working capital mgmt projects

7/31/2019 Working Capital Mgmt Projects

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ON

WORKING CAPITALMANAGEMENT

SUBMITTED BY:

CERTIFICATE


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This is to certify that the study entitled "WORKING

CAPITAL MANAGEMENT" has been carried out at 'HEEP'

(Heavy Electrical Equipment Plant) of BHEL, Ranipur,

Haridwar Unit by (Name of the Candidateunder my

guidance.

This 'dissertation' explains the Performance Management

with Special Focus on evaluation of Working Capital

Management and its merits and demerits which is beneficial

to the first time users and all readers.

(Certified by)


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DECLARATION

I hereby declare that the study entitled Working

Capital Management in the context of H.E.E.P. BHEL being

submitted by me in the partial fulfilment of the requirement

by the THE INSTITUTE OF COST AND WORKS

ACCOUNTANTS OF INDIA is a record of my own work. The

study was conducted at Finance Department, H.E.E.P. BHEL.

The matter embodied in this project report has not

been submitted to any other University or Institution for the

award of degree.

(Name of the Candidate)


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ACKNOWLEDGEMENT

Behind every study their stands a myriad of people whose

help and contribution make it successful. Since such a list

will be a prohibitively long, I may be excused for important

omissions.

The guidance, help and co-operation of my

supervisor .......................... , ............................, is gratefully

acknowledged with profound gratitude.

I have been benefited from discussion with

............................., .........................................I am also

thankful to all others in Finance Department, H.E.E.P., BHEL,

Hardwar, who provided me with all the required information

for my project.


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CONTENTS

1. BHEL INTRODUCTION

2.MEANING OF WORKING CAPITAL

3.WORKING CAPITAL MANAGEMENT-BHEL

4.DEBTORS MANAGEMENT

5.INVENTORY MANAGEMENT

6.CASH MANAGEMENT


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BHARAT HEAVY ELECTRICAL LIMITED-

A CORPORATE GIANT

BHEL was established nearly 40 years ago to become the most important symbol of

Heavy Electrical Equipment industry in India and rank amongst the first few in world.

It is the largest heavy engineering and manufacturing enterprise of its kind in India

with well- recognized track record of performance, making profits continuously since

1971-72.The company achieved a turnover of Rs.7257 crore and Gross margin of

Rs1104 crore in 2001-02. BHEL caters to core sector of Indian economy viz. Power

Generation and Transmission, Industry, Transportation, Telecommunication, Renewal

Energy Defence etc. The wide network of BHELs, 14 manufacturing divisions, 4

Power sector regional centers, over 150 project site and service centers and 15 regional

offices enable the company to be closer to its customer and provide them with suitable

products, system and services at competitive prices. Having attained ISO 9001,14001

certification, BHEL is now on its journey towards TQM.The company inherent

potential coupled with its strong performance over the years has resulted in it being

chosen as on of the Navratna PSUs which enjoy the support from the government their

endeavors to become global players with its prudent financial management. BHEL


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occupies an all-important niche as evident by its ranking by CII amongst top eight

PSUs based on financial performance. Recently in survey conducted by business India,

BHEL has been rated as seventh Best Employer in India.

HEAVY ELECTRICAL EQUIPMENT PLANT, HARDWAR :

Heavy Electrical Equipment Plant, Hardwar of this Multi-unit corporation with its

7467 strong highly skilled technicians, engineers, specialists and professional experts is

the symbol of Indo Soviet and Indo German Collaboration. It is one of the four major

manufacturing units of the BHEL. With turnover of 1088 crores and PBT of Rs.68

crores, HEEP added 3000 MW of power to the National grid during 2001-02. HEEP is

engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW, Hydro Sets

up to HT Runner dia 6300mm, associated Apparatus Control gears, AC& DC

Electrical machines and large size Gas Turbine of 60-200 MW. HEEP Hardwar

contributes about 44% of Indias total installed capacity for power generation with total

capacity of Thermal, Nuclear & Hydro Sets of over 45000MW currently working at a

Plant Load Factor of 76% and Operational Availability of 86%. Inspite of acute

recession in economy, BHEL Hardwar bagged recent orders worth 1500 Crores

including repeat orders for Suratgarh-5, Kota-6, Raichur-7, Rihand-3&4 and

Ramagundam-7 Unit. Additionally, Mejia-4, Panipat-7&8, Maithon and Bhatinda are

in pipeline.

HISTORICAL PROFILE :


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The construction of heavy electrical equipment Plant commenced in Oct.'1963 after

indo-soviet technical co-operation agreement in Sept.'1959. The first product to roll out

from the plant was an electric motor in January 1967. This was followed by first 100MW Steam Turbine in Dec.1969 and first 100MW Turbo Generator in August 1971.

The plants break even was achieved in March 1974. BHEL went in for technical

collaboration with M/s Siemens, Germany to undertake design and manufacture to

large size thermal sets upto a unit rating of 1000 MW in the year 1976.First 200

MWTG set was commissioned at Obra in 1977. The continuum of technological

advancement subsequently saw the commissioning of 500 MW TG Set in 1984 . The

technical cooperation of Gas Turbine manufacture was also signed with M/s Siemens

Germany. First 150 MW ISO rating gas Turbine was exported to Germany in

Feb'1995. Our 250 MW thermal set up at Dahanu Plant of BSES made a history by

continuous operation for over 150 days and notching up a record plant load factor

greater than 100%.

KEY COMPETITORS:

Power Sector Giant of the World viz. Siemens Germany, ABB, General electric of

USA etc. are the major competitors of HEEP. All these are the MNCs and enjoy huge

financial and R&D backup.

