A RESEARCH REPORT ON

WORKING CAPITAL MANAGEMENT AT BHEL

Submitted in partial fulfillment for the award of Degree of

BACHLOR OF BUSINESS ADMINISTRATION

(Affiliated to M.J.P.R UNIVERSITY)
(2008-2010)

SUBMITTED BY:

Akshita agarwal
BBA Vith Sem ROLL NO. 11514501

CERTIFICATE

This is to certify that the research project titled WORKING CAPITAL MANAGEMENT AT BHELis a bonafide work carried out by Mr. ASHISH SHARMA in the partial fulfillment of the requirement for the award of the degree of Master ofBusiness AdministrationfromU. P.Technical University, Lucknow under the guidance and direction of us.

DIRECTOR

SUPERVISOR

ACKNOWLEDGEMENT
I am highly indebted to all the executives of B.H.E.L. who have given their invaluable guidance and important role in making me able to do this
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vocational training and without whose help my efforts would not have taken the present form.

I have no words to express my gratefulness to my project Co-ordinator Mr.P.V.Ramakant (Accounts Officer) for his inspiring guidance, valuable help and angelic support for the Completion of my project on WORKING CAPITAL MANAGEMENT in B.H.E.L.

I am also thankful to Mr. C. N. Saraswat (Finance Manager), Mr. Janmejay Sharma (Dy.Mgr.Book/Budget/), Mr.Arshad Ali (Dy.Mgr.Cost PSL & Fixed Asset), Mr. Vikram Goel (Asst.Officer PSL), Mr. K.R Nair (Dy.Mgr.Pay Roll) for heir kind Co-operation in providing us the necessary facilities and Suggestion. We are also thankful to Mr. Dhruv Bhargava (Sr.Mgr.HR) for their kind cooperation. We should like to extend our gratitude to the management and staff of BHEL for their co-operation during training.

ASHISH SHARMA

TABLE OF CONTENT

1. INTRODUCTION 1.1 Introduction of BHEL

1.2 Objective of the Project

1.3 Need for working capital management 1.4 Working Capital Management 1.5 Scope of Project

2. RESEARCH METHODOLOGY 2.1 Research Methodology 2.2Data collection 2.3 Data collection methods

3. FINDING & ANALYSIS 3.1 Finding 3.2 Analysis

4. CONCLUSION & RECOMMENDATION 4.1 Conclusion 4.2 Recommendation

5. BIBLIOGRAPHY

BHARAT HEAVY ELECTRICALS

In the post-independence era when India was moving towards

industrialization the major thrust of the govt. was in the core sector and this sector was given to the public sector. With this objective, heavy electrical (I) limited was setup in Bhopal in August 1956 with a view to reach self-

sufficiency in the industrial product and power equipment. This plant was setup under technical collaboration of M/s AEI, U.K.

Three more plants were subsequently setup Tiruchy, Hyderabad and Haridwar with Soviet and Czechoslovakian assistance in May 1965, dec1965 and Jan 1967 respectively. As there was a need for an integrated approach for the development of power equipment to be manufactured in India. Heavy Electricals Ltd. Bhopal was merged into BHEL in 1974

BHEL has now become the largest Engineering and Manufacturing Company employing about 52,000 employees. Its headquarters is located at Delhi and there are 14 manufacturing units.

BHARAT HEAVY ELETRICALS LIMITED

UNIT

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices,

enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centers. BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management

BHEL has: Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kames Railway network Supplied over one million Valves to Power Plants and other Industries

BHEL's operations are organized around three business sectors, namely Power, Industry - including Transmission, Transportation, Telecommunication & Renewable Energy - and Overseas Business. This enables BHEL to have a strong

customer orientation, to be sensitive to his needs and respond quickly to the changes in the market. BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player. The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness.

FINANCE DEPARTMENT IN BHEL

A sound financial management is the crux of the efficient Management of a business enterprise and financial management on scientific and sound lines is a prime consideration of BHEL.The Finance/Accounts Department of the company controls all the financial operation. That is directed at improving profitability and internal resource generation through Optional utilization of men, material, tools and money. According to its various function the Finance/Account Department is Divided into following section: Price Store Ledger (PSL) Supply Bills Cash Pay Books Budget and MIS Sales Miscellaneous and Revenue Internal Audit Export Incentives, Sales Tax and Income Tax Provident Fund Works Traveling Allowance

 Price Store Ledger

PSL section is entrusted wITH THE JOB OF MATERIAL PRICING Determination of material consumption. PSL are used for the Material Accounting as well as their financial ACCOUNTING. THE DOCUMENT involved Are: SRV Store Receipt voucher MIV Material Issue voucher SRN Store Return Note MTV- Material Transformer Note RCDV- Receipt cum dispatch voucher Passing Bills The bills Passing process starts after the account section gets the Purchase order, SRVs and bills from suppliers. The accountants section Then makes payment.

Terms of payment are of three kinds: 10% in advance payment 100% after receipt and acceptance Partial advance and the remaining after receipt and acceptance

 Pay Section It is assigned the job of payment of salaries and other personal Payment to employees it looks after provident fund, gratuity and bonuses insurance facilities extend to employees. Employees leave encashment official traveling reimbursement and This Section deals other welfare expenses. It is entrusted with Clearance of medical claims.

Books, Budget and MIS

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

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 Budget
Budget is a target setting for operation.

Two types of budget are prepared: Revenue Budget:Itconsist of consolidated production programmed &
related expenses to carry out that programme.

Capital Budget:It includes the fixed assets.

