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SUMMER TRAINING PROJECT REPORT On WORKING CAPITAL MANAGEMENT FOR BHARAT HEAVY ELECTRICALS LIMITED
UNDERTAKEN AT BHARAT HEAVY ELECTRICALS LIMITED NEW DELHI
Submitted for partial fulfilment of award of Post Graduate Degree in Management 2009-11
By: Kanika Garg
DIAS INSTITUTE OF ADVANCED STUDIES IP UNIVERSITY DELHI
I kanika Garg, a bonafide student of MBA Programme at the school of management, DELHI INSTITUTE OF ADVANCED STUDIES; IP UNIVERSITY
I hereby declare that I have undergone summer training at BHEL (BHARAT HEAVY ELECTRICALS LIMITED).DELHI under the supervision of SHRI DEEPAK KUMAR (FINANCE MANAGER) on the project “Working capital management of bhel” from 8th June to 7th August.
I also declare that the project report is based on the above summer training and in my original work. The content of this project report has not been submitted to any other university or institute either in part on in full for the award of any degree or fellowship.
Further, I assign the right to the university, subject to the permission from the organization concerned, to the use of information and contents of the project to develop cases or for the use of teaching.
(Signature) KANIKA GARG
This is to certify that Miss Kanika Garg has completed his summer training under my direct supervision. She underwent the training from 8th june to 7th August, during which she was assigned the task of understanding working capital management and working of other sections in BHEL which she has successfully completed and the same is presented in the form of the present project report.
It is further certified the project report submitted by Miss Kanika Garg reflects her original work and based on the work assigned to her for the summer training and the present project has not been submitted elsewhere for award of any degree or fellowship.
Deepak Kumar Corporate manager (finance)
I wish to thank and express my indebt gratitude to the whole management and administration personnel’s of BHEL NEW DELHI for giving me permission and
offering training facilities for my summer training schedule for summer as per the curriculum of MBA SEM 3rd and providing me the complete guided corporate exposure as an integral part. It is a great experience and pleasure for me to present this report on the practical training at BHEL. I sincerely thanks to Mr. Mr. Deepak, Manager (Finance) of BHEL for generous and valuable guidelines provided by him and his department to successfully complete my summer training and a project report on it. I like to thanks Mr. Sandeep Agarwal, Executive (HR) for constantly helping and guiding me to perform job with higher efficiency. I sincerely thanks to my mentor Ms Shilky Bhatia (Lecturer, DIAS) for constant help and her valuable guidance to the project. Last but not the least, I express my gratitude to my highly esteemed parents and those respondents who directly and indirectly, spared their valuable time for us. Thank you
MBA program requires us to undergo 6-8 week summer training in an organization so as to give us an exposure to practical management and to make us familiar with various activities taking place in corporate world.
NEW DELHI as per the curriculum of MBA from DELHI INSTITUTE OF ADVANCED STUDIES. Decisions taken out of thin air. one should not take it for granted that the so-called theoretical concepts can be applied to the business environment in totality.IP UNIVERSITY. But. One Part of the story is that one has to take into consideration. A comprehensive understanding of the principle will increase their decision-making ability and sharpens their tools for this purpose. This report is about the practical training done at BHARAT HEAVY ELECTRICALS LIMITED. can expect to have the widest exposure of the reality show of the corporate sector. in the light of its feasibility and after effective consideration of the Cost and Benefit Analysis. This is to say that. Management of India is heading towards a better profession as compared to other professions. there actually is a difference between the theoretical and practical environment in totality. the same can prove to be very fruitful for the organization. 5 . During the curriculum of management program a student attains a practical exposure in an organization on live project CONTENTS TABLE OF in addition to theory he/she studies. But my summer training had enabled me to get an in depth knowledge of the realities of corporate sector. may spell a disaster for the organization as a whole. the feasibility of a specific theoretical concept before one is to apply the same in the typical/complex business situation. managers ought to be fully occupied with theory and practical exposure of management. aspiring to take specialization in the field of Finance. in an ad-hoc manner.DIAS I must say that being a MBA student. Another part of the story is that if one has applied a theoretical concept. The demand for the professional managers is increasing day by day. To achieve professional competence. in consideration. I was quite familiar with the business environment theory after completing one year of my studies. There is no doubt about the fact that theoretical knowledge acquired by a student during the pursuance of his/her MBA/PGDM lays down a foundation with the help of which the student.
C. Cycle UNIT-3 COMPANY PROFILE 1) BHEL –Background 2) Promoters 3) Company and its product 4) Performance of BHEL at a glance 5) Board of Directors 6) Achievements 6 .DIAS TABLE OF CONTENTS UNIT-1 1) Executive Summary 2) Introduction 3) Purpose of the study 4) Objective of the study 5) Research Methodology 6) Limitation of the study UNIT-2 1) Defining Working Capital 2) Determinants of Working Capital and W.
MISSION & VALUES of BHEL 2) Balance Sheet of BHEL 3) Issues in Working Capital Management a) Receivables management b) Payables management c) Inventory management 4) Key Ratios Suggestion and recommendation Conclusion Bibliography INTRODUCTION 7 .DIAS UNIT-4 1) VISION.
so that one can Have exposure to the Practical side. communication channel.The relevance of the Study is to understand the facts through a real organizational Scenario. The chief objective of the organizational study is to familiarize with the working of Management process in various departments for a particular period. budgeting process etc. This can be achieved only by a steady flow of profits. PURPOSE OF STUDY The main aim of any firm is to maximize the wealth of shareholders. To generate sales.DIAS The organizational study conducted at BHARAT HEAVY ELECTRICALS LIMITED Is to study about organizational structure. technology job tasks and Other resources are combined and coordinated so as to effectively achieve Organizational goal. and span of control Organizational culture. The need of 8 . As Management is the process by which people. investment of sufficient funds in current assets is required. Which in turn depend on successful sales activity. of the organization .
as the sales don’t convert into cash immediately but involved a cycle of operations. Monitoring the operation on cycle duration is an important aspect of working capital. Duration at the finished goods state (depends on pattern of production & sale). transactions time). The capital requirement for each department in an organization of BHEL is large which (depends on the product target for that particular year) calls for an effective working capital management.DIAS current assets should be emphasized. Thus a detailed study regarding the working capital management in BHEL is to be done to consider the effectiveness of working capital management. consistency in capacity utilization). OBJECTIVE • • • To study in general the working capital management procedure in BHEL To analyze and apply operating cycle concept of working capital in BHEL To know how the working capital is being financed. namely operating cycle. • • • Duration of raw material stage (depends on regularity of supply. Duration of work in progress (depends on length of manufacturing cycle. Some prominent issues that are to be addressed are. identify the shortcoming in management and to suggest for improvement in working capital management. BHEL is multi product manufacturing unit with varying cycle for each product. 9 .
for better working capital management in BHEL. EXECUTIVE SUMMARY This is a report on the Working Capital Management in BHEL. which includes Cash Management and short term Investment of Surplus Funds’ Accounts Receivable Management Inventory Management Current Liabilities 10 • • • . • To give suggestions. The Working Capital Management constitutes: • Treasury Management. The aim of Working Capital Management is to manage the firm’s Current Assets and Current liabilities in such a way that the level of working capital is kept at optimal levels and the operations of the company are not disrupted. Working Capital Management is Management of short-term assets and liabilities.DIAS • To know the various methods to be followed by BHEL for inventories and accounts receivables. if any.
Each of these aspects has been dealt with exclusively. research work has been designed in a proper way. The fourth section deals with the Management of Receivables. The next section on Treasury Management deals with its components namely-Cash management and Investment of surplus Funds. RESEARCH DESIGN In order to reach relevant conclusion regarding the project. also called Debtors Management. • The section on Working Capital explains the component. • • • • RESEARCH METHODOLOGY Therefore. 11 . this project aims at providing a comprehensive report on the complex but transparent process of Working Capital Management in BHEL. 2) Analysis: The whole comparison is made only on the basis of the criteria’s on which the data were provided. 3) Conclusion: Information gathered from the findings is concluded after doing the Analysis. significance and financing of Working Capital. The third section deals with Inventory Management defining how a large and diversified organization like BHEL manages its Inventory effectively. The last section elaborates on the Management of Current Liabilities.DIAS This project deals in depth with each of these components of Working Capital Management. Research part is divided into following steps:1)Literature survey 2)Analysis 3)Conclusion 1)Literature Survey:In order to reach to actual result extensive literature survey from different websites and booklets of the Organization has been done. These data are secondary information.
The use of primary sources is limited to interviews with some of the employees in finance department. it is not possible to make an exhaustive study in a limited duration of 2 months.DIAS The methodology used for this organization study is mainly in two ways. However the available data is analyzed with great effort to get an Working Capital Management in BHEL. one serious limitation of the study is. it is against the company’s policies & producers to reveal the sensitive financial information Limitations of the study: Although every effort has been made to study the “Working Capital Management” in detail. Apart from the above constraint. They are: PRIMARY DATA From the managers From the office staff SECONDARY DATA Business journals Annual reports Industry analysis is done based on the information gathered from newspapers and websites of Indian steel ministry & other sector related websites. insight into 12 . The reason being. in an organization of BHEL size. that it is not possible to reveal some of the financial data owing to the policies and procedures laid down by BHEL.
more specifically. Analysts look at these items for signs of a company's efficiency and financial strength. working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). Among the most important items of working capital are levels of inventory. so does the company's ability to fund operations.DIAS WORKING CAPITAL MANAGEMENT Cash is the lifeline of a company. these components of working capital are reported under the following headings: Current Assets • Liquid Assets (cash and bank deposits) and Receivables 13 • Inventory • Debtors . The term working capital refers to the amount of capital which is readily available to an organization. or. which the company sells for payment. reinvest and meet capital requirements and payments. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).CURRENT LIABILITIES In a department's Statement of Financial Position. Thus: WORKING CAPITAL = CURRENT ASSETS . for financing the conversion of raw materials into finished goods. Understanding a company's cash flow health is essential to making investment decisions. Defining Working Capital Working capital refers to the cash a business requires for day-to-day operations. and accounts payable. accounts receivable. If this lifeline deteriorates. That is.
short-term securities. Gross working capital 2. Debtors.DIAS Current Liabilities • • • Bank Overdraft Creditors and Payables Other Short Term Liabilities There are basically two concepts of working capital:- 1. Net working capital:-it refers to the difference between current assets and current liabilities. bills receivables (accounts receivables or book debts) and stock (inventory). Net working capital is positive When current assets >current liabilities Net working capital is negative When current asset<current liabilities 14 . bills payable and outstanding expenses. Current liabilities are those claim of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable). Net working capital Current assets are those which can be converted into cash within an accounting year and include cash. Gross working capital:-it refers to the firm’s investment in current assets.
