A Report on

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN INTERNATIONAL BUSINESS

Working Capital Management

PREFACE

As a matter of fact every management student has to undergo practical training in an approved business or organization for not less than six weeks normally in the summer vacation under the guidance of Professional managers, as to become aware of the real life business situations and the environment. To fulfill the said objective I was sent to the BHEL, Jhansi for my On the Job practical Training by our Training Coordinator. The duration of my training was from 07 Aug. 2009 to 25 Sept. 2006. During this period I visited various departments of BHEL, Jhansi to study their process of functioning & organization and also doing a project on The study of Working Capital Management to know the procedure of working Capital Management in BHEL.

Place: - BHEL, Jhansi

ACKNOWLEDGEMENT
We offer our gratitude to all those who have spent their precious time, expressed keen interest and given continued encouragement throughout the study enabled the successful completion of my ON THE JOB practical training in BHEL, Jhansi. Special thanks are due to our project co-ordinator Mr. Shailendra (Accounts Officer) for his inspiring guidance, valuable help and angelic support for the completion of our project in WORKING CAPITAL MANAGEMENT IN BHEL, Jhansi. We would like to extend our gratitude to the management and staff of BHEL, Jhansi for their co-operation during our training.

TABLE OF CONTENTS
1. INTRODUCTION (i) (ii) 2. 3. 4. 5. BHEL as a whole BHEL, JHANSI

DEPARTMENTATON IN BHEL, JHANSI FINANCE DEPARTMENT IN BHEL, JHANSI INTRODUCTION OF WORKING CAPITAL CASH MANAGEMENT (i) (ii) Introduction Cash management in BHEL, Jhansi

6.

RECEIVABLE MANAGEMENT (i) (ii) Introduction Receivable management in BHEL, Jhansi

7.

INVENTORY MANAGEMENT (i) (ii) Introduction Inventory management in BHEL, Jhansi

8.

ANALYSIS OF WORKING CAPITAL

BHARAT HEAVY ELECTRICALS

A Brief Introduction

In the post Independence era when India was moving towards industrialization the major thrust of the govt. was in the core sector and this sector was given to the public sector. With this objective, Heavy Electricals (I) Limited was setup in Bhopal in August, 1956 with a view to reach self sufficiency in the industrial product and power equipment. This plant was setup under technical collaboration of M/s AEI, U.K.

Three more plants were subsequently setup Tiruchy, Hyderabad and Haridwar with Soviet and Czechoslovakian assistance in May 1965, Dec 1965 and Jan 1967 respectively. As there was need for an integrated approach for the development of power equipment to be manufactured in India, Heavy Electronics Ltd. Bhopal was merged into BHEL in 1974.

BHEL has now become the largest Engineering and Manufacturing Company. Its headquarters is located at Delhi and there are 14 manufacturing units.

BHEL OBJECTIVES
A dynamic is one which keeps its aim high adopts itself quickly to changing environment. So here we are in BHEL. The objectives of the company have been redefined in the corporate plan for the 90s.

BUSINESS MISSION
To maintain leading position as supplier of quality equipment, systems and services in the field of conversion, transmission, utilization and conversion of energy for application in the areas of electric power, transportation, oil & gas explorations and industries. Utilize companys capabilities and resources to extend business into allied areas and other priority sector of the economy like defense, communication and electronics.

GROWTH
To ensure a steady growth by enhancing the competitive edge of BHEL in existing business new areas and international market so as to fulfill national expectation from BHEL.

PROFITABILITY
To provide a reasonable and adequate return on capital employed, primarily through improvement in operational, efficiency, capacity utilization and productivity and generate adequate internal resources to finance the companys growth.

FOCUS
To build a high degree of customer confidence by providing increased value for his money though International standards of product quality performance and superior customer service.

PEOPLE ORIENTATION
To enable each employees to achieve his potential, improve his capabilities perceive his role and responsibilities and participate and contribute to the growth and success of the company. To invest in human resources and continuously and alive to there need.

TECHNOLOGY
To achieve technological excellence in operation by development of indigenous technologies and efficient absorption and adoption of imparted technologies to
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suit business and priorities and provide competitive advantage to the company.

IMAGE
To fulfill the expectation which stakes holders like government as owner. Employees, customers and the country at large have from BHEL.

BUSINESS AREAS
BHEL covers a wide area of business. These areas are mentioned below.

POWER
Provide a gamut of equipment for Thermal, Hydro and Nuclear Power Plants. Range includes products and systems for the power generation, transmission and utilization.

TRANSMISSION
BHEL is manufacturing transmission equipments for all voltage rating including the 400 KV class transformers switch gears, control and relay panel, insulators, capacitors and other substation equipments.

INDUSTRY
Offers a comprehensive range of electrical, electronic and mechanical equipment for a host of industries fertilizers, petrochemicals, refineries, paper, sugar, rubber, cement, coal, steel, aluminum and mining.
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TRANSPORTATION
BHEL offers a variety of transportation equipment to meet the growing needs of country. 65% of Indian Railways are equipped with BHEL manufactured traction equipment. Underground metro also runs on drives and control supplied by BHEL. BHEL has taken up the manufacturing of locomotive to provide a pollution free transportation. BHEL also offers a battery operated passenger van to Delhi Government.

OIL AND GAS

Equipment for oil and gas exploration and transportation is manufactured by BHEL. The range covers super deep drill rigs with matching draw works and hosting equipment.

NON CONVENTIONAL
BHEL is playing a vital role in helping to harness the vest renewable sources of solar, wind and biogas energy. BHEL has supplied several water heating system, windmills generators and photo voltaic system.