CORPORATE CITIZEN:

HEEP Hardwars Strategic plans and its policy & strategy are commensurate withBHEL Corporate / strategic Plan . As first PSU to adopt Corporate Planning as a

process . Board meetings for long range development, BHEL has always guided other

PSUs in their Corporate planning process .Board meeting , monthly Management

Committee meetings, Annual Revenue Budget exercise, Mid term reviews, Apex TQ


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council reviews, Personnel Heads Meet, Quality Heads Meet, Technology Meets ,

Product committees meetings, Inter-Unit Quality Circle Meets etc. are the some of

crore strengths of BHEL Corporations vast network.

KEY CUSTOMERS AND SUPPLIERS

The Power supplier of the country National Thermal Power Corporation, NHPC, NPC,

and other IPPs and various State electricity Boards, are the key external customers of

HEEP Hardwar. HEEP has a long standing-relationship with its customers. Power

Sector-Regions, Power Sector Technical Services and other sister unit of BHEL are the

Essential Internal customers. Manufactures of Casting and Forging, ETS, Steels

including alloy steels, component of the product non-ferrous and insulating materials,

equipment etc. are its suppliers. Some of the key suppliers are Collaborators M/s

Siemens Germany, sister unit CFFP, SAIL, near by Ancillaries developed by BHEL

etc. To further strengthen the relations, one to one long-term cooperation meetings are

being held by BHEL with its 200 major suppliers on regular basis.

MAJOR MILE STONES

1975 Job Redesign concept launched for FIRST time in India.1978 well documented Suggestion Scheme launched1982 Launched Productivity Movement & Quality Circle. Concept1993 Accreditation of ISO 9001 quality System1995 Adopted EFQM model of TQM for achieving Business Excellence1997 BHEL one of the 9 PSEs declared Navratna by Govt. of India .1998 Certificate of Merit by National Productivity Council for

Outstanding performance for 2 nd consecutive year.1998 Accreditation of U stamp.1999 Accreditation of R Stamp from National Board of Boiler and Pressure

Vessel Inspector, USA .1999 AD-Merkblatt HPO Recertification by RWTUV for Gas Turbine

Combustion Chambers


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1999INSAAN Award for Excellence in Suggestion for 9 th consecutive year 1999 PCRI recognized as Environmental Lab by Haryana State Board for

Prevention and Control of Pollution1999 Accreditation of ISO 14001-Enviornment management system

2000 Site Visit for CII-EXIM Business Excellence Award-20002000 CII Site Visit for CII-EXIM Business Excellence Award-20002001 Top Management TQM Workshop at Rishikesh and HRDC2001 INSAAN Award for excellence in Suggestion for 11 th consecutive year 2001 Launching of QTM & RCA at HEEP Hardwar by CMD2002 Launching of delivery Index, Turnover Index and Manufacturing Index2002 Accreditation of ISO 9000-2k 2002 JBE Workshop of Apex TQM Group at Tehri to evolve Business policy

and CSF

TOTAL QUALITY FOCUS:

To face the increased competition from MNCs (due to liberalization policy of

Government) in early 90s and to enter European market we moved towards ISO 9000Certification.Concept of Business Excellence through EFQM Model was launched in

entire BHEL on pilot scale in Oct.'1995. In 1997 HEEP launched TQM in the entire

Plant and since then Self-Assessment is done every year in September.Based on

feedback Report of Assessment, critical success factors are identified.and TQ action

plans are drawn. The philosophy of ISO 9001, TQM and ISO 14001 has been

integrated BHEL Hardwar for ultimately achieving BUSINESS EXCELLENCE.

HEEP Hardwar plant is accredited for ISO 9001 and ISO 14001 and is now on March

towards TQM.5-S was launched in March 1999 in a big way and now it has become a

way of life in the organisation. In 2000 HEEP applied for CII-EXIM Business

excellence award and site visit was conducted Bu CII team in Seot.'2000. CII feedback


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has gone a log way in carrying out further improvement plans and giving a structured

thrust to TQM movement.

In July 2001, Units TQ Council reviewed the TQ Action Plans 2001-02 for itseffectiveness and impact on accelerating the pace of improvement and consequent TQ

Score.Executive Director laid the challenge of achieving the TQ score of 650.With an

objective to bring awareness about he CII-EXIM Business Excellence Model amongst

the Sr. Executives, the first Top Management TQM Workshops held at Rishikesh

during oct.2001Executive Director who is TQ Assessor also, himself steered the

Workshop with assistance from some experienced TQ Assessor of HEEP.It followed

by second Top Management TQM Workshop steered again by Ed was held at HRDC

on Oct29,2001.Subsequantly the third Top Management TQM Workshop was held in

Nov2001,where-in Sr.Counsellor,CII deliberate the detail on Best practices of TATA

STEEL-the winner of CII-EXIM Business Excellence Award 2000. Simultaneously,

TQ Assessors training program for the select group of young managers (to be

developed as Think Tanks) was organized in Nov2001.To give further boost Apex

Group was formed.Apex Group developed Roadmap to Business Excellence based

on Criteria Linkage of CII-EXIM BusinessModel and the initiatives taken at Hardwar

was drawn by the group and it was widely circulated amongst the employees through

special issue of Hardwar Current in April 2002. It followed by JBE workshop of Apex

TQM Group held at Tehri on June 30 and July 1, 2002 where-in following business

policy and critical factors was evolved.


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One of the major strengths of HEEP Hardwar is its free, open and consistent work

culture for making continuous improvement evident from the participation of

employees in Suggestions and Quality Circles. To recognize their efforts various

productivity drives and competition are organized through out the year and Executivedirector awards the winners in the special Award Distribution Functions. National

Award for Excellence in Suggestion Scheme for 11 th consecutive year by INSSAN,

National Award for excellence in Energy Conservation as an Energy Efficient unit

by CII, CMDs Rolling Trophy for 3 rd consecutive year, "Well known Forge Shop" by

Central Boiler Board etc. are some "Shram Vir Award 2001 and 12 employees

honoured with Vishwakarma Rashtriya Puraskar during 2001-02.

