A

PROJECT REPORT

ON

“Working capital management”In

“Bharat Heavy Electrical limited”

HEERP - Varanasi

In partial fulfillment of MBA Degree 2009-2011

Submitted By-

Raj DubeyBatch – “E”

MBA (2009-2011)

Asian School Of ManagementLandmark center, Opp – City pride multiplex

Pune satara road, Pune -Maharashtra

PREFACE

“Learning categorizes you and practicing on that learning specializes you”.

Theoretical concepts taught and discussed in the classroom prove useful if they have to remain relevant. Practice orientation of management student is must generating competence to deal with issues at grass root level it is for this reason that training & project study is prescribed as apart of syllabus for MBA Degree in Pune.

This training is the mode of imparting practical training to the student. The objective is to provide a deep insight into practical aspects of the functioning of the organization. The train apprises the student to the actual function, responsibility and problem faced by an organization. It provides him with the knowledge of the various kind of problem that crop up in the day to day functioning of the organization .The way they are solved by the departments and appraisal of the crucial decision taken by the manager at the crucial time.

I was fortunate enough to complete my Financial training at Bharat Heavy Electrical Limited (BHEL,HEERP), Shivpur Tarna Varanasi. This has given me an altogether new experience, which would be immense help to me in my days to come.

ACKNOWLEDGEMENT

I wish to acknowledge my specific indebtness to director “Asian School of Management ”, who made this opportunity to perform Financial training as a part of MBA degree Course.

I wish to extend my Sincere Gratitude towards “Mr. Ashok Shrivastav” Account Officer (BHEL – HEERP,Varanasi) for accepting me as a summer trainee and assigning this project to me.

I am extremely grateful to Mr. Praveen Tungare for their valuable guidance and best possible help during course of study.

I am deeply grateful to my parent’s who have given me every help and moral support and their constant advice which enabled me to pursue my academic aim.

Thanks to other summer trainees for their co-operation and suggestions through out this project.

DECLARATION

The researcher hereby declares that the dissertation is a result of his own research work and the same has not been previously submitted to any examination of this university or any other university.

Place- Pune Raj Dubey

Batch-“E”

Date-7/07/2010

TABLE OF CONTENTSChapter - 1

Executive Summary

Introduction

Purpose of the study

Objective of the study

Research Methodology

Limitation of the study

Chapter – 2

Company profile :-

BHEL –Background

Company and its product

Performance of BHEL at a glance

BHEL Balance sheet & Income Statement

Board of Directors

Achievements & Projects

SWOT Analysis of BHEL

Chapter – 3

Unit profile :-

About BHEL (HERP),Varanasi

Vision, Mission & Values of BHEL

Balance Sheet of BHEL (HERP) Varanasi

Profit & Loss A/C of BHEL (HERP) Varanasi

Chapter – 4

Defining Working Capital

Determinants of Working Capital and W.C. Cycle

Issues in Working Capital Management

Receivables management

Payables management

Inventory management

Key Ratios

Suggestion and recommendation

Conclusion

Bibliography

CHAPTER - 1

Executive summery

Working capital is the capital required for maintenance of day-to-day business operations.

The present day competitive market environment calls for an efficient management of working

capital. The reason for this is attributed to the fact that an ineffective working capital

management may force the firm to stop its business operations, may even lead to bankruptcy.

Hence the goal of working capital management is not just concerned with the management of

current assets & current liabilities but also in maintaining a satisfactory level of working capital.

Holding of current assets in substantial amount strengthens the liquidity position &

reduces the riskiness but only at the expense of profitability. Therefore achieving risk-return

trade off is significant in holding of current assets. While cash outflows are predictable it runs

contrary in case of cash inflows. Sales program of any business concern does not bring back cash

immediately. There is a time lag that exists between sale of goods & sales realization. The capital

requirement during this time lag is maintained by working capital in the form of current assets.

The whole process of this conversion is explained by the operating cycle concept.

This study gives in detail the working capital management practices in BHEL.

Management of each current assets, namely inventory management, cash management, accounts

receivable management is studied permanent to BHEL. Similarly management of accounts

payable is studied to understand the managing of current liabilities. A part from this concept of

operating cycle is studied.

The research methodology adopted for this study is mainly from secondary sources of

data which include annual reports of BHEL, & website of the company. The use of primary

sources is limited to interviews with few of the employees in finance department.

The study of working capital management has shown that BHEL has a strong working

capital position. The company is also enjoying reasonable profits. BHEL has corporate tie up

with maximum leading Banks in India for providing short and medium term finance to the

company. For financial requirement of projects outside India, BHEL has arranged forex funds.

BHEL sales position is also very good. Its excellent performance is attributed to reduced cost of

product The overall position of BHEL is good & the same is expected by continuum of existing

management policies, checking exchange rate risk, competing with domestic and global players

in terms of quality & quantity.

Introduction

Capital is essential for the setting up and smooth running of any business. Investments

made on fixed assets will yield excess cash inflows apart from the payback amount and is spread

over a longer period of time. Hence the cash inflows (or) benefits associated are not immediate

but are expected in the future. Cash inflows & outflows occur on a continuous basis in case of

current assets. Credit forms an essential feature in the business (credit given to customers &

credit from suppliers). Since there is some time lag from the time of sales & sales realization

current assets & current liabilities, which together constitute the net working capital, supports the

business in its normal of operations. This calls for an efficient management of working capital.

The policies, procedures and measures taken for managing of working capital gain

further importance in an organization like BHEL where the working capital requirements runs in

crores of rupees. Any mismanagement on the part of authority will not just cause loss but may

even impair business operations. It is in this context working capital has gained importance.

The growth of any organization depends on overall performance of all the departments.

A firms financial performance reflects its strength, weaknesses, opportunities and threats of the

organization with respect to profits earned, investments, sales realization, turnover, turn on

investment, net worth of capital. Efficient management of financial resources and analysis of

financial results are prerequisite for success of an enterprise. In that working capital management

is one of the major area of financial management. Managing of working capital implies

managing of current assets of the company like cash, inventory, accounts receivable, loans and

advances and current liabilities like sundry creditors, interest payment and provision.

Purpose of Study

The main aim of any firm is to maximize the wealth of shareholders. This can be

achieved only by a steady flow of profits. Which inter area depend on successful sales activity.

To generate sales, investment of sufficient funds in current assets is required. The need of current

assets should be emphasized, as the sales don’t convert into cash immediately but involved a

cycle of operations, namely operating cycle.

BHEL is multi product manufacturing unit with varying cycle for each product. The

capital requirement for each department in an organization of BHEL is large which (depends on

the product target for that particular year) calls for an effective working capital management.

Monitoring the operation on cycle duration is an important aspect of working capital.

Some prominent issues that are to be addressed are,

Duration of raw material stage (depends on regularity of supply, transactions time).

Duration of work in progress (depends on length of manufacturing cycle, consistency in

capacity utilization).

Duration at the finished goods state (depends on pattern of production & sale).

Thus a detailed study regarding the working capital management in BHEL is to be done

to consider the effectiveness of working capital management, identify the shortcoming in

management and to suggest for improvement in working capital management.

Objective of Study

To study in general the working capital management procedure in BHEL (HERP),

Varanasi.

To analyze and apply operating cycle concept of working capital in BHEL (HERP),

Varanasi.

To know how the working capital is being financed.

To know the various methods to be followed by BHEL for inventories and accounts

receivables.

To give suggestions, if any, for better working capital management in BHEL.

Research Methodology

Research methodology used for study includes both primary& secondary sources of data.

However most of study is conducted based on secondary sources.

Secondary sources of data mainly include annual reports of BHEL. Statement of changes in

working capital for the past 5 years is done using the data taken from these financial reports.

Similarly time series analysis of operating cycle and calculations of ratios is done. Apart from

this, the website of BHEL is referred to know the products, product facilities, network etc.

