A Project Report On "AN ANALYSIS OF WORKING CAPITAL MANAGEMENT OF NHPC

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A report submitted to Dr. VSIPS as a partial fulfillment of Master in Business Administration (MBA) Submitted to: Mr. S.K. AWASTHI, Finance manager, CPS-II Chamba (HP) Submitted By: GHANSHYAM VERMA Roll No: 960770023 Batch: 2009-011

Dr. Virendra Swarup Institute of Professional Studies Affiliated to UPTU, Lucknow 337, K-Block, Kidwai Nagar, Kanpur (0512)2611997, www.vsipskanpur.com

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

Ghanshyam Verma

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DECLARATION

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

GHANSHYAM VERMA

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

○ Significance of working capital ○ ○ ○ Working capital cycle Measurement of working capital Managing various components of working capital Chapter 4: Analysis of working capital ○ 72 -91 Analysis of trend in current assets Aspect of working capital 92-93 94-95 96 97-104 ○ Management of various important ○ Chapter 6: Suggestions/ Recommendations Conclusion Bibliography Appendix/ Annexure 1 .

which came into existence on Nov. it has become the single largest organization for Hydro Power development in India. Working capital management policies have a great impact on the firm's profitability. National Hydroelectric Power Corporation Ltd. He has to ensure that the amount of working capital available with his concern is neither too large nor too small for its requirement. Excessive working capital means ideal funds which earns no profit for the firm. The mission of National Hydroelectric Power Corporation Ltd. The organization has capabilities to carry out all activities from conceptualization to commissioning of hydroelectric projects. is to harness the vast hydro. Efficient management of working capital aims at solvency. On the other hand paucity of working capital may lead to a situation where the firm may not able to meet its liabilities. is 2 .EXECUTIVE SUMMARY Working Capital Management is usually concerned with the administration of all the current assets and current liabilities. wind. Further the present study related to National Hydroelectric Power Corporation Ltd. profitability etc. Managing working capital is having strategic importance in maintaining liquidity and improving financial position of any industry therefore we have to strike a balance between risk and profitability. geo-thermal and gas potential of the country to produce cheap/pollution free and inexhaustible power. liquidity and its structural health of the organization. Both excessive and inadequate working capital positions are undesirable and dangerous from the firm points of view. Thus proper management and analysis of working capital is highly crucial for all kind of business which is clearly highlighted in the present study. tidal. In its existence of over 25 years.1975. It is the job of the financial manager to estimate the requirements of working capital carefully and determine the optimum level of investment in working capital. Management of working capital is an essential task of the financial manager.

7000 Cores and investment base of Rs.schedule ‘An’ Enterprise having an authorized capital of Rs.1: Introduction 1. 10000 Cores at present. Chapter 1: 1.2: Objectives of the Study 1.3: Methodology  Formulation of Hypothesis  Sources of Data  The Area Of Work  Methods of data collection  Tools and Techniques of analysis 3 .

The saga of NHPC is replete with many challenges. So far. geothermal &gas potential.NHPC is a schedule ‘an’ enterprise of the government of India. A credited with ISO-9001:2000 &ISO-14001:2004 certificates for its quality system & environment concerns.000 crore and an investment base of about Rs. winds.000 crore. NHPC Corporate office is in FARIDABAD. 25. To begin with NHPC took over three most difficult & almost abandoned projects in geologically weak Himalayan Ranges from the erstwhile central hydroelectric projects Control Board. These projects were the 180MW Baira Siul in Himachal Pradesh. The initial mandate given to the corporation to complete these three projects were fulfilled with the commissioning of Baira Siul in 1981. NHPC is ranked as a premier organization in the country for development of hydropower. With an authorized share capital of Rs. 15. NHPC is among the TOP TEN companies in the country in terms of investment. It was established in 7th November 1975.INTRODUCTION In India. electricity is produced in various sector hydro. tidal. NHPC has completed 12 projects with a total installed capacity of 5175 MW which includes 1000MW. NHPC is the power organization in the field of hydro sector. Loktak in 1983 & Salal Stage-1 in1987. 105 MW Loktak in Manipur & the 345 MW Salal Stage-1 in J&K.Indira Sager project &520 MW Omkareshwar 2 .The successful completion of these projects in most difficult areas & their operation is a testimony to NHPC’s success.

In present study attention is given on the role of working capital management for achieving the overall financial objective and corporate goal. OBJECTIVE OF STUDY In the present study working capital management in NHPC Ltd. Liquidity and profitability are two contradictory and conflicting objectives which must be achieved to be ensured by the modern finance manager. has been analyzed to draw some conclusion on the management of working capital. On the whole basic ingredients of working capital management are overviews of working capital management as a whole and efficient management of individual current assets. At present 12 projects with a total installed capacity of 5132MW are under execution. 5. utilization of funds.Project through Narmada Hydroelectric Development Corporation Ltd. Further working capital has considerable impact on profitability. (NHDC)-a joint Venture of NHPC with government of Madhya Pradesh.25 MW Kalpong project in Andaman & Nicobar Islands &4MW Sippi projects in Arunachal Pradesh as deposit work. liquidity position and managing various individual components of current assets and current liabilities. Though there is a considerable on the context of academic debate about the impact of working capital on the profitability of a firm one school of thought argues that only fixed capital plays a vital role in profit generating process. The 2 . Besides this. NHPC has commissioned the 14. 60MW Kurichu project in Bhutan. Working capital management is an important and integral part of financial management as short term survival is a pre-requisite to long term sources. The key strategies and consideration is ensuring tradeoff between profitability and liquidity of working capital management. Further the role of working capital management cannot be over emphasized on account of trade off between profitability and risk.1 MW Devi hat projects in Nepal.

An efficient management of working capital can do much to ensure the success of an enterprise while its inefficient management can lead to loss of profit. The assured availability of even current finance through budgetary support makes them lax. industries do not make best use of financial resources. Moreover the study also indicates the factors responsible for slow progress of hydro power development in India and some measures for solution to those problems & constraints. Not only there working capital policies in determinate planned levels of individual current assets are not always subjected to rigorous exercises.e. In general the PSU have not always given enough attention to the problems of working capital planning. Further sample unit taken into consideration in the present study is a public sector undertaking. Further capital resources are scarce & limited by virtue of its nature. Unfortunately in our country.other school of tough argues that unless there is a minimum level of investment in working capital which provides a promising vehicle for increasing output and sales. In the context of the above discussion the objectives of the present study are mentioned below specifically. The earlier emphasis is based only on long term financial decision making. Being limited in nature it arrests the pace of development. The need for skilled working capital management thus becomes greater in recent years.) working capital management has caused many business to fail and in many cases has arrest their growth. Thus working capital acts as an explanatory variable in the profit function of a company. In this sense a firm’s profitability is determined in part by way its working capital managed. The present study also points out that a very important reason for slow progress of the organization is inefficiency in working capital management. However it is seen that inefficient management of short term financial decision making (i. profitability cannot be maintained. It is worthy to mention here that the vast hydropower resources in our country are yet to be tapped. Lack of an efficient and effective utilization of working capital either does not permit a business enterprise to earn plausible rate of return on capital employed on compel it to sustain continual losses. In view of the above the present study devoted to working capital management may be quite rewarding one. An effective utilization of capital resources is the vital aspect of our development policy and urgent to accelerate the pace of development. 3 .

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

RESEARCH METHODOLOGY The present study is based on secondary data. used to confirm the result of the study. rank correlation. THE RESEARCH PROBLEM The problem formulation is the first step to a successful research process. The investigation is carried upon the working capital in NHPC in Chambba. ratio analysis. measures of variability etc. are used as a part of methodology of the study. The reason for choosing this design is to get responses from the company’s Balance sheet. Further the data are mainly based on the published financial statement of the sample unit. Beside all these measures some statistical measures like arithmetic average. Besides other financial statement and different published material are also referred for the purpose of study. patterns of investment on current assets & liabilities etc. Trend analysis. THE RESEARCH DESIGN The research design used in the project is Descriptive Research. Company and to find out the ratio analysis of company. The summer training undertaken the problem of analyzing the working capital management of the. Methods of data collection In a nutshell the methods and techniques used to carry out the study are:a) Ratio analysis 1 .

Tools and Techniques of analysis The analytical tools used are mostly graphical in nature which include • • Ratio Analysis Tables showing percentage LIMITATION OF THE STUDY Every study has some limitations mainly in term of scope.e.) limitation of condensed financial statement etc. number of samples considered method techniques used and data collected for the study etc. Some of limitations are mentioned below:(1) The study is mainly based on published data only. only. basis of comparison etc. Since the study is based on the secondary data.b) c) d) e) Trend analysis Chart and Diagram Correlation Analysis Books Personal consultation THE AREA OF WORK The Office work is conducted in the NHPC in finance departments. period. The present study also has some limitations from various angles.) NHPC Ltd. Thus the limitation of small sample also applied to the study. (2) The period of the study is restricted to twelve years only. journals and newspapers. Thus the limitation of restriction in period also inherited to the study. is also part of the limitation 1 . The data are collected from various financial statements annual accounts to use topic in various magazines. it contains all the limitations that are inherited to secondary data (e. (3) The scope of sample is restricted to one unit (i. (4) Various limitations of ratio analysis different in opinion of accounting concept.g.

• Chapter 2: Literature Review Industry Overview Company Overview 3 .

NHPC has become the single largest leading tape all the activities from conceptualization to commissioning in relation to setting of hydro projects. India has an identified hydro power potential estimated at 84044 MW at 60% load factor. 15000 crores. the bulk potentialofwhich still 3 .H.P. In its existence of over 28 years.C. India is a veritable fountainhead of hydropower.C has been granted ISO-9001 and ISO-14001 certificates for its quality system. A land of continental dimensions blessed by the monsoon the snow capped Himalayas and rich river valleys. National hydroelectric power corporation was set up in 1975.P. India is a veritable fountain head of Hydropower.H. N. the bulk potential of which still remains untapped. National Hydroelectric power corporation Ltd. is a schedule ‘an’ enterprises of the government of India with an authorized capital of Rs. NHPC is among the top companies in the country in terms of investment N. the pioneer organization in hydro sector trying its best to tap the vast untapped Hydel recourses. India has an identified hydropower potential estimated at 84044 MW at 60 % load factor.INDUSTRY OVERVIW A land of congenital dimensions blessed by the monsoon the snow capped hills and rich river valleys.

(NHPC). The hydro power technology is well developed with proven overall efficiency of about 90% compared to 35% for thermal station. In spite of the fact that India is a monsoon blessed country of continental dimensions.I: Schemes in hilly regions characterized by utilization of comparatively small discharges and high heads.NHPC is a schedule ‘A’ Enterprise of the Government of India with an authorized share capital of Rs. NATIONAL hydroelectric power Corporation was set up in 1975.II: Schemes in plains characterized by comparatively high discharges and small heads. NHPC is among the top ten companies in the country in terms of investment. National Hydroelectric Power Corporation Ltd. which is over 5000 KWh. An ideal ratio of 60:40 thermal-hydro power mixes has dwindled down presently to approximately 75:25. perhaps due to lack of foresightedness in planning. In its existence of over 30 years. crowned in north by snowy mountains. Category.14000 crores. Power is the basic input for overall growth and development of any nation.Hydropower projects can be divided into Major Hydro Power Projects and Small Hydro Power Projects. the pioneer organization in Hydro sector trying its best to tapped the vast untapped hydel resources. With an investment base of over Rs. 32 to 34% for gas turbine and 42 to 44% for combined cycle plants. NHPC has been granted ISO-9001 certificates for its quality system. It is relevant to divide the small hydro potential in two distinct categories. It is an essential ingredient for improving the standard of living and is measured with the power consumption. Category. ringed in the center by the vast Deccan Plateau and garlanded by world’s largest number of dams. is facing crisis. Sizes of Hydropower Plants 2 .15000/.remains untapped. NHPC has become the single largest leading organization for hydro power development in India with capabilities to undertake all the activities from conceptualization to Commissioning in relation to setting of hydro projects.crores. The per capita electricity consumption of approximately 314 KWh in our country is one of the lowest in the world and is in sharp contrast with the average consumption in the developed countries.

and (2) The hydraulic head. The generator has two main components: a rotating magnet called the "rotor" which turns inside stationary coils of copper wire called the "stator. it was mentioned that. Many projects combine the modes. more than 70% of the global surface. Project design may concentrate on either of these variables or both. which is the elevation difference the water falls in passing through the plant. In a hydroelectric plant. Water being life supporting to the mankind. Hydropower projects are generally operated in a run-of-river. The power capacity of a hydropower plant is primary. The function of two variables: (1) Flow rate expressed in cubic feet per second (ft3/s). Run-of-river projects use the natural flow of the river and produce relatively little change in the stream channel and stream flow. As it is known that water covers. A storage project extensively impounds and stores water during high-flow periods to augment the water available during low-flow periods." When the rotor rotates through the magnetic field. electricity is produced through the force of moving water. it has to be used optimally in any country. peaking. water and minerals as natural resources to us for development as well as conservation. 1 . A turbine and a generator convert the energy from the water to mechanical and then electrical energy. A peaking project impounds and releases water when the energy is needed. it generates a flow of current through the copper coils of the stator . but only 3% of the water available is fresh water.Hydropower plants capture the kinetic energy of falling water to generate electricity. In old Hindu religious book. which is essential for human survival as balance 97% of the water available is salt. The turbines and generators are installed either in or adjacent to dams. allowing the flow releases and power production to be more constant. “there is no life in the Universe without the presence of water and water is essential for existence of life”. God has provided land. or storage mode. or use pipelines (penstocks) to carry the pressured water below the dam or diversion structure to the powerhouse.Facilities range in size from large power plants that supply many consumers with electricity to small and micro plants that individuals operate for their own energy needs or to sell power to utilities. A water wheel turns the generator.

navigation. spreading network of canals carrying water to the fields and reclaimed thousands of arable acres. All efforts from all sectors of economy must be made to attain the objective of growth of 1 . Development of backward areas due to nature of hydro projects. drinking water supply. It saves scarce fuel reserves. The objective being to generate clean & pollution free power at optimum cost. They are:i) ii) iii) A renewal source of energy. Power is the basic input just like oxygen for human body to run industries. vi) recreation. Further in thermal power system only one form of energy converted into another form. None polluting and investment friendly. hydro power projects are few inherited advantages than other source of energy. Power is regarded as the foundation pillar and corner stone of the industry on which the super structure of other industries are to build up. In Egypt irrigation projects were launched. Presently India is facing acute shortage of power. Cost of generation. operation and maintenance is quite lower than other source of Other benefits like irrigation. All kinds of industries including transportation. tourism and fish culture gained from hydro project. Moreover thermal based power station is not free from pollution.Rivers has been the source of water since time immemorial and their basins were the centers of early human settlements. Historical documents indicate that communities settled along the rivers ‘Nile’ and ‘Indus’ and their life was closely linked with rivers for obtaining food. leading and pioneer organization in the field of hydropower in India basically a capital intensive construction industry. In coming future day the role of hydropower is quite significant from India’s point of view so far as path of industrial development is concerned. Long life. flood control. In the present scenario India has to largely depend upon hydropower as the coal based thermal power is going to be exhausted in near future. NHPC Ltd. iv) v) energy. health and protection. which can be utilized for some other purpose. In other words. vii) In the nutshell growth of hydropower in India has strategic importance from many angles. communication as well as service industries cannot be run without aid of power.