The journey to excellence is unending .It is a continuous search with commitment and

belongings. Sky indeed is not the limit for perfection. The transition has strongly

experienced a silent internalization with a blend of commitment of the existing human

resource for creating benchmarks for excellence. The emergence of role models and

clear-cut driving force at the top provide an anvil to unleash the potential, which

remain unexplored in search of Attitude to perform. The surge has started and is

being communicated down the. BHEL today through TQM is on March towards

excellence.

--


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--------------- SWOT ANALYSIS ------------------

STRENGTH (S): - Low cost producer of quality equipment due to cheap labour and fully

depreciated plants.

Flexible manufacturing set up.

Entry barrier due to high replacement cost of its manufacturing facilities.

Comprehensive turnkey experience from product design to commissioning.

WEAKNESSES (W): -

High working capital requirement due to its exposure to cash starved SEBs (State

electricity boards).

Inability to provide project financing.

OPPORTUNITIES (O): -

High-expected growth in power sectors (7000 MW/p.a.needs to be added).

High growth forecast in Indias index of industrial production would increase

demand for industrial equipment such as motors and compressors.

THREATS (T): -

Technical suppliers are becoming competitors with the opening up of the Indian

economy.

Fall in global power equipment prices can effect profitability.

RESEARCH METHODOLOGY


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After recession with my locality member. I choose the project of Working capital

management. I discussed the project with my instructor and coordinator Mr.Inder

Arora, Sr. Accounts officer of Books & Budget section at H.E.E.P., BHEL,

Hardwar.

He approved the project. After that, a simple course of action has been

followed for working on this project. Entire information and data were gathered

from the respective annual report of BHEL, Hardwar. All the figures are taken from

their balance sheet, profit & loss account of the respective years and the other

internal documents, which were personally shown by the members of company in

our interest.

A great help was provided by our instructor Mr. Inder Arora in

understanding the facts and figures. Mr. Arora made it possible to us to ask our

query from that person who can answer it best than anybody else in the company.

Although it has been a difficult task but the availability of proper data and timely

guidance given by Mr. Arora made it a little simpler to complete this project.


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Working Capital may be classified on two basis: -

a) On the basis of Concept: -

On the basis of concept, working capital can be classified as, Gross Working Capital

Net Working Capital

b) On the basis of Time: -

On the basis of time, working capital can be classified as,

Permanent or Fixed Working Capital

Temporary or Variable Working Capital

Gross Working Capital: -

The Gross Working Capital is the Capital invested in the total current assets of the

enterprises. Current assets are those assets, which can be converted into cash within

a short period, normally an accounting year.

Gross Working Capital = Total Current Assets

Net Working Capital: -

The term Net Working Capital refers to the excess of current assets over current

liabilities, or say,

Net Working Capital = Current Assets Current Liabilities


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Net Working Capital can be positive or negative. When the current assets exceeds

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

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

liabilities are those liabilities, which are intended to be paid in the ordinary courseof business within a short period of normally one accounting year out of the current

assets of the income of the business . The gross working capital concept is financial

or going concern concept whereas net working capital is an accounting concept of

working capital. Both the concepts have their own merits.

The gross concept is sometime preferred to the concept of working capital for the

following reasons: -

It enables the enterprise to provide correct amount of working capital at correct

time.

Every management is more interested in total current assets with which it has to

operate then the sources from where it is made available.

It takes into consideration of the fact every increase in the funds of the enterprise

would increase its working capital.

The concept is also useful in determining the rate of return on investments in

working capital .

The net working capital concept, however, is also important for the following

reasons:-

It is a qualitative concept, which indicates the firms ability to meet its operating

expenses the short-term liabilities.

It indicates the margin of protection available to short term creditors.

It is an indicator of financial soundness of enterprise.


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It suggests the need of financing a part of working capital requirement out of the

permanent sources of funds.

Permanent or Fixed Working Capital: -

Permanent or fixed capital is the minimum amount, which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current

assets. Every firm has to maintain a minimum level of current assets is called

permanent or fixed working capital as this part of working capital is permanently

blocked in current assets. As the business, grow the requirement of working capital

also increases due to increase in current assets.

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 further be classified as seasonal working capital and special

working capital. The capital required to meet the seasonal need of the enterprise is

called the seasonal working capital. Special working capital is that part of working

capital which is required to meet special exigencies such as launching of extensive

marketing campaign for conducting research etc.

Temporary working capital differ from permanent working capital in the sense that it

is required for short periods and cannot be permanently employed gainfully in business


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NEEDS AND OBJECTIVES FOR WORKING CAPITAL

Every business needs some amount of working capital. The needs for workingcapital, arises due to time gap between production and realization of cash from

sales. There is an operating cycle involved in sales and realization of cash. There

are time gaps in purchase of raw material and production, production and sales, and

realization of cash.

Thus, working capital is needed for the following purposes: -

For the purchase of raw material, component and spares.

To pay wages and salaries.

To incur day- to- day expenses and overhead costs such as fuel, power and office

expenses etc.

To meet the selling costs such as packing, advertising etc.

To provide credit facilities to the customers.

To maintain the inventories of raw material, work in progress, store, spares, andfinished stock

.For studying the need of working capital in a business, one has to study the business

under varying circumstances such as new concern, as a growing and one, which has

attained maturity. A new concern requires a lot of funds to meets its initial

requirement such as promotion and formation etc. These expenses are called

preliminary expenses and are capitalized. The amount needed for working capital

depends upon the size of the company and the ambition of its promoters. Greater the

size of the business unit, generally will be the requirement of the working capital.

The requirement of the working capital goes on increasing with the growth and


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expansion of the business until its gains maturity. At maturity, the amount of

working capital required is called normal working capital.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT

1. NATURE OF BUSINESS :-

The requirement of working capital is very limited in public utility undertaking such

as Electricity, Water Supply and Railways because they offer cash sales only and

supply services not products and no funds are tied up in inventories and receivables.