TELE COMMUNICATION
BHEL has entered the field of telecom with electronics PABX system based on indigenous technology from C-DOT.

MANUFACTURING TECHNOLOGIES
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BHEL has 14 manufacturing plants, which are spread different parts of the country having unique manufacturing and testing facilities, CNC machines, turbine blade shape system, system bener, 8000-ton hydraulic press, heavy-duty lathe mailing machines and many more are available.

ACTIVITY PROFILE OF BHEL

POWER SECTOR PROJECTS
Thermal sets and auxiliaries. Steam generators and auxiliaries. Industrial fans. Electrostatic Precipitators. Air pre-heaters. Nuclear power equipment. Hydro sets and auxiliaries. Motors Transformers Rectifiers Pumps Heat exchange Capacitors
10

 Porcelain/Ceramic insulators Seamless steel tubes Castings and forgings

SYSTEM/SERVICES
Turnkey power station Data acquisition system Power system HVDC commissioning system Erection and commissioning system Modernization and rehabilitation

TRANSPORTATION SECTOR
Diesel electric generators AC/DC locomotives and loco shunters Traction system for Railways Electric trolley buses

INDUSTRY SECTOR
Boilers Valves
11

 T G Sets Power devices Solar cells Photo Voltaic cells Gas turbines Off rigs Blow out preventers Wind mills Control system for electric devices

12

BHARAT HEAVY ELECTRICALS LIMITED JHANSI UNIT

By the end of 5th five-year plan, it was envisaged by the planning commission that the demand for power transformer would rise in the coming years. Anticipating the countrys requirement BHEL decided to set up a new plant, which would manufacture power and other type of transformers in addition to the capacity available at BHEL, Bhopal. The Bhopal Plant was engaged in manufacturing of transformers of large rating and Jhansi unit would concentrate on power transformer upto 50 kVA, 132 kV Class and other transformers like Instrument Transformers, Traction Transformers for Railway etc. This unit of Jhansi was established around 14 km from the city on the N.H. No. 26 on Jhansi Lalitpur road. It is called second generation plant of BHEL set up in 1974 at an estimated cost of Rs. 16.22 crores inclusive of Rs. 2.1 crores for township. Its foundation was laid by Late Mrs. Indira Gandhi the Prime Minister on 9th January 1974. The commercial production of the unit began in 1976-77 with an output of Rs. 53 Lacs. This plant of BHEL is equipped with the most modern manufacturing processing and testing facilities for the manufacture of power, special transformer and Instrument
13

transformers, Diesel shunting Locomotives and AC/DC Locomotives. The layout of the plant is such that it is well streamlined to enable smooth material flow from the raw material stages to finished goods. All the feeder bays have been laid perpendicular to main assembly bay and each feeder bay raw material smoothly gets converted to sub assemblies which after inspection are sent to main assembly bay. The raw material that are produced for manufacture are used only after thorough material testing in the testing lab and with strict quality checks at various stages of productions. This unit of BHEL is basically engaged in the production and manufacture of transformers of various type and capacities with the growing competition in the transformer section, in 1985-88 it under took the repowering of diesel, but it took a complete year for the manufacturing to began. In 1987-88, BHEL has progressed a step further in undertaking the production of AC Locomotives and subsequently it is manufacturing AC/DC Locomotives also.

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SECTIONS OF BHEL JHANSI UNIT

BHEL has many departments, while production and Administrative departments are separate. Broadly speaking BHEL, Jhansi has two production categories. Transformer Section 2. Loco Section
1.

TRANSFORMER SECTION:
In the transformer plant there are ten bays:

Bay 0, 1& 2: These are fabrication shops established in

1978 and mainly deals with fabrication work of transformers and locomotives.

15

Bay 3:

It is splitted into two parts, half is the machine shop and the second half is for bus duct. Bus duct are used to transformer electricity from the generator to transformer.

Bay 4: Bay 5:

Here is the winding work of the power transformer & dry type transformer carried out. Basically it is core and punch section but in a part of it cast resin coil encapsulation plant is situated. The coils of dry type transformer are casted, cut and finally prepared.

Bay 6:

It is also engaged in two processes, one half is the traction transfer assembly.

Bay 7:

In this bay, the dry transformers are manufactured and various types of insulation are prepared to be used in the transformers.

Bay 8:

This bay was established in the year 1974. It is one of the earliest bays to setup. It is involved in the manufacturing of instruments, transformers like 132 kv and 220 kv voltage/current transformers. ESP transformers are also manufactured here. This is one of the largest bay in the unit engaged in the assembly of power and rectifier transformers. The time taken for assembly ranges from 4-12 weeks.

Bay 9:

LOCO SECTION
The other section, locomotives department is one of the most important departments in factory. It deals with the manufacture and production of following types of locomotives. 1. AC locomotives 2. AC/DC locomotives
16

3. Thryster type locomotives 4. Diesel electric locomotives shunting locomotives (DESL) 5. Diesel shunting/Engine of various capacities and haulage The unique modern machines available in Jhansi unit are as follows: CNC cropping line machines Vapour phase drying system Computer ICM 6040 and 6080 and IRISHI 40/20 with graphic facilities. Bogie frame machining centre CNC axle turning lathe Facing and centering machines Wheel forcing press CNC pipe bending machines

PROFILE OF BHEL JHANSI UNIT

Products
1. 2. 3. Power Transformer Special Transformer ESP Transformer

Rating
Upto 220 kV Class 250 MVA Upto 110 kV 100 kV, 1400 mA
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4. 5.