Industry analysis is done based on the information gathered from newspapers and websites of

Indian steel ministry & other sector related websites.

The use of primary sources is limited to interviews with some of the employees in finance

department. The reason being, it is against the company’s policies & producers to reveal the

sensitive financial information.

Limitations of the study

Although every effort has been made to study the “Working Capital

Management” in detail, in an organization of BHEL size, it is not possible to

make an exhaustive study in a limited duration .

It is not possible to include data of 2009- 10 as the audited financial report has

not come yet (at the time of preparation of this report). However data of 2009 –

10 is included partially from the un-audited financial reports of BHEL.

Apart from the above constraint, one serious limitation of the study is, that it is

not possible to reveal some of the financial data owing to the policies and

procedures laid down by BHEL. However the available data is analyzed with

great effort to get an insight into Working Capital Management in BHEL.

CHAPTER - 2

(COMPANY PROFILE)

BHARAT HEAVY ELECTRICTIAL LIMITED

Company background :-

1956 - Company was set up at Bhopal in the name of M/s Heavy electrical (India) Ltd. in collaboration with AEI, UK. Subsequently, three more plants were set up at Hyderabad, Hardwar and Trichy. The Bhopal Unit was controlled by the company, the other three were under the control of Bharat Hevey Electricals Ltd. - The Company`s object is to manufacture of heavy electrical equipments. 1972 - In July the Operations of all the four plants were integrated. 1974 - In January Heavy electrical (India) Ltd was merged with BHEL. - For the manufacture of a wide variety of products, the company has developed technological infrastructure, skills and quality to meet the stringent requirements of the power plants, transportation, petro chemicals, oil etc. - BHEL has entered into collaboration which are technical in nature. Under these agreements, the collaborators have transferred, furnished the information, documentation, including know-how relating to design, engineering, manufacturing assembly etc. 1982 - BHEL also entered into power equipments, to reduce its dependence on the power sector.

BHEL has :-

1. Installed equipment for over 90000MW of power generation-for utilities,captive and industrial users.

2. Supplied over 225000MW a transformer capacity and other equipment operating in transmission and distribution network up to 400Kv (AC& DC)

3. Supplied over 25000 motors with drive control system to power projects,petro chemicals, refineries, steel, aluminium, fertilizers, cement plants etc.

4. Supplied traction electrics and AC/DC locos to power over 12000kms railway network.5. Supplied over one million valves to power plants and other industries.

CORPORATE PROFILE :-

BHEL is the largest engineering and manufacturing enterprise in India in the energy related infrastructure sector BHEL is established more than 4 decades ago ushering in the indigenous heavy electrical equipment industry in India. BHEL has built over the years , a robust domestic market position by becoming the largest supplier of power plant equipment in India and by developing strong market presence in select segments of the industrial sector and the railways . Currently, 80 % of the nuclear power generated in country is through the BHEL equipment

BHEL caters to core sectors of the Indian economy viz., power generation and transmission , industry transportation , renewable energy defiance etc. the wide network of BHEL 14 manufacturing divisions 4 power sector regional centers, 8 service centers, 15 regional office, one subsidiary co. joint venture and a large number of projects sites spread all over India and abroad enables the company to promptly serve its customers and provide them with suitable products, systems and servicers- efficiently and at competitive prices.

BHEL where quality systems as per ISO-9000 have taken deep roots has now made significant achievements in total quality management by adopting the CII/EFQM model for business excellence. BHEL become the first public sector company in the country to win the coveted PRIZE through its haridware unit under the CII Exim award Scheme. BHEL Bhopal and JHANSI units and power sector northern and eastern regions’ have also won the commendation for significant achievement to TQM during 2008-2009

For the third consecutive year, BHEL performance was recognized by the prestigious publication ‘ Forbes Asia’ which featured BHEL in its fourth annual ‘fabulous 50’ list of the best of Asia pacific’s publically – traded company with revenue or market capitalization of a least us $ 5 billion having highest long term profitability and sells and earning growth significantly BHEL is only Indian PSU top figure on the elite list list since the list was conceived . BHEL and its four unit were awarded ICWAI awards for excellence in cost management for 208- the highest among both public and private sector companies .BHEL won EEPC’s top export award for the eightentith year in secession

Power sector :-

Power generation sector comprises thermal, gas, hydro and nuclear power plant business. As of 31-3-2004, BHEL supplied sets account for nearly 71,255 MW or 64% of the total installed capacity of 1,11,151 MW in the country, as against nil till 1969-70.

BHEL has proven turn key capabilities for executing power projects from concepts to commissioning. It possesses the technology and capability to produce thermal sets with super critical parameters up to 1000 mw unit rating and gas turbine-generator sets of up to 250 mw unit rating. Cogeneration and combined-cycle plants have been introduced to achieve higher plant efficiencies. To make efficient use of the high ash-content coal available in India, BHEL supplies circulating fluidized bed combustion boilers to both thermal and combined-cycle power plants.

The company manufactures 235 MW nuclear turbine generator sets and has commenced production of 500 MW nuclear turbine generator sets.

Custom-made hydro sets of Francis, Pelton And Kaplan types for different head discharge combinations are also engineered and manufactured by BHEL. In all, orders for more than 700 utility sets of thermal, hydro, gas and nuclear have been placed on the company as on date. The power plant equipment manufactured by BHEL is based on contemporary technology comparable to the best in the world, and is also internationally competitive.

The company has proven expertise plant performance improvement through renovation, modernization and upgrading of a variety of power plant equipment, besides specialized know how of residual life assessment, health diagnostics and life extension of plants.

Transmission :-

BHEL also supplies a wide range of transmission products and systems of up to 400KV class. These include high voltage power & instrument transformers, dry type transformers, shunt & series reactors, safe switch gear, 33KV gas insulated substation capacitors, insulators etc. for economic transmission of bulk power over long distances, High Voltage Direct Current(HVDC) systems are supplied. Series and shunt compensation systems, to minimize transmission loses, have also been supplied

Industry sector :-

BHEL is a major contributor of equipment and systems to industries: cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc. the range of systems and equipment supplied includes: captive power plants, dg power plants, high speed industrial drive turbines, industrial boilers and axillaries, waste heat recovery boilers, gas turbines, heat exchangers and pressure vessels, centrifugal compressors, electrical machines, pumps, valves, seamless steel tubes and process controls, control systems for process industries, and control and instrumentation systems for power plants, defense and other applications. The company has commenced manufacture of large scale desalination plants to help augment the supply of drinking water to people.

Transportation :-

Mostly of the trains operated by the Indian railways, including the metro in Calcutta, are equipped with BHEL’s traction electrics and traction control equipment. The company supplies electric locomotives to Indian Railways and diesel shunting locomotives to various industries. 5000/4600 hp ac/dc locomotives developed and manufactured by BHEL have been supplied to Indian railways. Battery powered road vehicles are also manufactured by the company. BHEL also supplies traction electrics and traction control equipment for electric locos, diesel electric locos, and EMUs/ DEMUs to the railways.

Telecommunication :-

BHEL also caters to telecommunication sector by way of small, medium, and large switching systems.

Renewable energy :-

Technologies that can be offered by BHEL for exploiting non-conventional and renewable resources of energy include: wind electric generators, solar power based water pumps, lighting and heating systems. The company manufactures wind electric generators of unit size up to 250 KW for wind farms, to meet the growing demand for harnessing wind energy.

International operations :-

BHEL has, over the years established its references in over 50 countries of the world, ranging from the united states in the west to new-Zealand in the far east. These references encompass almost the entire product range of BHEL, covering turnkey power projects of thermal, hydro and gas based type sub-station projects, rehabilitation projects, besides a wide variety of products, like switch gear, transformer, heat exchangers ,insulators, castings and forgings. Apart from over 1100MW of boiler capacity contributed in Malaysia, some of the other major successes achieved by the company have been in Oman,Saudi Arabia, Libya,Greece,Cyprus,Malta,Egypt,Bangladesh,Azerbaijan,Sri lanka,Iraq etc. execution of

overseas projects’ has also provided BHEL the experience of working with world renowned consulting organizations and inspection agencies.