On the other hand, the trading and financial firm requires less investment in fixed

assets but have to invest large amounts in current assets. The manufacturing

undertaking requires sizable amount of working capital along with fixed

investments.

2. PRODUCTION POLICY :-

The determination of working capital needs depends upon the production policy of

the business. The demand for certain products is seasonal i.e.; such products are

purchased in certain months of a year. For such industries, two types of production

policy can be followed. Firstly they can produce the goods in the months of demand

or secondly, they produce for the whole year. If the second alternative were

followed, it would mean that until the time of demand finishes, product would haveto be kept in stock. It would require additional working capital.


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7. RATE OF GROWTH AND EXPANSION OF BUSINESS: -

The larger size businesses require more permanent and variable working capital in

comparison to small business. If a company is growing, its working capital

requirements will also go on increasing. Thus, the growing concerns require more

working capital as compared to the stable industries.

8. SEASONAL VARIATION: -

Generally, during the busy season, a firm requires larger working capital than in the

slack season.

DEBTORS

CASH FINISHEDGOODS

RAW MATERIALWORK INPROGRESS


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9. BUSINESS FLUCTUATION: -

In period of boom, when the business is prosperous, there is a need for larger amountof working capital due to rise in sales, rise in prices, optimistic expansion of business

etc. On the contrary in time of depression, the business contracts, sales decline,

difficulties are faced in collection from debtors and the firm may have a large

amount of working capital idle.

10. EARNING CAPACITY AND DIVIND POLICY :-

Some firms have more earning capacity than other due to quality of their products,

monopoly conditions, etc. Such firms may generate cash profits from operations and

contribute to their working capital. The dividend policy also effects the requirement

of working capital. A firm maintaining a steady high rate of cash dividend

irrespective of its profit needs more working capital than the firm that retain larger

part of its profits and does not pay so high rate of cash dividend.

11.PRICE LEVEL CHANGES: -

Price level changes also affect working capital needs. If the prices of different goods

increase, to maintain same level of production, more working capital is needed .

12. AVAILABILITY OF RAW MATERIAL : -

Availability of raw material on the continuos basis affects the requirement of

working capital. There are certain types of raw materials, which are not available

regularly. In such a situation firm requires greater working capital to meet the

requirements of production. Some raw materials are available in particular season


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only for example wool, cotton, oil seeds, etc. They have to keep greater working

capital .

13. MAGNITUDE OF PROFIT :-

Magnitude of profit is different for different businesses. Nature of product, control

on the market and ability of managers etc. determine the quantum of profit. If the

profit margin is high, it will help to arrange funds internally, which will also increase

the working capital.

14. OTHER FACTOR : -

Operating efficiency

a) Management ability

b) Irregularities of supply

c) Import policy

d) Asset structure

e) Importance of labor


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MANAGEMENT OF WORKING CAPITAL

Management of working capital means management of all aspects of current assets

and current liabilities. Basically, Working capital management is concerned

with the problems that arise in attempting to manage the current assets,

current liabilities and the inter relationship that exist between them.

Financial management should determine the quantum and structure of current assets.

It should also see that current assets are financed from the proper sources.

Management should also see that current liabilities are paid in time, while managing

the working capital.

The main objective of working capital management is to manage current assets and

current liabilities in a manner so that working capital can be kept in a satisfactory

level. It is also taken in to account that the working capital should be neither

excessive nor inadequate. The amount of current assets should be adequate to pay

the current liabilities in time and adequate security margin can be maintained.Accordingly, proper balance among the different constituents of current assets is

maintained so that no current has more than require amount invested in it.

Management of working capital affects profitability, risk and liquidity of the

business significantly. Management should, therefore, maintain proper balance

among these factors while managing working capital. If the quantum of working

capital is more, it will increase liquidity, but decrease profitability and risk. If working capital relatively declines, it will decrease liquidity but cause an increase in

profitability and risk. If business wants to earn more profit, it will have to bear

higher risk. Risk means inability of the firm to pay current liabilities in time.


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Working capital management is three dimensional in nature : -

1) It concerned with the formulation. It of policies with regard to profitability,

liquidity and risk.2) It is concerned with the decisions about the composition and level of current

assets.

3) It is concerned with the decisions about the composition and level of current

liabilities.

Composition of level of Composition of level of current assets

current liabilities

Dimensions of working capital.

EXISTING SYSTEM OF WORKING CAPITAL IN BHEL, HARDWAR

To maintain the optimum level of working capital in such a big organization is reallya challenging task. The three basic components that determine the level of working

capital in any organization are: -

Policies regarding toProfitability, Liquidity and Risk.


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Cash

Debtors B/R

Inventory.

On the basis of our research in the BHEL Hardwar, these basic components are

managed in the organisation, in the under mentioned manner.

TABLE OF WORKING CAPITAL

(Rs. in Lacs) Particulars YEARS

1998-99 1999-00 2000-01 2001-02 2002-03

Current Assets

Debtors 53645 57350 54076 50904 41417Inventory 33849 37166 47369 43461 32370Cash 12 11 17 23 527Loan and Advaces 5440 6076 13367 6573 5730Total 92945 100603 114829 100962 80044

Current LiabilitiesSundry Creditors 15701 15753 18630 19718 15562Adv.from Customers 31634 26695 27107 33275 29360Other liabilities 1687 826 2665 1966 1980Provisions 19129 17002 15963 16682 14473Total 68151 60276 64365 71641 14473

Net Working Capital 24794 40327 50463 29320 18668Turnover 97100 81498 71799 108811 101335Working Capital to

Turnover

Graphical Representaion Of Working Capital In BHEL


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Interpretation: -

If we see from the above table, it can be clearly seen that net working capital has

come down to 293 crores in 2001-02 from 504 crores in 2000-01.

Moreover if we compare no. of days of net working capital to turnover, it has also

comes down to 99 days from 256 day in previous year.

This improvement does not come accidentally but considerable measures have been

taken to control working capital in organization in financial year 2001-02.