The cycle of nature. funding and lending agencies. 2 . kept in motion by sun’s energy. Waterwheels were already in use in different countries of world including Indus Valley domain hundreds of years BC. The earth’s supply of water is inexhaustible if not unlimited. The first small industries emerged soon after in many regions of Europe and North America. when cheap oil became available worldwide. Much later. HISTORY OF HYDROPOWER Simple water wheels have been used already in ancient times to relieve man of some forms of hard manual labor. policy-makers.hydropower. the identification of new sites and potentials. to spinning a generator to produce electricity. This led -and still does -to the reassessment of many projects once found not feasible. on the direction of working capital management is quite helpful for future growth of the organization. In later years. institutions and individuals take a growing interest.C. as a replacement for human and Animal Power. interest in hydropower was lost to a great extent in many areas. the art of building large water-wheels and the use of considerable power capacities was highly developed. makes water continuously available. Greeks used hydro power to turn water wheels for grinding wheat into flour as well. but long before the advent of the steam engine. powered by water turbines. but today the situation is different again. and a number of other activities related to hydro development. such as gristmill. But it was until the discovery of the dynamo electric principle in the latter half of 19 th Century and the resulting rapid development of high voltage technology that it became feasible to use water power to produce electrical energy. growth of hydropower development and attaining the rapid pace of industrialization and to attain the nation objective. Governments. Hence the study of NHPC Ltd. The use of this natural energy resource became even easier and more widespread with the invention of the water turbine in the early 1800’s and hydropower was quickly adapted from mechanical uses. Moreover NHPC being the pioneered organization in this sector has to play a vital role in near future to attain the nation’s objectives of maximizing the hydropower development. Water power was probably first mentioned by the Greeks. around 4000 B.

The most common way of capturing this energy is hydroelectric power. which vary in magnitude by location according to latitude and geography. Disadvantages can include high initial capital cost and potential site-specific and cumulative environmental impacts. There are many different ways to harness the energy in water. only the origin of the tides is not related to the Sun. The gravitational pull of the moon is responsible for the tides. Hydroelectric projects also include beneficial effects such as recreation in reservoirs or in tail water below dams. Another method of harnessing water’s energy includes utilization of the temperature of ocean water in a thermal transfer process.the distance through which the water falls. but a waterfall can spin a blade fast enough to generate electricity. electricity created by falling water. NHPC –AN OVERVIEW 3 . and it’s very low operating costs. then flows back to the ocean. in which it evaporates (due to the activity of the Sun) from oceans. the energy locked within Earth’s water cycle and ocean waves is extremely large. A flowing stream can make a paddle turn. is tapped most efficiently with hydropower. its capability in some cases to respond quickly to utility load demands. which is driven by the sun. The principal advantages of using hydropower are its large renewable domestic resource base. which itself is cause by uneven heating of the ground and oceans by the Sun. The energy of this water cycle. seas and other water reservoirs. Of the several types of hydropower. forms clouds.Water constantly moves through a vast global cycle. The real key in the magnitude of waterpower is the physical height difference achieved between source and sink . The waves are a direct result of wind. precipitates as rain or snow. the absence of polluting emissions during operation. waves and tidal power. When considered as a whole. The use of water to generate mechanical power is a very old practice. but harnessing this energy has proved to be exceedingly difficult.

000 cr.25. Unfortunately the 2 .76 Mus SCENARIO OF HYDRO POWER DEVELOPMENT Electric power is the core sector of the economy of any nation and vital for economic growth and improvement in the quality of life of the people. Rs. 13048.• • • • • • • • • Year of establishment Authorized share capital Asset value Projects completed Manpower Projects commissioned On deposit/ turnkey basis Projects under construction Total installed capacity Net Profit (2009-10) (2009-10) Overall generated capacity (2009-10) : : : : : : : 1975 Rs15. 1012 cr. Rs. Further hydropower is more superior to other source of electric power due to its various inherited advantages. 925 cr.114 : : : : 2 (74. 12(4665 MW) 13. The per capita consumption of electricity is often regarded as index of development. 000 cr.1 MW) 12(5132 MW) 4665MW Rs.

3 % of total power generation of the country.00 34920.00 84044. However a bulk portion of the potential is not yet tapped.000 KW of developed countries.6 % in the year of 1963. Kaunda.2 The regions wise hydro potential and development:- 2 .) as on today. The vast hydel resources of India are yet to be tapped .00 19988. Till independence India’s hydropower generation was in The order of 508 MW being 37.00 9532.The scenario of hydropower development in India shares a gloomy picture though country’s journey for hydropower development was commenced in 1897 with commissioning of a hydropower with an installed capacity of a 130 KW. Unfortunately there was a continuous decline in the hydropower after 1963 and the share of hydropower is only 21 % (approx. The share of hydropower was 50. were developed. After achievement of independence there was a tremendous development in the growth of hydropower as many mega projects like Chakra Nan gal.00 2740. and Konya etc. As per the reassessment of the hydro potential carried out by CEA India’s economically exploitable hydro potential is 84044 MW at 60% load factor which will yield an annual energy of 442 billion units of electricity.00 Table 1. Basin wise hydropower potential and development:Basin Ganga Central Indian River System Great Brahamputra Great Indus Western Flowing River of Southern India Eastern Flowing River of Southern India Total MW at 60% load factors 10715. The following are some tables showing the potential and status of development of hydropower in India.present per capita consumption of electric energy in India is approx 324 KW as against normal figure of 8.00 6149.

Many countries in the world including some small undeveloped countries are able to harness their vast hydel resources..00 31857. Thus proper attention must be given by central govt.49 1. North east region which can be quite helpful in solving the acute shortage of hydropower in India as well as making the regional development in that region . and private agencies for development of hydropower.22 16.00 10763.00 1369.69 24.04% of such vast potential is tapped.00 1845. In other words 98.6% of such potential is yet to be harnessed.49 53.00 84044.Region/ State Northern Western Southern Eastern NorthEastern Total Potential assessed at 60% load factor ( MW) 30155. 15.14 32.00 5679.00 13949. The following table explains the scenario of hydropower development of such country 1 . state govt.00 5590.00 389.00 5779.60 From the above two tables it is quite clear that north eastern region and Brahamputra river basin though have vast hydropower potential only 1.00 Potential developed in MW at 60% load factor 4567.00 Potential developed in %age.

3. Law and order and contractual problems 7. Lack of availability of funds for construction of mega hydro projects. As per 15th power survey committee the peak load of all India requirements by end of ninth and tenth plan would be 95757 MW and 130944 MW respectively for which the installed capacity would have to be of the order of 143000 MW and 190000 MW respectively.e. 4. Thus in terms of supply and demand there is a huge gap which has to be filled up and hydropower sector is to play a very crucial role in this regards. all other source of energy are exhaustible in nature. The nation has to explore the vast hydel resources to achieve its pace of industrial progress. Interstate aspects. 2 . Lack of availability of indigenous technology and machinery. Further the country is facing acute shortage power. Land acquisition and rehabilitation problems. 8. Over all country’s power development has been planned to achieve 40000 MW in next ten years.) NHPC Ltd. The sample unit (i. Non collection of revenue and problem relating to SEB. environment clearance etc. Geological surprises. The core / major issues creating obstacles in the path of hydropower development are explained below:1. In spite of various limitations problems & constraints hydropower has tremendous prospectus in a country like India facing acute power crisis. 2. Tariff determination problem. 5. as all other source of power are more expensive and pollute and exhaustible in nature. 9.Thus India is quite lacking in harnessing the hydel power resources in comparison to other countries of the world as indicated in the above table. 10. Unavailability of infrastructure facilities in remote hilly areas for immediate starting of hydel projects. It is because. 11. alone planning to add 30000 MW to its existing generation capacity within next 10 years. Various government clearances like forest-clearance. Manpower problem. 6.

3 .Benefits of Hydro Power Hydropower has several inherent advantages. recreation etc. drinking water supply. Have higher efficiency (about 95% to 98%) compared to thermal (35%) and gas (42% to 43% in case of combined cycle and 28% to 30% in case of open cycle). Normal life is 50 years with the possibility of further life extension with minimal renovation. Storage based hydro schemes often provide attendant benefits of irrigation. It stabilizes the grid power by increasing system reliability.the first hydro project completed in 1897 is still in operation. Ability to start and stop quickly and instantaneous load acceptance/ rejection make it suitable to meet peak demand and for enhancing system reliability and stability. flood control. navigation. Waterpower yields great ecological and economic benefits. These are as follows: It is a renewable source of energy thus saves scarce fuel reserves. Long life. It is non-polluting and hence environment friendly. It is a reliable energy source with approx. Cost of generation is free from inflationary effects after the initial installation. These do not pose any air or thermal pollution nor produce any green house gases. which make it the most preferred form of electric power. 90% availability. Cost of generation and cost of operation and maintenance are lower than the other sources of energy. The fact that the supply of water is constantly renewed at no cost to us makes the use of its potential and kinetic energy a clear choice. Hydel power generating systems are cheapest and offer least expensive environmentally cleanest technologies for electricity generation.

Being labour intensive. Disadvantages • • • • • • • • High initial capital cost Potential site-specific and cumulative environmental impacts. environment friendly and socioeconomically responsive manner.Hydropower results in creating lots of other benefits like boost to tourism. (road/ rail communication. Hydroelectric projects also include beneficial effects such as recreation in reservoirs or in tail waters below dams CORPORATE MISSION To achieve international standards of excellence in all aspects of hydro power and diversified business. However. Being located in remote regions. To maximize creation of wealth through generation of internal funds and effective 4 . Potential environmental impacts of hydropower projects include altered flow gimes below storage reservoirs or within diverted stream reaches Water quality degradation Mortality of fish that pass through hydroelectric turbines Blockage of upstream fish migration Flooding of terrestrial ecosystems by new impoundments. To continually develop state-of-the-art technologies thru innovative R&D and adopt best practices. up gradation of social parameters etc. medical facilities. in many cases. proper design and operation of hydropower projects can mitigate these impacts. telecommunication. lead to development of interior areas. To foster competent trained and multi-disciplinary human capital. industries. better standard of living). provide employment opportunities. To adopt the best practices of corporate governance and institutionalize value based management for a strong corporate identity. To execute and operate projects in a cost effective.

management of resources.

COMPANY OVERVIEW
Chamera Hydro Electric Project Stage-II

INTRODUCTION
Chamera Hydro Electric Project Stage-II is a 300 MW run of river scheme project envisaged on the Ravi river in the Chamba district of Himachal Pradesh. It diverts the water from the dam constructed at Bagga(22 Kms upstream of Chamba on the Chamba-Bharmour Highway) and generates electricity at the Powerhouse at Jarangla(9 Kms upstream Chamba) and discharges the water at Karian (4 Kms upstream Chamba). Execution of all the components of the project has been done on turnkey basis with M/s Jai Prakash Industries Ltd. Various administrative offices, other related infrastructure and office buildings have been constructed at Karian.The water wheel, as developed in the early part of 19th century played an important role in converting water power into mechanical power. With the discovery of conversion of mechanical energy from one place to another, the concept of hydroelectric power came into existence. Using the power from water flowing under pressure requires a Hydroelectric Power Station to supply energy. Flowing water has three forms of energy viz. Kinetic, Potential and Pressure energy. The power depends upon the mass of the flowing water and its velocity, the latter being the result of the difference in the water level between points known as “head”. The hydraulic turbine converts this mechanical energy of water into mechanical power, which is further used to produce electric power from generators. Hence, the turbine coupled to the generator acts as the prime mover for the generator. There are various advantages of hydropower enlisted as follows: 5

➢ A renewable source of energy, saves scarce fuel reserves. ➢ Non-polluting and hence environment friendly. ➢ Longevity; the first hydro electric project completed in 1897 is still in operation. ➢ Cost of generation, operation and maintenance is lower as compared to other sources of energy. ➢ Ability to start/stop quickly and instantaneous load acceptance/rejection makes it suitable to meet peak demands and for enhancing system stability and reliability. ➢ Has higher efficiency (over 90%) compared to thermal (35%) and gas (around 50%). ➢ Cost of generation is free from inflationary effect after the initial installation. ➢ Storage based hydro schemes often provide additional benefits of irrigation, flood control, drinking water supply, navigation, recreation, tourism, pisciculture, etc. ➢ Being located in remote regions leads to development of interior backward areas (education, medical, road communication, telecommunication, etc.). GEOLOGY The project lies within newer Himalayan terrain and is housed within competent metamorphic of Chamba formation and Dauladhar granites. The Chamba formation consists of varied rock types viz. greenish grey, phylites/slates, phylitic quartzite. The Dauladhar granites occur as apophasis within Chamba formation. ENVIRONMENT The Environment and Forest clearance for the project was obtained in March 1985 to June 1987 respectively. However, recently fresh Environment Impact Assessment report was prepared containing Environment Management Plan comprising mitigate measures in the form of Catchments Area Treatment Plan, Health delivery system, compensatory forestation etc.; about 9700 ha of area will be treated through engineering and biological measures. A mass scale a forestation program me has been envisaged for the project. A total of 4 lakhs Trees have been planted. Forestation in an area of 173 hectares has been carried out by the project outside the project area. Financial implementation of CAT plan would be Rs. 1072 lakhs. In all, about Rs. 1460 lakh is envisaged to be spent on environment conservation. 6

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

CLASSIFICATION OF HYDRO PLANTS The hydro power plants can be classified in terms of location and topographical features, the presence or absence of storage, the range of operating head etc. Classification based on plant capacity: Micro Hydel plant Medium capacity plant High capacity plant Super capacity plant : : : : less than 5 MW 5-100 MW 101-1000 MW Above 1000 MW

Classification based on construction: Run off river plant without poundage: A run-off-river plant is one in which a dam is constructed across a river and the low head thereby created is used to generate power. It is typically a low head plant and is generally provided with an overflow weir, the power station being an integral part of the dam structure. These plants thus use water as and when it is available. The capacity of such plants is very low if the supply of water is not uniform throughout the year. Run off river plant with poundage: The poundage increases the usefulness of this type of plant. The main requirement for the plant is that the tailrace should be such that the floods do not raise the tailrace water level, otherwise the operation will be affected adversely. With poundage it is

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Its firm capacity is relatively high. The main components of a diversion canal plant are:  Diversion Weir  Diversion canal intake with its auxiliary works  Bridges of culverts etc. The main components of a valley-dam plant are:  The dam with its appurtenant structure like spillways etc. which is located just before the plant. The important factors governing the selection are: 8 . average rainfall. etc. gradient. SELECTION OF SITE Preliminary investigations regarding catchments area.  The penstocks  The power plant with its components Diversion canal plant: The characteristic of this plant is that the water of the river is diverted away from the main channel through a diversion canal known as power canal. availability of raw material for construction work. The plant can be used efficiently throughout the year as it has large storage capacity. These plants are usually low head or medium head plants. etc. The main point of difference between high head and low head diversion plants is the elaborate conveyance system for the high head plants. are required. Valley-dam plant: The main feature of a valley-dam plant is a dam on the river which creates a storage reservoir that develops the necessary head required for the turbines. They do not have any storage reservoir. The powerhouse requirements of pondage are met through a pool called forebay. geology of foundation. stop logs and racks.  The intake with gate.possible to meet hour-to-hour fluctuations of load throughout the week or longer period depending upon the size. of the diversion canal  Forebay and its appurtenance High head diversion plant: The main feature of this plant is the development of high head resulting from the diversion of water. ground.