INVESTMENT: working capital represents a large portion of the total investments in assets. Working capital constitutes part of the Crown's investment in a department. CRITICALITY: working capital management has great signifance for all firms but it is very critical for small firms. 15 .) b. accounts receivable and payable. c. From a department's point of view. this over-investment represents an unnecessary cost to the Crown. bonds etc. patents or copyrights 3. In addition. and cash. Associated with this is an opportunity cost to the Crown. building. Long term borrowings/institutions loans. 3. TIME: working capital management requires much of the financial manager’s time. FIFO 2. GROWTH: the need for working capital is directly related to the firm’s growth. debentures. The management of working capital involves managing inventories. bonds/debentures etc. Sale of tangible fixed assets like land. excess working capital means operating inefficiencies. 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. plant or equipments. 4.DIAS The Importance of Good Working Capital Management Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities.) If a department is operating with more working capital than is necessary. 2. Sale of long term investments (shares. unnecessary working capital increases the amount of the capital charge which departments are required to meet from 1 July 1991. (Money invested in one area may "cost" opportunities for investment in other areas. There are many aspects of working capital management which make it an important function of the financial manager 1. Sources of working capital 1. long term financing a. Sale of intangible fixed assets like goodwill. Sale of non-current assets a.
b) Purchase of tangible fixed assets like land. short-term creditors always like a company to maintain current assets at a higher level than current liabilities. Excessive liquidity is also bad. building. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. b) Payment of cash dividend.DIAS b. In order to protect their interests. Focusing on liquidity management Net working capital is a qualitative concept. Short term financing such as bank borrowings. plant. Uses of working capital 1. 16 . copyrights 3. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. A negative working capital means a negative liquidity and may prove to be harmful for the company’s reputation. machinery. equipment etc. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. patents. c) Purchase of intangible fixed assets like goodwill. Repayment of long-term debt (debentures or bonds) and short-term debts (bank borrowings) a) Redemption of redeemable preference shares. It may be due to mismanagement of current assets. issuance of equity and preference shares 4. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. Purchase of non-current assets a) Purchase of long term investments like shares. Therefore prompt and timely action should be taken by management to improve and correct imbalances in the liquidity position of the firm. the quality of current assets should be considered in determining the level of current assets visa–visa current liabilities. Adjusted net loss from operations 2. bonds/debentures etc. However.
It becomes difficult to implement operating plans and achieve the firm’s profit target. share capital. higher incidences of bad debts result. Consequently. 3. 5. 17 . 2. waste. Tendencies of accumulating inventories tend to make speculative profits grow.DIAS Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. 2. debentures. 3. It results in unnecessary accumulation of inventories. Fixed are not efficiently utilized for the lack of working capital funds. Balanced working capital position The firm should maintain a sound working capital position. It stagnates growth. preference share capital or retained earnings. it should have adequate working capital to run its business operations. Excessive working capital means holding costs and idle funds which earn no profits for the firm. The dangers of excessive working capital are as follows: 1. Thus the firm’s profitability would deteriorate. long-term debt. For every firm there is a minimum amount of net working capital which is permanent. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. which adversely affects profits. Management must decide the extent to which current assets should be financed with equity capital or borrowed capital. Excessive working capital makes management complacent which degenerates into managerial inefficiency. 4. It is an indication of defective credit policy and slack collection period. 4. theft and losses increase. Thus chances of inventory mishandling. paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. Paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies and sales disruptions. Inadequate working capital is also bad and has the following dangers: 1. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits. Operating inefficiencies creep in when it becomes difficult even to meet day to day commitments. Therefore a portion of the working capital should be financed with the permanent sources of funds such as equity. Both excessive and inadequate working capital positions are dangerous from the firm’s point of view.
The lender considers a positive networking as a measure of safety. Nature of business Working capital requirements of a firm are basically influenced by the nature of its business. also have to invest substantially in working capital and a nominal amount in fixed assets. should be caused to predict the quantum of working capital needed at different time periods. All other things being equal.000 items. Risk in this regard means chances of the firm being unable to meet its obligations on due date. Retail stores. the less likely that it will default in meeting its current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position. Thus no funds will be tied up in debtors and stock (inventories). an analysis of relevant factors should be made in order to determine total investment in working capital. over 20. for example. In contrast. maintain the right amount of working capital on the continuous basis. not products. but require a large sum of money to be invested in working capital. Trading and financial firms have a very small investment in fixed assets. A large departmental store like wall-mart may carry. Therefore. Such concerns have to make adequate investment in current assets depending upon the total assets structure and other variables. The firm loses its reputation when it is not in a position to honors its short term obligations. Some manufacturing businesses. say. must carry large stocks of a variety of goods to satisfy varied and continuous demands of their customers. The importance of factors also changes for a firm over time. The following is the description of factors which generally influence the working capital requirements of firms. Only then a proper functioning of business operations will be ensured. A large number of factors. Their working capital requirements are normal because they may have only cash sales and supply services. the more the networking capital a firm has. each having a different importance. therefore. Determinants of working capital There are not set rules or formulae to determine the working capital requirements of firms. A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. supported by judgment. As a result the firm faces tight credit terms. Sound financial and statistical techniques. influence working capital needs of firms. Market and demand conditions 18 . public utilities may have limited need for working capital and have to invest abundantly in fixed assets. An enlightened management should. For the working capital requirements most of the manufacturing companies will fall between the two extreme requirements of trading firms and public utilities.DIAS 6. such as tobacco manufacturers and construction firms.
It is. therefore. as they will not be able to Pay dividends to shareholders. sales will fall and consequently. It is. Growing firms need funds continuously. Technology and manufacturing policy 19 . sales will increase. increase investment in current assets to support enlarged scale of operations. it will be more expensive during the slack periods when the firm has to sustain its working force and physical facilities without adequate production and sales.DIAS The working capital needs of a firm are related to its sales. seasonal fluctuations generally conform to a steady pattern. when there is decline in the economy. Seasonal fluctuations not only affect working capital requirement but also create production problems for the firms. Therefore. Under boom. necessary to make advance planning of working capital for a growing firm on continuous basis. Unlike cyclical fluctuations. therefore. Growing firms may need to invest funds in fixed assets in order to sustain growing production and sales. specially the temporary working capital requirement of the firm. This act of firms will require additions of working capital. in turn. However. These business variations affect the working capital requirement. They use external sources as well as internal sources to meet increasing needs of funds. increasing production may be expensive for the firm. This will. When there is an upward swing in the economy. imperative that such firms do proper planning to finance their increasing of working capital. Similarly. In practice. Such a policy will mean accumulation of inventories during off season and their quick disposal during the peak season. Under recession. Sales depend upon demand conditions. levels of inventories and debtors will also fall. current assets will have to be employed before growth takes place. the firm’s investment in inventories and debtors will also increase. firms generally resort to substantial borrowing. additional investment in fixed assets may be made by some firms to increase their productive capacity. A firm may thus follow a policy of level production irrespective of seasonal changes in order to utilize its resources to the fullest extent. Large number of firms experience seasonal and cyclical fluctuations in the demand for their products and services. firm try to reduce their short term borrowings. These firms face further problems when they retain substantial portion of profits. During peak periods of demand. correspondingly. On the other hand. it is difficult to precisely determine the relationship between volumes of sales and working capital needs. financial arrangements for seasonal working capital requirements can be made in advance. The increasing level of inventories during the slack season will require increasing funds to be tied up in the working capital for some months. To meet their requirements of funds for fixed assets and current assets under boom period.
Availability of credit from suppliers The working capital requirements of a firm are also affected by credit terms granted by its suppliers. will be detrimental to the firm and will create a problem of collection later on. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. Any delay in the manufacturing process will result in the accumulation of WIP and waste of time. larger will be the firm’s working capital requirements. services and financial enterprises do not have a manufacturing cycle. some firms. Therefore the technological process with the shortest manufacturing cycle may be chosen. it should be ensured that manufacturing cycle must be completed within the specified period. Depending upon the individual case. different terms may be given to different customers. Once a manufacturing technology has been selected. will be able to finance its inventories and debtors without much difficulty.DIAS The manufacturing cycle comprise of the purchase and use of raw materials and the production of finished goods. A high collection period will mean tie up of large funds in debtors. A liberal credit policy. specifically those manufacturing industrial products. A firm without the suppliers’ credit. the firm should follow a rationalized credit policy based on the credit standing of customers and other relevant factors. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. Suppliers’ credit finances the firm’s inventories and reduces the cash conversion cycle. Slack collection procedures can increase the chance of bad debts. The firm should evaluate the credit standing of new customers and periodically review the credit worthiness of the existing customers. The firm should be prompt in making collections. It influences the working capital policy of the firm. The case of delayed payments should be thoroughly investigated. Credit policy The credit policy of the firm affects the working capital by influencing the level of debtors. In order to ensure that unnecessary funds are not tied up in debtors. A firm will needless working capital if liberal credit terms are available to it from suppliers. In the absence of suppliers’ credit the firm will borrow funds for bank. Non manufacturing firms. This needs proper planning and coordination at all levels of activity. but which can get bank credit easily on favorable conditions. Operating efficiency 20 . The availability of credit at reasonable cost from banks is crucial. Longer the manufacturing cycle. have a policy of asking for advance payments from their customers. without rating the credit worthiness of customers. In order to minimize their investment in working capital. The firm should use discretion in granting credit terms to its customers.