There is direct relation of working capital requirement with Debtors and Inventory.

Above data indicates that company has taken certain strategic measures to manageits Debtor and Inventory

Following are the measures: -

WORKING CAPITAL

24794

40327

50463

29320

186681998-991999-002000-012001-022002-03


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Special task forces were built up from debtors and Inventory Management at

senior level.

Regular follow up at senior level.

A close contact with the customers.

Proper age- wise analysis of the debtors.

Proper classification between collectible Debtors and bad debts.

Bad debts written off as early as possible after making all efforts for its

collection.

Product cycle minimized so that cost of the product does not become high to the

agreed amount because of time factor. Formation of specific group in each area to identify the wastage elements and

seek participation of all.

Formulation of action plan to eliminate/minimize wastage.

Identification of corrective actions and their implementation.

.


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INTRODUCTION


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It is very difficult for the organization to sell always on cash basis in todays

competitive market. In almost every business, we have to sell on credit basis.

The basic objective of management of sundry debtor is to optimize the return on

investment on this asset. It is obvious that if there are large amounts tied up in

sundry debtors, working capital requirement would be high and consequently

interest charges will be high. In such cases, the bad debts and cost of collection of

debts would be high. On the other hand if the credit policy is very tight, investment

in sundry debtors is low but the sale may be restricted, since the competitors may

offer more liberal credit term.

We have limited resources and therefore every resource has its own opportunity cost.

Therefore, the management of sundry debtors is an important issue and requires

proper policies and efficient execution of such policies.

Debtors and cost of debtors have direct relation; cost will increase due to increase in

debtors and vice versa. It depend on the credit sale of concern and credit period

(collection period) allowed to customer. It is in interest of customer to pay as late as

possible, and company whom made sales, would like to collect their debtor as early

as possible. There is a conflict between the two aspects.

Debtor management is the process of finding the equilibrium at which companyagree to receive its payment without hampering or having any adverse effect on its

sales and customer agree to pay at their economical buying concept.

Sundry debtor level depends on two measure issues: -


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One is volume of credit sales and another is credit period allowed to customer. It is

the essence of every business that to sale on credit and allow credit period to the

customer in such a competitive market, following factors may be considered beforeallowing credit period to the customer: -

Nature of the product

Credit worthiness of the customer, which varies from customer to customer.

Quantum of advance received from customers

Credit policy of company, say number of days allowed to customer for payment

to the customers.

Cost of debtors

Manufacturing cycle time of the product etc.

Debtors Management: -

There are mainly three aspects of Management of Debtors

1. Credit Policy: -


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The credit policy is to determine. It involves a trade off between the profits on

additional sale that arises due to credit being extended on one hand and the cost of

carrying those debtors and bad debts losses on the other.

2. Credit Analysis:-

This requires to determine as how risky is to advance credit to a particular customer.

3. Control of Receivables: -

This requires to the firm to follow up debtors and decide about a suitable credit

collection policy. It involves both lying down of credit policy and execution of such

policies.

There is a cost of maintaining receivables, which comprises Cost of: -

The company require additional funds as resources are blocked in receivables

which involves a cost in the form of interest (loan fund) or opportunity cost (own

fund).

Administrative cost which includes record keeping, investigation of credit

worthiness etc.

Collection cost

Defaulting cost or Bad debts


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DEBTORS MANAGEMENT IN HEEP - HARDWAR

B.H.E.L Hardwar is engaged in the manufacturing business of heavy electricalequipments, where cycle time of the product is 18- 24 months and most of the

contracts take approximately 3-5 years to complete. Customers of B.H.E.L. Hardwar

are broadly divided into following categories: -

State electricity board

Power Project

Public Sector Under takings

Railways

Government Departments

Private Sectors

Exports


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In most of the contracts, payments of B.H.E.L. Hardwar are made in following

stages: -

Payment Terms

Advance from customers

At the time of dispatch of goods

At the time of MRC (material receipt at site) Deferred payment

after commissioning of project with certain test

However, the above terms may vary from contract to contract.

Based on the above payment terms, B.H.E.L. Hardwar categories their debtors into

two parts: -

Collectible debtors

Deferred debtors

Collectible debtors are those, which are due for payment as on now and there is no

credit time allowed to the customer say payment at the time of dispatch.

Deferred debtors are those, which will become due on the occurrence of a

particular event such as issuing of MRC (material Receipt Certificate) from

customer or completion of contract with certain tests etc.


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The position of collectible and deferred debtors in last few years along with its

comparison in nos of days to turnover in BHEL Hardwar, are as follows.

(Rs.in lacs)

ParticularsYEARS

1998-99 1999-00 2000-01 2001-02 2002-03Collectible

Debtors27950 35001 30638 28958 21373

Collectible

Debtors to

Turnover

105(D) 157(D) 156(D) 97(D) 77(D)

Deferred

Debtors25722 22354 23439 21946 18372

No. of Days to

Turnover97(D) 100(D) 119(D) 74(D) 66(D)

Provisions 4168 4291 5252 4945 4648

Total Debtors 49504 53064 48825 45959 36769Total Debtors

to Turnover186 238 248 154 132

Turnover 97100 81498 71799 108811 101335

Formula used for the calculation of debtor collection period: -

*D stands for days.

Collectible Debtor to Turnover:

Collectible debtors / turnover x 365

Collectible Debtors to turnover are the relationship between collectible debtors and

turnover, in no of days.


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Deferred Debtor to Turnover:

Deferred debtors / turnover x 365

Deferred debtors to turnover are the relationship between Deferred debtors and

turnover, in no of days.

Total Debtors to Turnover:

= Total debtors/turnover x 365

Total debtors to turnover are the relationship between Total debtors and turnover, in

no of days.