1. LOCATION OF DAM From the cost point of view. 2. 3. The dam should. be close to turbines and should have the shortest length of conduit. In order to have high production capacity. Availability of construction material and general know how should also be considered in site selection. ACCESSIBILITY OF SITE The site should be accessible from the view point of transportation of man and material. as far as possible. Sufficient storage of water should be available since rainfall is not uniform throughout the year and from one year to another. the lower will be the cost of construction. 5. Failure of dam may result in substantial loss of life and property. CHOICE OF DAM The most important consideration in the choice of the dam is safety and economy. The proposed dam must satisfy the test of stability for shock loads which may be due to earthquakes or sudden changes in the reservoir levels and high floods. the smaller the length of dam. FEATURES 9 . the site has to be where the river valley has a neck formation. so that the overall cost for construction of the project is kept low. DISTANCE FROM THE LOAD CENTRE The distance should be as small as possible so that the cost of transmission of power is minimum. QUANTITY OF WATER AVAILABLE This can be estimated on the basis of measurement of stream flow over as long a period as possible. It is desirable to locate a dam after the confluence of two rivers so that advantage of both the valleys to provide larger storage capacity is available. 4. a valley which has a large storage capacity on the upstream of the proposed dam site is probably the best. Storage of water is necessary for maintaining continuity of power supply throughout the year. Therefore.

& Chandigarh. H.Location Approach Capacity Annual Generation Project Cost Beneficiary State Deist Chamba in (H. Punjab. 1929.89 MUs Rs.57 cr.P) nearest Rail Head Pathankot 300 MW (3 *100 MW) 1499. Rajasthan.(completion Cost) Uttranchal. Haryana.P. J&K. Year of commissioning March 2004 Chapter 3: About the Project     Working capital Meaning & concept Significance of working capital Working capital cycle 10 .

investment in stock. (ii) To finance current assets required for day to day running of the business. It may also be defined as “ the capital representing current assets over current liabilities”.e. Current assets are essential to use fixed assets profitably. Measurement of working capital Managing various components of working capital Meaning and Concept:A business undertaking requires funds for two purposes: (I) to create productive capacities through purchases of fixed assets etc. sundry debtors cash and Other current assets. Working capital refers to the funds invested in current assets. i. The efficient management of working capital is an integral part of overall financial management as it has an impact on the 11 .

It enables the management to examine the profit earning capacity of current assets and ensure that the capacity is not less than cost of borrowed fund. It is also called as variable working capital. Permanent working capital has certain characteristics such as unlike fixed assets. On the other hand Net Working Capital (NWC) refers to excess of current assets over current liabilities. Therefore the gross working capital is the capital invested in total current assets of the enterprises. it never leaves the business. It is also referred to as core current assets. Working capital management is usually concerned with the administration of all the current assets and current liabilities. The concept of permanent working capital remains in the business on long term basis. Gross Working Capital (GWC) deals with the problems of managing individual current assets. It is basically concerned with (a) determining the need for working capital. The constituent of current assets are shown in the part-II of table 3. Temporary working capital refers to that part of total working capital which is required by a business over and above permanent working capital. (b) determining the optimal levels of investment in various current assets and (c) examining the salient points regarding each element of working capital. Since volume of temporary working capital keeps on fluctuating from time to time according to the business activities it may be financed from short term sources. 12 . Working capital has two concepts:(a) Gross working capital (b) Net working capital. Working capital has two concepts:(a) Permanent Working Capital (b) Temporary Working Capital Permanent working capital refers to that minimum level of investment in the current assets that is carried business at all times to carry out minimum level of its activities. Gross working capital refers to the total of all the current assets. From the management point of view. it should be financed from long term sources. it keeps on changing its shape.objectives of the maximization of the owner’s wealth. and it grows with the growth in the size of the business. Net Working Capital = Current assets – Current liabilities. It represents the amount of funds invested in currents assets.1.

advances & deposits Bank over draft Provisions Outstanding expenses Table – 3.stores & spares II) III) IV) V) VI) Sundry debtors Investments Loans and advances Bill receivables cash Cash & bank balance VII) Accrued Incomes VIII) Prepaid expenses PART-II : CURRENT LIABILITIES I II III IV V VI Sundry creditors Bills payable Short form loans.1 13 .PART-I: CURRENT ASSETS I) Inventories (a) (b) (c) (d) Raw material Work in progress Finished goods Others.

It is therefore important that the financial manager should chalk out such working capital management policies in respect of different components of working capital. Generally the current ratio and the quick ratio indicate liquidity aspects of the firm. etc. it will affect the liquidity aspects of the firm. a firm which has high working capital turnover will have higher profitability. if it is reduced disproportionately. i. and inventory so as to ensure higher profitability.e. proper liquidity and structural health of the organization. If current assets are reduced beyond limit. entering into the production process/stock and the inflow of cash from debtors 14 . WORKING CAPITAL CYCLE The Working capital cycle refers to the length of time between the firm’s paying cash for materials.Constituents of CA & CL The gross working capital concept is based on going concern concept and Net Working Capital is an accounting concept. These two concepts of working capital are not exclusive. Both of them have their own merits/ advantages SIGNIFICANCE OF WORKING CAPITAL The need and importance of working capital con not be over emphasized. liquidity and its structural health. cash. If a firm has relatively high investment in these assets in comparison to a firm which is transacting the same volume of sale. it will have lower profitability in comparison to the latter. Working capital management policies have a great effect on the firm’s profitability. receivables and inventory. gross working capital consists of cash. Therefore. when one increases the other decreases. A concern needs of funds for its day to day running. Therefore it is essential that financial manager lays down such working capital management policies that a proper balance is struck between profitability and liquidity. As pointed out earlier. receivables. The proper and efficient management of working capital can ensure of all this. This may require to reduction of investment in working capital but. the current and quick ratios will be adversely affected leading the firm to poor liquidity. In fact profitability and liquidity are inversely related.

Sundry debtors will be realized in cash after the expiry of credit period. These three combined together will constitute work in progress. This cycle is also known as operating cycle or cash cycle. The working capital cycle is depicted below: Cash Pay Supplier for Raw Material. debtors and finally cash again. cash will be paid out for the other part immediately. The finished product when sold on credit gets converted into sundry debtors. This time period is dependent upon the length of time within which the original cash gets converted into cash again. This cash can again be used for financing raw materials. work-in-progress. Some raw material available on credit but. finished goods. etc. After the production cycle is complete. work-in-progress. Then it has to pay labor costs and incur factory overheads. Short term funds are required to meet the requirements of funds during this time period. Overhead Collection Cash WIP Debtors Finishing Goods 15 Dispatch . Labour. work in progress will get converted into finished products.(Sales) suppose a company has a certain amount of cash. Thus there is a complete cycle from cash to cash wherein cash gets converted into raw material. It will need raw materials.

Receivables collection stage. Raw material and store stage 2. entering into stock and cash from sales of finished goods. 2) Conversion of WIP into finished stock. it gets credit from the supplier for 15 days. The total of all these. Work-in.progress stage 3. The duration of the operating cycle for the purpose of estimating working capital is equal to the sum of the durations of each of above said events. The duration of working capital cycle may vary depending on the nature of the business. For example a company holds raw-materials on an average for 60 days. i. The determination of working capital cycle helps in the forecast. It can be determined by adding the number of days required for each stage in the cycle. 60-15+15+30+30 days is the total working capital cycle. This cycle continues throughout the life of the business.M and ends with the collection of receivables and can be divided into four stages 1.Working capital cycle indicates the length of time between companies’ paying for materials. Finished goods stage 4.e. 16 . It indicates the total time lag and the relative significance of its constituent parts. The working capital cycle consists of the following events which continues Throughout life of business: Conversion of cash into raw material 1) Conversion of raw-material into work in progress. 120 days. 3) Conversion of finished stock into accounts receivables through sales and 4) Conversion of accounts receivables into cash. finished goods are held for 30 days and 30 days credit is extended to debtors. less the credit period allowed by the suppliers. control and management of working capital. Thus the operating cycle of a manufacturing company begins with acquisition of R. production process needs 15 days.

the operating cycle process can be expressed as follows: Operating cycle = R+W+F+D-C Where.M & stores R= -------------------------------------------------Average R. R Stand for Raw material period W F Stands for Work in progress Stands for finished stock period D Stands for debtor’s collection period The various complements of operating cycle may be calculated as shown below:Average stock of R.M & stores consumed per day Average WIP inventory W= -------------------------------------------------Average cost of production per day Average finished stock inventory F= -------------------------------------------------Average cost of goods sold per day Average Book debts D= -------------------------------------------------Average credit sales per day 17 .In the form of an equation.

the extent of liquidity in the assets structure and the efficiency with which the working capital is used in the business. The ratios normally used to measure the liquidity characteristics of working capital are:– (a) Current ratio 18 . The various tools and techniques used to measure and analyses the working capital are:(a) Ratio analysis (b) Funds flow analysis (i.e.) Sources & uses of working capital (c) Cash flow analysis and cash budget (a)RATIO ANALYSIS AS A TOOLS OF MEASURING THE WORKING CAPITAL:Ratio analysis can be used as a useful tool to verify the level and composition of working capital. so the same ultimately leads to blocked of capital. a. (I) RATIOS TO MEASURE THE LIQUIDITY ASPECT OF WORKING CAPITAL MANAGEMENT: . In a nut shell working capital ratio can be used to analysis these aspects of working capital management i.Average Trade creditors C= -------------------------------------------------Average credit purchases per day As time involved in conversion of different stage of operating cycle. This leads to the needs of working capital which is very crucial to sustain the day to day business activity.e. MEASUREMENT OF THE WORKING CAPITAL:It is already stated that working capital management is concerned with the maintaining of adequate level of working capital. Liquidity ratios measure the ability of a firm to meet its short-term obligations and indicate the short-term financial solvency of a firm. liquidity efficiency and structural health.Liquidity is considered to be the pre-requisite for the very survival of a firm. financing mix of working capital structure for permanent and temporary working capital and balance of current assets to fixed assets etc.

(b) Accumulation of debtors which may lead to bad debt loss of interest etc. It is because the current ratio is a quantitative measure of liquidity rather than a qualitative index. as some current assets are more liquid than others. More over the properties of various elements/component of current assets to total current assets also matters. (a) CURRENT RATIO:-Current ratio may be defined as the relationship between current assets and current liabilities.Thus the higher the current ratio the larger the amount of rupees available per rupees of current liability. bad debt etc. It is also known as the working capital ratio. the more the firm’s ability to meet current obligation and greater the safety of funds of short term creditors and vice. However a high current ratio is unfavorable from the firm’s point of view due to following reasons. For example cash and receivables are more liquid than inventory. Though there is no hard and fast rule as a convention the minimum of 2:1 ratio is referred to as rule of thumb or arbitrary standard of liquidity for a firm. However the rule of thumb should not be blindly followed. A ratio near to the standard is also considered satisfactory.versa. On the other hand. In this sense a firm 19 . It is computed by dividing the total current assets by total current liabilities. As we are known that current liabilities are to be paid in full where as the current assets are subject to fall in value in term of shrinkage obsolete. It is used as a general measure of liquidity.(b) Quick ratio/Acid Test (c) Super quick ratio. (a) Slow moving/piling of inventory leading to high carrying cost. a low current ratio reflects that the liquidity position of a firm is not good and it may find difficult to pay its current obligation. Current assets Current Ratio= -------------------------------Current liabilities INTERPRETATION OF CURRENT RATIO:-A relatively high current ratio is an indication that the firm has ability to pay its current obligations as and when they became due.

The ratio is computed by using following formula. Still the ratio sometimes fail to measure the real position of liquidity particularly when total current assets includes a very high portion of sundry debtors in its composition which cannot be easily collected or there is a more chance of bad debts losses. INTERPRETATION OF THE RATIO: . Thus quick assets exclude inventory and pre-paid expenses from current assets to determine quick ratio. Normally a quick ratio of 1:1 is considered satisfactory from firm’s liquidity point of view. (b) QUICK OR ACID TEST RATIO: . Quick Assets Quick Ratio = ---------------------------Current Liabilities The components of the quick assets are cash and bank balances. Prepaid expenses are also excluded based on the reasoning that they are not available to pay of current debt by virtue of its nature. short-term marketable securities.having low current ratio is quite able to pay its short-term obligation having more percentage of cash & receivable as current assets than the firm having high current ratio with more percentage of inventory as a part of its current assess. 20 . In a true sense acid test ratio provides a check on liquidity position determined on the basis of the current ratio. more rigorous and penetrating test of liquidity of a firm. The utility of the ratio based on the fact that it is the best available test of the liquidity position of a firm and it is widely accepted. All these leads to determination of super quick ratio.Quick ratio is a tight measure of liquidity in comparison to current ratio. The exclusion of inventory is based on the judgment that it is not easily and readily converted into cash. debtors/ receivable.This ratio expresses the relationship between quick assets and current liabilities.All these leads to analysis the quick or acid test ratio as a measure of working capital from the liquidity point of view.

Super Quick assets Super Quick Ratio = -----------------------Current Liabilities The super quick assets are cash and marketable securities. However super quick ratio is treated to be a conservative approach and is not widely used in practice. (ii) RATIOS TO ANALYSE EFFICIENCY OF WORKING CAPITAL:The various ratios uses to measure the efficiency of working capital are:(a) Inventory turnover ratio (b) Raw material turnover ratio (c) Work in progress turnover ratio (d) Finished goods turnover ratio (e) Debtors turnover ratio (f) Average collection period (g) Payables turnover ratio (h) Cash turnover ratio (i) Working capital turnover ratio (j) Current assets turnover rate 21 . In other words super quick ratio is determined by dividing the super quick assets by current liabilities. prepaid expenses and debtors are excluded from the current assets to test the liquidity. This is a most rigorous measure of a firm’s liquidity position. In this case inventory.(c) SUPER QUICK RATIO:-The super quick ratio establishes relationship between super quick assets and current liabilities.