Preparation of Budget is done at three level

1. Internal level: Each department is sent information about the Budgeted expenses provided to the department. It is necessary for control 2. Corporate level: Budget of BHEL unit is sent to the corporate Office 3. Government level: Budget of BHEL is also sent to govt. Level

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Three types of information system are generated--:

1. Internal for the unit 2. Foe the corporate office 3. For Government Every month information is generated regarding allocation of fund on various aspects for each department and is sent to every department Information is generated mainly for control purpose. Other information-generated are-

1. Cash flow 2. Inventory level (non moving and slow moving items) 3. Inventory of finished goods COST SECTION This section is responsible for accounting and reporting of costs. It determines direct labor rates and e.g. Rates and overheads recovery factors of manufacturing, engineering, commercial and administration for cost estimation. The cost accounting is done to record and collect cost for work order and product level information. It prepares material, labor, and overheads, cost consumption statement. It furnishes cost report to management about: Profitability Variance Performance - Product wise, order wise - Estimated and Actual cost - Efficiency and operating result

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 SALES SECTION
The accounting of sales is done in the section. The activity of this Section starts when the commercial department issues a work order. Work Order part II (Financial) summarizes the financial terms of the contracts. It Contains the information like the name of customer & consignee, description Of goods to be produce and sold, quantity, sales value, terms of delivery And payment, price variation clause, sales tax, excise duty, liquidated Damages, Bank guarantee, freight etc. with the part II W.O. details. A part from that the term and conditions embodied in W.O. part II as regards Adjustment of advances, deferred debts and calculation of PVC, Excise duty And Sales Tax must also be complies with. Sales section submits the bills to the customers as desired by commercial either direct or through Financial Such as Banks. This section does the necessary accounting for the bills raised; money collected from customers in from of advance or sale proceeds. MISCELLANEOUS AND REVENUE Miscellaneous wing of this section deals with payment of advance to employees going on official tour, LTC etc. Payment to transporters, welfare activities, security services, repairs and maintenance, daily wages, furniture, departmental and other petty expenses. The revenue wing of this section with recovery of rent, electricity and Water charges for other facilities from the salary of the employees.

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1.2 OBJECTIVE OF THE PROJECT

The fact that working capital is one of the most important tool in the hands of The company for the successful operation of the business. It is imperative for the finance manager to properly assess the future requirement of working Capital in the company. Keeping in the view this objective in mind, the Company assigned me this challenging project of estimating the future needs Of working capital of the company. The project itself speaks for the Importance of the study.

To study organizations working capital financial mix. To know about the length of operative cycle. To know about the optimum maintainable. To study the growth and performance To study the inflow and outflow of funds.

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1.3 NEED FOR WORKING CAPITAL MANAGEMENT

Along with the fixed capital almost every business requiring working capital though the extent of working capital requirement differs in different Businesses. Working capital is needed for purchasing raw materials. The Raw material is then converted into finished goods by incurring some additional costs on it. Now goods are sold. Sales do not convert into cash instantly because there is invariably some credit sales. Thus, there exists a time lag between sales of goods and receipt of cash. During this period, expenses are to be incurred for continuing the business operations. For this Purpose working capital is needed which shall be involved from the Purchase of raw materials to the realization of cash. The time period, which is required to convert raw materials to the realization of cash? The time Period, which is required to convert raw materials into finished goods and then into cash is known as operating cycle or cash cycle. The time need for Working capital can also be explained with the help of operating cycle.

Operating cycle of a manufacturing concern involves five phases: Conversion of cash into raw material Conversion of raw material into work in progress Conversion of work in progress into finished goods Conversion of finished goods into debtors by credit sales Conversion of finished goods into cash by realizing cash from them.

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1.4 WORKING CAPITAL MANAGEMENT OF BHEL

Meaning of Working Capital

Capital required for a business can be classified under two main categories is: 1. Fixed capital 2. Working capital. Every business needs funds for two purposes for establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery. Land, building, furniture, etc. investments in these assents represent that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-today expenses, etc. these funds are known as working capital. In simple words, working capital refer to that part of the firms capital which is required for financing short term or current assets such as cash. Marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash f lows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.

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DEFINITION : Working capital is the amount of funds necessary to cover the cost of operating the enterprise.

Concepts of working capital

There are two concept of working capital: 1. Gross working capital 2. Net working capital

Gross working capital

Gross working capital refers to the firms investment in current assts. Current assets are assets, which can be converted into cash within as accounting year. Current assets include cash and bank balance, short-term securities, debtors, bill receivable and inventory. The gross working capital concepts focus attention on two aspects of current assets management. Optimum investment in current assets. Financing of current assets

Net working capital

Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outside, which are expected to nature. The payments are within an accounting year and include bills payable and outstanding expenses. Net working capital can be positive or negative. Net working capital indicates the liquidity position of the firm. Generally net working capital is referred to as working capital.

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THE NEED OR OBJECTS OF WORKING CAPITAL FOR BHEL

The need for working capital. The for working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycles involved in the sales and realization of cash. There are time gaps in purchase of raw material and production, production and sales, and sales and realization of cash. Thus, working capital is needed for the following purposes: 1. For the purchase of raw materials, components and spares. 2. To pay wages and salaries, 3. To incur day-to-day expenses and overhead costs such as fuel, power and offices expenses, etc. 4. Together selling costs as packing, advertising, etc. 5. To provide credit facilities to the customers. 6. To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock. Debtors

Sales

Cash

operating cycle finished goods

Work-in-progressraw material

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In case of manufacturing company, the operating cycle is the length of time necessary to complete the following cycle of events: 1. Conversion of raw into raw material. 2. Conversion of raw material. into work-in-process. 3. Conversion of work-in-process into. Finished goods 4. Conversion of. Finished goods into accounts receivable 5. Conversion of. Accounts receivable into cash

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Classification or kinds of working capital

Working

capital may be classified as:

1. Permanent or working capital. 2. Temporary or variable working capital

Kinds of working capital

On the basis of concept

on the basis of time

GROSS WORKING CAPITAL

NETWORKING CAPITAL

PERMANENT OR FIXED WORKING

TEMPORARY OR VARIABLE

CAPITAL

WORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE

SEASONAL

SPECIAL

WORKING CAPITAL WORKING CAPITAL WORKINGCAPITAL

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PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is an always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. For example, every firm has to maintain a minimum level of current assets is process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital, as this part of capital is permanently working capital as this part of capital is permanent working capital also increase in current assets. The permanent working capital can further be classified as regular working capital and reserve working required to ensure circulation of current assets from cash to inventories, from inventories to receivable and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital which may be provide for contingencies that may arise at unstated periods such as strikes, rise in prices depression, etc.

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TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal needs of the enterprise is called seasonal working capital.