Technology Up gradation and research and development :-

To remain competitive and meet customers’ expectations, BHEL lays great emphasis on the continuous Up gradation of products and related technologies, and development of new products. The company has upgraded its products to contemporary levels through continuous inhouse efforts as well as through acquisitions of new technologies from leading engineering organizations of the world.

The corporate R&D Division at Hyderabad leads BHEL’s research efforts in a number of areas of importance to BHEL’s product range. Research and product development centers at each of the manufacturing divisions play a complementary role.

Reinforcing its position as a total solution provider BHEL has developed and successfully commissioned a maintenance controller at the western mountain power project , Libya. Based on powerpac-g , software jointly development by BHEL and TCS , this is the system for complete power plant application and takes care of all the maintenance needs of a power station.

Products

Thermal Power Plants

Steam turbines, boilers and generators of up to 800 MW capacity for utility and combined-cycle

applications;

Capacity to manufacture boilers and steam turbines with supercritical system cycle parameter and

matching generator up to 1000 MW unit size.

Steam turbines, boilers and generators of CPP applications; capacity to manufacture condensing,

extraction, back pressure, injection or any combination of these types of steam turbines.

Nuclear Power Plants

Steam generator & Turbine generator up to 700 MW capacity.

Gas-Based Power Plants

Gas turbines of up to 280 MW (ISO) advance class rating.

Gas turbine-based co-generation and combined-cycle systems of industry and utility applications.

There are other products given as follows:

Hydro Power Plants

DG Power Plants

Industrial Sets

Boiler

Boiler Auxiliaries

Piping System

Heat Exchangers and Pressure Vessels

Pumps

Power Station Control Equipment

Switchgear

Bus Ducts

Transformers

Insulators

Industrial and Special Ceramics

Capacitors

Electrical Machines

Compressors

Control Gear

Silicon Rectifiers

Thyristor GTO/IGBT Equipment

Power Devices

Transportation Equipment

Oil Field Equipment

Casting and Forgings

Seamless Steel Tubes

Distributed Power Generation and Small Hydro Plants

Systems and Services

BHEL AT A GLANCE ( Rs. In crore )

PARTICULARS 2008 - 09 2007 - 08 Change(%)

Order received 59678 50270 18.71

Order outstanding 117000 85200 37.32

Turnover 28033 21401 30.99

Value added 9894 8323 18.81

Employees(nos) 45666 43636 4.65

Profit before tax 4849 4430 9.46

Profit after tax 3138 2859 9.76

Dividend 832 746 11.53

Corporate dividend tax

142 127 11.81

Retained earnings 2165 1986 9.01Total assetsNet worthTotal borrowingsDebt equityPER SHARE ( IN RS.)-Net worth-EarningsEconomic value added

3958112939

1490.01

264.3264.112008

2955410774

950.01

220.1158411810

33.9320.0156.84

0.00

20.089.73

10.94

Profit before tax / profit after tax ( RS in crore )

Segment wise revenue

Segment wise result

Recent performance achievements

The company has ended the year 2008-09 with a turnover of Rs. 28,033 crore, and is likely to achieve a turnover of Rs. 32,000 crore in 2009-10, as envisaged in MOU for Excellent rating.

Order book position of BHEL has substantially improved. The company has received order of Rs. 36,400 crore upto December,2009 and is likely to receive orders of Rs 59,900 crore in 2009-10 as against Rs. 59,687 crore of orders in 2008-09. Against opening balance Rs. 1,17,000 crore of orders outstanding, company is likely to have Rs. 1,44,000 crore as on1.4.2010 for execution in 2010-11 and beyond.

During the year, the company has received highest ever Private Sector orders of Rs. 25,918 crore for Power Projects. Major orders received during 2009-10 are :-

Super-critical orders received for 3x660 MW Bara from Prayagraj Power Generation Company Limited (PGCL), a Jaypee Group company.

Order for 10 Sets of 270 MW from a single customer i.e Elena Power and Infrastructure order consist of 5x270 MW for Nasik and 5x270 MW for Amravati.

Orders for 16x270 MW, 2x525 MW and 5x600 MW of recently introduced new ratings (270 MW, 525 MW and 600 MW).

Repeat order of 4 steam Generators for 700MWe Nuclear Set for Rajasthan Atomic Power Project of Nuclear Power Corporation of India Ltd.

Orders for 1739 MW Hydro sets received, which include 3x110 MW for Kishanganga Project of Hindustan Construction Company and 3x99 MW+ 4x96 MW + 5x121.5 MW for Pranhita Lift Irrigation Scheme Projects of Mega Engineering & Infrastructures Limited.

Order for 1x160 MW Gas based Combined Cycle Power Project for Ramgarh of Rajasthan Rajya Vidhyut Utpadan Nigam Ltd (RRVUNL).

Order for 6 units of 150 MW from HINDALCO Industries Ltd for their upcoming captive power plant at Aditya Aluminium in Sambalpur district, Orissa.

Order for 2x150 MW sets from OPG Power Gujarat and 2x180 Tones per Hour (TPH) Bubbling Fluidized Bed Combustion (BFBC) Boilers from Jindal Steel & Power Limited (JSPL) Angul, Orissa.

Order for 150 nos. electric locomotives (25 KV, Type WAG7) from Indian Railways in the transportation segment.

Order for 14 Sets Electrics for HHP DEMU from ICF, Chennai and 51 Sets AC EMU Traction Electrics from Railway Board, Delhi.

1st & 2nd orders for 3 nos. 126 MW GTG sets received under price agreement entered during 2008-09 with Petroleum Development, Oman.

Overseas order for Gas turbine based cogeneration plant received for 100, 130 MW co -generation Power Project, Belarus. This is the first ever order from Belarus making an entry in a new country.

BHEL has signed Memorandum of Understanding for overseas execution with M/s Power Engineers Contracting Company for 3 combined cycle Projects involving 12 Fr 9E GTs in Iraq, 2 x 125 MW Coal based Power Plant and for 20 MW Gas Turbine based Power Plant in Nigeria. First order for 42 MW Gas Turbine Generator for Iraq has been secured from M/s. Power Engineers (UK) for Nasiriyah Project.

EXPANSION OF MANUFACTURING CAPACITY

BHEL has embarked upon a plan of enhancing its manufacturing capacity and capability for preparing itself to meet the country’s power demand, for providing “Power to all by 2012” and to contribute fully for meeting the power forecast of the 11th Plan and beyond. Towards this end, BHEL has been augmenting its capacity and capability and has already enhanced its power generating equipment manufacturing from 6000 MW in 1999-2000 to 10,000 MW per annum w.e.f. 1st January,2008. This manufacturing capacity is planned to be enhanced to 15,000 MW per annum by end of March, 2010. This will further go up to 20,000 MW per annum by March, 2012. A new transformer manufacturing facility at Bhopal Unit to produce an additional 12,000 MVA of transformers per annum was dedicated to the nation by Hon’ble Union Minister HI&PE on 17.11.2009. With this, transformer manufacturing capacity of Bhopal Unit stands enhanced to 30,000 MVA per annum.