in theory. The main sources of cash are Payables (your creditors) and Equity and Loans. Thus. helps in releasing the pressure on working capital. 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. He should anticipate the effect of price level changes on working capital requirement of the firm. Price level changes The increasing shift in price level make functions of financial manager difficult. However. There are two elements in the business cycle that absorb cash . it is possible that some companies may not be affected by rising prices while others may be badly hit. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Firms will feel effects of increasing general price level differently as prices of individual Products move differently. Working Capital Cycle Cash flows in a cycle into. The efficiency in controlling operating costs and utilizing fixed and current assets leads to operating efficiency.Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). the business will eventually run out of cash and expire.DIAS The operating efficiency of the firm relates to the optimum utilization of all its resources at minimum costs. Further. Same levels of current assets will need increased investment when prices are increasing. rising price levels will require a firm to maintain a higher amount of working capital. generate cash surpluses. labor and other resources. The cheapest and best sources of cash exist as working capital right within business. 21 . If it doesn't generate surpluses. Although it may not be possible for a firm to control prices of materials or wages of labor. If a business is operating profitably. Good management of working capital will generate cash will help improve profits and reduce risks. Generally. around and out of a business. then it should. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. Better utilization of resources improves profitability and thus. The faster a business expands the more cash it will need for working capital and investment. it can certainly ensure efficient and effective utilization of materials. companies that can immediately revise their product prices with rising price levels will not face a severe working capital problem.
and MONEY.. Similarly..g.. TIME. you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. As a consequence.g. receivables and payables) has two dimensions...... the business will generate more cash or it will need to borrow less money to fund working capital..... collect monies due from debtors more quickly) or reduce the amount of money tied up (e.. you effectively create free finance to help fund future sales IF you…. reduce inventory levels relative to sales). Then…… Collect receivables You release (Debtors) faster Collect from the cycle cash receivables Your receivables (Debtors) slower soak up cash Get better credit (in You increase your terms of duration or cash resoures amount)from supply Shift your inventory You free up cash (stocks) faster 22 . If you can get money to move faster around the cycle (e. get longer credit or an increased credit limit. When it comes to managing working capital TIME IS MONEY. if you can negotiate improved terms with suppliers e.g....DIAS Each component of working capital (namely inventory.
It is largest 23 .DIAS Move inventory You consume more cash (stocks) slower COMPANY OVERVIEW: BHEL Established in the late 50’s BHARAT is heavy electrical across the limited (BHEL) is a name which recognized industrial world.
. defence. renewable energy. transportation. VALUES and services in the 24 products. industry. With corporate headquarters at New Delhi. oil & gas. areas. A dynamic 45000 strong team embodies the BHEL philosophy of professional excellence to take up future challenges. 14 manufacturing units.DIAS manufacturing enterprise in India and one of the leading international companies in the field of A world class engineering enterprise committed to Enhancing Stakeholder Value power equipment manufacturer. BHEL is India’s industrial ambassador to the world with an export presence in more than 70 countries. systems through quality business solutions providing total enterprise engineering multinational To be an Indian MISSION . BHEL has a consistent track record of growth. power. viz. has described BHEL “one of the most efficient enterprise in the industrial sector at par with international standards of efficiency” BHEL has already obtained ISO-9000 certification for quality management and all major units/divisions of the company including the corporate office have been upgraded to the latest ISO-9000: 2000 VERSION.BHEL has secured iso-14001 certification for environmental management system and OHSAS-18001 certification for occupational health & safety management systems. one subsidiary. for all its major units. The world bank in its report on the Indian public sector. fields of energy. BHEL offers a wide spectrum of products and services to core sectors of the Indian VISION economy. other potential infrastructure and transportation. a widespread regional services network and project sites all over India and abroad.etc. performance and profitability.
• Respect for dignity and potential of individuals. • Foster learning.DIAS ● ● ● • Zeal to excel and zest for change. SWOT • Ensure speed of response. creativity and team work. • Integrity and fairness in all matters. • Loyalty and pride in the company ANALYSIS Strengths ➢ ➢ ➢ ➢ Good corporate image Complete range of products for transmission and distribution Established Brand Name Considered to be having design ability Weakness ➢ The procurement process in the company is cumbersome and subject to auditing ➢ Low exposure to the needs and dynamics of distribution business ➢ Role clarity on the requirement of being an equipment supplier or a solution provider 25 . • Strict adherence to commitments.
The major business (approx 80%) is from power sector. namely Power. Health diagnostics and Life Extension Program (LEP) of plants. BHEL turnkey capabilities have been proved in a number of projects in India and abroad. Its capability ranges from supplying individual equipment to setting up complete power plants on turnkey basis. BUSINESS SECTORS BHEL’s operations are organized around three business sectors. raising alarm about the privatization and being anti-people I. gas and hydro based utility power plants to meet customer requirements for power generation and transmission. Telecommunication & Renewable Energy and Overseas Business. Transmission. BHEL –built power generation sets account for nearly two-third of the overall installed capacity and three-fourth of the power generated in India. o Thermal 26 .DIAS ➢ Acceptance of customers to execute low value high volumes jobs Opportunities ➢ Huge investment leading to greater demand of goods and services ➢ Demand leading to industry operating at full and over capacity ➢ Better price realizations ➢ Earl birds to learn faster and achieve repeat orders ➢ Formation of business groups and tie ups for joint bidding ➢ Healthier working environment and increased private sector participation in operation of distribution circles also. (A) POWER SECTOR BHEL manufactures a wide range of products and systems for thermal. ➢ Political pulls and pressures may jeopardize the hole process. besides specialized know how of residual life assessment (RLA). The company has proven expertise in plant performance improvement through renovation. Threats ➢ Purchased preference maybe extended to distribution sector ➢ Increased in number of small contractors leading to price wars ➢ Emergence of new player in market. nuclear. industryincluding Transportation. packed by reliable after sale-services. modernization and upgrading of a variety of power plant equipment.
(B) INDUSTRY BHEL manufactures and supplies major capital equipment and systems like captive power plants. India's first underground metro at Calcutta runs on drives and controls supplied by BHEL. cement. electric machines. drive turbines. battery powered road vehicles. o Transportation Today over 70% of the Indian Railways . refineries and petro-chemicals. BHEL has acquired the technology 27 . Pump turbines. pelton and Kaplan type. bulb turbines. diesel shunting locomotives of up to 2600 HP. to a number of industries other than power utilities. heat exchangers. heavy castings and forgings.DIAS BHEL supplies steam turbines. boilers and matching auxiliaries up to 800 MW rating including supercritical sets of 660/800 MW.one of the largest railway networks in the world is equipped with traction equipment built with bhel . The Company has developed and supplied broad gauge 3900 HP AC locomotives. o Hydro BHEL engineers and manufactures custom-built hydro power equipment. desert rigs and heli-rigs. generators. Its range covers turbines of Francis. 235 MWe and 540 MWe ratings . pumps. o Nuclear BHEL has manufactured and supplied steam turbines and generators for 220 MWe. BHEL is supplying X'mas tree valves and well heads up to a rating of 10. and simulators for various applications. sub-sea well heads. waste heat recovery boilers. fertilizers. BHEL has also emerged as a major supplier of controls and instrumentation systems especially distributed digital control systems for industries. mining. valves. paper. centrifugal compressors. like metallurgical.Most of the trains of the Indian Railways are equipped with BHEL?s traction and traction control equipment. including electrics & control electronics.000 psi to ONGC and Oil India. gas turbines. industrial boilers & auxiliaries. It can also supply on-shore drilling rigs. 5000/4600 HP AC/DC locomotives. super deep drilling rigs.
dry-type transformers. Series and shunt compensation systems are also manufactured to minimize transmission losses. instrument transformers. Equipment for high-voltage direct current (HVDC) systems is also supplied. The company has been successful in meeting demanding requirements of international markets in terms of complexity of works as well as technological . photovoltaic equipment. X-MAS trees and oil rigs to ONGC and oil (C) INTERNATIONAL BUSINESS BHEL has. Hydro and gas based turnkey power projects . SF6 switchgear. covering Thermal. over the years established its reference in more than 70 countries across all inhabited countries of the world. comprising advance-class gas turbine up to 289 MW (ISO) rating for open and combined cycle operations. o Transmission BHEL today is the leader in the field of power transmission in India with a wide range of transmission systems and products. electrostatic precipitators. for economic transmission of bulk power over long distances. valves and oil field equipment. BHEL is the largest supplier of well heads.substation projects. BHEL supplies a wide range of transmission products and systems of up to 400 kV class. Those include: high-voltage power and distribution transformers. besides a wide variety of products like transformers. BHEL has developed and commercialized the country’s first indigenous 36 kV Gas Insulated Substation. compressors. o Gas BHEL is the only Indian company capable of manufacturing large size gas based power plant equipment.quality and 28 . These references encompass almost the entire range of BHEL products and services. Switch gears etc. Diesel EMUs and OHE cars. Heat exchangers. Insulators. rehabilitation projects. capacitors and ceramic insulators.DIAS for 6000 HP 3-phase AC Locos and started manufacturing the electrics & controls as well as those for 3-phase AC EMUs.
solar photovoltaic and solar water heating systems. to name a few. reducing time-cycle and costs. financing packages and associated O&M services. BHEL also possesses the requisite flexibility to interface and compliment other international companies for large projects and has also exhibited adaptability by manufacturing and supplying intermediate products. RESEARCH AND DEVELOPMENT BHEL’s engineering and R&D efforts are focused on improving the quality of its products. II. upgrading existing technologies.DIAS Other requirements viz HSE requirements. computational fluid dynamics (CFD). be it captive power. Hyderabad. A few among the many R&D accomplishments are: atmospheric bubbling fluidized bed combustion(AFBC) boiler(up to 165t/h). centers of excellence for simulators. utility power generation or for the oil sector. including wide electric generators. as well as at all the manufacturing units and they have close interaction with other national research laboratories and academic institutions. BHEL has also established its versatility to successfully meet the other varying needs of various sectors. Besides undertaking turnkey projects on its own. 29 . BHEL has proved its capability to undertake projects on fast track basis. R&D efforts have already yielded several significant results in terms of better products and improved technologies. accelerating indigenization and developing new products for diversification. renewable energy systems. have been established. and a centre for development of permanent magnet machines. surface coating for erosion.ceramic honeycombs for catalytic convertors. Recently. A highly qualified and experienced team of engineers and scientists are engaged in R&D activities at BHEL’s corporate R&D division.
has now made significant achievements in Total Quality Management by adopting CII/EFQM model for business excellence. BHEL gives emphasis to the highest standards of quality at every stage of operation through implementation of quality management system and procedures in line with international standards and practices. JOINT VENTURES a) BHEL-GE gas turbine services private limited (B b) NTPC-BHEL POWER PROJECTS PVT.The continuing growth momentum: Strategic business initiatives in year 2009-2010 30 .DIAS III. BHEL. LTD. LTD. e) Power plant performance improvement ltd. BHEL shares the growing global concern on issues related to environment & occupational health & safety. QUALITY ASSURANCE Quality of BHEL products is evidenced through state of-the-art design and technology adopted from world renowned collaboration. where quality systems as per ISO-9001 have taken deep roots. (NBPPPL) c) UDANGUDI POWER CORPORATION LTD. f) HEC & BHEL Joint Venture for Foundry Forge Company BHEL . d) BARAK POWER PVT. IV. The units of BHEL have been accredited to ISO-14001 Environmental Management System.