Temporary or variables

Temporary or variables Working capital

PERMANENT OR FIXED
WORKING CAPITAL

PERMANENT OR FIXED WORKING CAPITAL

In fig. 1 permanent working capital is stable or fixed over time while the Temporary or variable working capital fluctuates. In fig. 2 permanent working capital is also increasing with the passage of time due to expansion of business but

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even then it does not fluctuate as variable working capital which sometimes increases and sometimes decrease. The basic objective of working capital is to provide adequate support for the smooth functioning of normal business operations of the company. The term adequate working capital is subjective depending on managements attitude towards uncertainty / risk. Maintenance of working capital Availability of sample funds at the time of need.

SAFETY

LIQUIDITY

PROFITABILITY

CREDIT MGMT. MINIMIZE TIME

BANK MGMT.
MINIMIZE TIME

EXCESS

CASH ACCT.RECEVIABLE MGMT. MINIMIZE TIME MEDIA ACCT.PAYBLE MGMT. OPTIMIZE TIME

Goals of working capital management

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WC: A TRADE-OFF BETWEEN LIQUIDITY AND PROFITABILITY

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

Therefore, firm should maintain its current assets at that level where the liquidity cost is quite low and the firm is also able to achieve adequate profitability.

DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business. 2. Manufacturing cycle. 3. Sales growth. 4. Nature of raw material used. 5. Demand condition. 6. Production policy. 7. Price level changes. 8. Operating efficiency and performance. 9. Firms credit policy. 10.Available of credit. 11.Degree of synchronization among cash inflows and outflows.

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GUIDELINES

AND SOURCES OF FUNDS FOR WORKING

CAPITAL REQUIREMENTS OF BHEL

CASH CREDIT FROM BANKS:

The requirements of working capital will be met either from internal resources or borrowing from banks. All the banking transitions have been centralized at consortium of banks for total cash credit required for the company as a whole.

Working

capital loan from government:

The funds for working capital over and above cash credit limits may also be arranged through government loans.

RECEIPTS FROM CUSTOMERS --:

The bulk of working capital requirements are met from the advances from customers in accordance with the contract conditions as approved by the board, the receipts are deposited in the centralized account.
FIXED DEPOSITS FROM MEMBERS OF PUBLIC ---:
Subject

to the approval of the government and the board of directors, the

funds may be raised from public by obtaining fixed deposits under the provisions of the company rules to meets the working capital requirements of the company

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OTHER SOURCE OF FUNDS:

1. BILL REDISCOUNTING SCHEME OF IDBI:the scheme was introduced in1965the manufacturer of indigenous capital equipment can push up the sales of their products by offering to the prospective deferred payments facilities. The IDBI does not itself discount bill of exchange/promissory notes But rediscounts those discounted by any other approved bankers.

2. BILL MARKET SCHEME:

RBI providing rediscounting facility for bills having maturity of not more than 120 days introduced this scheme. This facility enables the supplier to get payment for their supplies at a reduced rate of interest
.

3. EXPORT PRE-SHIPMENT/ POST SHIPMENT CREDITS:

In respect of export orders finance at concessional rates is made available by the banking system on specific conditions. Pre-shipment finance at a concessional rate is granted for the period of 180 days. Post-shipment finance is available at same concessional rate for a maximum period of 90 days. The pre-shipment finance will form part of credit granted by banking system to the customers.

4. OTHER SCHEMES:
Discounting supply bills can also raise short-term funds. Another scheme related to rising of funds to the extent of 75% or 80% of the value of inventories not required for production for next few weeks/months by pledging of such inventories with a banker under a key loan or pledge account.

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FORECASTING OF WORKING CAPITAL

If the working capital is to be estimated for the ensuring year, then the currently requirement of the assets and cash flows for that period is to be estimated. The basic object of forecasting is either to measure the cash position of the enterprise or to exercise control over the liquidity position of the concern There are many popular methods available for forecasting the working capital requirement, which follows:

1.. Cash forecasting method 2.The balance sheet method 3.The profit & loss adjustment method 4.Percent of sale method 5.The operating cycle method 6.Regression Analysis method

CASH MANAGEMENT OF BHEL

Cash is an important current asset for the operation of the business. Cash is the basic input needed to keep the business running on a continuation basis. It is also the ultimate output realized by selling the services or the product manufactured by the firm. Cash is the most liquid of all the current assets. Higher cash and bank balances indicate high position result in lower profitability, as idle cash fetches no return. Thus a major function of finance manager is to maintain sound cash position.

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Cash management is concerned with managing of: 1. Cash flows in and out of the firm 2. Cash flows with in firm 3. Cash balance held by the firm at a point at time by financing deficit or investing surplus cash.

OBJECTIVES OF CASH MANAGEMENT

To meet day to day business requirements To provide for schedule major payment i.e. capital expenditure. To face unexpected cash drain. To maintain image of credit worthiness To size potential opportunities fro profitable long term investment. To meet requirement of bank relations. Efficient cash management function calls for cash planning, evaluation of benefits and cost of policies, sound procedures and practices and synchronization of cash inflows and out flows. Thus for achieving goals and objectives of cash management, finance manager has to plan cash needs of the firm followed by cash flow management, determination of optimum level of cash and finally investment of surplus.

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FACTORS AFFECTING CASH REQUIREMENTS

(A) Internal factors. Profit level Dividend an taxation policy Reserves and surplus Deprecation policy Expansion program Operating efficiency

(B) External factors

Fluctuation in market interest rate Investment avenues available in market Government economic policy Rule and regulations of RBI and other regulatory bodies

CASH MANAGEMENT IN BHEL

In BHEL the centralized cash credit system is followed. From 24-07-75 all the banking transaction of company has been centralized at corporate office .new Delhi. Under this system all the sale proceeds of the units are deposited in a centralized account. This account number is universal for all units at RODs. They have to deposit the sales process if this account withdraw money from it, only the corporate office operates it