Cash flow statement’s comparison

BOARD OF DIRECTORS

BOARD OF DIRECTORS

CHAIRMAN & MANAGING DIRECTOR Mr.BP RAO

DIRECTORS

Mr.Subash Chandra

Mr. Rajiv Bansal

Mr. ashok kumar basu

Mr. M A Pathan

Smt. Reva Nayar

Mr. S. Ravi

DIRECTOR (Finance) Mr. C. S. Verma

DIRECTOR (E, R & D) Mr. C. P. Singh

DIRECTOR (HR)

` Mr. Anil Sachdev

COMPANY SECRETARY Mr. IP singh

SIGNIFICANT ACHIEVEMENTS & HIGHLIGHTS( 09-10)

Scope MoU Excellence Award for the year 2006-07 for the highest growth rate in Market Capitalization. Award presented by Hon’ble Prime Minister, Dr. Manmohan Singh to CMD BHEL on 15th October, 2009 in New Delhi.

The Centralised Stamping Unit established at Jagdishpur (Uttar Pradesh) was dedicated to the nation by Shri Rahul Gandhi, Member of Parliament on 17th August, 2009.

For outstanding export performance BHEL has won the Engineering Export Promotion Council’s (EEPC) Top Export Award for the 19th year in succession. The award was conferred in the category “Star Performer in 2007-08” product group of motors, Generators and Transformers – Large Enterprise. The award was presented by the Hon’ble Union Minister for Commerce and Industry on 29th August, 2009.

BHEL once again made it to the prestigious ‘Fabulous 50’ list of Forbes Asia. The list

included companies that have revenue and market capitalization of at least $3 billion and a five year record of operating profitability and return on equity.

India Pride Gold Award for excellence in Heavy Industries instituted by Dainik Bhaskar Group. Award presented by Hon’ble Union Home Minister, Mr. P. Chidambaram to CMD BHEL on 9th October, 2009 in New Delhi.

BHEL was awarded the Dalal Street Investment Journal’s ( DSIJ) “Most Investor Friendly PSU mAward 2009” for the year 2009 as a recognition for its unmatched track record of earning profits and rewarding investors by paying dividends uninterruptedly for over three decades without a break. 2x500 MW Simhadri STPS (NTPC) - Gold Shield Winners for Meritorious Performance in Power Sector BHEL's Centralised Stamping Unit being inaugurated by Sh. Rahul Gandhi on 17.8.09.

BHEL supplied Thermal (Coal-Utility) Sets generated 405793 Million Units (MUs) in 2008-09. BHEL thermal sets have generated 203910 (MUs) upto September, 2009 in 2009-10.

2 nos 42 MW Generator Sets for Ras-Al- Khaimah Power Plant in UAE successfully commissioned

2 nos 126 MW GTG sets for Sulamaniah Power Plant in Iraq successfully synchronized

Major Achievements during 2008-2009

Six year price agreement for 126 MW unit rating gas turbine Generator package secured from petroleum development Oman, initially valid for six years with there provision of extension by another three years.

Largest ever export order – 2×200 MW steam turbine based tishreen thermal power plant secured from PEEGT, Syria and first ever EPC export orders for a 200MW unit rating based thermal power plant.

Two consecutive export orders for power generating equipment from international energy resources ,UAE comprising 4 NOS of 42 MW unit rating gas turbine generator sets.

First ever overseas order for an EPC hydro power plant secured form ministry of infrastructure , Rwanda for setting up 28 MW Nyaborango power plant , marking BHEL’s entry into Rwanda

First export order for 125 MW unit rating coal fired BTG package from an IPP to be set up in Senegal, expanding BHEL’s global foot prints with this entry in Senegal

Maiden export order for hydro generator from Tajikistan for supply of 7 MW hydro generator.

Another export orders for steam turbines and boilers secured from indinisia-3×18 MW BTG package with CFBC boilers from PT Kaltima Prima Coal (KPC) ,Indonesia.

18th consecutive order from PCC Greece , an unparalleled achievements . with this order for 5 nos 100 MVA power transformers, BHEL has now secured orders for over 3000 MVA transformers from Greece since 1995.

Other notable export order include ‘ boiler feed pumps from Libya , valves and wellheads from Nigeria , hydraulic couplings from new Caledonia and solar cells/ modules from Sweden, Japan and Uganda.

Continued focus on after sales service led to order for spares and service from Oman , Saudi Arabia , Indonesia , new Zealand , USA , Nepal , Sudan and Libya.

Projects completed upto February, 2010

Development of alternate design of Electro Hydraulic Converter for Governing system of Siemens design Steam Turbines of all ratings (210/250/500/525/600 MW).

Developed the design and manufactured “Special Fixtures mounted on 18-axle road trailer for Transportation of 500 MW Turbo Generator Stator”.

Successfully upgraded “PV Manufacturing Facilities” and carried out Process optimization trials successfully achieving competitive solar cell conversion efficiency.

Designed and demonstrated “Station LAN and Network Security System for NTPC Dadri, Farakka and Korba Projects” placing BHEL at par with world Standards of Network Security implementers.

Development of new processes of fabricating Ceramic filter candles with integral collars. The developed processes will help the indigenous manufacture of hot gas filter candles required for IGCC applications.

Designed and demonstrated “Development of 220-Watts Photovoltaic Modules using 156- mm Size Multi Crystalline Silicon Solar Cells”.

Designed and manufactured “Largest Rating 2150 KW, 6.6 KV, 4 Pole, SCIM Motor in 1RC7638-4 Frame delivering Constant Torque.

Development of Simulator for Khaperkheda and Bhusawal (500 MW) Plants. Design, development and generation of manufacturing drawings for 250MVA air-cooled

Turbo Generator TARI 115/52 for STG application (Export market).

Projects completed up to March, 2010

Design, development and generation of manufacturing drawings for 200 MW Steam Turbine with high back pressure suiting to desert application (Export market).

Design and development of Condenser for 660 MW supercritical parameter sets. Development of Thermal and Mechanical design and release of manufacturing drawings

for Feed Water Heaters with higher feed water outlet temperature for North Chennai 600 MW TG set.

Development of 765 kV / 4000A Gas Insulated Current Transformer for Yard Applications

SWOT (Strength, Weaknesses, Opportunities and Threats) analysis of BHEL:

Strengths:

Sound engineering base and ability to assimilate Relatively stable industrial relationship

Access to contemporary technologies with the support from renowned collaborators.

Ability to set up power plants on turnkey basis,

Complete know- how for manufacture of entire equipment is available with the company.

Ability to manufacture or procure to supply spares. Fully equipped to take capital maintenance and servicing of the power plants.

Largest source of domestic business leading to major presence and influence in the market.

Ability to successfully overhaul and renovate power stations equipment of different international companies.

Low labour cost.

For non- BHEL products, services and spares are not easily available and if they are, price charged are very high.

Sound financial position in terms of profitability and solvency.

Low debt equity ratio (even lower than 0.5:1) for all the years under study, enabling company to raise capital.

Weaknesses:

Difficulty in keeping up the commitments on the product delivery and desired sequence of supplies.

Larger delivery cycles in comparison with international suppliers of similar equipment.

Inability to provide supplier’s credit, soft loans and financing of power projects.

Lack of effective marketing infrastructure.

Due to poor financial position of state electricity boards, which are the major customers of BHEL in India, liquidity position of BHEL is not satisfactory.

Being a public sector company BHEL is suffering from sub optimality of control due to:1. Displacement of social objectives by political objectives, which may lead to redundant costs and also rising costs.2. Direct political intervention in managerial decision over an arm length relationship that would restrict government’s task of setting appropriate managerial incentive structure.3. Private goals that lead to budget growth and employment growth.

Opportunities:

Demand for power and hence plant equipment is expected to grow.

Private sector power plants to offernexpanded market as utilities suffers resource crunch.

Ageing power plants would give rise to more spares and services business.

Life expansion program for old power stations.

Export opportunities.

Easy processing of joint ventures/ collaboration/import/ acquisition of new technology.

Financial and operational autonomy for profit making public sector enterprises. To make the public sector more efficient government has decided to grant enhanced autonomy and delegation of powers to the profit making public sector enterprises.