DIAS • BHEL and Toshiba Corporation. BHEL is implementing companywide ERP covering technical. Japan have signed a MoU to explore the possibility of establishing a Joint Venture Company to address transmission and distribution (t&d) business in India and other mutually agreed countries. Future Dimension • The power sector is poised to remain in a growth trajectory even during XII and XIII plan periods as the Govt. Bihar. • MoUs have been signed with Alstom for participating in the tender for setting up a factory for electric loco companies at Dankuni. 31 . own and operate a 2*800 MW Thermal Power Plant with super critical parameters at Khandwa in Madhya Pradesh. commercial and manpower areas. • BHEL and Maharashtra State Power Generation Company Limited have signed a MoU for setting up a JV company to builddown and operate a 1500-1600 MW Power plant at Latur in Maharashtra. • To achieve time cycle reduction. the share of thermal projects based on supercritical technology will rise. with rated power of 12MW. BHEL will focus efforts on Transportation and Transmission sectors. going forward. • BHEL and Madhya Pradesh power Generation Company limited have formed a JV company to build. West Bengal and with GE for participating in the tender for setting up a Diesel loco factory at Marhowar. • BHEL has been nominated as the nodal agency for serial production of marine gas turbines named Sagar Shakti Engine for propulsion of Indian Naval Ships. shifts gears on infrastructure’s a part of the plan to shift to energy-saving technology and lower emissions. • To maintain a balanced growth.
during the year BHEL undertook socio-economic and community development programs to promote education. With capacity expansion to 20. scholarship schemes for underprivileged children. • During the year. improvement of living conditions and hygiene in villages and communities located in the vicinity of its manufacturing plants &project sites spread across the country. and creation of self employment opportunities for unemployed women from the downtrodden community.DIAS • The new paradigm of competitiveness calls for a strategic shift that that will require enhancement of capabilities. • As part of social commitment. • The company is on track to become a $10-11 billion turnover company by 2011-12 in line with its strategic plan. providing water facilities. BHEL has made a humble contribution to help alleviate their suffering. BHEL’s performance in the year gone by was made possible by the confidence reposed by its stake holders including the government of India. • Engineering and technology have been BHEL’s core capabilities. 3626 act apprentices were trained in the company. organizing eye camps. Considering need of the country to transmit bulk power over long distance. In addition.000 MW by March 2012. nine social & welfare projects were completed by various units of BHEL. up gradation of schools. well planned. These include construction of community facilities in villages. 70`` students/trainees from various professional institutions underwent vocational training 32 . scalable and competitive. Greater standardization of components and subsystems that will drive competitiveness and faster delivery is being pursued. we are building new foundation for BHEL by ensuring that investments are timely. • Reaching out to the distressed victims in the flood ravaged areas of Andhra Pradesh and Karnataka. BHEL would continue its development of 1200 KV products such as transformer and CVT which are slated to field trial at 1200 KV Bina Test State Corporate social responsibility in BHEL • As part of its corporate social responsibility.
Former secretary –Power. BHEL receiving the DSIJ Most Investor Friendly PSU Awards 2009 from Hon’ble Chief Minister of Delhi. BHEL Receiving ICWAI National Award for Excellence in Cost Management from Shri Anurag Goel. GOI MOU signed by BHEL 33 . Secretary. Smt. Director (Finance).P. Shri Ravi Kumar receiving the prestigious ‘ENERTIA’ Individual Contribution Awards in Thermal Power Sector’ from Shri R V Shahi.Rao.S Verma. GOI Shri B. Minister of Corporate Affairs. Sheila Dikshit CMD.DIAS AWARDS AND PRIZES Shri C. Director (IS&P).
Ministry of Heavy Industries & Public Enterprises) in the presence of Functional Directors on the board of BHEL and other senior officials of the Ministry. CMD (BHEL) and Dr. • A MOU has been signed in between BHEL and Nuclear Power Corporation of India Ltd. 31 new cranes procured to increase erection capability at various sites. GLOBAL FORAYS • • • Physical export orders of Rs 3571 crore Foray into a new market-Belarus Order for largest ever Hydro Project-1.000 MW per annum by March 2012 • • • State-of-the-art manufacturing facilities established for supercritical equipment.DIAS • BHEL signs MoU with Ministry of Heavy Industries & Public Enterprises The Memorandum of Understanding (MoU) for the year 2010-11 between BHARAT Heavy Electrical Limited (BHEL) and the Ministry of Heavy Industries & Public Enterprises was signed by B. Secretary (Department of Heavy Industry. Bhutan.000 MW of power equipment per annum established and further augmentation to 20.200 MW Punatsangchhu Hydro electric projects. Satyanarayana Dash. Prasada Rao. 34 . To form a joint venture to carry out EPC activities for power plants based on atomic energy both within the country and outside. Contemporary manufacturing facility set up for high-rating transformers. CAPACITY EXPANSION • Capability to deliver 15.
Aggarwal Mr. C.S. S. Meena Dr. B. S. P. Anil Sachdev Mr. Sanjay M. Madhukar DIRECTORS DIRECTOR (Finance) DIRECTOR (E. Shekhar Datta Mr. Dadlika Mr. Verma Mr. Ravi Mr. Rao 35 . K. C. Ashok K.DIAS • 734 MW commissioned overseas – a new record. R & D) DIRECTOR (HR) ` Mr. Manish Gupta Mr. Singh DIRECTORS (IS & P) Mr. Ravi Kumar Mr. P. BOARD OF DIRECTORS CHAIRMAN & MANAGING DIRECTOR Mr. B. Surajit Mitra Mr.
Prasada Rao (Chairman & Managing Director) Power generation. India India and presence in 70 countries B. Renewable energy.6% Rs. Transportation. Transmission Key people Products Revenue Total assets Employees ▲18.DIAS BHEL OVERVIEW Type Industry Founded Headquarte rs Area served Public Heavy Electrical Equipment 1953 New Delhi. Industries. 29352 Million 45000 36 . 4430 Million ▲ Rs. Oil and gas.
2008-2009 Turnover Crore) (Rs. 28033 2009-2010 34154 6590 4310 15721 88 27.70 1767 %age change 22 36 37 22 37 28 63
Profit Before 4849 Tax (Rs. crore) Net profit (Rs. 3138 crore) Net worth(Rs. 12939 crore) Earnings Share(Rs.) Per 64.11
Value added 21.67 per employee (Rs. Lakh) Capital 1082 Investment(Rs. Crore)
COMPARISON OF BALANCS SHEETS
Particulars SOURCES OF FUNDS Share Capital Share warrants & Outstanding Total Reserve Shareholder's Funds Secured Loans Unsecured Loans Total Debts Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment A/c Capital Work in Progress Pre-operative Expenses pending Assets in transit Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Other Current Assets Loans and Advances Total Current Assets Less : Current Liabilities& Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets / Liabilities Total Assets 280237.00 44180.00 324417.00 104931.00 0.00 15272.00 160451.00 233573.20 49755.8 283329 85681.70 0 18403.00 130881.80 165764.50 34458.5 200223.00 78838.80 0 13379.30 108693.90 118978.7 25222.4 144201.1 66428.6 0 9351.60 88775.9 88077.4 15122.8 103200.2 60107.6 0 6737.20 78596.2 71204.46 13254.47 99213.58 48970.85 0 5182.79 65638.76 92355.00 206887.00 97901.00 4068.00 28137.00 429348.00 78370.20 159755.00 103146.70 3502.1 24236.7 369010.7 57364.00 119748.70 83860.20 4210.9 13878.00 279061.8 42176.70 96958.2 58089.10 1997.00 11408.7 210629.7 37443.7 71680.7 41339.7 845.00 11998.7 163307.8 29161.07 59721.42 31778.62 471.76 12296.92 133429.79 0.00 0.00 798.00 0.00 52248.70 37132.50 0 15116.20 -412.20 11569.70 0 0 523.40 44434.70 34030.80 0 9812.6 -591.30 6580.03 0 0 82.90 41350.50 31170.50 0 10180.00 -292.60 3025.40 0 0 82.90 38220.6 28527.6 0 9693.00 129.80 1845.72 0 0 82.93 36289.37 26193.47 0 10095.90 346.51 953.18 0 0 89.52 4895.00 0.00 154278.00 159173.00 0 1278.00 1278.00 160451.00 4895.2 0.00 124492.90 129388.10 0 1493.70 1493.70 130881.80 4895.2 0.00 102846.90 107742.10 0 951.80 951.80 108693.90 2447.6 0.00 85435.00 87882.60 0 893.30 893.30 887759.00 2447.6 0.00 70566.2 73013.38 5000.00 582.40 5582.40 78596.2 2447.60 0.00 57821.34 60268.94 5000.00 369.82 5369.82 65638.76 Mar 2010 Mar 2009 Mar 2008 Mar 2007 Mar 2006 Mar 2005
NOTE: the data for the year 2009-10 is provisional.
Issues in working capital management
Working capital management refers to the administration of all components of working capital.
1. Debtors Management 2. Creditors(Payables) 3. Inventories Management(Stock)
Calculate current assets to fixed asset ratio
A firm needs current and fixed assets to support a particular level of output. However, to support the same level of output the firm can have different levels of current assets. As the firm’s output and sales increases, the need for current asset increases. Generally the current assets do not increase in direct proportion to output; current assets may increase at a decreasing rate with input. This relationship is based upon the notion that it takes a greater proportional investment in current assets when only a few units of output are produced than it does later on when the firm can use its current assets more efficiently.