Fir meeting day-to-day expenses the unit has to prepare the estimates of such expenses, which are then sent to corporate office weekly or monthly, or both .at unit level the cash budget is prepared on yearly basis for estimating the
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expected cash inflows and outflows. The yearly budget is broken down into monthly and weekly intervals. The inflows and outflows and estimated on following basis. The only source of cash inflow for unit is the corporate office. The sale proceeds cannot be directly utilized. Based on the above requisition, the corporate office allocates the funds. For cash credit, corporate office will negotiate with consortium of bank for total cash credit required for the company as a whole. A consortium deed for hypothecation of stock and store of company is executed office. All the information, document etc. required in this connection will be called for by corporate office from tee division. Arrangement have already been made with state bank of India, HDFC Bank, Canara Bank, Bank of Baroda and Indian overseas bank for centralizing total cash credit limits at New Delhi. Under this scheme, the units have the following documents. The units will send estimated, monthly cash flow statement to the corporate office by 18 th of every month. Based on these cash flow statement the corporate office will allocate the sub limit will be transferred to the consortium of banks by 25 th of the month. The units can utilize this fund. The actual cash flows statement will be sending to corporate office monthly i.e. 1st of succeeding month. The units are also required to send the weekly report of daily bank transactions, to the corporate office. These reports show the details of daily debit and credit transaction appearing in bankbooks of the company, enabling the positing of corporate bankbooks as well as verification of banks statement received from banks.
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These report are sent to corporate office on1st (showing the transaction from 25th to 30th of the previous month) 8th (showing the transaction from 1st to 7th of current month) 16th (showing the transaction from 8th to 15th of current month) 25th (showing the transaction from 16th to 21st of current month)

The units are required to send the comparative statement of estimated and annual cash flow of the preceding month. This report will be sent quarterly after inter-unit reconciliation meeting. The total interest payable a cash credit available by corporate office is to be allocated among the units in the ratio of utilization of funds. Thus cash forecast and budget is the principle tools of cash management. Forecasting helps manager to know how much cash will be held in balance, to what extent the firm should rely on bank financing and how much to invest in marketable securities.

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ADVANTAGE OF CENTRALIZED SYSTEM

Excess cash at various units can be effectively used for various purpose and improvements. Deficit of cash at various units can be sorted out through centralized cash system Idle cash at various units, may be noted or avoided.

CASH BUDGET IN BHEL

Cash budget is the most significance device to plan for and control receipt and payment. Cash budget is a summary statement of the firms expected cash

inflows and inflows over a projected time period. In BHEL, cash management is centralized and is controlled directly from corporate office, whatever requirement of funds is felts in BHEL it is sent to the corporate office and corporate office disburse the funds accordingly. Cash budget in BHEL is prepared on the basis of production schedule, in prepared after receiving customers order at the beginning of the year. There are two aspects of cash budget inflows and outflows. Inflow in cash budget is determined on the basis of receiving the customers orders and preparing production schedule. Out flow is determined on the basis of requirement of raw materials, payment of taxes and duties, interest on borrowing etc. outflow in cash budget is categorized into operation and non-operation outflow consist of capital expenditure, exchange variations and suppliers credit

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Thus after determining the budgeted estimates of inflows and outflows cash budget is prepared at the beginning of the year. The distribution of cash is determination on monthly basis in every month of that year. In the last quarter of the year cash budget is revised and the latest estimates are calculated and fixed. Monitoring of cash budget is done through management information system.

RECEIVABLE MANAGEMENT OF BHEL

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

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Cost of Maintaining Receivable

The costs associated with the maintenance of account receivable are 1. Capital Cost When a firm maintains receivables, there is a time lag between the sales of goods and payment by the customers. Meanwhile. The firm has to be made by the use of additional capital which alternatively could be profitably employed elsewhere.

2.Collection Cost
These are costs, which the firm has to in for collection of the amounts at the appropriate time from the customers.

3.Administrative

Cost

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

4. Default

Cost

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

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OBJECTIVE OF RECEIVABLE MANAGEMENT

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

Credit Policy
Credit policy of a firm can be regarded as a kind of trade-off between increased credit sales leading to increase in profit and the coasts of having larger amount of funds locked up in form of receivable and loss due to incidence of bad debts.

The variables associated with credit policy are-

1. Credit standard 2. Credit terms 3. Collection efforts Credit standard are criteria to decide the type of customers to whom goods could be sold on credit. Credit terms specify duration of credit and the terms of payment by customers. Collection efforts determine the actual collection period, the lower is the investment in accounts receivable and vice versa.

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Receivable management in BHEL

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL grants liberal terms regarding trade credit to lure the potential customers to buy its products at favorable selling prices. To utilize its excess capacity, BHEL is granting liberal trade credit terms to its customers. The main customers of BHEL are railways, power industries and other private parties. BHEL has overseas sales also. All the BHEL units are having their commercial department. Commercial department and regional operational division (RODs) primarily carry out the job of recovery from customers. The sales section of finance department also actively takes part in receivable management by preparing and sending invoices and reminders to customers at appropriate time. They keep track of money received from customers as advances, as against dispatch of finished goods and money recoverable on account of price variation claims and conversion of deferred debts into debtors. This monitoring is done work order wise. The aging schedule of customers if also prepared which gives the picture regarding period of outstanding balances. The terms and condition with the customers ate finalized according to the credit policy laid down by corporate office BHEL. However deviation is permitted with the due approval from corporate office. While lying down of credit policy by head office, industry conditions are taken into consideration. Seeing huge investment in execution of work order, BHEL demands considerable payment in advance in different phases of completion of work i.e. erection, installation, commissioning, maintenance etc. Despite all these BHEL is presently facing cash crunch because a major chunk of BHELs customers consists of government bodies, which are very casual in clearance of dues.

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INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of large majorities of companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Inventories are stock of the product, a company is manufacturing for sale and components that make up the product. The various forms in which inventories exists in manufacturing company are raw materials; work in process and finished goods.

The levels of above-mentioned three kinds of inventories for a firm depend on the nature of its business. A manufacturing firm will have substantially high level of all three kinds of inventories, while a retail or wholesale firm will have a very high of finished goods inventories and raw material work in process inventories.

In a manufacturing firm the level of inventory depends on the operating cycle. A manufacturing firm with a long operating cycle has to maintain a high inventory level.

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Need to Hold Inventories

There are three general motive to hold inventories1. Transaction Motives Companies hold inventories to facilitate smoothproduction and sales operation. Company should maintain adequate stock of raw material for a continuous supply to the factory for an uninterrupted production and keeping stock of finished goods as the firm cannot produce immediately when customers demand goods.

2. Precautionary Motives

Firm holds inventories to guard against the

risk of unpredictable changes in demand and supply forces and other factors. Firm may also purchase large quantities of raw material than needed for desired production and sales level to obtain quantity discounts on bulk purchases.