Threats:

Increased competition both national and international.

More concessions to private sector and not to government owned utilities like NTPC or S.E.Bs, so future power projects would be opened up in privat sector.

CHAPTER - 3

( UNIT PROFILE )

About BHEL : HERP Varanasi

(Heavy Equipment Repair Plant)

Varanasi is endowed with five universities, Lord Buddha’s first preaching center and many religion / cultural centers, situated near the holy Ganga, with Lord Kashi Vishwanath Temple at the heart of it. HERP is located at Shivpur, 11 Kms from main railway station and 15 Kms from Varanasi Airport. 

HERP is also situated at the center of the largest power belt of northern region. This power belt supplies 10650 MW of power to the country. In the line with BHEL’s of providing constant service at their doorsteps, the idea of establishing repair shop in the vicinity of power station was mooted objective. 

Accordingly, two repair plants at Bombay & Varanasi came into existence, the foundation equipment repair plant sprawling in 29.8 acre area at Varanasi was laid on 20 th September 1984 by Chief Minister of U.P. Shri Narayan Dutt Tiwari within a short span of 21 month much before the schedule.

Starting a manufacturer of O&M spares for the boiler and boiler auxiliaries, repair activities got a real break in 1990 when rebabitting of TG set bearing was taken up in the plant. Since than rebabitting of different type of bearing including an unconventional synchronous condenser has been carried out to the entire satisfaction of the customers. Now HERP manufactures turbine spares, tools & tackles complete spares of bowl mill XRP 623,803,883 & 1003. The unit has a plan to add Constant load hanger, Variable load hanger & condensate polishing unit in near future.

Through small in size, HERP has been in adequate attention to all the facts of plant operation like computerization, inventory control, quality assurance. In order to channellies the creative energy of employees suggestion scheme and quality circle and productivity improvement project are in operation. 

HERP takes pride in being one of the best among BHEL unit in term of value added per employee. it has a track reward of continuing harmonious industrial relations. Being a public sector, HERP is aware of social responsibility as a corporate citizen as quality of like for the residents of near by area. 

Heavy Equipment Repair Plant, Varanasi has highly skilled & dedicated technicians, engineers & specialist catering the requirements of various power plants of their mill and turbine O&M spares. HERP has contributed a lot in refurbishing of various units of NTPC after taking it over from SEB’s and is a major player in Govt of India PIE program.

Range Of Products/Services Provided By HERP , VARANASI

Bowl Mill XRP/XRS 623, 703HP, 783, 803, 803HP, 883, 1003 spares Turbine fasteners Repair/Rebabbiting of TG bearings Rotor machining Spares for Boiler Auxiliaries like Coal Burners, Fuel Piping, ESP, Air Preheater     &

R.C. Feeder etc. Hydro Turbine component machining like Guide Vanes, Guide Bearings. Tools & Tackles of Steam Turbines Limiter Assembly, Oil Filter Assembly & Speed Changer Assembly of Governing

System.

Services Offered By HERP,VARANASI

Repair Machining Of --

HP/LP rotor of steam turbine  (removal of thermal cracks) Casing Liners and Diaphragm of steam turbine. Minor machining of Power plant components at the site. NDT like Ultrasonic testing of bearings at site Consultancy for performance improvement of Bowl mills through modification of mill

components.

Customers

HERP's customers are various SEBs viz. APGENCO, BSEB, CSEB, MSEB, MPEB, PSEB, RVUNL, TNEB, UPRVUNL, NTPCs, OPPs & Private Power Plants.

Partners

Our partners & suppliers include our sister units viz. Haridwar, Bhopal, Tiruchy, Hyderabad, Varanasi as well as various ancillaries developed by various units of BHEL.

Total Quality Focus

HERP has achieved certification of ISO 9001, ISO 14001 & OHSAS 18001 and targeted TQM score during 03-04. Unit level TQ council is committed towards improvement on regular basis in line with the organizational goals. The other apex level committee like HMC, PQC & PEC is also having meetings as per schedule for review as per agenda keeping in view, the interests of our Stakeholders.

Business Policy

"In line with Company's Vision, Mission and Values, we dedicate ourselves to sustained growth with increasing Positive Economic Value Addition and Customer focused business leadership in the Power & Industry Sector"

One of the major strengths of HERP Varanasi is its free, open and consistent work culture for making continuous improvement. To recognise employees’ participation & valued suggestions HERP has always been recognising their good efforts. Felicitation letters are distributed on 15 th

August & 26th January regularly.

VISION , MISSION & VALUES OF BHEL

VISION:

To become a continuously growing world class company.

To harness the growth potential & sustain profitable growth.

To deliver high quality & cost competitive products & to be the first choice of customers.

Create an inspiring work environment to unleash the creative energy of people.

Achieve excellence in enterprise management.

Be a respected corporate citizen, ensure clean & green environment & develop vibrant

communities.

MISSION:

To be an Indian Multinational Engineering Enterprise providing Total Business Solution through

Quality Products, Systems and Services in the fields of Energy, Industry, Transportation,

Infrastructure and other potential areas.

VALUES:

Commitment

Customer satisfaction

Continuous improvement

Concern for environment

Creativity & innovation

BALANCE SHEET, BHEL (HERP), VARANASI

CHAPTER - 4

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

Defining Working Capital

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.

The term working capital refers to the amount of capital which is readily available to an organisation. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organisational commitments for which cash will soon be required (Current Liabilities).

Thus:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of working capital are reported under the following headings:

Current Assets

Liquid Assets (cash and bank deposits) Inventory

Debtors and Receivables

Current Liabilities

Bank Overdraft Creditors and Payables

Other Short Term Liabilities

There are basically two concepts of working capital:-

1. Gross working capital2. Net working capital

Current assets are those which can be converted into cash within an accounting year and include cash,short-term securities,debtors,bills receivables(accounts receivables or book debts) and stock(inventory)

Current liabilities are those claim of outsiders which are expected to mature for payment within an accounting year and include creditors(accounts payable),bills payable and outstanding expenses.

Gross working capital:-it refers to the firm’s investment in current assets.

Net working capital:-it refers to the difference between current assets and current liabilities.

Net working capital is positive

When current assets >current liabilities

Net working capital is negative

When current asset<current liabilities

The Importance of Good Working Capital Management

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Working capital constitutes part of the Crown's investment in a department. Associated with this is an opportunity cost to the Crown. (Money invested in one area may "cost" opportunities for investment in other areas.) If a department is operating with more working capital than is necessary, this over-investment represents an unnecessary cost to the Crown.

From a department's point of view, excess working capital means operating inefficiencies. In addition, unnecessary working capital increases the amount of the capital charge which departments are required to meet from 1 July 1991.

There are many aspects of working capital management which make it an important function of the financial manager

1. TIME: working capital management requires much of the financial manager’s time.2. INVESTMENT: working capital represents a large portion of the total investments in

assets.

3. CRITICALITY: working capital management has great signifance for all firms but it is very critical for small firms.

4. GROWTH: the need for working capital is directly related to the firm’s growth.

Sources of working capital

1. Sale of non-current assetsa. sale of long term investments(shares,bonds/debentures etc.)b. sale of tangible fixed assets like land,building,plant or equipments.c. sale of intangible fixed assets like goodwill,patents or copyrights

2. long term financinga. long term borrowings/institutions loans,debentures,bonds etc.b. issuance of equity and preference shares

3. short term financing such as bank borrowings.

Focusing on liquidity management

Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggest the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. In order to protect their interests, short-term creditors always like a company to maintain currnet assets at a higher level than current liabilities. It is a conventional rule to maintain the level of currnet assets twice the level of current liabilities. However, the quality of current assets should be considered in determining the level of current assets vis-a –vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore prompt and timely action should be taken by management to improve and correct imbalances in the liquidity position of the firm.