The level of the current assets can be measured by relating current assets to fixed assets. There are three policies:1) conservative current assets policy: CA/FA is higher. It implies greater liquidity and lower risk. 39
DIAS 2) aggressive current assets policy: CA/FA is lower. It implies higher risk and poor liquidity. 3) moderate current assets policy: CA/FA ratio falls in the middle of conservative and aggressive policies.
would mean interrupted production and sales. the firm must decide about levels of current assets to be carried. A larger investment in current assets under certainty would mean a low rate of return of investment for the firm. the cost of liquidity increases with the level of current assets. Its return on assets will be low. because of frequent stock-cuts and inability to pay to creditors in time due to restrictive policy. 2. • --the cost of illiquidity is the cost of holding insufficient current assets. As it is not possible to estimate working capital needs accurately. Similarly. the low levels of stock will result in loss of sales and customers may shift to competitors. There are two types of cost involved:I. Thus. The Cost Trade Off: A different way of looking into the risk return trade off is in terms of the cost of maintaining a particular level of current assets. it has excessive liquidity. Thus the low level of current assets involves cost that increase as this level falls. on the other hand. return. Under perfect certainty. Also. current assets holdings would be at the minimum level. The firm would make just enough investment in current assets if it were possible to estimate working capital needs exactly. The firm will not be in a position to honor its obligations if it carries to little cash. Liquidity V/S. This will also adversely affect the credit-worthiness of the firm and it will face difficulties in obtaining funds in the future. Cost of liquidity II. This may force the firm to borrow at high rates of interests. as excess investment in current assets will not earn enough A small invest in current assets. Cost of illiquidity • --If the firm’s level of current assets is very high. 41 . All this may force the firm into insolvency. low level of debtors may be due to right credit policy which would impair sales further.DIAS Estimating working capital needs 1. Profitability: Risk Return Trade Off. as funds tied up in idle cash and stocks earn nothing and high level of debtors reduce profitability.
preference share capital debentures. bonds redemption reserve and general reserve. long term borrowings from financial institutions and reserves and surplus. 42 . foreign project reserve. BHEL manages its long term financing from capital reserve.DIAS Policies for financing current assets The following policies for financing current assets in HERP. share premium A/C. Varanasi:LONG TERM FINANCING: The sources of long term financing include ordinary shares capital.
commercial paper. loans (d) Credits for assets taken on lease (e) Financial institutions and others (f) Foreign financial institutions (g) Public deposits 43 bills accepted guaranteed by .DIAS SHORT TERM FINANCING: The short term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short term finance include working capital funds from banks. (iii)From financial institutions (iv) (vi) From foreign financial institution Credit for assets taken on lease (v) Post shipment credit exim bank 4) Interest accrued and due on (a) Post shipment credit (b) Govt. of India (ii) From state govt. credit (c) State Govt. Varanasi manages unsecured loans as:1) Public deposits 2) Short term loans and advances: (1) From banks (a) Commercial papers (2) From others (a) From companies (b) From financial institutions 3) Other loans and advances (a) From banks (b) From others (i) From govt. factoring of receivables etc. public deposits. (b) From financial institutions bonds and other (c) Packing credit The HERP. (iii)Loans from financial institutions(secured by pledge of PSU bonds and banks) 3) Interest accrued and due on loans (a) From State Govt. BHEL manages secured loans as:1) Loans and advances from banks 2) Other loans and advances: (i) Debentures/bonds (ii) Loans from State Govt.
once the spontaneous sources of financing have been fully utilized.DIAS SPONTANEOUS FINANCING:Spontaneous financing refers to the automatic sources of short term funds arising in the normal course of a business. The firm fixed assets and permanent current assets are financed with long term funds and as the level of these assets in increases. a ten year loan may be raised to finance a plant with an expected life of ten year. Using long term financing for short term assets is expensive as funds will not be utilized for the full period. the long term 44 . the source of financing and the asset should be relinquished simultaneously. it should be realized that exact matching is not possible because of the uncertainty about the expected lives of assets. the approach followed by a company may be referred to as: 1. is between the long term and short term sources of finances. A firm is expected to utilize these sources of finances to the fullest extent. Thus. stock of goods to be sold in thirty days may be financed with a thirty day commercial paper or a bank loan. The justification for the exact matching is that. How ever. The real choice of financing current assets. Trade Credit and outstanding expenses are examples of spontaneous financing. Similarly. When the firm follows matching approach (also known as hedging approach) long term financing will be used to finance fixed assets and permanent current assets and short term financing to finance temporary or variable current assets. since the purpose of financing is to pay for assets. Aggressive approach Matching approach The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source of funds raised to finance assets. Conservative approach 3. Matching approach 2. financing long term assets with short term financing is costly as well as inconvenient as arrangement for the new short term financing will have to be made on a continuing basis. What should be the mix of short and long term sources in financing current assets? Depending on the mix of short and long term financing.
DIAS financing level also increases. the firm has less risk of facing the problem of shortage of funds. Note that when the firm has no temporary current assets. The temporary or variable current assets are financed with short term funds and as their level increases. no short term financing will be used if the firm has a fixed current assets need only. The conservative plan relies heavily on long term financing and. the level of short term financing also increases. Under a conservative plan. The financing policy of the firm is said to be conservative when it depends more on long term funds for financing needs. the long term funds released can be invested in marketable securities to build up the liquidity position of the firm. the idle long term funds can be invested in the tradable securities to conserve liquidity. Conservative approach A firm in practice may adopt a conservative approach in financing its current and fixed assets. In the period when the firm has no need for temporary current assets. 45 . therefore. the firm finances its permanent assets and also a part of temporary current assets with long term financing. The conservative financing policy is shown below. Under matching plan.
46 . The relatively more use of short term financing makes the firm more risky.DIAS Aggressive Approach A firm may be aggressive in financing its assets. Some extremely aggressive firms may even finance a part of their fixed assets with short term financing. Under an aggressive policy. An aggressive policy is said to be followed by the firm when it uses more short term financing than warranted by the matching plan. the firm finances a part of its permanent current assets with short term financing. The aggressive financing is illustrated in fig below.
but it is generally upward sloping. It has been found in developed countries like USA. Flexibility. reasons: For two 1. relating to maturity of debt and interest rates. the rate of interest is related the maturity of debt. This decision of the firm will be guided by the risk return trade off.DIAS Short term v/s long term financing: A Risk Return Trade off A firm should decide whether or not it should use short term financing. The curve. If short term financing has to be used. is called the yield curve. the firm must determine its position in total financing. The cost advantage 2. 47 . The fig indicates that more the maturity greater the interest rate. Fig below shows the yield curve. The yield curve may assume any shape. The relationship between the maturity of debt and its cost is called the term structure of interest rates. Short term financing may be preferred over long term financing. But short term financing is more risky than long term financing Cost: short term financing should generally be less costly than long term financing.
The main source of long term loans are financial institutions which till recently were not charging interest at differential rates. it runs the risk of renewing borrowing again and again. permanent current assets refer to the minimum level of current assets which a firm should always maintain. it will have to raise new short term funds as debt matures. At times.DIAS The justification for the higher cost of long term financing can be found in the liquidity preference theory. the firm may have to borrow at most inconvenient terms. Their rates of interest on working capital finance are quite high. if a firm anticipates that its requirement for funds will diminish in near future. the firm may be unable to raise any funds and consequently. If the firm finances it permanent current assets with short term debt. This is particularly so in the case of permanent assets. If the firm uses short term financing to finance its current assets. short term financing involves greater risk than 48 . But the short term financing ought to cost less than the long term financing. Flexibility: it is relatively easy to refund short term funds when the need for funds diminishes. it operating activities may be disrupted. most lenders would prefer to make short term loans. This continued financing exposes the firm to certain risks. In order to avoid failure. Risk returned trade-off: Thus. it is more risky than long term financing. The prime rate of interest rate charged by financial institutions is lower than the rate charged by banks. Risk: although short term financing may involve less cost. The cost of financing has an impact on the firm’s return. It is noticeable that in India short term loans cost more than the long term loans. therefore. it gives relatively higher return to shareholders. These problems are much less when the firm finances with long term funds. The only way to induce these lenders to lend for longer periods is to offer them higher rates of interest. Long term funds such as debenture loan or preference capital cannot be refunded before time. This theory says that since lenders are risk averse. There is less risk of failure when the long term financing is used. at the same time. Thus. it would choose short term funds. Both short and long term financing have a leveraging effect on shareholders’ return. It may be difficult for the firm to borrow during stringent credit periods. there is conflict between long term and short term financing. and risk generally increases with the length of lending time (because it is more difficult to forecast the more distant future). Short term financing is less expensive than long term financing. but. Banks are the major suppliers of the working capital finance in India. As discussed earlier.
working capital requirement would be high and consequently interest charges will be high. The choice between long term and short term financing involves a trade-off between risk and return. they will begin to manage your business as you will gradually lose control due to reduced cash flow and. 49 . 1. in particular on small businesses who can least afford it. In such cases. you could experience an increased incidence of bad debt. Every business needs to know who owes them money...DIAS long term financing. The basic objective of management of sundry debtors is to optimize the return on investment on this asset. If you don't manage debtors. Late payments erode profits and can lead to bad debts... MANAGING PAYABLES(CREDITORS) 3. how long it is owning.. the bad debts and cost of collection of debts would be high. we have to sell on credit basis. On the other hand if the credit policy is very tight. INVENTORY MANAGEMENT 4.. In almost every business.. Slow payment has a crippling effect on business. KEY WORKING CAPITAL RATIOS HANDLING RECEIVABLES (DEBTORS) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. It is very difficult for the organization to sell always on cash basis in today’s competitive market. It is obvious that if there are large amounts tied up in sundry debtors. how much is owed.. for what it is owed.. of course. HANDLING RECEIVABLES(DEBTORS) 2.