(a) INVENTORY TURNOVER RATIO:Inventory turnover ratio indicates the number of times inventory replaced during a given period normally a year. The inventory or stock turnover ratio satisfies the efficiency of the firm’s inventory management. And Opening Inventory + Closing Inventory Average Inventory = -----------------------------------------------2 In the absence of cost of goods sold and inventory data the ratio can be calculated by following formula: Sales ------------------------Closing Inventory 22 . It is calculated by dividing the cost of goods sold by the average inventory. Cost of goods sold Inventory turnover ratio = -----------------------Average Inventory Where Cost of goods sold = (Opening Inventory + Manufacturing Cost) – Closing Inventory. The ratio establishes the relationship between costs of goods sold and inventory level.

over valuation of stock etc. However a too high ratio needs careful analysis. scrap. Thus a very high or low inventory ratio needs careful analysis and undesirable from the firm’s point of view. It is a test of efficient inventory management. INTERPRETATION OF THE RATIO:The inventory turnover ratio indicates how quickly the inventory is turning into receivable through sales. (b) RAW MATERIAL TURNOVER RATIO:The ratio is computed by dividing the raw material consumed during the year by average balance of raw materials held during the year. wastage. Raw materials Consumed during the year Raw material Turn our Ratio= --------------------------------------------------23 . On the other hand a low ratio indicates unnecessary tie up of funds in inventory or a slow moving / obsolete inventory. A low ratio may be the result of inferior quality of goods. A low-level inventory has also serious implications in terms of firm’s inability to meet customers’ demand and there may be bottleneck in production. A low-level inventory is quite dangerous for the firm. It may be the result of a very low-level inventory that results in frequent stock outs and involve shortage costs. To judge whether the ratio of the firm is satisfactory or not.e.) rent of storage. insurance. theft lighting. deliberate excessive purchase in anticipation of future price increase. hearing. it should be compared over a period of time or the same can be compared with industry norms or competitive firms.However this approach is not a logical one since sales is based on the market price and closing inventory is based on the cost. opportunity cost of lockup funds and so on. pilferage. It is because carrying excessive inventory involves cost in terms of high carrying cost (i. A high inventory turnover is a better than a low ratio and implies better inventory management. Further inventory figures may be under estimated due to the fact that normally firm have lower inventory at the end of the year.

heating etc. The ratio reflects the rate of utilization of raw material. A higher turnover ratio indicates higher utilization of raw material.M consumed per day The holding period must not be too high or too low. However a very high ratio is not good from the organization point of view as the same may lead to bottleneck in production due to stock out of raw material.M causing high carrying cost in term of shrinkage in values. On the other hard a low turnover of raw material is an indication of accumulation of inventory. Raw material holding period (in days):365 ----------------------------------Raw material turns over 365 * average R. lightening. A high holding period leads to accumulation of R. pilferage.M = ---------------------------------------R.administrative cost. The efficiency of utilization of raw material can also be judged from raw material holding period which is determined by dividing the number of days during the year by inventory turn our ratio.M consumed during the year Average R.M = -----------------------------------------R. (c) WORK IN PROCESS TURN OVER RATIO:- 24 . theft .Average raw material held. whereas too low holding period leads to high ordering cost and there may be interruption in production process. were housing charges.

Conversion period :. Cost of goods sold Finished goods Turnover ratio= ------------------------------Average finished goods 25 .(in days) 365 ----------------------------------------WIP turnover ratio Average WIP inventory ----------------------------------------------Cost of goods manufactured per day (d) FINISHED GOODS TURNOVER RATIO:This ratio is calculated by the following formula.This ratio is calculated by dividing the cost of goods manufactured by average WIP inventory. Cost of goods manufactured WIP turnover ratio= --------------------------------------Average WIP A higher turnover ratio indicates lower inventory accumulation and vice versa. Conversion period can also be determined by dividing the number of days in a year by WIP turnover ratio.

Average finished goods And finished goods holding period= -------------------------------Cost of goods sold per day A high holding period is not good from the organization point of view as the same leads to higher working capital requirements. (e) DEBTORS TURN OVER RATIO: Debtor turnover ratio is a supplementary measure the liquidity of a firm is mainly computed to judge the efficiency of firm’s credit policy. Net Credit Sales Debtor Turnover Ratio = ----------------------------Average Debtors Net Credit sales = Total credit sales – sales returns In case of non availability of data in respect of credit sales and average debtors the formula used to calculate the ratio is Total sales ----------------------------26 . The ratio indicates how quickly debt / receivables are converted into cash. The ratio is calculated by dividing the net credit sales by average debtors.

On the other hand a longer the collection period indicates poor debt management and there is an increasing chance of bad debt and other collection expenses. Long collection period means the firms is adopting a poor credit policy. it is not wise on the part of a firm to have either a very short or a very long collection period. The shorter the average collection period. trade practice etc. competition. (f) AVERAGE COLLECTION PERIOD:The average collection period ratio is interrelated and dependent upon the debtor’s turnover ratio. Similarly a very short collection period may adversely affect the sales volume. which may lead to an increase in the interest cost and increasing bad & doubtful debts. the better the trade credit management. INTERPRETATION OF THE RATIO:The ratio indicates the speed at which debtors/ receivable are collected.Closing Debtors However the ratio is not logical one. Days in year Average collection period = ----------------------------Debtors turnover ratio Debtors X Days in year = -------------------------------Credit sales 27 . since the same show an inflate receivable turnover ratio. However. Thus it signifies how many times receivables are converted into cash in average collection. It is determined by dividing the days in a year by debtor’s turnover ratio. The reasonableness of collection period can be judged in view of the industry norms.

Normally a higher turnover ratio is preferable to the firm. Thus efficient management of cash is quite important from the firm point of view. On the other hand keeping less cash balance may lead to insolvency.(g) PAYABLES TURNOVER RATIO:Accounts payable forms an important source of spontaneous financing to the firm. The formula used to calculate payable turnover ratio is mentioned below:- Annual purchases Payable turnover ratio= ------------------------------Average payables The ratio expresses the number of times accounts payables are converted into purchases during the year. The average payment period determined as 365 Average payment period = -----------------------------Payable turnover ratio (h) CASH TURNOVER RATIO: Keeping more cash to maintain liquidity is a loss to the firm as the same can be invested in profitable assets to earn better return. 28 .

5. The tool used to analyze the structural health of working capital is known as decomposition analysis. 3. Sundry creditors to total CL. Cash operating exp. Inventory to total current assets. All these ratio can be computed for different year very easily by dividing for the different elements of CA with total CA of respective year and different elements of CL with total CL. The ratio can be compared with the ratio of other similar firm competitors and the industry as well. Cash/Bank balance to total current assets. Current liabilities to total liabilities. Receivables or debtor to total current assets. The various ratios used to analyze the structural health of working capital are:1. Day Cash Turnover Ratio = -----------------------------------Average cash balance Day. A (iii) RATIO TO ANALYSE THE STRUCTURE OF WORKING CAPITAL:The structural health of working capital can be determined by analyzing the various elements of current assets and current liabilities over a period of time. 4.Cash turnover ratio is an important tool in this regard which can be computed by using following formula. Simply current 29 . In decomposition analysis spilt and changes made in different elements of CA and CL has been determined by computing the ratio of various elements of CA to total CA and various elements of CL to total CL. 2. 6. 365 And cash holding period= -------------------------------Cash turnover ratio. Current assets to total assets.

In funds flow statement two main financial statements are prepared.assets to total assets ratio can be computed by dividing total CA of different year with total assets and current liabilities to total liabilities by dividing total CL of different year with total liabilities of respective years. The goal of working capital management is to manage each of the firm’s current assets efficiently in order to maintain the firm’s liquidity while not keeping any of the current assets at too high level. Thus this statement provides same meaningful information about working capital and its requirement MANAGING VARIOUS COMPONENTS OF WORKING CAPITAL:We have already seen that proper management policies are required for the various constituents of working capital. it is absolutely 30 . For the survival of the business. They are:(a) Statement of changes in working capital (b) Sources of uses and application of funds Statement of changes in working capital indicates the increase/decrease on working capital over the previous year both individual element wise of current assets and current liabilities as well as overall changes in working capital. We shall now consider the salient features of management of each element of working capital separately. The modern day business comprises numerous units spread over geographical areas. (a) FUNDS FLOW ANALYSIS:Funds flow analysis provides insight into the movement of funds and helps in understanding the changes in the structure of assets. and owners equity. It is the duty of the finance manager to provide adequate cash to each of the units. liabilities. The elements of working capital are:(a) Cash management (b) Debtors management (c) Inventory management CASH MANAGEMENT:Management of Cash is an important function of the finance manager.

It can either be a projected statement which acts as a guideline for management or a record of actual performance 31 . The term ‘cash flow’ depicts the flow of liquid funds as as result of business activities. (2)Ability to take advantage of profitable opportunities that may present themselves which may be lost for want of ready cash/settlement. It is the duty of finance manager to have liquidity at all parts of the organization while managing cash. Hence. Need for Cash:The following three basic considerations in determining the amount of cash of liquidity have been outlined by Lord Keynes: (1)Facility in meeting the day-to-day expenses and other payments on the dates. A cash flow statement records and reflects the quantum and the nature of inflow and outflow of liquid funds. it is only the reserve cash balance that can enable the firm to make its payments in time. he is also to ensure that there are no funds blocked in idle cash. Cash management is one of the key areas of working capital management. Cash plays a vital role so far as daily operation of business enterprise is concerned. In such cases. On the other hand. Normally. This is the Speculative Motive. the question of cost of idle cash must also be kept in mind by the finance manager. Idle cash resources entail a great deal of cost in terms of interest charges and in terms of opportunities cost. But sometimes this inflow may be temporarily blocked. Estimation of Cash Requirements: The first step in cash management is to be estimating the requirements of cash. A cash management scheme therefore. For this purpose cash flow statements and cash budgets are required to be prepared.essential that there should be adequate cash. inflow of cash from operations should be sufficient for this purpose. It is the most liquid component of current assets. The need for cash arises due to following reasons. (3)Safety as is typified by the saying that a man has only three friends an old wife. an old dog and money at bank. This is given the name of precautionary motive. This is Transaction Motive for maintaining liquidity. . is a delicate balance between the twin objective of liquidity and cost.

analyzing the strength and the weakness of the short term financial position. because it explains how the funds came and where they have gone. From the conventional Profit and Loss Account. Sometimes it is also referred to as ‘how come. the management does not know its cash position. (3) It reveals the estimated availability of cash. etc. (4) It reveals the need for additional cash requirements in advance so that negotiations for obtaining loans could be started in time. or (ii) showing the net inflows outflows from revenue operations as one consolidated figure and inflows/outflows of capital nature separately. (2) It shows the amount of internal accruals. It might so happen that. and how much can be spared for capital expenditure. so that advance planning of cash utilization becomes possible. the company may not have sufficient funds to pay even salaries. The increased inflow from profit may have gone into the financing of stocks and debtors or utilized to acquire fixed Assets or repayment of term liabilities. Profit is not cash. A cash flow statement is actually the summarized from of cash book in which the actual receipts and payments are sectionalized. where gone’ statement. the financial institutions try to from an ideal whether the firm to be financed would be able to 32 . in spite of big profit as revealed by the profit and loss account. This is because adequate profits do not necessarily ensure adequate cash resources. management can assess how much is needed for increase working capital. It is thus a vital tool for providing data for a number of managerial decisions. The preparation of cash flow statement offers the following advantages: (1) It tells the management when to plan and for what amount of liquid funds. It shows the sources from where the funds were obtained and the uses to which they were put. It is because of all these advantages that financial institutions insist on projected cash flow statements for 5 to 10 years before entertaining loan applications. From the cash flow statement. and an increase in profit is not necessarily a comfortable cash situation. Cash flow statement can be prepared in the following two ways: (I) show in detail each item of inflow of cash irrespective of whether it is capital or revenue in nature.

dividends to shareholders. raw material purchases budget. this will depend on the credit allowed to the customers in the trade. Cash Budgets for Short Period: Preparation of cash budget month by month would involve making the following estimated: a) As regards receipts: (1) Receipts from debtors: (2) Cash Sales. 33 company) . normally the credit period is extended beyond what is actually allowed as a matter of policy. (2) Payments to be made for expenses. (ii) Income tax paid in advance. etc can be prepared and converted into cash flow on the basis of the credit available against them. etc. actually pay within the credit period allowed because in certain trades. for example. and (3) Any other sources of receipts of cash (say. (4) Special payments to be made in particular months. After ascertaining the production programmed. (iii) Sale tax etc. although the period covered in this case is much shorter. which should be adjusted to assess the cash inflow from sales.generate sufficient cash to pay the interest and installments in time after meeting their own need. for the same reason. redemption of debentures or repayments of loan. (I) Debenture interest. (3) Payments that are made periodically but not every month. Also is should be ascertained from the market whether the customer. Recently. banks have also started insisting on projected cash flow statements before granting loans for working capital. The costs of the production programmed required to feed the budgeted sales are then estimated. and labour budget. Some of the points regarding the above are discussed below: The sales figure is taken from sales budget. payment for assets acquired. dividend from a subsidiary B) as regards payments: (1) Payments to be made for purchases.

Long-range Cash Forecast: Long-range cash forecast often resemble the projected sources and application of funds statement.Separate budgets could then be prepared for salaries. This task assumes special importance on account of the fact that there is generally a tendency amongst divisional managers to keep cash balance in excess of their needs. Hence. For this. Add(ii) (a) trading profit (before tax) expected to be earned. (a) Sale proceed of assets. The following procedure may be adopted to prepare long-range cash forecast:(a) Take the cash at bank and in hand in the beginning of the year. (ii) Deduct-(a) Dividends to be paid. (b) Proceeds of fresh issue of shares or debentures. (b) Depreciation and other development expenses incurred to be written off. (b) Cost of assets to be purchased. (c) Taxes to be paid. (e) Increase in working capital. and the payment to be made against them would be known from the terms of purchases. Systems of Cash Management: A finance manager must control the levels of cash balance at various points in the organization. (d) Debentures or shares to be redeemed. wages and other overheads. methods have to be employed to (a) speed up the mailing time of 34 . Other items like interest. should also be provided for. dividends etc. and (c) Reduction in working capital that is current assets (except cash) less current liabilities. the financial managers must devise a system whereby each division of an organization retains enough cash to meet its day to day requirements without having surplus balances on hand. keeping in view the past practice and contractual obligations. The information about the fixed assets to be acquired would be available from the capital expenditure budget.