Net working capital concept also covers the question of judicious mix of long-ter and short-term funds for financing current assets. For every firm there is a minimum amount of net working capital which is permanent. Therefore a portion of the working capital should be financed with

the permanent sources of funds such as equity, share capital, debentures, long-term debt, preference share capital or retained earnings. Management must decide the extent to which current assets should be financed with equity capital or borrowed capital.

Balanced working capital position

The firm should maintain a sound working capital position. it should have adequate working capital to run its business operations. both excessive and inadequate working capital positions are dangerous from the firm’s point of view. excessive working capital means holding costs and idle funds which earn no profits for the firm. Paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies and sales disruptions.

The dangers of excessive working capital are as follows:

1.It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling,waste,theft and losses increase.2.It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts result, which adversely affects profits.

3. Excessive working capital makes management complacent which degenerates into managerial inefficiency.

4.Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

Inadequate working capital is also bad and has the following dangers:

1. It stagnates growth. It becomes difficult for the firm to undertake profitable projets for non-availability of working capital funds.

2. It becomes difficult to implement operating plans and achieve the firm’s profit target.3. operating inefficiencies creep in when it becomes difficult even to meet day to day

commitments.4. Fixed are not efficiently utilized for the lack over working capital funds. Thus the firm’s

profitability would deteriorate.5. Paucity of working capital funds render the firm unable to avail attractive credit

opportunities etc,

6. The firm loses its reputation when it is not in a position to honor its short term obligations. as a result the firm faces tight credit terms.

An enlightened management should, therefore, maintain the right amount of working capital on the continuous basis. Only then a proper functioning of business operations will be ensured. Sound financial and statistical techniques, supported by judgement,should be used to predict the quantum of working capital needed at different time periods.

A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. in this regard means chances of the firm being unable to meet its obligations on due date. The lender considers a positive networking as a measure of safety. All other things being equal, the more the networking capital a firm has, the less likely that it will default in meeting its current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position.

Determinants of working capital

There are not set rules or formulae to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. The importance of factors also changes for a firm over time. Therefore, an analysis of relevant factors should be made in order to determine total investment in working capital. The following is the description of factors which generally influence the working capital requirements of firms.

Nature of business

Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assests,but require a large sum of money to be invested in working capital. Retail stores, for example, must carry large stocks of a variety of goods to satisfy varied and continuous demands of their customers. A large departmental store like wal-mart maycarry, say, over 20,000 items. Some manufacturing businesses, such as tobacco manufacturers and construction firms, also have to invest substantially in working capital and a nominal amount in fixed assests. In contrast, public utilities may have limited need for working capital and have to invest abundantly in fixed assests. Their working capital requirements are normal because they may have only cash sales and supply services, not products. Thus no funds will be tied up in debtors and stock(inventories). For the working capital requiorements most of the manufacturing companies will fall between the two extreme requirements of trading firms and public utilities. Such concerns have to make adequate investment in current assests depending upon the total assessts structure and other variables.

Market and demand conditions

The working capital needs of a firm are related to its sales.however,it is difficult to precisely determine the relationship between volumes of sales and working capital needs.in practice,current assets will have to be employed before growth takes place.it is,therefore,necessary to make advance planning of working capital for a growing firm on continous basis.

Growing firms may need to invest funds in fixed assests in order to sustain growing production and sales.this will,in turn, increase investment in current assests to support enlarged scale of operations.growing firms need funds continuously.they use external sources as well as internal sources to meet increasing needs of funds.these firms face further problems when they retain substantial portion of profits,as they will not be able to

Pay dividends to shareholders. It is ,therefore,imperative that such firms do proper planning to finanace their increasing neefws of working capital.

Sales depend upon demand conditions. Large number of firms experience seasonal and cyclical fluctuations in the demand for their products and services.these business variations affect the working capital requirement,specially the temporary working capital requirement of the firm. When there is an upward swing in the economy ,sales will increase;orrespondingly , the firm’s investment in inventories and debtors will also increase. Under boom,additional investment in fixed assests may be made by some firms to increase their productive capacity. This act of firms will require additions of working capital. To meet their requirements of funds for fixed assests and current assests under bom period,firms generally resort to substantial borrowing. On the other hand ,when there is decline in the economy,sales will falll and consequently, levels of inventories and debtors will also fall.under recession,firm try to reduce their short term borrowings.

Seasonal fluctuations not only affect working capital requirement but also create production problems for the firms. During peak periods of demand,increasing production may be expensive for the firm. Similarly,it will be more expensive during the slack periods when the firm has to sustain its working force and physical facilities without adequate production and sales. A firm may thus follow a policy of level production irrespective of seasonal changes in order to utilize its resources to the fullest extent. Such a policy will mean accumulation of inventories duing off season and their quick disposal during the peak season.

The increasing level of inventories during the slack season will require increasing funds to be tied up in the working capital for some months. Unlike cyclical fluctuations, seasonal fluctuations generally conform to a steady pattern. Therefore,financial arrangements for seasonal working capital requirements can be made in advance.

Technology and manufacturing policy

The manufacturing cycle comprise of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle ,larger will be the firms working capital requirements.therefore the technological process with the shortest manufacturing cycle may be chosen.once a manufacturing technology has been selected, it should be ensured that manufacturing cycle must be completed within the specified period. This nees proper planning and coordination at all levels of activity.any delay in the manufacturing process will result in the accumulation of WIP and waste of time. In order to minimize their investment in working capital, some firms ,specifically those manufacturing industrial products,have a policy of asking for advance payments from their customers. Non manufacturing firms,services and financial enterprises do not have a manufacturing cycle.

Credit policy

The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. The firm should use discretion in granting credit terms to its customers. Depending upon the individual case,different terms may be given to different customers. A liberal credit policy,without rating the credit worthiness of customers,will be detrimental to the firm and will create a problem of collection later on. The firm should be prompt in making collections. A high collection period will mean tie up of large funds in debtors. Slack collection procedures can increase the chance of bad debts. In order to ensure that unnecessary funds are not tied up in debtors, the firm should follow a rationalized credit policy based on the credit standing of customers and other relevant factors. The firm should evaluate the credit standing of new customers and periodically review the credit worthiness of the existing customers. The case of delayed payments should be thoroughly investigated.

Availability of credit from suppliers

The working capital requirements of a firm are also affected by credit terms granted by its suppliers. A firm will needless working capital if liberal credit terms are available to it from suppliers. Suppliers’ credit finances the firm’s inventories and reduces the cash conversion cycle. In the absence of suppliers’ credit the firm will borrow funds for bank.

The availability of credit at reasonable cost from banks is crucial. It influences the working capital policy of the firm. A firm without the suppliers’ credit, but which can get bank credit easily on favourable conditions, will be able to finance its inventories and debtors without much difficulty.

Operating efficiency

The operating efficiency of the firm relates to the optimum utilization of all its resources at minimum costs. The efficiency in controlling operating costs and utilizing fixed and current assests leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization of resources improves profitability and thus,helps in releasing the pressure on working capital. Although it may not be possible for a firm to control prices of materials or wages of labour,it can certainly ensure efficient and effective utilization of materials ,labour and other resources.

Price level changes

The increasing shift in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital requirement of the firm. Generally,rising price levels will require a firm to maintain a higher amount of working capital. Same levels of current assests will need increased investment when prices are increasing. However, companies that can immediately revise their product prices with rising price levels will not face a severe working capital problem. Further, Firms will feel effects of increasing general price level differently as prices of individual Products move differently. Thus,it is possible that some companies may not be affected by rising prices while others may be badly hit.

Working Capital CycleCash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cashflow 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. 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. 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

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

ISSUES IN WORKING CAPITAL

Working capital management involves arranging short term financing negotiating favorable credit terms, controlling the movement of cash administreing inventory, thus Working capital management has following three components:

Management of cash

Management of sundry debtors

Management of inventory

CASH MANAGEMENT

If you .......Then ......