Debtor management is the process of finding the balance at which company agrees to receive its payment without hampering or having any adverse effect on its sales and customer agree to pay at their economical buying concept.DIAS investment in sundry debtors is low but the sale may be restricted. Investment in accounts receivables will be high if customers are allowed extended time period for making payments. We have limited resources and therefore every resource has its own opportunity cost. cost will increase due to increase in debtors and vice-versa. Credit policy of company. Credit worthiness of the customer. Credit policy: The term credit policy is used to refer to the combination of three decision variables: Credit standard are criteria to decide the types of customers to whom goods could be sold on credit. Credit terms specify duration of credit and terms of payment by customers. It depends on the credit sale of concern and credit period (collection period) allowed to customer. would like to collect their debtor as early as possible. which varies from customer to customer 3. Cost of debtors 6. 50 . Manufacturing cycle time of the product etc. say number of days allowed to customer for payment to the customers 5. If a firm has more slow paying customers. Sundry debtor level depends on two measure issues: • • Volume of Credit sales Credit period allowed to customers. Nature of product 2. since the competitors may offer more liberal credit term. Debtors and cost of debtors have direct relation. Therefore the management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies. who made sales. It is interest of customer to pay as late as possible and company. The firm will also be exposed to higher risk of default. Quantum of advance received from customers 4. its investment in accounts receivable will increase. Following factors may be considered before allowing credit period to the customer:1. There is a conflict between the two aspects.
the financial or credit manager should consider: Character refers to the customer’s 51 . the firm may have larger sales. the higher the firm’s investment in accounts receivables. It measures the number of days for which credit sales remain outstanding. Such standards will result in no bad debt losses and less cost of credit administration. On the contrary. Thus. The firm may have tight credit standards. To estimate the probability of default. The cost of administrating credit and bad debt losses will also increase. The longer the average collection period.DIAS Collection efforts determine the actual collection period. Default rate can be measured in terms of bad debt losses ratio. it may sell mostly on cash basis and may extend credit only to the most reliable and financially strong customers. the lower the investment in accounts receivable and viceversa. the finance manager should be able to form a reasonable judgment regarding the chance of default. The impact of changes in the major decision variables of credit policy are: Credit standards These are the criteria which a firm follows in selecting customers for the purpose of credit extensions. The lower the collection period. Credit standers and analysis 2. if credit standards are loose. Bad debt losses ratio indicates default risk. On the basis of past practice and experience. There are two aspects of the quality of customers. that is. But the firm may not be able to expand sales. marketing and finance functions. Default risk is the likelihood that a customer will fail to repay the credit obligation. Collection policy and procedures The financial manager or the credit manager may administer the credit policy of a firm. The profit sacrificed on lost sales may be more than the costs saved by the firm. (I) The time taken by customers to repay credit obligation and (II) The default rate. Credit terms 3. The average collection period determines the speed of payment by customers. Credit Policy Variables These are: 1. Credit policy has important implications for the firm’s production.-the proportion of uncontrolled receivable. the choice of optimum credit standards involves a trade-off between incremental return and incremental costs. Credit analysis: Credit standards influence the quality of the firm’s customers. But the firm will have to carry large receivables.
The financial or credit manager should judge whether the customers will make honest efforts to honor their credit obligations. high risk customers. Cash discount: it is a reduction in payment offered to customers to induce them to repay credit obligations within a specified period of time. Credit period: the length of time for which credit is extended to customers is called the credit period. customers with moderate financial health and risk. 3. Marginal accounts. Capacity refers to the customer’s ability to pay. It is generally stated in term of a net date. The cost involved is the discounts taken by customers. A firm’s credit period may be governed by the industry norms. Adverse economic conditions can affect the ability or willingness of a customer to pay. The moral factor is of considerable importance in credit evaluation in practice. Cash discount terms indicate the rate of discount and the period for which it is available. he must make payment within the normal credit period. The financial or credit manager should determine the real worth of assets offered as security. Condition refers to the prevailing economic and other conditions which may affect the customer’s ability to pay. the level of receivables and associated costs may be reduced. Thus. Collection policy and procedures 52 . Bad accounts. Capacity is evaluated by the financial position of the firm as indicated by analysis of ratios and trends in firm’s cash and working capital position. But depending on its objectives the firm can lengthen the credit period. The firm may categorize its customers at least in the following three categories: 1. financially strong customers 2. financially very weak. On the other hand. Good accounts.DIAS willingness to pay. It is usually expressed as a percentage of sales. which will be less than the normal credit period. These stipulations include (A) credit period (B) cash discount. A firm uses cash discount as a tool to increase sales and accelerate collections from customers. Credit terms: the stipulations under which the firm sells on credit to customers are called credit terms. Ability to pay can be judged by assessing the customer’s capital and assets which he may offer as security. the firm may tighten its credit period if customers are defaulting too frequently and bad debts losses are building up. If the customer does not avail the offer.
Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. Some of them may not be permanent customers. 11. Such cases must be promptly identified and necessary action should be initiated against them to recover the full amount. 8.DIAS A collection policy is needed because all customers do not pay the firm’s bill in time. industry sources etc. Establish credit limits for each customer. A collection policy should ensure prompt and regular collection. Use credit agencies.Monitor your debtor balances and ageing schedules. therefore. and stick to them. Some customers are slow payers while some are non-payers. keeping collection costs and bad debts within limits and maintaining collection efficiency. 9. bank references. The collection procedures for past dues or delinquent accounts should also be established in unambiguous terms. 3. The slow paying customers should be handled very tactfully. 5. Cash discount is a cost to the firm for ensuring faster recovery of cash.. The collection policy should lay down clear cut collection procedures. 4. 12. Invoice promptly and clearly. yet they may make payment after deducting the amount of cash discount. aim at accelerating collections from slowpayers and reducing bad-debt losses. and especially larger ones. suppliers and customers. 7. 53 .Consider charging penalties on overdue accounts. Prompt collection is needed for fast turnover of working capital. and don't let any debts get too large or too old. Establish clear credit practices as a matter of company policy. 6. Make sure that these practices are clearly understood by staff. Check out each customer thoroughly before you offer credit. Be professional when accepting new accounts. 10. The collection efforts should.. Keep very close to your larger customers. 2. Some customers fail to pay within the specified discount period.Consider accepting credit /debit cards as a payment option. The firm should decide about offering cash discount for prompt payments. MEASUREMENTS OF DEBTORS: The following measures will help manage your debtors: 1.
Slow Issue Of Invoices Or Statements 5. 6. Make that call now. particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references receiving part payments from debtors. 54 . you may need to look for the following possible defects: 1... Don't feel guilty asking for money.DIAS Recognize that the longer someone owes you. 3.not to score points or get even. Poor Collection Procedures 3. Errors In Invoices Or Statements 6.. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demand their attention now. There is nothing more important than getting paid for your product or service.. or is already very long. 7. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. take what you can now and agree terms for the remainder. Track and pursue late payers. Lax Enforcement Of Credit Terms 4... When asking for your money. 5. • longer credit terms taken with approval. Develop appropriate procedures for handling late payments. Don't give the debtor any excuses for not paying.. In difficult circumstances. 8. the greater the chance you will never get paid. be hard on the issue . Here are a few ideas that may help you in collecting money from debtors: 1. And keep asking until you get some satisfaction...but soft on the person. A customer who does not pay is not a customer. For example. 2. Make it your objective is to get the money . Look for the warning signs of a future bad debt. Get external help if your own efforts fail. If the average age of your debtors is getting longer. Weak Credit Judgment 2. It lessens the problem. 4.. Profits only come from paid sales.. its yours and you are entitled to it. Customer Dissatisfaction.
if you are my debtor I am your creditor! We give credit but we need to control how much we give. In spite of what we have just said. get quotes from major suppliers and shop around for the best discounts. Are purchase quantities geared to demand forecasts? 3. That is. of course. The length of credit period allowed is also a factor that can help a potential customer decides whether to buy from your business or not: the longer the better. Do you know the cost to the company of carrying stock? 5.after all. they are more likely to buy from your business than from another business that doesn't give credit. and reduce dependence on a single supplier. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: 1. they allow us time to pay rather than paying in cash. 6. Do you use order quantities which take account of stock-holding and purchasing costs? 4. how often and for how long.DIAS MANAGING PAYABLES (CREDITORS) Creditors are the businesses or people who provide goods and services in credit terms. Who authorizes purchasing in your company . credit terms. creditors will need to optimize their credit control policies in exactly the same way that we did when we were assessing our debtors' turnover ratio . If a supplier of goods or services lets you down can you charge back the cost of the delay? 55 .is it tightly managed or spread among a number of (junior) people? 2. The formula for this ratio is: Average = Creditors (Cost of Sales/365) Creditors' Turnover Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. There are good reasons why we allow people to pay on credit even though literally it doesn't make sense! If we allow people time to pay their bills. Are you in a position to pass on cost increases quickly through price increases to your customers? 8. How many of your suppliers have a returns policy? 7. Do you have alternative sources of supply? If not.
Raw materials inventories are those units which have been purchased and stored for future productions.DIAS 9. inventories are approximately 60 percent of current assets in public limited companies in India. a considerable amount of funds is required to be committed to them. It is important to look after your creditors . It is possible for a company to reduce its level of inventories to a considerable degree. therefore. Management of your creditors and suppliers is just as important as the management of your debtors. On an average. The reduction in excessive inventories carries a favorable impact on company’s profitability. absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. Because of the large size of inventories maintained by firms. a good supplier is someone who will work with you to enhance the future viability and profitability of your company. without any adverse effect on production and sales. Remember.g. The various forms in which inventories exist in a manufacturing company are: Raw Materials: These are those basic inputs that are converted into finished product through the manufacturing process.slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!). It is.. by using simple inventory planning and control techniques. 10 to 20 per cent. e. 56 . Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis? There is an old adage in business that if you can buy well then you can sell well. INVENTORY MANAGEMENT Inventories constitute the most significant part of current assets of a majority of companies in India. Nature of Inventories Inventories are stock of the product a company is manufacturing for sale and components that make up the product. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately.
therefore they carry large inventories. SPECULATIVE MOTIVE: It influences the decision to increase or reduce inventory levels to take the advantage of price level fluctuations. light bulbs etc. PRECAUTIONARY MOTIVE: It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forcs and other factors. Therefore. fuel. these supplies are small part of the total inventory and do not involve significant investment. Stocks of raw materials and work-in-process facilitate production. but are necessary for production process. Supplies include office and plant cleaning materials like soap. If it is expensive to maintain inventories. It is not possible for a 57 . these materials do not directly enter production. Large heavy engineering companies produce long production cycle products. while stock of finished goods is required for smooth marketing operations. A company should maintain adequate stock of materials for a continuous supply to the factory for an uninterrupted production. Usually. Thus. oil. there will be differences. supplies or stores and spares. They represent products that need more work before they become finished for sale. Need To Hold Inventories The question of managing inventories arises only when the company holds inventories.DIAS Work in Process: These inventories are semi-manufactured products. a sophisticated system of inventory control may not be maintained for them. Finished Goods: These inventories are those completely manufactured products which are ready for sale. Maintaining inventories involves tying up of the company’s funds and incurrence of storage and handling costs. Within manufacturing firms. A manufacturing firm will have substantially high levels of all three kinds of inventories. brooms. why do companies hold inventories? There are three general motives for holding inventories:TRANSCATIONS MOTIVE: It emphasizes the need to maintain inventories to facilitate smooth production and sales operations. Firms also maintain a fourth kind of inventory. inventories serve as a link between the production and consumption of goods. The levels of three kinds of inventories for a firm depend on the nature of its business.