3. Speculative Motive It influence the decision of the firm to increase or decrease inventory level to take advantage of price fluctuations.

Cost Associated with holding inventories are:

Material Cost Order Cost Carrying Cost Cost of funds tied up in inventory Cost of running out of goods

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Objectives of Inventory Management

To maintain a large size of inventory for efficient and smooth production and sales operation. To maintain a minimum investment in inventory to maximize profitability.

The effective management of inventory involves a tradeoff between having too little and too much inventory. The firm should avoid a situation of over investment or under investment in inventories. The major disadvantage of over investment are Unnecessary tied up of firms funds and losses of profit. Excessive carrying cost. Risk of liquidity. Physical detritions of inventory during storage.

Maintaining an adequate level is also dangerous. The consequences of under investment in inventory are Production hold ups Failure to meet delivery commitment

Thus the aim of inventory management should be to avoid excessive and inadequate level of inventories and to maintain sufficient inventory for the smooth production and sales operation.

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INVENTORY MANAGEMENT IN BHEL

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

1. Planning This is done by PPC department is consultation with purchase, commercial, design and manufacturing department prepares the planning schedule. This schedule along with information provided by engineering and design department helps in material planning and inventory control.

2. ProcurementThe procurement done by purchase department. It is done with the assistance of PPC and commercial department for maintaining a tradeoff between carrying costs and ordering cost. A single purchase order is placed for the entire quantity of a specific item and its scattered delivery over a period of time is received. This method helps in obtaining cash and quantity discounts and saving carrying cost.

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3. Receipts and CustodyFor the proper inventory control on receipts of material in store, quality control department checks the material as per specification. The cost section fills details of all the purchase by issuing store receipts voucher and material issue voucher.

4. IssueAfter receiving the material and storing, the management keeps the information whether these material are being issued to desired destination. Full record of every issuing of material is kept for the proper inventory control.

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

METHODS USED FOR INVENTORY CONTROL

In BHEL, planning and control of inventory is done by using two methods ABC analysis Slow moving and non- moving goods analysis. Budgeting material requirements Fixation of raw material levels Variety reduction Codification of materials Control of work in progress
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ABC Analysis
In case of manufacturing company like BHEL, the number of items of raw material run into thousands (67000 in BHEL) From the point of view of monitoring information for control, it become extremely difficult to consider each one of these items.

In this case ABC analysis become useful and enables management to concentrate attention and keeps a close watch on a relatively less number of items, which account for a high percentage of annual usage value of all items of inventory.

Annual usage value = Annual requirement per unit cost

In the analysis, items are categorized into A, B, & C category on the basis of their usage value. The more costly items are classified as an A. This represent large investment item but is low in number. In B.H.E.L. A category items amount to 60% of investment in inventory items. Inventory items of average usage are put in S category and these accounts for 30% of total investment in inventory. Low usage items are pull in C category. It represents 10% of degree of control and accurate planning. B category requires moderate control. As C category represents low usage value, much importance is to pay on try control. Also the planning and control cost incurred for this category will be greater than their total cost. The advantages of this system are--: Ensues closer control on costly on costly items. Helps in developing scientific methods of controlling inventories. Clerical cost is reduced and stock is maintained at minimum level. Helps in achieving the main objective of inventory control at minimum level.

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Slow moving and Non-moving goods analysis

It is advantageous to compare the turnover of different stock, which does not move, and kinds of materials as a means of detecting stock which does not move regularly. Thus enabling management to avoid keeping capital locked up in undesirable stock. Stock turnover helps in analyzing such items.

Stock turnover

Cost of material consumed during period Average stock of raw material during period

Stock turnover figures the presence of slow moving stock and helps in keeping the level of such stock to a low mark Slow Moving stock material which have a low turnover are classified as slow moving stock. In B.H.E.L., Hardwar an item is regarded as slow moving one, If stock turnover ratio is less than 10%.

Non-Moving stock- These items have no immediate demand but may be

required in future. Here the items, which are not consumed since two years, are regarded as non-moving stock or dead inventory. This category includes mainly directly chargeable items.

These items having turnover ratio of 10% or more a fast moving items and such acquire more importance.

Documents Used For Inventory control

The various documents used for control of inventory are discussed below: -

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 Store Receipt Voucher

This is issued when raw material purchased reaches the store. It is issued by store in charge.

Material Issued Voucher

This is an authorization to the storekeeper to issue raw material. Any material ordered for a specific work order will be recorded on MIV details of material requisition is entered on the Bin card.

Material Transfer Note

This is issued when the material booked to one particular order is transferred to another work order.

Material Return Note

This is an authorization to the storekeeper regarding, raw material, finished parts or other stores no longer required by the factory. The various stock record and cost accounts are adjusted in due course from the details given in the form.

Material is kept in appropriate bin and draws. For each kind of material a bin card is maintained showing details. A bin card assists the storekeeper to control the stock. The bin card incorporates all information viz. opening balance of materials, material ordered, and material allotted and closing balance of materials. As a result bin card shows the full cycle of material like the order of few supplies, allocation of materialto jobs, receipt and issue of material, stock in hand and balance available.
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1.5SCOPE OF THE PROJECT

During the entire duration an emphasis was laid on understanding the foundational principal which governs the economy of a state and also the interacting variables influencing the financial well-being of any particular organization are it a mammoth size government running a state or a small enterprise promoted for the social cause by that state. The project was confined to not study of state government financials that were collection from various sources for each of the state of the country. The Annual Performance three year -2007, 08 and 09 for each of the state were analyzed on the basis of certain set parameters. Once a rating modal based on the financial well-being of the states was formalized the study of the various state government enterprises was carried out. Due to time constraint only five sectors were chosen so as to justify the quality of study. The selected sector for the study werea. Irrigation b. State Electricity Boards c. Power Financial Corporations d. Roads e. State Finance Corporations These sectors were chosen on the basis of number of issues of Bond, Fixed Deposits, and etc. for raising fund either private or through public offering that come out from them. Apart from that the kind of guarantees extended by the state government to various sector also formed the basis of selecting these sectors.