For example. The concentration bank with which the company has its major bank account is generally located at the headquarters. Chennai for the South and Nagpur for the Centre. remittance are received by a collection centre and deposited in the bank after processing. which a company chooses according to its billing patterns.payments from customers. (b) Concentration Banking: In concentration banking the company establishes a number of strategic collection centers in different regions instead of a single collection centre at the head office. This system reduces the period between the times a customer mails in his remittances and the time when they become spendable funds with the company. Customers are billed with instructions to 35 . Payments received by the different collection centers are deposited with their respective local banks which in turn transfer all surplus funds to the concentration bank of the head office. Under this arrangement. if a company divides the country into five zones on the basis of feasibility studies. a feasibility study is made of the possibilities of cherubs that would be deposited under alternative plans. Calcutta for the East. Two very important methods to speed up collection process are (I) Concentration banking and (ii) lock-box system. A lock box arrangement usually is on regional basis. Mumbai for the West. In this regard operations research techniques have proved useful in the location of lock box sites. The purpose of lock box system is to eliminate the time between the receipt of remittances by the company and the deposit in the bank. (b) reduce the time during which payments received by the firm remain uncollected and speed up the movement of funds to disbursement banks. it might pick up New Delhi for the North. (ii) Lock Box system: Another means to accelerate the flow of funds is a lock box system. Concentration banking is one important and popular way of reducing the size of the float. Before determining the regions to be used. the company rents the local post-office box and authorizes its banks at each of the locations to pick up remittances in the boxes. With concentration banking.

is simply to compare the added cost of the most efficient system with marginal income that can be generated from the released funds. If costs are less than income. certain motivational factors 36 . The main advantage of lock box system is that cheques are deposited with the banks sooner and become collected funds sooner than if they were processed by the company and the time they are actually deposited in the bank is eliminated. if not the system is not a profitable undertaking. In a decentralized form of organization. making excessive use of draft instead of cherubs. The bank provides a number of services in addition to usual clearing of cheques and requires compensation for them. In a highly centralized organization. The main drawback of the lock box system is the cost of its operation. Since the cost is almost directly proportional to the number of cheques deposited. The bank picks up the mail several times a day and deposits the cheques in the company’s account. This procedure frees the company from handling and depositing the cheques. Availability of cash can be maximized by playing the float. In this. concentration banking. it may not be possible and advisable for the central office to exercise a detailed control over cash inflows and outflows. Lock box arrangements are usually not profitable if the average remittance is small. therefore. a firm estimates accurately the time when the cherubs issued will be presented for encashment and thus utilizes the float period to its advantage by issuing more cherubs but having in the bank account only so much cash balance as will be sufficient to honor those cherubs which are actually expected to be presented on a particular date. The appropriate rule for deciding whether or not to use a lock box system or for that matter. the system is profitable. the system would be such that the central or head office controls the inflows and outflows of cash on a routine and daily basis.mail their remittance to the lock boxes. an effective control over payments can also cause faster turnover of cash.Besides accelerating collections. In such a situation. Playing the float: . This is possible only by making payment on the due date. where the divisions have complete responsibility of conducting their affairs. The exact nature of a cash management system would depend upon the organizational structure of an enterprise. The company receives a deposit slip and lists all payments together with any other material in the envelope.

the local branches of the bank make a telegraphic transfer of funds collected during the week to their main office at Delhi. and (b) Cash in excess of requirements is specially invested. The bank is advised to release the amount of such weekly requirements at various places in the country. therefore. To achieve these objectives. (c) The main office of the bank works out the total receipts of funds from all over the country and intimates this figure to the financial controller of the organization. the organization has made the following arrangements: (a) All collections from workers and their employers during a week are deposited in a special account in the branch of a nationalized bank which has a net work of branches at all the collection centers. under reference. It has a net work of 529 cash payment offices which make more than 5. The head office controls the various divisions closely. No collection centers can use any cash out of the collections so made. It covers more than 15. has to take into account all these problems. The organization thus deals with huge amounts of cash and liquid resources. Consider the following case which illustrates a centralized cash management system. disablement and death.7 million beneficiaries at 314 centers in the country. Thus. The cash requirements of each centre are separately worked out through weekly cash budgets. each of which should have optimum liquidity to meet its needs. Such a form of organization requires quick and effective information links. The system of cash management. is entrusted with the task of providing industrial workers all over the country insurance cover in case of sickness. The scheme is financed mainly by contributions from the employer and employee ate the specified rates. The organization.must be built into the system of performance appraisal so that the various managers are impelled to retain only the optimum balance of cash. each centre can draw 37 . Cash Management in a highly centralized organization:A highly centralized organization implies that the decision-making authority tends to concentrate with the top management at the head office.5 million payments on an average in a year. (b) Every Monday. maternity. The centralized cash control system or concentration banking system in the organization ensures that: (a) Cash is collected speedily from the various centers.

cash management in such an organization has different characteristics. Interest may be allowed on deposits and similarly interest may be charged on withdrawals. In short. it can do so by telegraphically informing the financial controller at Delhi. (e)A special feature of the system is very quick communication which minimizes the float. Inventory type models have been constructed to aid the finance manager to determine optimum cash balance of his firm. the Railway deposits their excess cash with the Reserve Bank of India and gain interest thereon. In case a centre needs more cash than was projected in its budgets. In a decentralized organization this may not be possible on account of the relatively independent authority that each divisional manager enjoys. William J. (d)It is obvious that the financial controller at Delhi would. Cash Management in a decentralized Organization: Cash management in a centralized organization is based upon centralized control over cash inflows and outflows. In India. All these models can be put in two categories-inventory type models and stochastic models. The difference can now be invested in an assortment to spread risk and optimize liquidity and return. in a decentralized organization. CASH MANAGEMENT MODELS: In recent years several types of mathematical models have been developed to help determine the optimum cash balance to be carried by a business organization. by the mid-week. know his total cash balance which is the difference between total cash receipts of the previous week of all centers collected through various branches and total cash expenditure expected for the next week of all carters. Consider the following case of Indian Railway. This can be achieved through the mechanism of interest5 on periodical balances of various divisions with the head office.from the branch of the bank its weekly requirements of cash. The purpose of all these models is to ensure that cash does not remain idle unnecessarily and the same time the firm is not confronted with a situation of cash shortage. Hence. Bohol’s economic order 38 . the constituent units must be encouraged to keep their cash requirements at the minimum.

These limits satisfy the demands for cash at the lowest possible total cost.) Z Return Point 39 . The high and low limits of cash balance are set up on the basis of fixed cost associated with the securities transactions. It happens when the demand for cash is stochastic and not known is advance. in a situation where the EOQ Model is not applicable.e. H Upper control Limit Cash Balance (Rs. the transfer of cash equal to h-z is affected in marketable securities account. When the cash balance reaches the upper limit. z as the return point. These limits may consist of h as upper limit. During the period when cash balance stays between h & z. and zero as the lower limit. However. the opportunity cost of holding cash and the degree of likely fluctuations in cash balances. high and low limits no transactions between cash and marketable securities account is made. In this model control limits are set for cash balances. The model is designed to determine the time and size of transfers between an investment account and cash account. When changes in cash balances occur randomly the application of control theory serves a useful purpose. a transfer from marketable securities account to cash account is made. stochastic model of cash management helps in determining the optimum level of cash balance. When it touches the lower limit. The Miller-Orr model is one of such control limit models. The Miller-Orr cash management model incorporates stochastic nature of cash flows. According to this model the net cash flow is completely stochastic. i.quantity model applies equally to cash management problems.

It is obvious that if there are large amounts tied up in sundry debtor. the financial manager is in a particularly. the financial manager has relatively little impact upon the level of receivables. But. The basic objective of management of sundry debtors is to optimize the return on investment on this asset. since the competitors may offer more liberal credit 40 . working capital requirements and consequently interest charges will be high. In the beginning the financial manager plays an important role in determination of credit period and deciding the criteria for selection of credit applications. however limit the amount of receivables by rejecting occasionally credit applications or he may speed up the conversion of receivable into cash by aggressive collection policy. the bad debts and the cost of collection of debts would be high. He may. In addition to his role of supervising the administration of credit. strategic position to contribute to top management decisions relating to the best credit policies of the firm. Also. the sales may be restricted. if the investment in sundry debtors is low. in such a case. these activities have smaller effect upon the level of receivables than the initial and fundamental decision regarding the terms of credit and the overall credit standard laid down by the firm. On the other hand.0 TIME Lower control Limit MILLER-ORR CASH MANAGEMENT MODEL MANAGEMENT OF SUNDRY DEBTORS The financial manager has operating responsibility for the management of investment in receivables. Once it has been done and the management has determined the role of credit in the package of goods and services offered.

the credit policy is to be determined. average collection period and debt losses. Credit policy involves the following considerations: (a) Credit Period: . This involves a tradeoff between the profits on additional sales that arise to credit being extended on the one hand and the cost of carrying those debtors and bad debt losses on the other. The important factors are:(1) The effect of credit on the volume of sales (2) Credit Terms (3) Cash discount (4) Policies and practices of the firm for selecting credit customers (5) Paying practices and habits of customers (6) The firm’s policy and practices of collection (7) The degree of operating efficiency in the billing. However. cash discount and other special items. the credit period may be small. if product has an elastic demand.What should be the credit period? If the demand of a product is inelastic. These decisions in turn determine investments in sundry debtors. Therefore. CREDIT POLICY:The credit policy of a firm involves decisions relating to length of the credit period. The second aspect of management of sundry debtors is credit analysis. record keeping and adjustment function. A number of factors determine the size of the investment in receivables. the credit period will 41 . The third aspect is follow up of debtors and credit collection. There are basically three aspects of management of sundry debtors. whereby the financial manager determines as to how risky it is to advance credit to a particular party. management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies. Firstly. Thus management of sundry debtors involves both laying down credit policies and execution of such policies.terms.

Suppose further that the return on investment of the particular firm is 30% it is obvious that the firm will gain 30% of 25 lakhs (or Rs. the firm has to ascertain credit rating of prospective customers. 7. 3 lakhs. in case the credit period is too long. In a scheme of cash discounts. Cash discounts are particularly useful where a firm has dealings with government departments. where payments are usually delayed.Having determined the credit terms. 25 lakhs would now be released on account of the new policy. It is obvious that a given point of time the firm will carry debtors amounting to Rs. (d)Credit Analysis: . For this purpose. It is obvious that a scheme of cash discounts in such a case would be beneficial to the concern. Suppose further that 50% of the customers will pay cash promptly. 50 lakhs. there is likelihood that such department may pay up the amounts more quickly. Since the firm would spend about Rs. The rate of discount to be given should depend upon the cost of carrying debts. Also. 42 . since the situation in the market keeps on changing. a firm may have a policy of allowing different credit periods to different customers. Another important factor in determining the credit period is the possibility of bad debts. the firm has to evaluate individual customers in respect of their credit-worthiness and the possibility of bad debts.5 lakhs by way of cash discounts it makes an overall gain of Rs. The credit period is also dependent on the custom in the industry and the practice followed by various competitors. (c)Discount policy: . A firm cannot determine the credit period once for all.5 lakhs) which can be invested in the expansion programmed etc. It is obvious that this possibility will increase. 4. The availability of funds and the credit risks involved also determine the credit period. For the larger number of customers having small dealings a firm may allow general credit since it may be too costly to distinguish and classify customers. A cash discount is a means of improving the liquidity of the seller. etc.determine the quantum of sales. It means that Rs.Discounts are normally given to speed up the collection of debts.

the past experience of his account would be valuable source of essential data for scrutiny and interpretation. (4)Past experience: In case of an existing customer. The following are the important sources: (1)Trade references: The prospective customer may be required to give two three trade references.(e)Credit Rating: . the customer may give a list of personal acquaintances or some other existing credit-worthy customers. A shrewd manager can look into the account carefully and try to find out the credit risk involved. if a customer’s name appears in the list of 43 . (3)Credit bureau reports: In some cases the associations for specific industries maintain credit bureau which provides useful and authentic credit information for their members. This involves decisions regarding individual parties as to how much credit can be extended and for how long. The agency lists alphabetically about 3 million business firms with regard to their estimated financial strength and net worth. (5)Published financial statements: Sometime the published financial statements can be examined to see the credit-worthiness of a customer. (2)Bank references: Sometime the customer is asked to request the banker to provide the required information. In foreign countries specialized agencies are engaged in the task of providing rating information regarding individual parties. The credit manager can send a short questionnaire to the references seeking the relevant information. In India the task of the financial manager is a little more difficult. It is thus quite easy for a sales manager to judge the credit-worthiness of his customer by just referring to the book. its reputation and previous record of meeting commitments. bankers in India normally refuse to give detailed and unqualified credit reference. Dun and Bradstreet is one such source which reports on the credit-worthiness of various businessmen. This would involve an analysis of the financial status of the party. The composite credit appraisal is also given in terms of condensed rating symbols. Thus. However. The credit manager here has to employ a number of sources to obtain credit information. Further.An important task for the financial manager is to rate the various debtors who seek credit. He has to look into the credit – worthiness of a party and sanction credit limit only after he is convinced that the party is sound.

the credit manager must be discreet and should always have the interest or high sales in view. The major components of these types of costs are costs incurred on collection effort cost of capital legal charges etc. the next question to resolve is to set a limit on the credit.S. For proper determination of the limit of the customer the salesman should also ascertain the potential sales which the customers can affect to the ultimate customers. (6)Salesman’s interview and reports: First hand information through personal contact can also aid in judging the credit rating of a customer.These are the cost incurred to arrange the funds to be invested in receivables.approved suppliers of a Government agency like D.These are costs incurred in collecting receivables mainly includes costs of maintaining credit department and expanses involved in acquiring credit information.G. (b) Capital Cost: . In all such enquires. Many companies evaluate the credit worthiness of their customers by consulting salesmen or sales representatives.Such costs arise out of the failure of the customers to meet their obligations. it can be taken as a plus point. (a) Collection Cost: . 44 . Once credit-worthiness of a client is ascertained. (d) Default Cost: . Therefore cost on the use of additional capital to support credit sales which alternatively could be profitably employed elsewhere is a part of the cost extending credit receivables. (c)Delinquency Cost: . COSTS ASSOCIATED WITH RECEIVABLES The various types of costs associated with receivables management are (a) Collection cost (b) Capital cost (a) delinquency cost (b) Default cost. and D or other reputed organization.Such types of cost mainly includes bad debts.