← Collect receivables (debtors) faster You release cash

from the cycle← Collect receivables (debtors)

slower Your receivables soak up cash

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

You increase your cash resources

← Shift inventory (stocks) faster You free up cash

← Move inventory (stocks) slower You consume more cash

INTRODUCTION

Cash is an important current asset for the operation of the business. Cash is the basic input

needed to keep the business running on a continuation basis. It is also the ultimate output

realized by selling the services or product manufactured by the firm. Cash is the most liquid of

all the current assets. Higher cash and bank balance indicate high liquidity position in lower

profitability, as ideal cash fetches no return. Thus a major function of finance manager is

maintain sound cash position.

Cash management is concerned with managing of: -

(i) Cash flow in and out of the firm.

(ii) Cash flow within the firm.

(iii) Cash balance held by the firm at a point of time by financing deficit or investing surplus

cash.

Objective of Cash Management

1) To meet day to day business requirements.

2) To provide for schedule major payment i.e. Capital expenditure.

3) To face unexpected cash drain.

4) To maintain image of credit worthiness.

5) To size potential opportunities for profitable long term investments.

6) To meet requirement of bank relationships. Efficient cash management function calls for cash

planning, evaluation of cash benefits and cost of policies, sound procedures and practices and

synchronization of cash inflows and outflows. Thus for achieving goals and objectives of cash

management, finance manager has to plan cash needs of the firm followed by cash flow

management, determination of optimum level of cash and finally investment of surplus.

Factors Affecting Cash Requirement

(A) Internal Factors

(a) Profit level

(b) Dividend and Taxation policy

(c) Reserve and surplus

(d) Depreciation policy

(e) Expansion programme

(f) Operating efficiency

(B) External Factors

(a) Fluctuating in marketing interest rates

(b) Investment avenues available in market

(c) Government economic policies

(d) Rules and regulations of RBI and other regulatory bodies

Cash Management in B.H.E.L.

In B.H.E.L., the centralized cash credit system is followed. From 24-07-75 all the banking

transactions of the company have been centralized at corporate office, New Delhi. Under this

system all the sales proceeds of the units are deposited in a centralized account. This account

number is universal for all the units of ROD’s. They have to deposit the sales process if this

account withdraws money from it. Only the corporate office operates it.

For meeting day to day expenses, the units have to prepare the estimates of such expenses,

which are then sent to corporate office weekly or monthly, or both. At unit level, the cash budget

is prepared on yearly basis for estimating the expected cash inflows and outflows. The yearly

budget is broken down into monthly and weekly intervals. The inflows and outflows and

estimated on following basis.

The only source of cash inflow for unit is corporate office. The sale proceeds cannot be directly

utilized. Based on the above requisitions, the corporate office allocates the funds.

For cash credit, corporate office will negotiate with consortium of Bank for total cash credit

required for the company as the whole. A consortium deed for hypothecation of stocks and stores

of company is executed by corporate office. All the information, documents etc. required in this

connection will be called for by the corporate office from the division.

Arrangements have been already been made by the State Bank of India, HDFC Bank, Canara

Bank, Bank of Baroda and Indian Overseas Bank for centralizing total cash credit limits at New

Delhi.

Under this scheme, the units have finished the required information under the following

documents. The units will send estimated, monthly cash flow statement to the corporate office

by 18th of every month.

Based on these cash flow statements, the corporate office will allocate the sub limits will be

transferred to the consortium of the bank by 25th of the month. The unit can utilize this fund.

The actual cash flow statement will be send to corporate office monthly i.e. 1st of succeeding

month.

The units are also required to send the weekly report of daily bank transactions to the corporate

office. These reports shows the detail of daily debit and credit transaction appearing in bankbook

of the company, enabling the posting of corporate bankbooks as well as verification of bank

statement received from banks. These reports are sent to corporate office on

1st (showing the transaction from 25th to 30th of the previous month)

8th (showing the transaction from 1st to 7th of the current month)

16th (Showing the transaction from 8th to 15th of the current month)

25th (showing the transaction from 16th to 21st of current month)

The units are required to send the comparative statement of estimated and annual cash flow of

the preceding month. This report will be sent quarterly after inter-unit reconciliation meeting.

The total interest payable on cash credit availed by corporate office is to be allocated among the

units in the ratio of utilization of funds. Thus cash forecasting & budget are the principal tools of

cash management. Forecasting helps manager to know how much cash will be held in balance, to

what extent the firm should rely on banks financing and how much to invest in marketable

securities.

Advantages of Centralized System

1) Excess cash at various units can be effectively used for various purposes and improvements.

2)Deficit of cash at various units can be sorted out through centralized cash system.

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

Cash Budget in B.H.E.L.

Cash budget is the most significance device to plan for and control receipt and payment. A cash

budget is a summary statement of the firms expected cash inflows and outflows over a projected

time period. In B.H.E.L., cash management is centralized and is controlled directly from

corporate office, whatever requirement of fund is felt in BHEL, Varanasi it is sent to the

corporate office and corporate office disburse the funds accordingly. Cash budget in BHEL,

Varanasi is prepared on the basis of production schedule, which is prepared after receiving

customer’s orders at the beginning of the year. There are two aspects of cash budget inflow and

outflow. In flow of

cash budget is determined on the basis of receiving the customer’s orders and preparing

production schedule. Outflow is determined on the basis of requirement of raw materials,

payment of taxes and duties, interest on borrowings etc. Outflow in cash budget is categorized

into operation and non-operation outflow consist of capital expenditure, exchange variations and

supplier’s credit. Thus after determining the budgeted estimates of inflow and outflows, cash

budget is prepared at the beginning of the year. The distribution of cash is determined on

monthly basis in every month of that year. In the last quarter of the year cash budget is received

and the last estimates are calculated and fixed. Monitoring of cash budget is done though

management information system.

RECEIVABLE MANAGEMENT

Introduction

Customers arising from sale of goods or services define the term receivable as debt owed to the

firm in the ordinary course of business. Receivable constitute a substantial position of current

assets. Granting credit and creating debtors amount to the blocking of firm’s fund. The interval

between the date of sale and date of payment has to be financed out of working capital. Thus

trader’s debtors represent investment.

Business firm generally sell goods on credit to facilitate sales. When a firm makes an ordinary

sale of goods on services and does not receive payment, the firm grant trade credit and create

accounts receivable that would be collected in the future.

Cost of Maintaining Receivable

The cost associated with the maintenance of account receivables are:

1) Capital Cost

When a firm maintains receivables, there is a time lag between the sales of good and payments

by the customers. Mean while, the firm has to pay to the employees and to the suppliers of raw

materials. These payments are made by the use of traditional capital which alternatively could be

profitably employed elsewhere.

2) Collection Cost

These are costs, which the firm has to in for collection of the amounts at the appropriate time

from the customers.

3) Administrative Cost

In the process of maintaining receivable company incurs some administrative expenses in the

form of salaries to clerks who maintain records of debtors, expenses on investigating the credit

worthiness of debtors etc.

4) Default Cost

When customers make default in payments, not only the collection effort has to be increased but

the firm may also have to incur losses due to bad debts.

Objective of Receivable Management

The objective of receivable management is to promote sales and profits until that point is reached

where return on investment in future funding of receivables is less than cost of funds raised to

finance that additional credit.

Credit Policy

Credit Policy of a firm can be regarded as a kind of trade-off between increased credit sales

leading to increase in profit and the cost of having large amount of fund locked up in the form of

receivables and loss due to incidence of bad debts. The variables associated with credit policy

are: -

(A) Credit Standard

(B) Credit Terms

(C) Collection Efforts

Credit Standards are criteria to decide the type of customers to whom goods could be sold on

credit.

