap, which has been

increasing over the years. Necessary measures should be taken for the disposal

of the scarp as soon as possible.

4. The debtors constitute nearly 50% of the total current assets. To the company

this is difficult to manage the accounts receivables. Company should collect the

debts as soon as possible.

5. Company's average collection period of debtors is satisfactory when

compared to previous years. But the company should strive to minimize the

period future.

6. Majority of the sundry debtors constitute state electricity board and

public sector undertakings. Some contract should enter with electricity boards

such that the necessary Power will be supplied by them for producing the goods
necessary with regards to the other public sector undertaking also mutual

exchange of services can be done whenever possible.

7. It should be applied to the government that some aid is granted directly to

BHEL with regard to electricity boards and other public sector unit so that the

previous debts will be recovered.

8. There has been reduction in W-I-P inventory also which is mainly due to

decrease in manufacture cycle time. Thus, it can be recommended reducing

the cycle time to possible extent.

9. There should be revision of credit policy on sales and liquidity to reduce

the debtors there by increase efficiency in collection performance.

 BIBLIOGRAPHY

• FINANCIAL MANAGEMENT
BY I M PANDEY

• PRINCIPLES OF MANAGEMENT ACCOUNTING

BY Dr. S.N.MAHESHWARI

• BHEL ANNUAL REPORT 2008-09

• www.investopedia.com

• www.studyfinance.com