The firm should always avoid a situation of over investment or under investment in inventories. Both excessive and inadequate inventories are not desirable. The objective of inventory management should be determine and maintain optimum level of inventory investment. A time lag exists between demand for materials and its supply. stock of WIP has to be maintained. their stock has to be maintained. To maintain a large size of inventories of raw materials and WIP for efficient and smooth production and of finished goods for uninterrupted sales operations. Therefore. the firm is faced with the problem of meeting two conflicting needs: 1. The firm may purchase large quantities of raw materials than needed for the desired production and sales levels to obtain quantity discounts of bulk purchasing. Therefore.DIAS company to procure raw materials whenever it is needed. 2. Stock of finished goods has to be held because production and sales are not instantaneous. The procurement of materials may be delayed because of such factors as strike. Till production cycle completes. the firm should maintain sufficient stock of raw materials at a given time to stream line production. Also. Other factors which may necessitate purchasing and holding of raw materials inventories are quantity discounts and anticipated price increase. the firm would like to accumulate raw materials in anticipation of price rise. Te optimum level of inventory will lie between the two danger points of excessive and inadequate inventories. A firm cannot produce immediately when customers demand goods. To maintain a minimum investment in inventories to maximize profitability. there exists uncertainty in procuring raw materials in time on many occasions. These are two danger points which the firm should avoid. Objective of Inventory Management In the context of inventory management. The major dangers of over investment are: • • Unnecessary tie up of the firm’s funds loss of profit Excessive carrying costs 58 . Production cycle is the time pan between introduction of raw materials into production and emergence of finished product at the completion of production cycle. Work in process inventory builds up because of the production cycle. transport disruption or short supply. to supply finished goods on a regular basis. At times.
handling. Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service. Another danger of carrying excessive inventory is the physical deterioration of inventories while in storage. recording and inspection. The company provided for weekly meetings between material planning.DIAS • Risk of liquidity The excessive level of inventories consumes funds of the firm. Following steps have been taken to control inventory: • • • An inventory monitoring cell is constituted at the corporate office. it involves an opportunity cost. These costs will impair the firm’s profitability further. The aim of inventory management is to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for the smooth production and sales operations. The carrying costs such as the costs of storage. which cannot be used for any other purpose. • Monthly review of total inventory at the level of chief executives of plants and corporate management is introduced. Excessive inventories carried for long period increases chances of loss of liquidity. production control and purchase departments for better matched material availability. also increases in proportion to the volume of inventory. It may not be possible to sell inventories in time and at full value. The purchases were controlled by the materials management group reporting to the Director of Finance. An effective inventory management should: Ensure a continuous supply of raw materials to facilitate uninterrupted production Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level. Raw materials are generally difficult to sell as the holding period increases. 59 . The consequences of under investment in inventories are • • • Production hold-ups Failure to meet delivery commitments Inadequate raw materials and WIP inventories will result in frequent production interruptions. and thus. Maintaining an inadequate level of inventories is also dangerous. insurance.
1. why? days One or more large or slow debts can drag out the average days. Faster production. Current Liabilities are amount you are due to pay within the coming 12 months. Effective debtor management will minimize the days. say. Obsolete stock. If you simply defer paying your suppliers (without Cost of Sales days agreement) this will also increase . Top 100 inventory items are identified for closer scrutiny and control KEY WORKING CAPITAL RATIOS The following ratios are important measures of working capital utilization Ratio Formulae Result Interpretation On average. you turn over the value of your entire stock every x days. For example. to = Payables Ratio (in days) Creditors 365/ * x get a discount this will decline.DIAS • Inventory control is dovetailed with the budgeting system. If you pay earlier. If you negotiate better credit terms this will increase. you pay your suppliers every x days. the quality of service and any flexibility provided by your suppliers may suffer. If your official credit Receivables Ratio (in days) Debtors * 365/ = Sales x terms are 45 day and it takes you 65 days. just in time ordering will reduce average days. On average.5 times means that you should be able to 60 Current Ratio Total Assets/ Total Current Current Liabilities . It take you on average x days to collect monies due to you.. fewer product lines. You may need to Stock Turnover (in days) Average Stock * Sold 365/ = Cost of Goods days break this down into product groups for x effective stock management.but your (or Purchases) reputation. slow moving lines will extend overall stock turnover days.. Current Assets are assets that you can = x times readily turn in to cash or will do so within 12 months in the course of business.
Less than 1 time e.40 2008-2009 1.As Sales % A high percentage means that working capital needs are high relative to your sales.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.50 for every $1.58 2006-2007 1. (Total Assets Quick Ratio Inventory)/ Total Current Liabilities Working Capital Ratio (Inventory Receivables Payables)/ Sales + .30 2009-2010 1. 0.g.32 61 . Current =x times Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.46 2007-2008 1.00 you owe. CURRENT RATIO CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITY / YEARS CURRENT RATIO 2005-2006 1. FINANCIAL RATIOS 1.DIAS lay your hands on $1.
58 in 2005-2006 reached to 1.This increase shows that the current liabilities are more in the company then its current assets which implies that the creditors of BHEL are not being able to get their money in full in comparison to the past years.10 2009 – 2010 1.16 2007 .52 62 .2007 1.DIAS INTERPRETATION Value of current ratio goes on decreasing and from 1.21 2006 .32.11 2008 . 2.Then in 2009-2010 it increased to 1.2009 1.30 in 2008-2009. QUICK RATIO QUICK RATIO = LIQUID ASSETS / CURRENT LIABILITY YEARS QUICK RATIO 2005 – 2006 1.2008 1.
3.52 from 1. DEBTOR TURNOVER RATIO DEBTOR TURNOVER = GROSS SALES / TOTAL DEBTORS YEARS 2005 .02 TURNOVER RATIO 63 .2006 2006 .65 DEBTOR 2.10 in the previous year which shows that the company was relying too heavily on inventory to meet its obligations.75 2009 – 2010 1.2008 1.DIAS INTERPRETATION Quick ratio shows a decreasing trend from 2005-2006 till 2009 and again in 2010 it got increased to a considerable amount that is 1.79 2008 .93 2007 .2009 1.2007 1.
DIAS This is also called Debtors Velocity or Average Collection Period or Period of Credit given. (Average Debtors/Sales) x 365 for days (52 for weeks & 12 for months) INTERPRETATION Debtors’ turnover ratio shows a decreasing trend from past five years.2008 14. PROFIT MARGIN PROFIT MARGIN (%) = PROFIT AFTER TAX / NET SALES YEARS 2005 .5% MARGIN(%) 64 . That means the liquidity of debtors goes on decreasing which implies inefficient management of debtors.00% 2009 – 2010 12.8% PROFIT 12. 4.60% 2008 .2006 2006 .2007 14.2009 12.00% 2007 .
5.60 2006 .2008 58.6 showing lesser control over its costs then again it shows a small increase in the next year.00 2008 . EARNING PER SHARE EARNING PER SHARE = PROFIT AFTER TAX / NUMBER OF EQUITY SHARES YEARS EARNING PER SHARE 2005 .70 2007 .10 2009 – 2010 88.2009 64.2006 68.05 65 .2007 98.DIAS INTERPRETATION Profit margin trend shows an increasing trend from 2005 to 2008 which implies that the control of the company over its costs is better in comparison to its competitors but then it got decreased to 12 from 14.
then a weighted average is taken to find the number of shares outstanding (0. 6.5M).that company would be more efficient at using its capital to generate income and. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. but one could do so with less equity (investment) . if BHEL has a net income of $25 million and it pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half. the EPS would be $1. AVERAGE DEBT COLLECTION PERIOD AVERAGE DEBT COLLECTION PERIOD (DAYS) = TOTAL DEBTORS * 360 / GROSS SALES 66 .92 (24/12. all other things being equal. but to use it in conjunction with statement analysis and other measures. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation.5).5 x 10M+ 0. For example. First. It is important not to rely on any one financial measure. Two companies could generate the same EPS number.DIAS INTERPRETATION Earnings per share is generally considered to be the single most important variable in determining a share's price. would be a "better" company.5 x 15M = 12. It is also a major component used to calculate the price-toearnings valuation ratio. the $1 million is deducted from the net income to get $24 million.
it is not as liquid an asset as cash in the bank.2008 201 2008 . Firms who do a lot of business on credit though will have much higher debt collection periods. Debt control is an important part of business activity because although a debt is an asset.DIAS YEARS 2005 – 2006 2006 . INVENTORY TURNOVER RATIO INVENTORY TURNOVER RATIO = GROSS TURNOVER / INVENTORIES 67 . Increased trend of debt collection period of BHEL shows that it has increased his business on credit. they would rather have cash now. 7.2007 186 2007 . as would your creditors! Firms therefore have to ensure they collect their debts as efficiently as possible within the terms they have set for the debt. Employees would not be very happy to hear that they will be paid when your debtors pay up.2009 205 2009 – 2010 218 AVG DEBT 178 COLLECTION PERIOD(DAYS) INTERPRETATION Debt collection period of BHEL has increased from the past five years.