Graphical presentation of the above data is as follows:


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Interpretation: -

If we analyze the position of debtors, period of collectible debtors to turnover and

total debtors to turnover has come down from 130 days to 97 days and 248 days to

154 days respectively in few years. Debtors level of 154 days in the industry where

cycle time is 2 years (appro.) is considerably good and shown an improvement from

the past.

Although the balance of debtor comes down considerably but still there is scope in

Debtors Management for the company.

Analysis Of Deb to

157 156

9777

100

186

238 248

154

105

7466

11997

132

0

50

100

150

200

250

300

1998-99 1999-00 2000-01 2001-02 2002-03

Ye ar

N o

. O f D a y s

Collectible

Deferred

total


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STEPS INVOLVED IN MANAGEMENT OF DEBTS: -

The following steps are involved in debtors management

There should a close contact with the customers.

There should be proper age- wise analysis of the debtors.

There should be proper classification between collectible Debtors and bad debts.

Bad debts should be written of as early as possible after making all efforts for its

collection.

Product cycle should be minimized so that cost of the product should not become

high to the agreed amount because of time factor.

There must be a provision of discount for early payment of debts by thecustomers.

Regular checking of the records of the debtors is essential so as to analysis the

current position of that organization.

While making a policy, regarding the debtors the point should be considered that

customer having excellent past record, follow the lenient policy is adopted for

doubtful customers.


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Manage the working capital according to need as recovering the debt from

customer as early as possible while, get extension of payment of dues on the

company of others as suppliers of raw material as late as possible.

Age-wise analysis of sundry debtors as on 31.03.2000 is as follows:

(Rs. In crores)

1) Less than 6 months 2478.76

2) 6 months to 1 year 386.33

3) 1 year to 3 years 1116.72

4) More than 3 years 604.99

TOTAL 4586.80

TRENDS OF SUNDRY DEBTORS: -

(Rs.in Lakhs ).

Head of a/c Des. 1997-98 1998-99 1999-00 2000-01181 State Elec. Board 10385 10308 13387 10970182 O.P.P.S. 10282 10050 10482 11540183 P.S.U. 1873 1767 2094 1954184 GOVT. 313 9 359 276186 PVT. PARTIES 1073 689 982 877187 EXPORTS 118 118 62 0Total

collectible

collections

24043 22941 31744 25617

188 Fright recoverable 43 13 47 Nil189 Deferred debtors 14116 21191 20700 22149


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190 Debtors deferred

under spl

4079 4531 1654 1290

TOTAL 45849 53671 57355 59867

CREDIT GRANTING DECISIONS: -

CREDIT GRANTINGDECISIONS

NOCREDI

GRANTCREDIT


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Inventory Management

Introduction

Inventories constitute most significant part of current assets, in most of the

companies in India. To maintain a large size of inventory, a considerable amount of

fund is required. It is, therefore, absolutely imperative to manage inventories

efficiently and effectively in order to avoid unnecessary investment. A firm

neglecting the management of inventories will be jeopardizing its long-run

profitability and may fail ultimately. It is possible for a company to reduce its levelsof inventories to a considerable degree, e.g.10% to 20%, without any adverse effect

on production and sales, by using inventory planning and control techniques. The

reduction in excessive inventories carries a favorable impact on a companys

profitability.

There are at least three motives for holding inventories:

1- To facilitate smooth production and sales operation ( transaction motive ).

2- To guards against the risk of unpredictable changes in usage rate and delivery

time ( precautionary motive ).

3- To make advantage of price fluctuations ( speculative motive) .

OBJECTIVE: -

Inventories represent investment of a firms funds. The objective of the inventory

management should be the maximization of the value of the firm. The firm should

therefore consider:


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(a) costs,

(b) return, and

(c) Risk factors in establishing its inventory policy.

Two types of costs are involved in the inventory maintenance:

1-Ordering costs: - Requisition, placing of order, transportation, and staff services.

Ordering costs are fixed per order size increases.

2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance

and taxes. Carrying cost increases.

The firm should minimize the total cost (ordering cost + carrying cost). The

economic order quantity (EOQ) of inventory will occur at a point where the total

cost is minimum. The following formula can be used to determine EOQ:

EOQ = (2AO/C) ^

Where,

A= Annual requirement.

O= Per order cost.

C= Per unit carrying cost.


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WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH

INVENTORY?

The inventory level at which the firm places order to replenish inventory is calledreorder point. It depends on (a) the lead time and (b) the usage rate.

Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero

lead time0, the reorder point will be equal to:

Lead-time x Usage rate +Safety stock.

The firm should strike a trade-off between the marginal rate of return and marginal

cost of funds to determine the level of safety stock.

A firm, which carries a number of items in inventory, which differ in value, can

follow a selective control system. A selective control system, such as the A-B-C

analysis, classifies inventories in to three categories according to the value of item:

A-Category consists of highest value items,

B- Category consists of high value items,

C -Category consists of lowest value items.

More categories of inventories can also be created. Tight control may be applied for

high-value items and relatively loose control for low-value items.


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FUNCTION OF INVENTORY CONTROL

Functions to be performed in the field of Inventory Control are:

1 Setting up norms for carrying Inventory.2 Determining what items to be stocked.

3 Setting rules for Inventory replenishments.

4 Receiving, storing and issuing inventory items as needed.

5 Maintaining records of inventory quantities and values.

6 Identifying and deposing of slow moving, non-moving, obsolete or damage

inventories.

7 Furnishing summary information on inventory position for control purposes.

Locations of position responsible for performing each of these functions in

organisation structure greatly vary from company to company.

In BHEL Hardwar determination of product material or direct work order material

(what?) to be carried in Inventory is more or less automatic result of product design

formulation and is given in material forecast for a work order. Indirect materials

consumed in manufacturing process such as electrodes, brazing alloys, tooling etc.

are usually given by process engineering or at times by design departments.

Balance great bulk of indirect materials is made up of repair parts and general

supplies. Responsibility for specific (what?) items to be carried in inventory rests

with Works Engineering.