Freight Loco Transformer ACEMU Transformer

3900 to 5400 kVA & 6500 kVA (3 Phase) Upto 1000 kVA 25 kV(1 Phase) 1385 kVA (3 Phase) Upto 3150 kVA Upto 15.75 kV Generating Voltage. VT & CT upto 220 kV Class. Upto 2600 HP. 5000 HP.

6. 7. 8. 9.

Dry Type Transformer Bus-duct Instrument Transformer Diesel electric Locomotives

10 AC/DC Locomotive . 11 Over Head Equipment cum . Test Car.

GROWTH OF PRODUCTION AND MILESTONES

Year
1976-77

Milestone
Start of Instrument Transformer production.
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1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Start of Traction Transformer and Power Transformer (upto 132 kV) Start of HFTT type freight Loco Commissioning of 2,500 kV DG Set (due to server Power Cuts). Start of ESP Transformer. Start of 220 kV Power Transformer. Achieved Break Even. Start of Bus-duct Start of dry type transformer. Re-powering of Diesel Loco Started. Start of new Diesel Loco Manufacturing. Manufacturing facilities for AC Loco. Crossed 100 crore target. Successful design and manufacturing of 450 HP 3 Axel Diesel CCI Manufacturing of first 2600 HP Diesel for NTPC. Successful Design and Development of 5000 HP Thyristor control Locomotive. Unit has been awarded ISO-9001 certificate for quality systems. 240 MVA Power Transformer Produced first time. AC/DC Locomotive first time in India. 100th Loco Manufactured. 250 MVA Transformer produced first time. Developed overhead equipment test

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Exported one DESL loco to Malaysia 1999-00 Diesel

20

FINANCE DEPARTMENT IN BHEL, JHANSI

A sound financial management is the crux of the efficient management of a business enterprise and financial management on scientific and sound lines in a prime consideration of BHEL. The Finance/Accounts Department of the company controls all the financial operations. That is directed at improving profitability and internal resources generation through optional utilization of man, material, machines, tools and money. According to its various functions the Finance/ Account Department is divided into following sections: i) Price Store Ledger(PSL) ii) Supply Bill iii) iv) Cash Pay

v) Books Budget and MIS vi) vii) viii) Sales Miscellaneous and Revenue Internal Audit

ix) Export Incentives, Sales Tax and Income Tax

21

x) Provident Fund xi) Works xii) Travelling Allowance

Price Store Ledger(PSL)

PSL section is entrusted with the job of material pricing and determination of material consumption. PSL are used for the material accounting as well as their financial accounting. The documents involved are: -

SRV Store Receipt Voucher MIV Material Issue Voucher SRN Store Return Note MTV Material Transformer Note RCDV Receipt cum Dispatch Voucher

Passing of Bills
The Bills Passing process starts after the account section gets the purchase order, SRVs and bills from suppliers. The accountants section then makes payment. Terms of Payment are of three kinds: i) 10% in advance payment
22

ii) 100% after receipt and acceptance iii) Partial advance and the remaining after the receipt

and acceptance

Foreign Purchase
There are certain items, which are to be imported. A license is required for such items. The license can be acquired from DGTD. There is also a provision for forward cover.

Cash
This section is responsible of banking of all the money

worth received by the company from the costumers and disbursement of all authorized payment on behalf of the company to suppliers, contractors in form cheques, cash, drafts, postal orders etc. It is also concerned with payment of salaries, wages and other personal payments of employees.

Cash section prepares these statements for management information: -

Daily cash flow > Direction collection of sales.

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 Weekly Cash inflow > outflow during week Statement of pending bills of cash section status of margin money. Monthly cash flow forecast for 3 months.

Operating result statement. Statement guarantee. of outstanding letter of credit & bank

Daily bank transfer statement. Bank reconciliation statement is also prepared.

BHEL has centralized cash credit system.

Pay Section
It is assigned the job of payment of salaries and other

personal payments to employees it looks after provident fund, gratuity and bonuses insurance facilities extend to employees. Employees leave and encashment, this section official deals other travelling welfare

reimbursement claims.

expenses. It is also entrusted with clearance of medical

24

 Books, Budget and MIS

General ledger is the consolidated list of general entries. As soon as the general voucher is received, the general ledger is prepared. In the general ledger, receipt and expenditure both are recorded. This section prepares section wise and monthly Trial Balance. After the preparation of general ledger and trial balance, P&L Account and the Balance Sheet are prepared yearly. The Balance sheet is prepared in accordance with the companys act.

Two types of Audits are done by the BHEL: i) Internal Audit ii) Government Audit

Budget
Budget is a target setting for operations. There are two types of Budget prepared by BHEL:
25

1.

Revenue

Budget:

It

consists

of

consolidated

production programmed &related expenses to carry out that programme.

2.

Capital

Budget: It includes the fixed assets.

Preparation of budget is done at three levels: i) Internal Level: Each department is sent information control. ii) Corporate Level: Budget of BHEL unit is sent to the corporate office. iii) Government Level: Budget of BHEL is also sent to Government level. about the budgeted expenses provided to the department. It is necessary for

Management Information System

Three types of information system are generated in the BHEL: i) ii) Internal for the Unit For the Corporate Office

iii) For Government Every month information is generated regarding allocation of funds on various aspects for each department
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and is sent to every department. Information is generated mainly for control purpose. Other information generated is: i) ii) Cash Flow Inventory Level (non moving and slow moving items) iii) Inventory of finished goods

Cost Section

This section is responsible for accounting and reporting of costs. It determines direct labour rates and Engineers rates and overheads recovery factors of manufacturing, engineering, commercial and administration for cost estimation. The cost accounting is done to record and collect cost for work orders and product level information. It prepares material/labour overheads consumption statements. It furnishes cost reports to management about:

1. 2. 3.