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RESEARCH METHODOLOGY
DATA COLLECTION SOURCES:-. As my topic is related to the working capital, the secondary data has been very useful for this purpose. The cost audit reports of various years have been used in analyzing the data. Mainly secondary data has been used. To know about the working capital management, I have talked to various persons in accounts departments.

Main topics of Research Methodology are:

I. Research Methodology

II.

Steps in Research Methodology Collection of data Organization of data Presentation of data Interpretation of data

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TYPES OF RESEARCH

Descriptive Research Analytical Research Qualitative research Quantitative Research

DESCRIPTIVE RESEARCH OR EX-POST FACTO RESEARCH

To conduct the research work accurately, we conducted descriptive Research. It includes surveys and fact-finding inquiries of different kinds.

It is done to know following facts:

The BEL sales are more influenced by quality. Frequency of using BEL products. Liking in respect of quality. Media for awareness of schemes.

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ANALYTICAL RESEARCH
In it, we have to use facts and information already available and Analysis theses to make an evaluation for project. QUALITATIVE RESEARCH In selection the appropriate research design of the study and the type of data needed, the choice of data collection techniques is four grouped. It is done for: - Consumers needs Consumers preference for brand

Availability for consumers.

QUANTITATIVE RESEARCH Quantitative research is obtained to rate the different aspect on parameters. Image of brands Brand loyalty Expectation of customers Awareness among consumers for schemes Switch ability of consumers. Trails etc.

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METHODOLOGY
The project includes both primary & secondary sources of data. The data

collected through these sources has been organized, analyses and interpreted so as to draw conclusion and arrive at appropriate recommendation

a) Primary sources of data include personal interviews from various accounts officers in the enterprise.

b) The secondary sources of data include the annual reports, website of BHEL.

Company, which contains details, which is helpful for making my project report.

Data collection method:

Both the primary and secondary data has been collected from the market and the company respectively. The secondary data was provides through the annual reports, website etc. of the company and the primary data was collected through the medium of face-to-face interaction/interviews with the businesspersons in the market.

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 Data collection instruments

Data once collected needed to be organized for further processing. Data collected by me was carefully gone through then the relevant and useful matter was assorted and properly organized. Sampling plan The data collected is of no use unless and unstill it is given in a presentable from. Thus, after proper organization, the data is given in a presentable form with complete details with the help of bar diagram, pie charts etc. Analysis of data: The data is carefully analyzed keeping in consideration both the pros and cons for purpose of arriving at concrete conclusions. Interpretation of data: After carefully analyzing the data, it has been aptly interpreted in order to give concrete conclusions and proper recommendations.

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SCOPE OF THE PROJECT Solvency of the business: Adequate working capital helps in maintain
solvency of the business by providing uninterrupted flow of production. Goodwill:Sufficient working capital enables a business concern to make prompt payment and helps in creating and maintaining goodwill. Easy loan: A concern having adequate working capital can arrange loan from banks and other sources on easy and favorable terms. Cash discount: Adequate working capital also enables a concern avail cash discounts on the purchase and hence in reduces cost. Regular supply of raw material:Sufficient working capital ensures regular supply of raw material and continuous production. Regular payment of salaries, Wages and other day-to-day commitment: A company which has adequate working capital can make regular payments of salaries, wages and other day to day commitments which raises the morale of its employees, increases their efficiency, reduces stages and costs. Ability to face crisis:Adequate working capital enables a company to face

business crises in emergencies such as depression because during such period, generally there is much pressure on working capital. So keeping in views all these point we can say that a business should have adequate Working capital.

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FINDING & ANALYSIS

The Analysis of working capital is primarily a test of short-term solvency. There is danger in having too little or too much working capital. Therefore: The financial manager has to be very vigilant all throughout about the trends in the items that make up working capital. The questions to be studied and answered in connection with the analysis of working capital include the following: Is the management utilizing working capital effectively? Is the amount working capital adequate, excessive or insufficient? Does the firm have a favorable credit rating? Is the current financial position improving?

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Inventory valuation:
Inventory is valued at actual / estimated cost or net realizable value, whichever is lower. Finished goods in plant and work in progress involving hydro and thermal sets including gas-based power plants, boiler auxiliaries, compressors and industrial turbo sets are valued at actual / estimated factory cost or at 97.5% of realizable value whichever is lower. In respect of valuation of finished goods in plant and work in progress, cost means factory cost, actual / estimated factory cost includes excise duty payable on manufactured goods. In respect of raw material, a component, loose tools, stores and spares cost means weighted average cost. The components and other material purchased / manufactured against production order but declared surplus are charged off to revenue retaining residual value based on technical estimates.

Tools of Analysis of working capital

Working capital ratio analysis. Movement of working capital statement. Fund flow analysis. Cash flow analysis Working capital budget. Working capital report. We are using the technique of ratio analysis as a means of checking upon the efficiency with which working capital is being used in the company. These ratios would measure the pulse of working capital management in BHEL. These are as follows:-

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(1)Current ratio: Current ratio represents a margin of safety for creditors. The higher the current ratio, the greater the margin of safety, the larger the amount of current assets in relation to current liabilities, the more the firms ability to meet its current obligation. This ratio is calculated as follows: CURRENT ASSETS CURRENT RATIO= CURRENT LIABILITIES

(2) QUICK RATIO: This ratio provides a better measure of overall liquidity. A firms inventory cannot be easily being converted into cash so it is not taken account here. A ratio 1:1 is considered satisfactory. Ratio is computed as under: CURRENT ASSETS INVENTORY QUICK RATIO= CURRENT LIABILITIES

(3) CASH RATIO

Cash is the most liquid asset and it should be minimum in the firm as the excess of cash in hand/bank implies loss of interest i.e. the misutilisation of funds, which could have been utilized/invested elsewhere. There is nothing to be worried about lack of cash if the company has reserve borrowing power.