The outright sale of accounts receivables known as “factoring” is very much popular means of short term financing abroad especially in United States and has also gained firm roots in India during the recent years. it has to work in a very smoother manner and diplomatically. On the other hand. 45 . Factoring is a debt collection service which includes buying the receivables of a company and extending credit up to 70-80% of the invoice value. Accounts receivable may thus be financed either through the outright sale of such accounts by the business. In effect this would mean financing the sundry debtors and so falls within the category of working capital finance. Hence.Efficient and timely collection of debtors ensures that the bad debt losses are reduced to the minimum and the average collection period is shorter. This involves a tradeoff between the levels of expenditure on the one hand and decreases in bad debt losses and investment in debtors on the other. it has to keep the amount of the outstanding in check. The collection cell of a firm has to work in a manner that it does not create too much resentment amongst the customers. Such procedures must answer questions like the following:(a)How long should a debtor be allowed to exist before collection process is started? (b)What should be the procedure of follow up defaulting customer? How reminders are to be sent and how should each successive reminder be drafted? (c)Should there be collection machinery whereby personal call by company’s representatives are made? (d)What should be the procedure for dealing with doubtful accounts? Is legal action to be instituted? How should the account be handled? FACTORING SERVICES:The entry of factoring in the Indian financial arena perhaps marks the beginning of the end of bank monopoly in selling working capital credit to business enterprises. If a firm expands more resources on collection of debts. a firm must work out the optimum amount that it should spend on collection of debtors.Collection Policy: . Thus. It is important that clear-cut procedures regarding credit collection are set up. or through borrowing with the receivable assigned as security. it is likely to have smaller bad debts.

therefore important that investment in inventory is properly controlled. losses and cost of maintaining documents concerning the inventories. collection and risk taking and provision of advance. It is therefore important that the financial aspect of inventories is carefully examined. on the one hand. to a great extent. In factoring accounts receivables are generally sold to a financial Institution who charges commission and bears the credit risks associated with the accounts receivable purchased by it. Clients enter into an agreement with the “Factor” working out a factoring arrangement according to his requirements. receipts and inspection procedures. sales ledger management. certain costs are incurred like interest cost on monies blocked in inventory. Factoring involves provision of specialized services relating to credit investigation. keeping check over obsolescence and ensuring control over movement of inventories. INVENTORY MANAGEMENT Inventories constitute a major element of working capital. if inventories are maintained at a low 46 .It is just a single service. cost of obsolescence and other storage. Generally. Inventory management covers a large number of problems including fixation of minimum and maximum levels. The seller may utilize the factor to perform the credit checking and risk taking functions but not the lending functions.e. The sellers are free to avail of any combination of services offered by the factoring organizations to their individual requirements. credit protection as well as provisions of finance against receivables and risk bearing. Like sundry debtors. Thus. rather a portfolio of complimentary financial services available to clients i. The objectives of inventory management are. Under this arrangement the factor checks and approves the invoices. The factor generally fixes up a limit customer wise for the client. The sellers select various combinations of these functions by changing provisions in the factoring agreement. if inventory are kept at a high level. Purchases and collection of debts. deciding about the issues. proper storage facilities. On the other hand. It is. determining the economic order quantity. determining the size of inventory to be carried. Its operation is very simple. sellers. similar to the objectives of cash management. management of inventories also involves a tradeoff between the carrying cost and the loss because of reduction in sales pursuant to nonavailability of inventories for an uninterrupted production programmed. follow up. The Factor then takes the responsibility of monitoring. cost of shortage.

Carrying Cost: . It mainly involves storage cost. detoriation in inventory on account of pilferage. These costs are fixed for the order placed.The cost incurred in maintaining and holding inventory is known as carrying cost. It is therefore. Management of inventory can be achieved through the use of one or more of the following techniques: (1) STOCK LEVELS: In order to minimize the unnecessary blocking of the capital in the material stock and to avoid the interruption in the smooth production process certain levels of stocks are to be determined in advance. cost of set up and cost of planning in storage. technological obsolesce. important that inventories are kept at optimum levels and a constant check is kept on the various inventory levels.level. In other words the acquisition cost is inversely related to size of inventory. depreciation. there may be interruptions in the production schedule resulting in under-utilization of capacity and lesser sales. cost of raising funds and opportunity cost of funds (interest on capital locked up in inventory). maintenance of building.Ordering cost is otherwise known as setup cost. It mainly involves cost of requisitioning. The main stock levels to be determined are: 47 . insurance. The determination of levels of stock helps in achieving the objectives of the inventory control. tax. service cost. The costs associated with inventory can be classified under following heads:• • • Ordering Cost Carrying Cost Shortage Cost Ordering Cost:. price decline. insurance cost against fire and theft. Shortage Cost: Such type of cost arises when inventories are short of requirement for meeting the needs of high costs on commitment with crash procurement. loss an accent of fall in sales and bottleneck in production. The small number of the orders frequently placed leads to more ordering cost and vice versa.

Maximum Stock level 2. Rate of consumption 2. Storage capacity 4. policy 8. Minimum Stock Level = ROL – (Average Consumption Rate*Average Lead Time) 48 .1. 1. Minimum Stock level 3.e. Availability of working capital 5. Danger level of buffer stock or safety stock level (1) Maximum Stock Level:The stock level above which the stock of any raw material is not allowed to go is called as maximum stock level. 3. 2. Economic order quantity 6. Govt. below which the raw material should not be allowed to fall. average rate of consumption average lead time re-order level It is also called as buffer stock. It depends upon the following factors:1. Carrying cost or holding cost 7. Lead time or reorder period 3. Re-order level 5. Re-order level Maximum Stock Level= ROL – (Minimum consumption rate*Minimum lead time) + Re-order quantity or EOQ (2) Minimum Stock Level:Minimum stock level is the lowest quantity of any raw material which should always remain as balance in hand i. Average Stock level 4. It depends upon the following factors.

It depends upon:(I) Lead time (ii) Rate of Consumption Max.3. Consumption Rate * Max. Average Stock Level= Minimum Stock Level + Maximum Stock Level / 2 OR Minimum Stock Level + Re – order quantity/2 OR When no Minimum Stock is maintained Re – order Quantity / 2 4. Average Stock Level:-The level which is normally carried by the business looking towards the nature and the requirements of the business. (iii) EOQ 49 . Stock Expressed in week + Average Delivery time in week) OR Minimum Level + (Average Consumption Rate * Average Lead Time) 4. Re – Order Level: The reorder level is that level at which a fresh order should be placed for the purpose of supply of the raw materials. (i) Danger Or Safety Stock Level: This is a level fixed usually below the minimum level. Lead Time OR Average Consumption per week * (Min.

Lead time. very urgent action for purchase is indicated. In the situation when the discount facility on the bulk purchases is also available the inventory cost also includes the purchasing cost.) OR Maximum consumption during Av. At EOQ the total order cost is equal to the total carrying cost. 6. Consumption during Av. Lead Time * (Max. C = Carrying Cost per Unit per Period. Lead time – Av. Economic Order Quantity:- It is that order quantity lot size which should be purchased by the business so that the inventory cost of the business becomes minimum. Inventory cost mean order cost and carrying (Holding) cost. (Where no discount is available) The EOQ will be calculated as under in the following two situations:(1) When discount facility is not available:EOQ = 2*A*B C Here:A = Annual Demand or Consumption. Rate of Consumption – Average Rate of Con. (Annual) (2) When at discount facility is available:50 . ROL – (Average Rate of Consumption * Average Lead Time) OR Av. This presupposes that a minimum level contains a cushion to cover such contingencies. B = Order Cost per Order.(ii) When the stock reaches this level.

the balance of each item of stores in hand.When at different level of purchase discount facility is available the EOQ is calculated by preparing following table in which the total cost of Inventory (including purchase cost) is calculated and the level of purchase at which the total cost is minimum will become EOQ. Thus the two main functions of the perpetual inventory system are:First Function Comprises of maintaining Second Function requires: 51 .* per order cost Order Quantity (C) Carrying Cost = Order Quantity -------------------. (A) Purchase Cost = Annual Demand * Purchase Price per Unit. Inventory means a list of goods in hand and the term perpetual inventory means a system of inventory which indicated at all times. (B) Order Cost = Annual Demand ---------------------.*per unit carrying cost per period (annual) 2 (D) Total Inventory Cost= A+ B+ C PERPETUAL INVENTORY SYSTEM:When the materials are in storage the control is affected through what is known as the perpetual Inventory.

(B) Stores Ledger:In the Store Ledger the quantities and values both are entered in the receipt. The sheets are numbered serially and initialed by a responsible official so as to avoid the risk of removal or loss. Thus.(a) Bin Cards (Quantitative perpetual inventory) (b) Stores Ledger (Quantitative Cum Valued perpetual inventory) (c) Continuous Stock taking (I) Recording store receipts and issues so as to determine at any time the stock in hand. and balance columns but in Bin Card only quantity are entered. issue. In some concerns the store ledger is maintained in bound volumes so as to rule out the possibility of loss of folios. Reconciliation of Bin Cards and Store Ledger:After posting in the bin cards. separate ledger sheets or folios are maintained in the stores ledger for each item of material. (A) Bin Card:This is containing only quantity details of stock. Like the bin cards. in quantity or Value or both without the need for physical count of stock. normally there should be no difference between the balances shown in two sets of records. If there is any difference then it should be reconciled and 52 . Additional information as noted in bin cards regarding quantity on order and quantity reserved. together with their values may also be recorded in the store ledger but the common practice is to record such transactions only one of the two sets of documents. the receipt and issue documents are valued and then passed on to the store ledger clerk for entry in the ledger. (ii) Continuous verification of the physical stock with reference to the balance Recorded in the stores records.

Another 10 to 20 percent of total items may be categorized as B items. It would normally be found that a small number of items add up to a very high value. These may be called C items. X price per unit. For this purpose. the balances can be tallied. The items are classified in the various category items according to their usage value.e. This method. The following procedure is adopted. 70 to 85 percent of items. 53 . Usage value means Qty. At the time of posting these documents in the store ledger. with the stores ledger balances. The rest i. The bin cards and the store ledger record the balance but their correctness can be verified by means of physical verification only. it is essential to keep all the postings up to date. Thus 5 to 10 percent of total items may constitute 70 to 85 percent of material cost. Such items are classified as items. though numerous. involves extra work. All the items are then re-arranged according to their usage value in a descending order. however. ABC ANALYSIS/SELECTIVE INVENTORY CONTROL:ABC analysis is a technique whereby high value items are controlled more closely than items of low value.corrected at regular intervals to make physical stock taking. The books indicate what the balance should have been where as physical check would reveal what the balance actually is. Category B items: Middle level will exercise close control & top management will exercise occasional control on them. On the basis of above classification now the control can be exercised as under:Category An items: Top management can exercise close control on these items. (ii) Continuous Physical Stock Verification The perpetual inventory system is not complete without a systematic procedure of physical verification of stores. If the closing balances on a facilitates automatic reconciliation is to note the stock balances on all the receipt and issue documents after they have been posted in the bin cards. will thus from only 5 to 10 percent of the total material cost.

EOQ will be decided. A close check on the consumption of these items will also be kept & reporting will continuously be made to top Management. will be defined carefully. Aging schedule of inventory etc. Regarding items of Category a different stock levels such as maximum stock level. minimum stock level etc. Besides above the various another techniques uses for the inventory control such as VED analysis.Category C items: General control by the top management & will be closely controlled by floor Mgt. 54 .

Chapter 4: ANALYSIS OF WORKING CAPITAL    Analysis of trend in current assets Management of various important Aspect of working capital 55 .

Such a movement/ direction of change may be positive (improvement on financial position ) or negative declining condition of financial position).4. Emphasis has been given to analyse the working capital position of the sample unit from liquidity risk and profitability point of view over a period of twelve years in this chapter. ANALYSIS OF TREND: The term trend refers to direction of change over a period . determinants and measurement of working capital from various angles. importance . 56 . role of such direction of change is quite crucial one. Thus a positive or upward trend shows growth of improvement while negative or downward trend shows an adverse situation. trend of net working capital. In financial analysis . analysis of various working capital ratios are discussed in this chapter.1 INTRODUCTION: After discussing the concept . the trend clearly reflects the change in overall financial poison of the organisation in long run. it is important to know the status of managing the working capital through detail analysis of various component and aspects of the same . Further the important dimensions of working capital management and inventory management also discussed and analysed specifically. For this purpose. trend of current assets and their components . trend of current liabilities and its components .

6 2005-06 668.79 cr.1 indicate the movement in absolute terms while 4.2 in term of percentage.4 2007-08 2276.ANALYSIS OF TREND IN CURRENT ASSETS:year CA 2004-05 2005-06 2006-07 2877.06 57 . to Rs. The total current assets during the period under analysis (refer to table 4.8 2282. It is significantly increase in 2004-05 and then again decreasing.88 cr.2.67 % of total current assets for the period.23 2009-10 1326. 53.2 2008-09 1394. it is evident that average inventory constitute only 1.5 2532. Looking into the item wise analysis of current assets.92 cr. Tables 4.24 2009-10 1385.1. to Rs. 1394. From Table 4.4.24 cr. The overall trend of inventory showed an increasing trend.50 cr. ANALYSIS OF TREND OF CURRENT LIABILITIES: YEAR CL 2004-05 776. However the inventory constitutes a very small portion of total current assets.2 and 4. during the period under study.64 The trend of current assets can be well judged from Table. 19.3 2008-09 1282. The growth of current shows an increasing trend over the period. with an average of 2110.4 2007-08 785.3 from different angles. it is seen that inventory ranged between Rs. 2877.6 2006-07 732. 4.1) is ranged between Rs.

there are three kinds of ratios used to analyzed the working capital (i. 1440. 58 .6 cr.06 cr.01 The trend of net working capital was fluctuating during the period under analysis . during the period with an average of Rs.) liquidity. 9285. 776.19 cr. with an average of Rs.58 2005-06 2153.Looking into table 4.47 2006-07 1864. to Rs. 1326.1.2 2007-08 1550 2008-09 1490.4 ANALYSIS OF VARIOUS RATIOS RELATING TO WORKING CAPITAL Ratio analysis is a quite useful technique to analyses the composition of working capital extent of liquidity in current assets and efficiency of working capital. 1112.58 cr. to Rs.9 2009-10 1112. The growth of the same was tremendously significant during the year 2005-06 and 2006-07 then it is decreasing from the year 2009-10. 1470. Total current liability varied between Rs.e. 2008-09 and 2009-10 TREND OF NET WORKING CAPITAL :Year Net Working Capital 2004-05 1470. 4. it is quite clear that the total current liabilities showed a fluctuating trend during the period.31 cr.2. efficiency and structural ratios. The table shows highest increase in 2004-05.01 cr. It increased from Rs.

42 2005-06 3. Since the average ratio is greater than the arbitrary standard of 2:1.09:1 with an average of 2. quick ratio and super quick ratio.47:1 to 1.3) the current ratio is not satisfactory in the year 2005-06.09 YEAR C.97 2006-07 3. the current ratio of the sample unit is presumed to be quite satisfactory.12 2008-09 2.82 1.R. As already mentioned in earlier current ratio express the relationship between current aspects and current liabilities.35 2005-06 3.Ratios used to measure the liquidity aspects of working capital are current ratio.79 2007-08 3.05 59 . ANALYSIS OF CURRENT RATIO AS A MEASURE OF LIQUIDITY OF WORKING CAPITAL a) Analysis of Current Ratio :2004-05 3. 2004-05 3. In the present analysis. b) Analysis of Quick Ratio :Year Q.R.65 2007-08 3 2008-09 2009-10 2. 2006-07 and 2004-05 it decreased significantly in 2007-08.86 2006-07 3. As a rule of thumb a ratio of 2:1 is assumed to be quite satisfactory. the current ratio over the past six years is fluctuating ( the period under review for the purpose of study) varies between 3.9 2009-10 1.60:1 (refer to table 4.