Profitability Variance Performance

Product wise/ Order wise. Estimated and Actual Cost Efficiency and operating results

27

Sales Section
The accounting of sales is done in this section. The

activity

of

this

section

starts

when

the

commercial

department issues a work order. Work order part II (Financial) summarizes the financial terms of the contract. It contains the information like the name of customer & consignee, description of goods to be produced and sold, quantity, sales value, terms of delivery and payment, price variation clause, sales tax, excise duty, liquidates damages, Bank guarantee, fight etc. with the part II W.O. details. Apart from that the terms and conditions embodied in W.O. part II as regard adjustment of advances, deferred debts and calculation of PVC, Excise duty and Sales tax must also be complies with. Sales section submits the bills to the customers as desired by Commercial either direct or through Financial such as Banks.

This Section does the necessary accounting for the bills raised; money collected from customers in form of advance or sale proceeds.

Miscellaneous and Revenue

Miscellaneous wing of this section deals with the

payment of advances to employees going on official tours, LTC etc. Payment to transporters, welfare activities, security
28

services, repairs and maintenance, daily wages, furniture, departmental and other petty expenses.

The revenue wing of this section with recovery of rent, electricity and water charges for other facilities from the salary of the employees.

Internal Audit
BHEL is having its own team of internal auditors, who

to

unearth

the

discrepancies

in

accounting,

check

periodically the books of accounts as well as schedules forming part of accounts.

Export Incentives, Sales Tax and

Income Tax
This section deals with export procedures of finished goods. It is entrusted to get licenses for export. It is also responsible for claim of duty draw back and export incentives. This section also looks the import of raw materials that forms par to finished good.
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It also assesses of sales tax, income tax and other matters related to custom duty.

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INTRODUCTION TO WORKING CAPITAL

Working capital refers to a firms investment in short term assets-cash, short term securities, accounts receivable and inventories. - Weston Brigham Working capital can be classified either on the basis of its concept or on the basis of periodicity of its requirement.
(I)

&

On the basis of concepts there are two concepts of working capital: 1. Gross Working Capital 2. Net Working Capital

Gross Working Capital

Gross working capital refers to the firms investment in current assets. Current assets are assets that can be converted into cash within an accounting year. Current assets include cash and bank balance, Short-term securities, debtors, bills receivables and inventory.

31

The Gross Working Capital concept focuses attention on two aspects of current assets management. (a) (b) Optimum investment in current assets Financing of current assets.

NET WORKING CAPITAL

Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include bills payable and outstanding expenses. Net working capacity indicates the liquidity position of the firm. Generally net working capacity is referred to as working capital.

(II) On the basis of requirement According to Gestenberg, the working capital can be classified into permanent or regular working capital and variable working capital.

NEED FOR WORKING CAPITAL

A firm required as sufficient amount of working capital to run its day-to-day business. We can hardly find a firm that does not have any amount of working capital. But
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firms differ in their requirement for working capital. The firm needs working capital because sales do not convert into cash instantaneously. There is always a time duration required to convert sales, after the conversion of resources into inventories, into cash. This time duration is called Operating Cycle of the firm. Firms like BHEL must maintain an adequate amount of working capital because of a long operating cycle.

Operating Cycle: - It is clear that working capital is

required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as operating cycle of the business. Funds required investing in inventories, debtors and other current assets keep on changing shape and volume. Like a company has some cash in the beginning. This cash may be to the suppliers of raw material, to meet labour costs and other overheads. These three combined would generate WIP, which will be converted into finished goods on completion of production process. On sale these finished goods gets converted into debtors and debtors pay, the firm will again have cash. This cash will again used for financing raw materials, WIP, etc. Thus, there is a complete cycle when cash gets converted into raw material, WIP finished goods, debtors and finally again cash.

DEBTO RS

SALES
33

CASH

OPERATING CYCLE

FINISHED GOODS

RAW MATERIAL

WORK IN PROGRESS

In case of a manufacturing company, the operating cycle is the length of time necessary to complete the following cycle of events: (i) Conversion of cash into raw material. (ii) Conversion of raw material into work-in-progress.
(iii)

Conversion of work-in-progress into finished goods. of finished goods into accounts

(iv) Conversion

receivables, and (v) Conversion of accounts receivables into cash. The operating cycle of manufacturing business can be shows as in the following chart.

OBJECTIVES MANAGEMENT

OF

WORKING

CAPITAL

The basic objective of working capital is to provide adequate support for the smooth functioning of normal business
34

operations of a company. The term adequate working capital is subjective depending on managements attitude towards uncertainity/risk.

I. II.

Maintenance of working capital. Availability of ample funds at the time of need.

SAFETY PROFITABILITY

LIQUIDITY

CREDIT MGMT. MINIMIZE

BANK MGMT MINIMIZE TIME

CAS EXCESS H
ACCT RECEIVABLE MGMT MINIMIZE TIME

ACCT PAYABLE MGMT OPTIMIZE TIME

MEDIA

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Goals of Working Capital Management

WCM: A TRADE-OFF BETWEEN LIQUIDITY AND PROFITABILITY

The two important aims of working capital management are to gain profitability along with liquidity. Liquidity is the firms continuous ability to meet maturing obligations. To ensure liquidity, the firm has to maintain a relatively large investment in current assets holding. But there is a cost associated with maintaining a sound liquidity position. A considerable amount of firms profitability will suffer. To achieve higher profitability, the firm can sacrifice liquidity and maintain a relatively low level of current assets. If the firm does so, its profitability will improve as fewer funds as tied up in the current assets, but its solvency will be threatened and exposed to greater risk. Therefore, firm should maintain its current assets at that level where the liquidity cost is quite low and the firm is also able to achieve adequate profitability.

DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business. 2. Manufacturing cycle. 3. Sales growth. 4. Nature of raw material used. 5. Demand condition. 6. Production policy.
36

7. Price level changes. 8. Operating efficiency and performance. 9. Firms credit policy. 10.Available of credit. 11.Degree of synchronization among cash inflow and outflows.

GUIDELINES AND SOURCES OF FUNDS FOR WORKING CAPITAL REQUIREMENTS OF BHEL

1. CASH CREDIT FROM BANKS The requirements of working capital will be met either from internal resources or borrowings from banks. All the banking transactions have been centralized at Corporate office, New Delhi. The Corporate office will negotiate with consortium of banks for total cash credit required for the company as a whole. 2. WORKING CAPITAL LOAN FROM GOVERNMENT The funds for working capital over and above cash credit limits may also be arranged through government loans.
37

3.

RECEIPTS FROM CUSTOMERS The bulk of working capital requirements are met from the advances from customers in accordance with the contract condition as approved by the board. The receipts are deposited in the centralized account.

4.

FIXED DEPOSITS FROM MEMBERS OF PUBLIC Subject to the approval of the government and Board of Directors, the funds may be raised from public by obtaining fixed deposits under the provisions of the company.

5.

PROVISIONS OF THE FUNDS FOR SITE OFFICES Funds required to site offices will be provided by the divisions under which they are functioning and for the purpose. Current accounts will be authorized to be opened with branches of SBI or any other nationalized bank.

6. (a)

OTHER SOURCES OF FUNDS Bill rediscounting scheme of IDBI:

The scheme was introduced in 1965. The manufacture of indigenous capital equipment can push up the sales of their products by offering to the prospective purchaser deferred payment facilities. The IDBI does not itself discount bill of exchange/promissory notes but rediscounts those discounted by any other approved bankers. (b) Bill market scheme:

RBI providing rediscounting facility for bills having maturity of not more than 120 days introduced this scheme. This facility enables the
38

supplier to get the payment for their supplies at a reduced rate of interest. (c) EXPORT PRE-SHIPMENT/POST SHIPMENT CREDITS: In respect of export orders finance at concessional rates is made available by the banking system on specific conditions. Preshipment finance at a concessional rate is granted for a period of 180 days. Post-shipment finance is available at same concessional rate for maximum period of 90 days. The pre-shipment finance will form part of cash credit granted by banking system to the customers. (d) Other Schemes: -

Discounting supply bills can also raise shortterm funds. Another scheme related to rising of fund to the extent of 75% or 80% of the value of inventories not required for next few weeks/months by pledging of such inventoried with a banker under a Key loan or Pledge amount.

Forecasting of Working capital

If the working capital is to be estimated for the ensuring year, then the current requirement of the assets and the cash flow for the period is to be estimated. The basic object of forecasting is either to measure the cash position of the enterprise or to exercise control over the liquidity position if the concern. There are many popular methods available for forecasting the working capital requirements, which follows: 1) Cash Forecasting Method
39

2) The Balance Sheet Method 3) The profit & loss adjustment Method 4) Percent of Sales Method 5) The Operating cycle Method 6) Regression Analysis Method

CASH MANAGEMENT
INTRODUCTION
Cash is an important current asset for the operation of the business. Cash is the basic input needed to keep the business running on a continuation basis. It is also the
40

ultimate output realized by selling the services or product manufactured by the firm. Cash is the most liquid of all the current assets. Higher cash and bank balance indicate high liquidity position in lower profitability, as ideal cash fetches no return. Thus a major function of finance manager is t maintain sound cash position. Cash management is concerned with managing of: (i) (ii) (iii) Cash flow in and out of the firm. Cash flow within the firm. Cash balance held by the firm at a point of time by financing deficit or investing surplus cash.

Objective of Cash Management

1) 2) 3) 4) 5) 6) To meet day to day business requirements. To provide for schedule major payment i.e. Capital expenditure. To face unexpected cash drain. To maintain image of credit worthiness. To size potential opportunities for profitable longterm investments. To meet requirement of bank relationships.

Efficient cash management function calls for cash planning, evaluation of cash benefits and cost of policies, sound procedures and practices and synchronization of cash inflows and outflows. Thus for achieving goals and objectives of cash management, finance manager has to plan cash needs of the firm followed by cash flow management, determination of optimum level of cash and finally investment of surplus.
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Factors Affecting Cash Requirement

(A) Internal Factors (a) Profit level

(b) Dividend and Taxation policy (c) Reserve and surplus

(d) Depreciation policy (e) (f)

(B)

Expansion programme Operating efficiency

External Factors (a) Fluctuating in marketing interest rates

(b) Investment avenues available in market (c) Government economic policies of RBI and other