Cash ratio= Current liabilities

Cash

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(4) INVENTORY TURNOVER RATIO AND HOLDING PERIOD

It

shows how rapidly the inventory is turning into receivable through sales. High

ratio is indicative of good inventory management. A low ITR implies excessive inventory levels. Ratio should neither be too low nor too high. It is computed as follows: -

ITR=

Sales

Average inventory

(5) RAW MATERIAL INVENTORY RATIO AND HOLDING PERIOD

RMI turnover ratio indicates the efficiency with which the firm converts raw material into work in progress and into finished goods. Calculation is done by this formula RMI ratio=Raw material consumption Average inventory

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CURRENT RATIO:
CURRENT RATIO: - CURRENT ASSETS / CURRENT LIABILITIES

YEAR C. Ratio
3 2.5 2 1.5 1 0.5 0

2005-06 2.67
2.67

2006-07 2.54

2007-08 1.99

2008-09 1.90

2009-10 2.10

2.54 1.99 1.9 2.1

2005-06

2006-07

2007-08

2008-09

2009-10

It measures the short-term solvency of the firm, its ability to meet shortterm obligations that indicates the rupees of current assets available for each rupee of the current liability. It is a margin of safety for creditors. The current ratio of 2:1 is been considered satisfactory.

In context to BHEL, Hardwar the current ratio is more the than standard. Although in the year 2007-08 and 2008-09, it is 1.99 & 1.90 respectively, but it is approximately 2, which is acceptable. The data shows increase in current ratio due to increase in debtors and inventory as compared to increase in loans andadvances and creditors. When we compare the data of the last two years, following important facts is revealed: -

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CURRENT ASSETS

Increase in debtors = 43.54% Increase in inventory = 38.4%

CURRENT LIABLITIES Increase in creditors = 16.42% Increase in loans & advances = 42.8%.

The higher ratio indicates its ability to meet the current obligations as soon as possible. The higher current ratio shows higher liquidity of the firm to pay for its liabilities.

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QUICK RATIO: QUICK RATIO: - QUICK ASSETS / CURRENT LIABILITIES

Quick Assets: It includes allcurrent assets other than stock and prepaid Expenses.

Year

2005-06

2006-07

2007-08

2008-09

2009-10

Quick Ratio

1.93

1.86

1.45

1.35

1.46

2.5 2 1.5 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 1.93 1.86 1.45 1.35 1.46

It is widely available test of measure of liquidity position of firm. It is superior to the current ratio test. The quick ratio of 1:1 is considered to be satisfactory as a firm can easily meet all current claims while calculating it prepaid expenses and inventory are been excluded from current assets. The ratio of BHEL is almost more than standard i.e. 1:1.The company is capable of meeting its liability frequently as shown in the data i.e. debtors is more frequently converted into cash. Liquid ratio of the year 2009-10 is less as compared to 2008-10 due to less cash balance & other current assets.

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INVENTORY TURNOVER RATIO INVENTORY TURNOVER RATIO: - COST OF GOODS SOLD/AVG. INVENTORY
Year 2005-06 2006-07 2007-08 2008-09 2009-10

ITR

2.91

2.55

3.15

3.4 6

3.17

4 3.5 3 2.5 2 1.5 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 2.91 2.55 3.46 3.15 3.17

It shows the relationship between the cost of good sold and the average inventory in hand. It is also indicative of the number of times the inventory has been given the shape of final sales during the year. This ratio indicates how frequently the stock has been converted into sales /cash. The inventory turnover ratio has been frequently increasing which indicates that the stock is frequently converted into sales.

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The average ratio for the given years comes around 3, which show that the inventory has been considerably decreased which indicate that the amount of stock, which is kept in warehouse, has been decreased. The production cycle is to be consistent. The main product is locomotives and transformers, which normally have a long production cycle. The major problem of investment inventory is in form of WIP on an average account for 59% of total inventory. To keep the production flow even certain amount of inventory buildup is in the form of W/P is essential. The inventory T/O ratio keeps fluctuating depending on the number of orders. Material with low turnover ratio is classified as slow moving (it is 10 % in case of BHEL.) while item, which have number immediate demand are non-moving items. Non-moving item includes mainly directly chargeable items. The requirement of which may change due to work designing and technology improvement.

DEBTORS COLLECTION PERIOD: -

Year

2005-06

2006-07

2007-08

2008-09

2009-10

DCP

11.21

13.21

10.34

8.63

8.15

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DCP

14 12 10 8 6 4 2 0 2005-06 11.21

13.21 10.34 8.63 8.15

2006-07

2007-08

2008-09

2009-10

This ratio indicates the speed with which debtors and receivable are being collected a very long collection period would empty either poor Cr selection or an inadequate collection effort. The delay in collection to receivables would mean that apart from the interest cost involved in maintaining a high level of debtors the liquidity of the firm is adversely effected a large number of a/c s receivable becoming bad debts short period of average collection is not necessarily good. It is to that it avoids the risk of receivable being bad debts as well as the burden of high interest on outstanding debtors it may have the adverse effect on the volume of sale of the firm. Sales may be confirmed to the customers making prompt payment in the debtors collection period has been increased form 11.21 to 13.21 in the year 2002 to 2004 it is decreased from 10.34 to 8.15 in the last 3 years.

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CREDITORS TURN OVER RATIO :

Creditor turnover ratio= Net Cr. Purchase Avg. Cr.
Year 2005-06 2006-07 2007-08 2008-09 2009-10

Ratio

2.84

2.66

3.97

3.75

4.00

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

3.97 2.84

3.75

2.66

2005-06

2006-07

2007-08

2008-09

2009-10

The ratio indicate that the net credit purchase to average Credit. The creditor turn over ratio of BHEL, is quite good because the company is capable of making payment to its creditors frequently. Comparison of credit payment period with debtors collection period shows that BHEL is very liberal in coll ecting due from its customers. There is no synchronization between cash outflows and an inflow regarding payments to suppliers and collection from debtors collection period is more than twice the credit Payment period BHEL, needs to take a serious step in this area.

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TURNOVER CAPITAL EMPLOYED

Year Cap. Employed

2005-06 20171

2006-07 22961

2007-08 21203

2008-09 23688

2009-10 33442

40000 35000 30000 25000 20171 20000 22961 23688 21203 33442

15000
10000 5000 0 2005-06 2006-07 2007-08 2008-09 2009-10

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Content of Working Capital management

Working Capital Cycle Sources of Additional Working Capital Handling Receivables (Debtors) Managing Payables (Creditors) Inventory Management Key Working Capital Ratios Introducing Invest-Tech &Plan Ware Copyright & Legal Stuff

1. WORKING CAPITAL CYCLE

Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. Click here for more information about the vital distinction between profits and cash flow. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits.