With respect to raw materials and purchased parts, responsibility for determining(when?) and how much to buy is a sign to relevant product manufacturing i.e.

production planning and material planning groups. However a strict budgetary

control and allocation to specific work order control on high value items is exercised

by Inventory control department organized separately under Material


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Management.Purchase department attached to manufacturing department determines

(where?) to buy.

Determination of indirect material (when?) and how much to buy and (where?), is

done by central group under Material Management by consolidating requirements of all sections and while looking at consumption trends over a No. Years.

Again a strict budgetary control and control on high value items for their allocation

is exercised by Inventory control group.

Receiving and storing is done by Central Stores CSX under Material Management

Department.

Issuing Inventory is done by CSX on demand from manufacturing and is controlled

by Material Planning.Again some on

Line checks are proposed to be introduced at raising of Store Issue voucher stage

itself, for high value items so that induction is controlled strictly as per requirement

of production schedule based on lead time for manufacture to keep WIP inventory

under control.

Records of Inventory are maintained on a main frame computer centrally arranged

having shared access from all functions for their specific use.

Inventory Record Keeping and Related Procedures

How well Inventory records are maintained has a major bearing on the effectiveness

of Inventory control program. Mostly information recorded in B.H.E.L. system is:

Name of the part or material Short description

Identifying No called Material code

Unit of measurement


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Location in store (custody)

Bin no.

Opening, received, issue, closing quantity and value.

These records are maintained in an online system on main frame computer user

departments have shared access for posting and retrieval of information.

There is a system for reserving specific items as customer specific, which is done by

tagging on the item.

Posting of withdrawals or issue from inventory is done on specific authorization by a

document called Store Issue voucher.


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INVENTORY MANAGEMENT IN BHEL

BHEL produces long production cycle items against the firm orders from

customers. Because of this as well as sizeable imported raw materials and

compulsory bulk purchase of items like steel and copper in line with availability

from SAIL and MMTC, the company has to carry high level of inventories.

RS/LACS

Formula used : -

Inventory Turnover Ratio = Sales / Average Inventory

Days Of Inventory Holding =365 / inventory Turnover Ratio

PARTICULARS YEARS1998-99 1999-00 2000-01 2001-02 2002-03

Raw materials &

components7996 5702 7953 10012 7639

Material with fabricators222 202 143 152 99

Stores & spares3188 2928 2756 2728 2333

Material in transit3185 2987 2718 2866 1466

F.goods at plant 3197 923 1050 1300 931

F.goods with customers 0 0 0 0 0

WI.P14070 22776 30833 25121 18488

Transfer in transit1673 966 852 1281 1413

Material with ROD119

Total 33531 36603 46305 43461 32370

TURNOVER 97100 81498 71799 108811 10335Average inventory 31247.5 35067 41454 44455

Inventory turn over ratio 3.1 2.2 1.7 2.4

Days of inventory holding 118 157 211 149


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NEED OF INVENTORY MANAGEMENT

Stiff competition, globalization of trade and liberalization.

Achieving, increasing and positive EVA.

Cost reduction.

Energy conservation.

Conservation of natural resources.

Better, work environment.

Improved health and safety.

Enhanced public image.

GRAPH OF INVENTORY IN BHEL

STANDARDINVENTORY

LEVEL

COMPARISION OFACTUAL WITH

STANDARD

TAKECORRECTIVE ACTIONS

ANALYSING REASONOF

VARIATION/DEVIATION

VARIATION/DEVIATION

TAKINGACTUAL

INVENTORYLEVEL


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By the graphical representation, we can easily understand that the level of inventory

is coming down .It comes down because company takes some effective measures to

control the level of inventory. Those steps are following steps to control its

inventory: -

STRATEGIES/MEASURES

Formation of specific group in each area to identify the wastage elements and

seek participation of all.

Identification of wastage.

Formulation of action plan to eliminate/minimize wastage.

Review of status.

Identification of corrective actions and their implementation.

Highlighting the gains.

Inventory

28964

3353136603

46305

42606

0

10000

20000

30000

40000

50000

1997-98 1998-99 1999 -00 2000-01 2001-02

YEARS

A M O U N T

Inventory


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Suggestion: -

After analyzing the steps taken by the company there are some suggestions to

manage the Inventory

There should proper analysis of requirement of raw material.

Order should be placed according to the lead-time.

Wastage should be avoided.

There should be proper coordination between the Inventory Department and

Production Department


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MANAGEMENT OF CASH

It is the duty of the finance manager to provide adequate cash to all segments of the

organization. At the same time, he /she has also to ensure that no funds are block in

idle cash as this will involve cost in terms of interest to the concern. A sound cash

management scheme has to maintain the twin objective of liquidity and cost.

Meaning of cash management

The term cash management refers to the management of cash and near cash assets

while cash includes coins, currency notes, cheques, bank drafts, and the demand

deposits, the near cash assets include marketable securities and time deposits with

banks. Such securities and deposits are easily convertible into cash.

MOTIVES FOR HOLDING CASH

In spite of the fact that cash does not earn any substantial return for the business, it is

held by the concern with the following motives.

1. Transaction motive . A Company enters a variety of business transactions

resulting both inflow and outflow of cash; at times the cash outflow exceed the cash

inflow. In order to meet the business obligations in such situation, it is necessary to

maintain adequate cash balance. Thus, a firm with the motive of making routine

business payments maintains cash balance.


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2. Precautionary motive: A firm holds cash balance to meet sudden cash needs

arising out of unexpected contingencies such as floods, strikes, obsolesces, sharp

increase in prices of raw materials, presentation of bills for payment earlier than

expected date.more amount of cash will be kept by the firm if there is more possibilityof such contingencies.

3. Speculative motive: BHEL also keeps cash balance to take advantage of

unexpected business opportunities. Such motive is there of speculative nature.