(d) Rules and regulations regulatory bodies

Cash Management in B.H.E.L., Jhansi

In B.H.E.L., the centralized cash credit system is followed. From 24-07-75 all the banking transactions of the company have been centralized at corporate office, New Delhi. Under this system all the sales proceeds of the units are deposited in a centralized account. This account number is universal for all the units of RODs. They have to deposit the sales process if this account withdraws money from it. Only the corporate office operates it. For meeting day to day expenses, the units have to prepare the estimates of such expenses, which are then
42

sent to corporate office weekly or monthly, or both. At unit level, the cash budget is prepared on yearly basis for estimating the expected cash inflows and outflows. The yearly budget is broken down into monthly and weekly intervals. The inflows and outflows and estimated on following basis. The only source of cash inflow for unit is corporate office. The sale proceeds cannot be directly utilized. Based on the above requisitions, the corporate office allocates the funds. For cash credit, corporate office will negotiate with consortium of Bank for total cash credit required for the company as the whole. A consortium deed for hypothecation of stocks and stores of company is executed by corporate office. All the information, documents etc. required in this connection will be called for by the corporate office from the division. Arrangements have been already been made by the State Bank of India, HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank for centralizing total cash credit limits at New Delhi. Under this scheme, the units have finished the required information under the following documents. The units will send estimated, monthly cash flow statement to the corporate office by 18th of every month. Based on these cash flow statements, the corporate office will allocate the sub limits will be transferred to the consortium of the bank by 25th of the month. The unit can utilize this fund. The actual cash flow statement will be send to corporate office monthly i.e. 1st of succeeding month.
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The units are also required to send the weekly report of daily bank transactions to the corporate office. These reports shows the detail of daily debit and credit transaction appearing in bankbook of the company, enabling the posting of corporate bankbooks as well as verification of bank statement received from banks. These reports are sent to corporate office on 1st (showing the transaction from 25th to 30th of the previous month) 8th (showing the transaction from 1st to 7th of the current month) 16th (Showing the transaction from 8th to 15th of the current month) 25th (showing the transaction from 16th to 21st of current month) The units are required to send the comparative statement of estimated and annual cash flow of the preceding month. This report will be sent quarterly after inter-unit reconciliation meeting. The total interest payable on cash credit availed by corporate office is to be allocated among the units in the ratio of utilization of funds. Thus cash forecasting & budget are the principal tools of cash management. Forecasting helps manager to know how much cash will be held in balance, to what extent the firm should rely on banks financing and how much to invest in marketable securities.

Advantages of Centralized System

1) Excess cash at various units can be effectively used for various purposes and improvements. 2) Deficit of cash at various units can be sorted out through centralized cash system.
44

3) Idle cash at various units, may be noted or avoided.

Cash Budget in B.H.E.L., Jhansi

Cash budget is the most significance device to plan for and control receipt and payment. A cash budget is a summary statement of the firms expected cash inflows and outflows over a projected time period. In B.H.E.L., cash management is centralized and is controlled directly from corporate office, whatever requirement of fund is felt in BHEL, Jhansi it is sent to the corporate office and corporate office disburse the funds accordingly. Cash budget in BHEL, Jhansi is prepared on the basis of production schedule, which is prepared after receiving customers orders at the beginning of the year. There are two aspects of cash budget inflow and outflow. In flow of cash budget is determined on the basis of receiving the customers orders and preparing production schedule. Outflow is determined on the basis of requirement of raw materials, payment of taxes and duties, interest on borrowings etc. Outflow in cash budget is categorized into operation and non-operation outflow consist of capital expenditure, exchange variations and suppliers credit. Thus after determining the budgeted estimates of inflow and outflows, cash budget is prepared at the beginning of the year. The distribution of cash is determined on monthly basis in every month of that year. In the last quarter of the year cash budget is received and the last

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estimates are calculated and fixed. Monitoring of cash budget is done though management information system.

RECEIVABLE MANAGEMENT
Introduction
Customers arising from sale of goods or services define the term receivable as debt owed to the firm in the ordinary course of business. Receivable constitute a substantial position of current assets. Granting credit and creating debtors amount to the blocking of firms fund. The interval between the date of sale and date of payment has to be financed out of working capital. Thus traders debtors represent investment. Business firm generally sell goods on credit to facilitate sales. When a firm makes an ordinary sale of goods on services and does not receive payment, the firm grant trade credit and create accounts receivable that would be collected in the future.

Cost of Maintaining Receivable

The cost associated with the maintenance of account receivables are: 1) Capital Cost
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When a firm maintains receivables, there is a time lag between the sales of good and payments by the customers. Mean while, the firm has to pay to the employees and to the suppliers of raw materials. These payments are made by the use of traditional capital which alternatively could be profitably employed elsewhere. 2) Collection Cost These are costs, which the firm has to in for collection of the amounts at the appropriate time from the customers.

3)

Administrative Cost In the process of maintaining receivable company incurs some administrative expenses in the form of salaries to clerks who maintain records of debtors, expenses on investigating the credit worthiness of debtors etc.

4)

Default Cost When customers make default in payments, not only the collection effort has to be increased but the firm may also have to incur losses due to bad debts.

Objective of Receivable Management

The objective of receivable management is to promote sales and profits until that point is reached where return on investment in future funding of receivables is less than cost of funds raised to finance that additional credit.

Credit Policy

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Credit Policy of a firm can be regarded as a kind of trade-off between increased credit sales leading to increase in profit and the cost of having large amount of fund locked up in the form of receivables and loss due to incidence of bad debts. The variables associated with credit policy are: (A) (B) (C) Credit Standard Credit Terms Collection Efforts

Credit Standards are criteria to decide the type of customers to whom goods could be sold on credit. Credit Terms specify duration of credit and terms of payment by customers. Collection Efforts determine the actual collection period. The lower the collection period, the lower is the investment in accounts receivable and vice versa.