Quick ratio expresses the relationship between quick assets and current liabilities.69 1.05:1 with an average of 2.83:1 ( Table 4. c) Analysis of Super Quick Ratio :2004-05 0.R.91 2009-10 0.35:1 to 1.92:1 to .52:1. In the present analysis from table 4. it is clear that the ratio varies between 3. WORKING CAPITAL RATIO TO ANALYSIS THE CAPITAL To analysis the efficiency of working capital the following ratios are taken into consideration :EFFICIENCY OF WORKING 60 .66:1 with an average of . The standard norms of quick ratio are 1:1.92 2005-06 0.3) .66 Year S. The super quick ratio over the period under study varies between 0.27 2008-09 0.71 2006-07 2007-08 0. Thus the ratio is quite satisfactory as it is significantly higher than the standard norms.Q.3.

5 shows the results of various activity ratios for the past six years. Current assets to total assets ratio.45:1 with an average of 12. b) Analysis of Debtors Turnover Ratio and Average Collection Period :Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 61 .86:1 which is abnormally high.T. Current assets turnover ratio.02 2009-10 13.04 2007-08 10. From this table.45 Let us analyses the each of the above ratio in details. Table 4.79 2005-06 10. Analyze of Inventory Turnover Ratio :2004-05 21. Inventory turnover ratio. The ratio varies between 21.79 2006-07 10. Working capital turnover ratio. it is quite clear that the inventory ratio shown a fluctuating trend.79 : 1 to 13.R.09 2008-09 11. Debtors turnover ratio and average collection period.a) b) c) d) e) a) Year I.

7 shows the working capital turnover ratio for various years for the sample unit.76 0. c) Working Capital Turnover Ratio (WTR) :2005-06 0. The ratio varies from . the ratio is below 1(one). 0.76:1 to similarly 1.7 2007-08 0.O. it is the highest being 698 days approximately two years.63 for the period under study. Excluding the year 2005-06 & 2006-07.96 1. The average ratio is 2. It indicates that how many times the receivable terms to achieve the desired sales from table 4.87 2008-09 0. The ratio ranged bet weens 0.42 Debtor’s turnover ratio express the relationship between net credit sales and debtors.R.81 This ratio expresses the relationship between working capital and sales.85:1.6 0. This is a highly alarming situation which indicates very poor credit policy or inefficiency on the part of management managing the receivables.D.T. continuously monitoring and reviewing to improve the situation.5. In the year of 2009-10.C.5 2006-07 0.81 to 12.83 0. 62 .63 Year 2004-05 W. This is an indication or very serious and alarming situation which needs careful attention proper investigation into the matter. Table 4.52 0. It is crystal clear that for all the past six years except 2004-05 & 2009-10.73 which indicate that the ratio is not satisfactory from liquidity point of view. It is noticed that ratio is below 1. 0.89 2009-10 12.42:1 with an average of 0. The average collection period varies between 526 days to 257 days with an average of 279 days.T.R.

57 to 0.57 2005-06 0. the ratio is always below with an average of 0.22 2009-10 0.7 63 . Looking into table 4.06 2009-10 0.A. to TA 2004-05 0.05 2007-08 0. The ratio varies between 0.88 1.7. A low ratio is an indication of efficiency in management of current assets and vice versa.TR 0.1 Current assets turnover ratio expresses the relationship between current assets and sales. The ratio indicates that how many times current assets turns to achieve the desired sales.10 lowest being in the year of 2006-07 e) Current Assets to Total Assets :Year CA.06 2008-09 0.20:1.22 2006-07 2007-08 1.44 2008-09 1.d) Current Assets Turnover Ratio (CATR):- Year 2004-05 C.18 2005-06 0.37 2006-07 0.

Analysis of the 64 . Inventory. their current liabilities constitute the major portion of total current liabilities being 27% in average for the period under study. The ratio is determined by dividing current assets by total assets. The next major portion is loans and advances being 21% approximately in an average over the past six years and next is cash and bank balance being 5% in average for the period under study. The next major portion is represented by interest accrued but not due being 22% (approximately) in average for the past six years. constitute WIP and mislenious current assets constitutes very law portion of total current assets. Looking into the composition of current liabilities.2 .2. The status of these ratio are expressed in table 4. Surplus funds gain due to efficient management of current assets can be efficiently used in various better opportunity investment/ profit accruing projects . Efficient management of current assets is highly essential to increase the profitability as only noncurrent assets loans profit. From table 4. RATIO TO ANALYSE THE STRUCTURE OF WORKING CAPITAL The portion of various components of current assets to total currents and portion of various components of current liabilities to total current liabilities determines the structural health of working capital.. We have the current average current assets is 10% of total assets which is quite satisfactory. it is clear that the highest portion of current assets is sundry debtors.

3. Inventory though show a abnormally low position . As the average cash balance is only 5% only hence finely steps must be taken to collect the debt to repay that interest. the control of receivable (i. Loans and advances position also needs to be reviewed. In near future. Sundry creditors merely constitute 9% in average. However the sales data are based on the monthly statement received from the various regional offices of Power Grid Corporation of India Ltd. The status of the same also needs review and it must be reduced to some extent. these may be due for payment. The obligation on account of sundry creditors can be paid early as and when due as the average cash balance is around 5% in average. It is revealed that various factors attributed to other current liabilities are unspent amount of deposits with various agencies security deposits and retention money. Where the same is to be paid. 4.1 ANALYSIS AND CONTROL OF RECEIVABLE Likewise cash management. however the situation is not working are as the sample unit belongs to hydro power industry and the inventory in the present case constitute only construction material only.Average cash balances & needs little improvement only.e. execution & implementation of credit policies are taken up at corporate level in cash of sample unit.) states and state electricity boards on the basis of such statement by different projects and units for the project/ unit and at the corporate level for the organization as a 65 . since it constitute 21% and same must be reduced to some extent .composition of current assets and current liabilities reveals that the portion of sundry debtors must be reduced and must be converted into cash.e. Analysis of composition of current liabilities indicated that interest accrued but not due constitute 22% approximately in average.3 MANAGEMENT OF VARIOUS IMPORTANT ASPECTS OF WORKING CAPITAL:4. Other current liabilities constitute 27% of total current liabilities from the details schedule of balance sheet of various years. The generation reports are sent to corporate office by different operating units on daily basis.) farming. ( PGCIL) . Accordingly the debtors statement is prepared after in respect of various beneficiaries (i.

450. It is helped that in near future the present management is able to collect the dues on account of debtors. However the present management is taking some corrective measures in this regard like deduction of SEB/ states dues from central assistance plan through ministry of finance.69:1 and the average collection period also decreases in recent years. From table 4.97 cr. Similarly the collections of receivable are normally received by the corporate office in respect of different projects / units. and state electricity board from whom these dues are to be recovered from organization point of view who may be the debtors. Accordingly the debtor statement is updated for the organization as a whole after each such receipt.3 2 ANALYSIS OF INVENTORY MANAGEMENT Inventory as a part gross working capital has no significant role like receivables in the present due to nature of industry. 2280. the dues must be recovered to maintain sound liquidity position and to increase the profitability as well. in the year of 2004-05 to Rs. In term of percentage the debtors raises from 20. Thus the average collection period is quite satisfactory and at he same time it suggests that it must be continuous monitoring and reviews.1. in the year of 2009-10.79% The growth trend of debtors also showed an increasing trend and decreasing after 2004-05( table-4.5 it is also quite clear that the debtor turnover ratio is 0. as shown from various yardstick and indicators used to measure the status of receivable management. The product being electricity can not be stored and raw material being water 66 .2) . It is clearly marked that the receivable increases from Rs. Discounts are also affected for paying the dues within six month of raising the bill . The position of overall receivable management of the sample unit is showing an unhealthy situation.whole. Attractive discounts must be offered for quick repayment. It is also worthy to mentioned that the sundry debtors in the questions are state govt.44 % of total current assets to 35. Further corporate office sends the collection information to different projects and units in respect of collection of receivables on behalf of such information projects updated their individual’s debtor statements. 4. The receivables are accumulating year to year from table 4.90 cr. Some times (not regularly) the projects received collection of receivables directly from beneficiaries and accordingly the debtor statement of the projects is updated to know the balance and same instruction is communicated to corporate commercial division for necessary action at corporate level.

88 cr.67 % of total current assets in an average.R. it is quite clear that inventory increases from Rs.) cash management. 53. In the nut shell out of three important dimensions of working capital management (i. 4. Recently the present management is taking lot of steps to reduce its inventory costs mainly in term of carrying costs.2 2009-10 8. only the materials are to be purchased after receiving the minimum level or when the material is out of stock.63 2006-07 5. 19. 2004-05 11. However as already indicated inventory constitute only 1.49 2008-09 2. The inventory constitute in the present case is mainly material used for construction of projects as well as running and maintenance of generating stations. However as per present policy of the govt.3 ANALYSIS OF CASH MANAGEMENT Year C.96 2007-08 2.11 67 .69 2005-06 9.1. as there is no stock out costs.79 cr.3. and some of these materials cannot be used for other projects due to change in technology.is without price (except water cuss) period to state govt. For this purpose recently integrated inventory management system(fully computerized system for inventory management ) is under implementation with the help of Tata consultancy service ( TCS) group. However income of receivable management some measures must be taken up to rectify the situation and the management is remaining the position continuously approaching the central govt. for quick recovery of the dues.10 times showing healthy inventory management. during the period under study and growth of inventory showed an increasing trend. This is quite good from organizations point of view.e. to Rs. and its availability of management. However due to poor planning sometimes huge materials are remain surplus after completion of projects. Looking into table 4.T.the analysis suggest that the organization is doing quite well so far as cash & inventory management is concerned. The inventory turnover ratio is 9. so far as inventory management is concerned. Bills / receivable management and inventory management . Ultimately these inventories are to be sold as scrap material or to survey off.

At present the company’s cash management is basically based on the projected cash flow requirement / projected cash flow statement. Moreover the cash turnover ratio of the sample unit varies from 1.82:1. However the basis of projected cash requirement of an unit / project is based on budget of that project/ unit. expenditure and inflow of cash is maintained by integrated cash management system at corporate level. Both inflow and outflow of cash has been properly planned in order to avoid any cash crisis. At the end of each month different MIS reports are prepared preferably budget head wise to avoid idle cash and bank balances.31:1 to 8. However this does not indicate any adverse position from cash / liquidity 68 . Thus without approval plan / budget cash out flow is not possible. It means the cash out flow of a particular financial year is very much well planned before six month of the commencement of that year. The cash inflows are centralized which means the various projects / units are not empowered to receive income from generation sales of energy or any other source. The highest being in the year of 2004-05 and lowest in the year of 2006-7. Thus the organization is having a very sound control in its cash management continuous monitoring.11:1 during the period under analysis with an average ratio of 4. A copy of such Performa is also enclosed for ready reference both in cash of construction and O&M projects. It is also worthy to mention that in cash any balance at the end of the month which cannot be spent due to any reason are invariable remitted to corporate office through bank remittance. review of budget. Any such receipts by the units remitted to corporate office as and when they are collected in checks / cash. The growth of CTR is upward indicating the better management of cash over the period gradually. A copy of the Performa budget is also enclosed herewith on which the cash flow statement is prepared. After receiving the cash out flow statement from various projects and units. projected cash outflows are prepared by various units and projects on monthly basis and some are sent to corporate office to draw the monthly limit through bank. same are complied at corporate level to determine the total cash requirement and disbursement for a particular month. Similarly. However there is provision for revised estimate after three month of actual expenditure of current financial year to adjust any deviation in expenditure.

Both inflow and outflow of cash has been properly planned in order to avoid any cash crisis.point of view. diagrams. After receiving the cash out flow statement from various projects and units. The cash inflows are centralized which means the various projects / units are not empowered to receive income from generation sales of energy or any other source. bar charts. same are complied at corporate level to 69 .26 % of total current assets while sundry creditor is only of total current liability and total current assets is more than of current liability in average during the period of analysis. ratio charts relating to working capital components and working capital ratio are enclosed with this chapter for ready reference which are the extracts from the various financial statements. because the average cash balance is 5. Further various tables. annual accounts etc. ANALYSIS OF CASH MANAGEMENT At present the company’s cash management is basically based on the projected cash flow requirement / projected cash flow statement. Any such receipts by the units remitted to corporate office as and when they are collected in chaques / cash. projected cash outflows are prepared by various units and projects on monthly basis and some are sent to corporate office to draw the monthly limit through bank. charts. Similarly.

Thus without approval plan / budget cash out flow is not possible. because the average cash balance is 5. diagrams. charts. The highest being in the year of 2002-04 and lowest in the year of 2004-06. Moreover the cash turnover ratio of the sample unit varies from 1. A copy of such preformed is also enclosed for ready reference both in cash of construction and O&M projects. Thus the organization is having a very sound control in its cash management continuous monitoring. annual accounts etc. bar charts. At the end of each month different MIS reports are prepared preferably budget head wise to avoid idle cash and bank balances. It is also worthy to mention that in cash any balance at the end of the month which cannot be spent due to any reason are invariable remitted to corporate office through bank remittance.31:1 to 8. It means the cash out flow of a particular financial year is very much well planned before six month of the commencement of that year. Further various tables. However there is provision for revised estimate after three month of actual expenditure of current financial year to adjust any deviation in expenditure. review of budget.82:1. A copy of the preformed budget is also enclosed herewith on which the cash flow statement is prepared. 70 . The growth of CTR is upward indicating the better management of cash over the period gradually.determine the total cash requirement and disbursement for a particular month.11:1 during the period under analysis with an average ratio of 4. expenditure and inflow of cash is maintained by integrated cash management system at corporate level. However this does not indicate any adverse position from cash / liquidity point of view.26 % of total current assets while sundry creditor is only of total current liability and total current assets is more than of current liability in average during the period of analysis. However the basis of projected cash requirement of a unit / project is based on budget of that project/ unit. ratio charts relating to working capital components and working capital ratio are enclosed with this chapter for ready reference which are the extracts from the various financial statements.

Chapter 5: SUGGESTION / RECOMMENDATIO The summary of major findings is mentioned below:(I) Trend of Gross Working Capital:71 .

The total investment in current assets increases from Rs. It should be improve by reducing the other current liabilities and sundry creditors. The factor contributed to decrease is the decrease in sundry debtors considerably and also increase in sundry creditors and other current liabilities.These leads to analysis of super quick ratio which is quite relevant in this case. (IV) Analysis of the super quick ratio also reveals that the trend is increasing up to 2004-05 but after that it decreased. This must be reviewed and attempts to reduce the other current liabilities. (II) Trend of Net Working Capital ( NWC) :Likewise GWC trend of NWC also showed an increasing trend up to 2007-08 but thereafter it has decreased year by year. which ultimately takes some times for conversion into cash.24 crores during the period under reviewed. However current ratio in many cases does not reveal the real picture of liquidity as the same is quantitative analysis only.97:1 thereafter it has decreased continuously and comes to 1. This is below the norms.95 crores to Rs. 1394.g.09 in 2009-10. It has . Since super quick ratio excludes aspects of sundry debtors from the components of current assets in comparison to 72 . But since 2006-07 it has been decreased continuously the main factor for this is decrease in sundry debtors.71:1 in 2006-07 and then comes to . This is a good indication from the smooth running of the day-to-day operation as well as paying the current obligation points of review. The highest NWC was in the year of 2007-2008 and lowest being in the year of 2009-10.In the year 2009-10 it is below than the standard norms of 1:1.) inventory and debtors. 937. (III) Position of Liquidity or Trend in liquidity :Analysis of various liquidity ratios expresses the trend of liquidity over the past twelve years. These attempts shall improve the liquidity position of organization. It was highest in the year of 2008-2009 being 3. Analysis of current ratio reveals that the ratio shown an increasing trend up to 2006-07 but thereafter it decreased.Trend of Gross Working Capital (GWC) or total current assets showed an upward trend.66:1 except slightly increased in the year 2008-09 . It takes into consideration all the components of current assets (e. (V) The results show a gloomy picture in comparison to current & quick ratio.