70 INVENTORY 3.2006 2006 .2007 68 2007 . Manufacturers and retailers should have a higher level of inventory so BHEL has maintained its higher level of inventory. 8.2008 2008 . DEBT EQUITY RATIO DEBT EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY YEARS 2005 .2006 2006 .2007 4. then it indicates that the management team doesn't do its job properly in managing inventories.57 2009 – 2010 3. If the value of the inventory-turnover ratio is low.87 TURNOVER RATIO INTERPRETATION This ratio represents the turnover or inventory or how many times inventory was used and then again replaced. This number is representative for a one year time period.DIAS YEARS 2005 .2009 3.73 2008 .2008 3.44 2007 .2009 2009 – 2010 .
01 from 0.01 0.07 in 2005.This indicates that investing in BHEL with low debt equity ratio is not riskier in the current scenario where interest rates have been rising.2007 2007 .DIAS DEBT EQUITY RATIO 0. PRICE EARNING RATIO PRICE EARNING RATIO = MARKET PRICE PER EQUITY SHARE / EARNING PER SHARE YEARS 2005 .07 0. Investing in a company with a higher debt/equity ratio may be riskier. especially in times of rising interest rates.2008 2008 .2009 2009 – 2010 69 .2006 2006 .01 0. BHEL has maintained this ratio from the past four years as 0.01 0. 9. due to the additional interest that has to be paid out for the debt.01 INTERPRETATION Debt/equity ratio is equal to long-term debt divided by common shareholders.
2007 70 2007 . P/E ratio is highest in 2007-2008 indicating BHEL a good pick for stock investors in that year. 10.24 21.29 44. If next year's profits are on course to be significantly higher than this year's.2008 2008 .20 23. the prospective P/E ratio will be lower than the current P/E ratio. In conclusion.32 INTERPRETATION A valuation ratio of a company's current share price compared to its per-share earnings.25 27. the P/E tells what the market thinks of a stock. INTEREST COVERAGE RATIO INTEREST COVERAGE RATIO = PROFIT BEFORE INTEREST & TAX / INTEREST EXPENSES YEARS 2005 . High P/E ratio means overpriced stock while low P/E ratio indicates that the market has just overlooked the stock.2006 2006 .DIAS PRICE EARNING RATIO 20.2009 2009 – 2010 .
73 in 2009 from 43.08 120.60 197. 71 .73 INTERPRETATION A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period.65 86.22 125.DIAS INTEREST COVERAGE RATIO 43.65 in 2005 which is a significant increase in the ratio indicating that the business is smoothly generating cash necessary to pay its interest obligations. Interest coverage ratio goes on increasing from 2005 to 2008 then it showed a slight decrease in 2007-2008 and after that it shows an increasing trend and reached to 197. This ratio is important as it gives a picture of the short term financial health of the business.
lines of credit. Cost of bank loans. Bad debts expressed as a percentage of sales.Larger the current and Quick ratios.degree of dependency on a limited number of customers. greater the probability that a company will be able to pay its debts in the near term. 3. 2. 72 . invoice discounting etc. Debtor concentration .DIAS COMPARISON OF CURRENT AND QUICK RATIO To decide whether a firm has sufficient Current Assets or Quick Assets to cover their Current Liabilities. one need to know what the current and quick ratios were in the preceeding periods. Other working capital measures include the following: 1.
BHEL PERFORMANCE 73 .DIAS Once ratios have been established for your business. it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.
79 99213.8 103200.7 144201.7 78838.8 66428.1 2006 163307.21 74 .58 NET W/CAPITAL ( CA CL ) 104931 85681.2 2005 133429.7 283329 2008 279061.6 34216.6 60107.DIAS CALCULATION OF WORKING CAPITAL OF BHEL 2010 Total Current Assets Total Current Liabilities 429348 324417 2009 369010.8 200223 2007 210629.
WORKING CAPITAL LOAN FROM GOVERNMENT The funds for working capital over and above cash credit limits may also be arranged through government loans. The Corporate office will negotiate with consortium of banks for total cash credit required for the company as a whole. New Delhi. 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.DIAS 1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 2005 2006 2007 2008 2009 2010 NET W/CAPITAL ( CA . 2. The receipts are deposited in the centralized account.CL ) Total Current Liabilities Total Current Assets 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. 75 . 3. All the banking transactions have been centralized at Corporate office.
6. Current accounts will be authorized to be opened with branches of SBI or any other nationalized bank. 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”. 76 . Post-shipment finance is available at same concessional rate for maximum period of 90 days. (b) Bill market scheme: RBI providing rediscounting facility for bills having maturity of not more than 120 days introduced this scheme. The IDBI does not itself discount bill of exchange/promissory notes but rediscounts those discounted by any other approved bankers. 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. Preshipment finance at a concessional rate is granted for a period of 180 days. This facility enables the supplier to get the payment for their supplies at a reduced rate of interest. 5. FIXED DEPOSITS FROM MEMBERS OF PUBLIC Subject to the approval of the government and Board of Directors. (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. The pre-shipment finance will form part of cash credit granted by banking system to the customers. 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. The manufacture of indigenous capital equipment can push up the sales of their products by offering to the prospective purchaser deferred payment facilities.DIAS 4. (f) Bill market scheme: RBI providing rediscounting facility for bills having maturity of not more than 120 days introduced this scheme. This facility enables the supplier to get the payment for their supplies at a reduced rate of interest. OTHER SOURCES OF FUNDS (a) Bill rediscounting scheme of IDBI: The scheme was introduced in 1965. the funds may be raised from public by obtaining fixed deposits under the provisions of the company. (e) Bill rediscounting scheme of IDBI: The scheme was introduced in 1965. (d) Other Schemes: - Discounting supply bills can also raise short-term funds.
The pre-shipment finance will form part of cash credit granted by banking system to the customers. 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”. 77 . Post-shipment finance is available at same concessional rate for maximum period of 90 days. Preshipment finance at a concessional rate is granted for a period of 180 days.DIAS (g) 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. (h) Other Schemes: - Discounting supply bills can also raise short-term funds.
Cash is required to meet a firm’s transactions and precautionary needs. Firms prepare cash budget to plan and control and cash flows. Gross working capital refers to the firms investments in current assets.DIAS SUMMARY AND SUGGESTIONS The concept of working capital is used in two ways i. A firm needs cash to make payments for acquisitions of resources and services for normal conduct of business. It issued as a marketing tool to expand or maintain the firm’s sales. and therefore represents the position of current assets. controlling cash balance sat any point of time. Management of cash involves three things. Trade credit creates book debts accounts receivable. Net working capital means the difference between current assets and current liabilities. A firm should hold optimum amount of cash at any time and invest the temporary excess amount in short term securities. Cash is also held to meet emergency situations. They are: 78 .e. A firm’s investment on account receivable depends on volume of credit sales and collection period through credit policy. which is financed either from long term funds or banks borrowings. Credit policy includes credit terms and collection efforts the firm’s credit policy will be considered optimum at the three methods monitor book debts. a) managing cash flows in and out of a firm b) managing cash flows within a firm c) financing deficit or investing surplus cash And thus. Cash budget can serve its purpose only when firm can manage its collection and payments within the allowed limits. gross and net.. Some firms hold cash to take advantage of speculative changes in prices of input and output.
3936 crores. In such situation the company should try to go for expansion. precautionary motive and speculative motive.13169 crores and profit is Rs. Recommendations 79 . The third approach uses the desegregated data and it is better method than first two methods. working capital is synonymous with current assets. They are transaction motive. BHEL is a multi product large organization with huge capital turnover where the working capital requirement depends on the level of operation and the length of operation cycle. Inventories constitute about 60% of current assets to public limited companies of India. They are three motives for holding inventories. The capital required by each repairing unit depends on the individual products cycle of each item. In finance. so that the company comes to a position for further increasing its profits. such as production enhancement system. * Scope of enhancing: during the year 2005-06 the turnover is Rs5339 crores and profit is Rs1473 crores. The manufacturing companies hold inventories in the form of raw materials work in process and finished goods. BHEL is a multi product repairing unit with varying cycle time for each product. It indicates that the net profit forms nearly 25% of the total sales turnover. Monitoring the duration of the operating cycle is an important aspect of current assets management and control.DIAS a) b) c) average collection period ageing schedule collection experience matrix The first two methods are based on the showing payments patterns and hence do not provide meaningful information for collecting book debts. The department wise capital whose capital requirement coupled with their production target for a year invites and effective working capital management. during the year 2006-07 turnover is Rs10410 crores and profit is Rs3389 crores and during 2007-08 turnover is Rs.
DIAS There is a great need for effective management of working capital in any firm. It is not feasible in practice to finance current assets by short-term sources only. Since current assets involve cost of funds. Keeping in view the constraints of the company. There is no precise way to determine the exact amount of gross or net working capital for any firm. Conclusion 80 . a judicious mix of short and long term finances should be invested in current assets. There is no specific rule as to how current assets should be financed. The data and problems of each company should be analyzed to determine the working capital. they should be put to productive use.
the relative liquidity of the firm’s financial structure can be measured by shortterm financing to total financing ratio. A firm will be following a very conservative working capital policy if it combines a high level of current assets with a high level of long term financing (or low level of short term financing). Similarly. The relative liquidity of the firm’s assets structure is measured by current to fixed assets or current asset to total asset ratio. The greater this ratio. The lower this ratio the less risky as well as profitable will be the firm and vice-versa. In shaping its working capital policy. In fact. the firm the firm may follow a conservative financing policy to counter its relatively liquid asset structure in practice. the less risky as well as the less profitable will be the firm and vice versa.DIAS Let us summarize our discussion on the structure and financing of current assets. The conclusion of all this is that the considerations of assets and financing mix are crucial to the working capital management. Such a policy will not be risky at all but would be less profitable. the firm should keep in mind these two dimensions: relative asset liquidity (level of current assets) and relative financing liquidity (level of short term financing) of the working capital management. 81 . This firm will have high profitability and high risk. An aggressive firm on the other hand would combine low level of current assets with a low level of long term financing (or high level of short term financing).
Pandey R. Gupta Financial Management I.K. www.M.M. The Hindu. Newspapers: Economic Times of India.P. Rustagi Annual Reports of BHEL Website: www.com.indianinfoline.DIAS Financial management Financial management Financial management Working capital Management Financial Management S. Sharma & R. Pandey Presanna Chandra My Khan I.K. BIBLOGRAPHY 82 .com.bhel.
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