Receivable Jhansi

Management

in

BHEL,

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL grants liberal terms regarding trade credit to lure the potential customers to buy its product at favorable selling prices. To utilize its excess capacity, BHEL is granting liberal trade credit terms to its customers. The main customers of BHEL are Railways, Power Industries and other Private Parties. BHEL has overseas sales also. All the department. BHEL units are having their commercial Commercial department and Regional
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Operational Divisions (RDOs) primarily carry out the job of recovery from the customers. The sales section of finance department also actively takes part in receivable management by preparing and sending invoices and reminders to customers at appropriate time. They take track of money received from customers as advances, as against dispatch of finished goods and money recoverable on account of price variation claims and conversion of deferred debts into debtors. This monitoring is done work order wise. The aging schedule of customers also prepared which gives the regarding period of outstanding balances. The terms and conditions with the customers are finalized according to the credit policy laid down by corporate office BHEL. However deviations are permitted with the due approval from corporate office.

While lying down of credit policy by head office, industry conditions are taken into consideration. Seeing huge investment in execution of work order, BHEL demands considerable payment in advance in different phases of completion of work i.e. erection, installation, commissioning, maintenance etc. Despite all these BHEL is presently facing cash crunch because a major chunk of BHELs customers consists of government bodies, which are very casual in clearance of dues.

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INVENTORY MANAGEMENT
Introduction
Inventory constitutes the most significant part of the current assets of the large majorities of the companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Inventories are stock of the product, a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in manufacturing company are raw material; work in process and finished goods. The level of above mentioned three kinds of inventories for a firm depend on the nature of its business. Manufacturing firm will have substantially high level of all three kinds of inventories, while a retail or wholesale firm will have a very high level of finished goods inventories and raw material and work in process inventories. In a manufacturing firm the level of inventory depends on the operating cycle. A manufacturing firm with a long operating cycle has to maintain a high inventory level.

Need to Hold Inventories

There are three general motives for holding inventories: 1.

Transaction Motives: - Companies hold inventories to facilitate smooth production and sales operation. Company should maintain adequate stock of raw material for a continuous supply to the factory for uninterrupted production and keeping stock of finished
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goods as the firm cannot immediately when customers demand goods.

2.

Precautionary Motive: - Firm holds inventories to guard against the risk of unpredictable change in demand and supply of force and other factors. Firm may also purchase large quantities of raw material; than needed for desired production and sales level to obtain quantity discount on bulk purchases. Speculative Motive: - It influence the decision of the firm to increase or decrease inventory level to take advantage of price fluctuations.

3.

Cost Associated with Inventory Holding

There are five costs associated with inventory holding. Of these, three are direct costs that are immediately connected to buying and holding goods and other two are indirect costs, which are losses of revenues. These costs of holding inventories are: (1) Material cost (2) Order Cost (3) Carrying Cost (4) Cost of fund tied up in inventory (5) Cost of running out of goods

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Objectives of Inventory Management

1. To maintain a large size of inventory for efficient and smooth production and sales operation 2. To maintain a minimum investment in inventories to maximize profitability. The effective management of inventory involves a tradeoff between having too little and much more inventory. The firm should always avoid a situation of over investment or under investment in inventories. The major disadvantages of over investment are: (i) Unnecessary tide up of firms funds and losses of profit. (ii) Excessive carrying cost. (iii) Risk of liquidity. (iv) Physical deterioration of inventory during storage. Maintaining an inadequate level is also dangerous. The consequences of the under investment in inventories are: (i) (ii) Production hold ups. Failure to meet delivery commitment.

Thus the aim of inventory management should be to avoid excessive and inadequate level of inventories and to maintain sufficient inventory for the smooth production and sales operations. Efforts should be made to place an order at
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the right time with right source to acquire the right quantity ant the right price and quality.

Factors Affecting Level of Investment in Inventories: (1) Seasonal nature of raw material. (2) Length and technical nature of production process. (3) Style factor in end product. (4) Terms of purchase. (5) Time factor. (6) Supply condition. (7) Loan facilities. (8) Other factors.

Inventory Management in BHEL, Jhansi

The investment in inventory in production to total is a dominant determinant of working capital management. It holds much important in context of BHEL as it is having a long production cycle where a good amount of capital is tied up in form of raw material, work in progress and conversion cost. Production planning and control department plays a pivotal role in inventory management. The engineering department plays a supporting role and provides the requisition regarding technology to be applied and material
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requires to PPC department. In BHEL the inventory control is perform with following steps: -

1. PlanningThis is done by PPC department is consultation with purchase, commercial, design and manufacturing department prepares the planning schedule. This schedule along with information provided by engineering and design department helps in material planning and inventory control. 2. Procurement The procurement is done by purchase department. It is done with the assistance of PPC and commercial department for maintaining a tradeoff between carrying cost and ordering cost. A single purchase order is placed for the entire quantity of a specific item and its scattered delivery over a period of time is received. This method helps in obtaining cash and quantity discounts and saving carrying cost. In case of foreign purchase also one order is placed for the full requirement of an item and scattered delivery is opted because variation caused in material cost due to fluctuation in exchange rate is much less than the carrying cost of the material which is approximately 25% of the total price. 12. Receipt and Custody For the proper inventory control on receipt of material in store, quality control department checks the material as per specification. The cost section fills details of all the
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purchase by issuing store receipt voucher and material issue voucher. 13. Issue After receiving the material and storing, the management keeps the information whether these material are being issued to desired destination. Full record of every issuing of material is kept for the proper inventory control.

14. Accounting The record of every transaction regarding the use of material in every department is kept. These records give the overall view of how and where inventories have been used.

Methods Used For Inventory Control

In BHEL, planning and control of inventory is done by using two methods (i) ABC analysis moving and non-moving goods

(ii) Slow analysis. (iii) (iv) (v) (vi) (vii)

Budgeting material requirements Fixation of raw material levels Variety reduction Codification of materials Control of work in progress

(i)

ABC Analysis
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In case of manufacturing company like BHEL, the number of items of raw material run into thousands. From the point of view of monitoring information for control, it becomes extremely difficult to consider each one of these items.