4. Compensation motive. Banks provide certain services to their customers free of

charge. So they usually require the customers to keep minimum cash balance with

them which enables them to earn interest and compensate for the free services

rendered.

Reasons of cash management :

Cash management involves the following four basic problems.

1. Controlling level of cash. One of the basic objectives of cash management is to

minimize the level of cash balances with the firm. This objective is sought to be

achieved by means of the following:

i) Preparing cash budget. Cash budget is the most important device for planning

and controlling the use of cash. It involves the future receipts and payments of the


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firm. On the basis of this information the finance manager can determine the future

cash needs of the firm.

ii) Providing for unpredictable discrepancies. Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities.

iii) Availability of alternative source of funds: a firm may need not keep large cash

balance. If it has arrangements with banks for borrowing money in times of

emergencies.

2. Controlling of cash inflow: in order to prevent fraudulent diversion of cash

receipt and speeding up collections of cash, an adequate control on cash inflow is

necessary. A properly installed internal check system can, to a great extent, a

minimize the possibility of fraudulent diversion of cash. Speedier collection of cash

can be made possible by adoption of the following two techniques:

i) Concentration banking system: it is a system of decentralizing collection of

account receivables. According to this system, BHELs branch offices are authorized

to collect the payment from the customers, and deposit in the local bank accounts.

This system facilities fast movement of funds. This system is good in case of the

firms having their spread over a large area.


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ii) Lock box system: This system is more popular in the U.S.A. and is further step

in speeding up collection of cash. This system has been devised to element delay

arising in cash of the concentration banking system on account of a time gap

between actual receipt of cheques by the regional collection centers and itsdeposits in the local bank account.under this system BHEL hires a post office

box and instruct its customers for there remits to the box. It also reduces the

chances of frauds in the cash collection process and controls the cash inflows

better. In order to avoid the unnecessary pockets of idle funds, the company

should maintain minimum number of bank accounts.

3. Controlling outflows of cash: - an efficient control over cash outflows is equally

important for conserving cash and reducing financial requirements. Control over

cash outflows signifies slow disbursement.in order to control the outflows of cash

efficiently, a firm should keep in view the following considerations:

i) Centralized system for cash payments: should be followed as compared to

decentralized system in cash of collections. All payments should be made from a

single control account, i.e., from the central office of the company. However, the

local office of the company may pay local expenses.

ii) Payment should be made on the due dates , neither before nor after. The

company should neither lose cash discount nor its prestige on account of delayed

payments. The company should, there fore, made payments within the termsoffered by the suppliers.

iii) Playing float , technique should be used by the company for maximizing the

availability of funds. The term float means the account tied up in checks which


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ANALYSIS OF CASH MANAGEMENT WITH THE HELP OF

CERTAIN RATIOS: -

(Rs.in Crores)

DES. FORMULA 1997-1998 1998-1999 1999-2000 2000-01 2001-02

Current

Ratio

Current

asset/current

liab.

75870/58738

=1.29:1

88350/63556

=1.39:1

95591/55264

=1.72:1

108343/57879

=1.87:1

94848/65528

=1.44:1

Liquidity

ratio

Liquid asset

/current liab

51491/58738

=0.87:1

54819/63556

=0.86:1

58988/55264

=1.06:1

62038/57879

=1.07:1

52242/65528

= 0.79:1

Interpretation: - As we know that the current ratio of any company may be 2:1 but

according to the U.S.A. Accounting standard any company should maintain a ratio

of 1.33:1 . Moreover, as we can see from the above table the current ratio of BHEL is

1.29:1 in 1997-98, which is not favorable from the

COMPARISION OF CASH WITH THE HELP OF RATIOS

1.291.39

1.72

1.87

1.44

0.87 0.86

1.06 1.07

0.79

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1997-98 1998-99 1999-00 2000-01 2001-02

YEARS

R A T I O S

CURRENTRATIO

LIQUIDITYRATIO


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Companys point of view but this ratio is favorable from the shareholders point of

view. But in the year 1998-99, the current ratio goes to 1.39:1 which is quite better for

the companies point of view .It means that the company is quite able to meet out its

liabilities. The current ratio of the company is continuously rising i.e.1999-00 is1.72:1 and in 2000-01 is 1.87:1 which is highest in the last five years.

In 2001-02, the current ratio goes down to 1.44:1 due to increase in the current

liabilities and decrease in current assets as compared to previous year. Current assets

decrease due to decrease in inventory, which is 46305 in 2000-01 & 42606 in 2001-

02. It indicates the ideal stock is less, which is favorable for the company. It indicates

the company is in position to meet its liabilities.

Now we compare the companys position according to the liquidity ratio. As we know

the standard of the liquid ratio is 1:1.

In 1997-98 the liquid ratio of the company is 0.87:1 which is less than the standard

ratio this indicates the liquidity position of company is not good The liquidity ratio

follows the same trend in the year 1998-99 i.e. 0.86:1 is due to large amount of current

liabilities as compared to liquid assets.

However, in the year 1999-00 the liquidity ratio goes up to 1.07:1, which is more than

the standard ratio. This indicates that the company has followed some strategy to

maintain its standard liquidity position. The ratio is a 1.06:1 in the year 2000-01.However, in the year the ratio goes down to 0.79:1, which is due to increase in current

liabilities and decrease in current assets


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In Year 2001-02

CURRENT ASSETS = 52242

CURRENT LIABILITIES = 65528

This is less then the previous year.

In addition, the numbers of debtors of the company are increase. This is not better

from the management point of view. As more of amount is blocked in, the debts and

the chances of bad debts will be increased.

CURRENT LIABILITIES

0 0 0 0 0

6825

15701 1575318630 19718

40017

31634

26695 27107

33275

1687 8262665 1966

8875

1453411990

947710569

3021

0

10000

20000

30000

40000

50000

YEARS

A M O U N

Years

Sundry Creditors

Advances fromCustomersOther Liabilities

Provisions

working capital mgmt projects

Documents