The study also throws some light towards the factors responsible for slow growth of the organizations and actions / steps necessary for solutions to those problems. All leads to a sound cash management system in case of sample unit. However the situation is quite improving due to continuous efforts of present management.O. This aspect is further summarized and explained in expressing the results of efficiency of working capital used. units. EXPECTED CONTRIBUTION FROM THE STUDY The present study will help the management of the sample unit to take appropriate/ better decisions in managing the working capital. review of cash budget cash flow on day to day basis no unnecessary tie up of funds etc. offices and corporate office as well as . proper disbursement procedure. hence analysis of sundry debtors needs for the investigation. The aim and objectives of the study is to provide right quantum of working capital at right time at right place and from right source. The study also has some contribution to other interested parties and other stock holders as better management of working capital leads to improvement in two important aspects (via) liquidity and profitability . special cell to monitor and review the position incessantly. The most important aspects and contribution from the study are to identify the factors. elements and components responsible for blockage of funds in W. and solutions to such problems. steps. pressure on various state electricity department and SEB through central govt. The study can helpful to other similar organization and enterprises and the industry as a whole as well. System norms. In a nut shell the position of sundry debtors requires more constituent collection effort. 73 . (VI) Over all cash management of the sample unit indicates that there is proper maintenance of records preparation of cash budget in the beginning of the month. for speed collection of receivable.No capital expenditure is allowed without approval budget. rules and conditions are well designed and laid down for running & maintenance expenditure. The cash disbursement for the whole year is planned in the beginning of each financial year by various projects. which indicates inefficiency in receivable management.C. C. In a nutshell cash receipts and disbursements are well managed. cash expenditure only against the approval budget. (VII) Over all receivable management shows a gloomy picture.super quick ratio.

This can easily judges from the trend of Gross Working Capital (GWC). Sundry debtors are accumulating over the period. This is quite clear of trend of N. which needs some speed collection efforts. At the same time it is understand that the profitability position of the sample unit is improving rapidly over the past few years without hampering the liquidity status. However the present study suggests that the trend of liquidity is quite improving which includes large sundry debtors. & profit ratio.CONCLUSION Working capital management is a vital aspect of total financial management as it deals with shortterm investment decision. But the debtors are mainly govt. Networking capital (NWC) and the individual’s components of current assets and current liabilities. After analyzing the various aspects of working capital . The main objective of working capital management is to provide right quantum of working capital at right time. So that balance between liquidity and profitability position can be maintained reasonably without hampering their status. From the analysis of the present study we may broadly conclude that the liquidity position of the organization / sample unit is quite sound well balanced and well maintained over the study period.P. debt and there are little chances of debt on account of that. This was ascertained from the trend of net working capital and various liquidity ratios. Only worrying factors are the corporation is losing opportunity cost of capital on account of blocked capital tied in sundry debtors. It is already started in the present the present study that working capital is to be treated as life blood and controlling nerves center of the business. 74 . it may roughly concluded that the overall working capital management is quite good over the period of last twelve years on the basis of which we can say that working capital is managed efficiently in case sample unit. But in recent years it decreases considerably therefore the efforts have to make to improve this situation.

Looking into other two important dimensions of working capital management besides receivable management. NHPC Ltd. Further in the present economic scenario high importance has been given to hydro power due to its inherited advantages and other forms of power are exhaustible in nature. It generates the pollution free electricity with minimum cost. For financing of working capital . it may roughly conclude that the sample unit is doing well so far as cash management and inventory management is concerned. It is mainly due to India is a developing country and facing acute shortage of power. 75 . So far as the overall growth of the organization is concerned. Accordingly the role of working capital management is also greater on the part of the management in coming days. the study suggest that the construction projects are to be completed prior to target which not only reduce cost over runs of income but also the generation on account of such early completion can be ploughed back as financing the working capital. is a pioneer organization in the field of hydropower in India. the organization has wide scope and opportunities to grow like anything in recent future. The present study on the working capital management of PSU in hydro power has a significant role for the growth of organization and industry as a whole.

html? col=eren&qc=eren&qm=1&si=0&ht=147982353&ct=741214436 http://connect.co.com http://www.com/English/Scripts/PressRelease.(6).aspx?VId=197 Books & newspaper:Financial management (khan and Jain) Financial management (I.in/#hl=en&source=hp&q=nhpc&aq=f&aqi=g4g-s1g4gs1&aql=&oq=&gs_rfai=&fp=9b6eac6c91f48023 http://www.C.nhpcindia.Pandey) Financial management (Kuchal S.M.) 76 .in.google.gov/query. Bibliography Websites: http://search.nrel.

Annexure Balance sheet and Ratio Table 2004-2005 TO 2009-2010 77 .CHPTER-7.

1 78 .POSITION OF CURRENT ASSETS AND CURRENT LIABILITIES (RS.1 4.IN.)Table 4.LAKHS.

PARTICULARS ( A)CURRENT ASSETS 1 Interest accrued but not due on i investment Inventories Const.54 20299.4.22 84997.78 TABLE.2 POSITION OF CURRENT ASSETS AND CURRENT LIABILITIES IN % 79 .23 10420 11240 39730 16270 77660 210090 10660 10230 11170 34800 66860 186420 25860 8030 7720 31630 73240 155000 18970 3870 14140 41550 78530 149090 29419 7755 49017 42032 128223 11201 27081 7289 30900 67336 132606 5958 12341.54 164393.77 28703. WIP Sundry Debtors Cash &Bank Balances Other Current Assets Loans & advances Sub Total(A) (B)CURRENT 2 LIABILITIE Sundry Creditors Interest accrued but not due Other Current Liabilities Provisions Sub Total(B) NET 3 (NWC) CURRENT ASSETS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE 15450 8300 21420 228090 11170 2690 16080 287750 9040 180 198250 22060 5480 18270 253280 8370 110 127150 54170 13570 24870 228240 6410 1050 149380 60230 7630 2920 227620 5379 2658 49896 17437 40173 23881 139424 4915 4287 45097 31168 8520 29127 138564 1188.38 6916.46 4835.00 42778.38 2721.15 20738.S.15 99728.69 21685.31 11732.

23 23.82 3.5 22.71 10.98 Cash &Bank Balances 3.95 3.26 Other Current Assets 0.01 38.91 32.05 5.13 21.28 17.79 32.15 0.42 15.16 16.27 78.47 15.04 Sundry Creditors Interest accured but not due Other Liabilities Current 13.71 23.55 1.15 Inventories 2.46 1.05 43.94 20.27 55.57 3.35 28.86 3.02 21.19 52.31 24.78 50.21 10.81 6.85 Sundry Debtors 79.67 2.49 5.93 6.96 4.91 3.42 9.3 27.54 18. WIP 7.06 Provisions 20.94 2.67 Const.63 35.44 0.73 26.16 5.46 12.51 22.95 52.88 3. PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009AVEAVRAGE 1 CURRENT ASSETS Interest accrued but not due on investment 11.59 7.9 1.88 8.87 Loans & advances CURRENT LIABILITIES 2 5.78 7.94 35.05 0.46 80 .55 36.07 0.S.09 0.54 51.61 14.71 65.16 22.3 10.

TABLE -4.3

CALCULATION OF CURRENT, QUICK & SUPER QUICK RATIO

(Rs. In Lacs)

C

PARTICULARS CURRENT

2004-05

2005-06

2006-07

2007-08

2008-09

200910 15450

AVERAGE

(A) ASSETS 1 Inventories Const. WIP

8300 21420

9040 180

8370 110

6410 1050

5379 2658

4915 4287

2395.50 2257.50

Sundry Debtors

228090

198250

127150

149380

49896

45097

60558.17

Cash &Bank Balances

11170

22060

54170

60230

17437

31168

6568.92

Other Current Assets

2690

5480

13570

7630

40173

8520

1212.08

Loans & advances

16080

18270

24870

2920

23881

29127

22839.83

Sub Total(a) 2
(B) CURRENT LIABILITIES

287750

253280

228240

227620

139424

138564

95832

Sundry Creditors Interest accrued but not due

10420

10660

25860

18970

29419

27081

4037.25

11240

10230

8030

3870

7755

7289

9612.58

Other Current Liabilities

39730

11170

7720

14140

49017

30900

14080.00

81

Provisions

16270

34800

31630

41550

42032

67336

4353.83

Sub Total(B)

77660

66860

73240

78530

128223

132606

32083.67

NET 3 (NWC)

CURRENT

ASSETS

210090

186420

155000

149090

11201

5958

63748.33

4

CURRENT RATIO (CA /CL)

3.71

3.79

3.12

2.9

1.09

1.04

2.06

5 CL

QUICK RATIO (CA-INV.) /

3.6

3.65

3

2.82

1.05

1.01

2.01

6

SUPERQUICK RATIO {CA-(INV.+ DEBTORS ) /

0.66

0.69

1.27

0.91

0.66

0.90

CL}

82

TABEL4.4 NET PROFIT MARGIN RATIO (RS.IN CRORES).

S.N . PARTICULARS 1 SALES NET PROFIT 2 AFTER TAXES NET PROFIT 3 MARGIN

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE 1194.40 1075.07 1313.70 1349.60 1324.86 1414.43 1278.68 305.30 25.56 401.20 37.32 443.40 33.75 470.90 34.89 510.50 38.53 621.38 43.93 TABLE-4.5 Rs. In Cr. 458.78 35.66

S.N . I II III IV V VI

PARTICULARS Net Credit Sales Cost of goods sold Sundry debtors. Average Debtors. Inventory Average Inventory Debtors Turn Over VII Ratio(I/IV) Average collection VIII Period(365/VI) Inventory Turn Over IX Ratio(II/VI)

2004-05 1194.40 889.10 1751.80 1563.65 42.00 40.80 0.76 477.84 21.79

2005-06 1075.70 674.50 2363.50 2057.65 83.00 62.50 0.52 698.19 10.79

2006-07 1313.70 870.30 1982.50 2173.00 90.40 86.70 0.60 603.75 10.04

2007-08 1349.60 878.70 1271.50 1627.00 83.70 87.05 0.83 440.02 10.09

2008-09 1324.86 814.36 1493.80 1382.65 64.10 73.90 0.96 380.92 11.02

2009-10 1414.43 793.05 498.96 996.38 53.79 58.95 1.42 257.12 13.45
TABLE4.6

AVERAGE 1278.78 820.00 1560.34 1633.39 69.50 68.32 0.85 476.31 12.86

83

20 0.11 4.70 2153.71 3.63 5.40 3.30 105.8 9590.21 0.17 6134.1 0 7749.90 15809.30 13480.98 6.6 102.80 22824 541.N .22 2006-07 1313.52 6.00 18613.38 20010.50 1490.12 8832.05 5.73 0.50 1864.54 2.73 0.70 12883.06 2.70 TABLE -4.87 0.57 5.86 18615.80 15807.6 8 3.4 174.47 0.93 11106.17 2.89 0.29 7.37 640.44 4.80 3.70 AVERAGE 458.00 0.78 15344.70 0.88 2007-08 1349.60 237.81 0.88 0.40 13490.49 3.0 0 13942.70 13490.37 9.40 11257.00 22762 602.60 15809.60 2.5 111.58 0.23 14968.60 2.2 0 2877.50 0.99 2005-06 401.22 AVERAGE 1278.51 1.69 5.74 5. I II III IV V VI VII PARTICULARS Net profit after Taxes Total Assets Capital Employed Net Worth Capital Return on Assets in %( I / II ) Return on Capital Employed in % ( I / III ) Return on Share Holders Equity in % ( I / IV) 2004-05 305.15 293.44 2008-09 1324.10 8.96 5.5 7837.99 1440.7 2009-10 1414.23 14101.19 2.N i ii iii iv v vi vii viii ix x XI PARTICULARS Sales Total Assets Current Assets Cash Other Current Assets Net Working Capital Working Capital Turnover(WTR) (i/vi) Current Assets Turnover(CTSR) ( I /III ) Cash Turnover (CTR)( I / IV) Misc.66 2007-08 470.43 20010.53 1.S.01 12. Current Asset Turnover(MCATR) Current Assets To Total Assets(IIII/II) 2004-05 1194.50 18615.60 2009-10 621.94 5.70 187.68 5.73 0.54 2006-07 443.57 11.20 12.94 84 .78 15344.40 1550.4 6 13229.32 4.40 S.99 5.86 5096.56 1.20 208.63 0.75 292.70 384.30 11257.18 2005-06 1075.30 1470.90 0.54 112.91 2008-09 510.02 4.2 0 8877.1 0 2078.20 12883.30 25328 220.11 2.20 5.11 6.0 0 20077.20 6.06 2.

09 1.96 0.86 12.84 0.05 2.73 0.NHPC LTD.42 3.50 0.82 0.05 2007-08 3.27 10.06 2009-10 1.45 1.86 0.81 0.52 698.31 2.19 0.60 603.75 0.12 3.79 0.79 3.00 1.96 380.70 0.92 0.97 3.89 0.79 0.10 AVERAGE 3.57 2005-06 3.91 11.35 0. SUMMARY OF THE RATIOS S.09 0.N i ii iii iv v vi vii viii PARTICULARS Current Ratio Quick Ratio Super Quick Ratio Inventory Turnover Ratio Debtors Turnover Ratio Average Collection Period(ACP) Working Capital Turnover(WTR) Current Assets Turnover(CTSR) 2004-05 3.06 2008-09 2.02 0.87 0.04 0.71 10.85 476.86 0.69 10.83 440.42 257.76 477.20 85 .12 12.37 2006-07 3.05 0.63 0.90 2.02 0.92 21.66 13.65 0.

11 2.56 1.53 2.89 2.71 3.11 6.51 1.63 5.52 6.11 4.69 5.32 3.70 43.56 2.93 3.21 0.20 12.44 4.20 5.91 2.98 6.96 5.22 38.53 1.02 4.60 8.88 0.39 6.18 25.44 34.54 5.32 4.75 3.70 5.73 0.66 2.98 5.73 0.74 5.96 35.22 37.66 2.29 7.68 5.94 5.49 3. Current Asset Turnover(MCATR) Current Assets To Total Assets(CTTR) Net Profit Margin Return On Assets Return On Capital Employed Return On Shareholders Equity 11.ix x XI xii xiii xiv xv Cash Turnover (CTR) Misc.57 86 .99 9.88 33.

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