In this case ABC analysis becomes useful and enables management to concentrate attention and keeps a close watch on a relatively less number of items, which account for a high percentage of annual usage value of all items of inventory. Annual usage value = Annual requirement per unit cost In this analysis, items are categorized into A, B, & C category on the basis of their usage value. The more costly items are classified as A. This represents large investments items but is low in number. In BHEL A category items amounts to 60% of investment in inventory items. Inventory items of average usage are put in B category and these accounts for 30% of total investment in inventory. Low usage items are pull in C category. It represents 10% of degree of control and accurate planning. B category requires moderate control. As C category represents low usage value, much importance is to pay on its control. Also the planning and control cost incurred for this category will be greater than their total cost.

The advantages of this system are Ensures closer control on costly items.
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 Helps in developing scientific methods of controlling inventories. Clerical costs are reduced and stock is maintained at minimum level. Helps in achieving the main objective of inventory control at minimum level. (ii) Slow moving and Non-moving goods analysis

It is advantageous to compare the turnover of different grades and kinds of materials as a means of detecting stock which does not move regularly, thus enabling management to avoid keeping capital locked up in undesirable stock. Stock turnover helps in analyzing such items. Cost of material consumed during period Stock turnover -------------------------------------------------------------during period Stock turnover figures the presence of slow moving stock and helps in keeping the level of such stock to a low mark. =

Average stock of raw material

Slow Moving Stock Material which have low turnover are classified as slow moving stock. In BHEL, Jhansi an item is regarded as slow moving one, if turnover ratio is less than 10%. Non-Moving Stocks-- These items have no immediate demand but may be required in future. Here the items, which are not consumed since two years, are regarded as non-moving stock or dead inventory. This category includes mainly directly chargeable items.
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These items having turnover ratio of 10% or more are fast moving items and such acquire more importance.

Documents Used For Inventory Control

The various documents used for control of inventory are discussed below (i) Store Receipt Voucher This is issued when raw material purchased reaches the store. It is issued by store in charge.

(ii) Material Issued Voucher This is an authorization to the storekeeper to issue raw material. Any material ordered for a specific work order will be recorded on MIV details of material requisition is entered on the Bin card. (iii) Material Return Note This is an authorization to the storekeeper regarding raw material, finished parts or other stores no longer required by the factory. The various stock records and cost accounts are adjusted in due course from the details given on the form. (iv) Material Transfer Note This is issued when the material booked to one particular order is transferred to another work order. (v) Material is kept in appropriate bin and draws. For each kind of material a bin card is maintained showing details. A bin card assists the storekeeper to control the stock. The bin card incorporates all information viz. opening balance of
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materials, materials ordered, materials allocated and closing balance of materials. As a result the bin card shows the full cycle of material like the order of few supplies, allocation of material to jobs, receipt and issued of material, stock in hand and balance available.

ANALYSIS OF WORKING CAPITAL

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The analysis working capital is primarily a test of short term solvency. There are dangers in having too little and too much working capital. Therefore The financial manager has to be very vigilant all throughout about the trends in the items that make working capital. The questions to be studied and answered in connection with the analysis of working capital including the following (i) Is the efficiently? management utilizing working capital

(ii) Is the amount of working capital is adequate, excessive and insufficient? (iii) Does the firm have the favorable credit rating? (iv) Is the current financial position improving?

Objective of Analysis
(i) To maintain adequate working capital at every time. (ii) To minimize the cost of short term finance.

(iii) To plant the various sources of short term finance well in advance in case of the need. (iv) TO study the trends positions. in the working capital

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(v) To assess the effectiveness of management of current assets. (vi) To maximize the return on investment of equity shareholders.

Inventory Valuation: (i) Inventory is valued at actual/estimated cost or net realizable value, whichever is less. Finished goods in plant and work in progress involving hydro and thermal sets including gas based power plants, boilers auxiliaries, compressors and industrial turbo sets are valued at actual/estimated factory cost or at 97.5% of the realizable value whichever is lower.
(ii)

(iii) In respect of valuation of finished goods in plant and work in progress, cost means factory cost, actual/estimated factory cost includes excise duty payable on manufactured goods. (iv) In respect of raw material, components, loose tools, stores and spares cost means weighted average cost. (v) The components and other material purchased/manufactured against production order but declared surplus are charged off to revenue retaining residual value based on technical estimates.

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BHEL AT A GLANCE
Rupees(in millions) 2006-07 CHANGE(%) Turnover Value added Employee (Nos.) Profit before tax Profit after tax Dividend Dividend Tax Retained earnings Total assets Net worth Total Borrowings Debt: Equity Per share (In Rupees.): -Net worth -Earnings -Dividend (US $ in million) Turnover Profit Before Tax Profit After Tax 4344 866 560 5419 1122 724 24.8 29.5 29.3 179.5 49.3 220.1 58.4 22.6 15.4 7182 42124 3736 2415 600 93 1722 22280 8788 89 0.01 18739 21401 8323 43636 4430 2859 746 127 1986 29352 10774 95 0.01 14.2 15.9 3.6 18.6 18.4 24.4 26.8 15.3 31.7 22.6 6.3 0.0 2007-08

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BIBLIOGRAPHY
FINANCIAL MANAGEMENT
BY I M PANDEY

PRINCIPLES OF MANAGEMENT ACCOUNTING

BY Dr. S.N.MAHESHWARI

ANNUAL REPORT 2007-08

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