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There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions ...TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

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You release cash from the cycle Collect receivables (debtors) faster

Collect receivables (debtors) slower

Your receivables soak up cash

Get better credit (in terms of duration or amount) from suppliers

You resources

increase

your

cash

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a plug hole, they remove liquidity from the business

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2. Sources

of Additional Working Capital

Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).

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3. Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts

Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. Establish clear credit practices as a matter of company policy. Make sure that these practices are clearly understood by staff, suppliers and customers. Be professional when accepting new accounts, and especially larger ones. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. Establish credit limits for each customer... and stick to them. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. Keep very close to your larger customers.

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 Invoice promptly and clearly. Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects: Weak credit judgments Poor collection procedures Lax enforcement of credit terms Slow issue of invoices or statements Errors in invoices or statements Customer dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. Example......... Longer credit terms taken with approval, particularly for smaller orders Use of post-dated checks by debtors who normally settle within agreed terms Evidence of customers switching to additional suppliers for the same goods New customers who are reluctant to give credit references

Receiving part payments from debtors.

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Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors: Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even.

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Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities for exploring alternative payment scenarios for receivables. See also the white paper on Making Cash flow Forecasts and Checklist for Improving Cash flow.

Managing Payables (Creditors) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities, which take account of stock holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers?

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 If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well then you can sell well. Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill feeling and can signal that your company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with you to enhance the future viability and profitability of your company. Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities for exploring alternative payment scenarios for payables. See also the white paper on Making Cash flow Forecasts and Checklist for Improving Cash flow.

5. Inventory Management: -Managing inventory is a juggling act.

Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock

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every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them. Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize stock holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management. The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best sellers?

Remember that stock sitting on shelves for long periods of time ties up money, which is not working for you. For better stock control, try the following: Review the effectiveness of existing purchasing and inventory systems.

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 Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it. Consider having part of your product outsourced to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock "is going out the back door!" Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges. Our range of financial planners, Exl-Plan and Cash flow Plan, contain extensive facilities for exploring alternative stock-holding strategies. See also the white paper on Making Cash flow Forecasts and Checklist for Improving Cash flow. 6. Key Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital utilization Ratio Formulae Average Stock * Stock Turnover (in days) 365/ Cost of Goods Sold =x days Result Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.

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Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.

It takes you on average x days to collect monies due to you. If your official credit terms are 45 Receivables Ratio (in days) Debtors * 365/ = x Sales days day and it takes you 65 days... why? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay Creditors * Payables Ratio (in days) 365/ Cost of Sales (or Purchases) earlier, say, to get a discount = x this will decline. If you simply days defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.

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Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 Total Current Current Ratio Assets/ =x months. For example, 1.5 times means that you should be able

Total Current times to lay your hands on $1.50 for every $1.00 you owe. Less than Liabilities 1 time e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

(Total Current Assets Quick Ratio Inventory)/ Total Current Liabilities (Inventory + Receivables Payables)/Sales

Similar to the Current Ratio but = x takes account of the fact that it times may take time to convert inventory into cash. A high percentage means that As % working capital needs are high Sales relative to your sales.

Working Capital Ratio

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Other working capital measures include the following: Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers. Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors. When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cash flow forecasts. Our financial planning software packages - Exl-Plan and Cash flow Plan canfacilitate this task as they provide for the setting of targets for receivables, payables and inventory

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 Advice on getting new business ideas, managing working capital, devising business strategies and much more. Free Online Financial Planner to produce 'first-cut' five-year projections. Pages devoted to famous business quotations and examples of bad business advice and mistakes.

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RecommendationS
During my project period. I have studied the working capital management in BHEL; On the basis of my study I am putting forward some suggestions. Implementation of which may certainly improve the efficiency of working capital management in the unit. 1. Estimation of working capital requirement should be done on the basis of length of operating cycle of different products W.C. requirement = Average daily requirement of Working capital X length of operating cycle. 2. The credit policy of BHEL should be made more practical to shorten the debt collection period. The age wise schedule of debtors shows that debtors pertaining since financial year 1991-92 are outstanding. This alarming phenomenon assists point that the terms and conditions of payment as well as recovery procedure had been very-very liberal. The current cash crunch would have been not there had all the recoveries been made on time. A new credit policy is need of the hour, which should specific strict terms and penalties in case of delay release of payments without doing my harm to relation with BHELs customer. To decrease loss due to bad debts and to reduce collection period. Credit rating of customers should be done more efficiently. Evaluation of credit worthiness is precursor to the final decision to grant credit or not for decision-making. Decision Tree Approach can be adopted under this approach. Probability of default and payment by the customer are determined. The weighed net benefit is calculated as.
p(Revenue-cost)-(1-p)cost

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Where P is probability that customer pays his dues. The customer should not be granted credit if answer is negative. Quality of the product should be improved so that the company can dictate terms of payment. This will screen out unworthy customers and recovery position will definitely improve.

3. Inventory management plays an important role in effective working capital management for a business firm producing industrial goods. For improvement in the area of inventory management. Suggested steps are as under: The ABC analysis used considers only the value of material and quantity of usage. It does not consider the important of material in production function. To overcome this VED analysis could also be used which categories the items according to theory importance as vital essential and desirable. I suggest through research in this regard to arrive at some suitable mix of both these methods which gives due consideration to value, quality, importance, etc of stock items.

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 The maximum and minimum level of each items should be indicated to avoid over-stock or under-stock situations Internal performance report on inventory on at least monthly basis should be prepared to study the material price variance, material usage variance and inventory level variance from the estimated figures The indenting and tendering process for purchases should be made expeditious to decrease the lead time and reduce the chances of Stock out situations.. It has been seen that delay in supply of raw materials is regularly Occurring and this ultimately to delay in supply to customer. This Should be avoids as it lowers the performance rating of the company.

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BIBLIOGRAPHY

FINANCIAL MANAGEMENT BY I M PANDEY

(Working Capital Management page 729-747)

PRINCIPLE OF MANAGEMENT ACCOUNTING BY DR. S N MAHESHWARI

(Financial Ratios Page: B.44 - B. 45)

ANNUAL REPORT 2009-10

(Accounting Policies Followedby BHEL,

Balance SheetAndProfit And Loss A/C)

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