Credit Terms specify duration of credit and terms of payment by customers.

Collection Efforts determine the actual collection period. The lower the collection period, the

lower is the investment in accounts receivable and vice versa.

Receivable Management in BHEL.

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL grants

liberal terms regarding trade credit to lure the potential customers to buy its product at favorable

selling prices.

To utilize its excess capacity, BHEL is granting liberal trade credit terms to its customers. The

main customers of BHEL are Railways, Power Industries and other Private Parties. BHEL has

overseas sales also.

All the BHEL units are having their commercial department. Commercial department and

Regional Operational Divisions (RDOs) primarily carry out the job of recovery from the

customers. The sales section of finance department also actively takes part in receivable

management by preparing and sending invoices and reminders to customers at appropriate time.

They take track of money received from customers as advances, as against dispatch of finished

goods and money recoverable on account of price variation claims and conversion of deferred

debts into debtors. This monitoring is done work order wise. The aging schedule of customers

also prepared which gives the regarding period of outstanding balances.

The terms and conditions with the customers are finalized according to the credit policy laid

down by corporate office BHEL. However deviations are permitted with the due approval from

corporate office.

While lying down of credit policy by head office, industry conditions are taken into

consideration. Seeing huge investment in execution of work order, BHEL demands considerable

payment in advance in different phases of completion of work i.e. erection, installation,

commissioning, maintenance etc. Despite all these BHEL is presently facing cash crunch

because a major chunk of BHEL’s customers consists of government bodies, which are very

casual in clearance of dues.

INVENTORY MANAGEMENT

Introduction

Inventory constitutes the most significant part of the current assets of the large majorities of the

companies in India. On an average, inventories are approximately 60% of current assets in public

limited companies in India. Inventories are stock of the product, a company is manufacturing for

sale and components that make up the product. The various forms in which inventories exist in

manufacturing company are raw material; work in process and finished goods.

The level of above mentioned three kinds of inventories for a firm depend on the nature of its

business. Manufacturing firm will have substantially high level of all three kinds of inventories,

while a retail or wholesale firm will have a very high level of finished goods inventories and raw

material and work in process inventories. In a manufacturing firm the level of inventory depends

on the operating cycle. A manufacturing firm with a long operating cycle has to maintain a high

inventory level.

Need to Hold Inventories

There are three general motives for holding inventories: -

1. Transaction Motives: - Companies hold inventories to facilitate smooth production and sales

operation. Company should maintain adequate stock of raw material for a continuous supply to

the factory for uninterrupted production and keeping stock of finished goods as the firm cannot

immediately when customersdemand goods.

2. Precautionary Motive: - Firm holds inventories to guard against the risk of unpredictable

change in demand and supply of force and other factors. Firm may also purchase large quantities

of raw material; than needed for desired production and sales level to obtain quantity discount on

bulk purchases.

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 Inventory Holding

There are five costs associated with inventory holding. Of these, three are direct costs that are

immediately connected to buying and holding goods and other two are indirect costs, which are

losses of revenues.These costs of holding inventories are: -

(1) Material cost

(2) Order Cost

(3) Carrying Cost

(4) Cost of fund tied up in inventory

(5) Cost of running out of goods

Objectives of Inventory Management

1. To maintain a large size of inventory for efficient and smooth production and sales operation

2. To maintain a minimum investment in inventories to maximize profitability. The effective

management of inventory involves a tradeoff between having too little and much more inventory.

The firm should always avoid a situation of over investment or under investment in inventories.

The major disadvantages of over investment are: -

(i) Unnecessary tide up of firm’s funds and losses of profit.

(ii) Excessive carrying cost.

(iii) Risk of liquidity.

(iv) Physical deterioration of inventory during storage. Maintaining an inadequate level is also

dangerous.

The consequences of the under investment in inventories are: -

(i) Production hold ups.

(ii) Failure to meet delivery commitment.

Thus the aim of inventory management should be to avoid excessive and inadequate level of

inventories and to maintain sufficient inventory for the smooth production and sales operations.

Efforts should be made to place an order at the right time with right source to acquire the right

quantity ant the right price and quality.

Factors Affecting Level of Investment in Inventories: -

(1) Seasonal nature of raw material.

(2) Length and technical nature of production process.

(3) Style factor in end product.

(4) Terms of purchase.

(5) Time factor.

(6) Supply condition.

(7) Loan facilities.

(8) Other factors.

Inventory Management in BHEL,

The investment in inventory in production to total is a dominant determinant of working capital

management. It holds much important in context of BHEL as it is having a long production cycle

where a good amount of capital is tied up in form of raw material, work in progress and

conversion cost. Production planning and control department plays a pivotal role in inventory

management. The engineering department plays a supporting role and provides the requisition

regarding technology to be applied and material requires 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. Procurement – The procurement is done by purchase department. It is done with the

assistance of PPC and commercial department for maintaining a tradeoff between carrying cost

and ordering cost. A single purchase order is placed for the entire quantity of a specific item and

its scattered delivery over a period of time is received. This method helps in obtaining cash and

quantity discounts and saving carrying cost. In case of foreign purchase also one order is placed

for the full requirement of an item and scattered delivery is opted because variation caused in

material cost due to fluctuation in exchange rate is much less than the carrying cost of the

material which is approximately 25% of the total price.

3. Receipt and Custody- For the proper inventory control on receipt of materialin store, quality

control department checks the material as per specification. The cost section fills details of all the

purchase by issuing store receipt voucher and material issue voucher.

4. Issue -After receiving the material and storing, the management keeps the information

whether these material are being issued to desired destination. Full record of every issuing of

material is kept for the proper inventory control.

5 . Accounting -The record of every transaction regarding the use of material in every

department is kept. These records give the overall view of how and where inventories have been

used.

Methods Used For Inventory Control

In BHEL, planning and control of inventory is done by using two methods —

(i) ABC analysis

(ii) Slow moving and non-moving goods analysis.

(iii) Budgeting material requirements

(iv) Fixation of raw material levels

(v) Variety reduction

(vi) Codification of materials

(vii) Control of work in progress

(i) ABC Analysis

In case of manufacturing company like BHEL, the number of items of raw material run into

thousands. From the point of view of monitoring information for control, it becomes extremely

difficult to consider each one of these

items. In this case ABC analysis becomes useful and enables management to concentrate

attention and keeps a close watch on a relatively less number of items, which account for a high

percentage of annual usage value of all items of inventory.

Annual usage value = Annual requirement per unit cost

In this analysis, items are categorized into A, B, & C category on the basis of their usage value.

The more costly items are classified as ‘A’. This represents large investments items but is low in

number. In BHEL ‘A’ category items amounts to 60% of investment in inventory items.

Inventory items of average usage are put in B category and these accounts for 30% of total

investment in inventory. Low usage items are pull in C category. It represents 10% of degree of

control and accurate planning. B category requires moderate control. As ‘C’ category represents

low usage value, much importance is to pay on its control. Also the planning and control cost

incurred for this category will be greater than their total cost.

The advantages of this system are —

· Ensures closer control on costly items.

· Helps in developing scientific methods of controlling inventories. Clerical costs are reduced

and stock is maintained at minimum level.

· Helps in achieving the main objective of inventory control at minimum level.

(ii) Slow moving and Non-moving goods analysis

Slow Moving Stock – Material which have low turnover are classified as slow moving stock. In

BHEL an item is regarded as slow moving one, if turnover ratio is less than 10%. Non-Moving

Stocks-- These items have no immediate demand but may be required in future. Here the items,

which are not consumed since two years, are regarded as non-moving stock or dead inventory.

This category includes mainly directly chargeable items. These items having turnover ratio of

10% or more are fast moving items and such acquire more importance.

Documents Used For Inventory Control

The various documents used for control of inventory are discussed below

(i) Store Receipt Voucher This is issued when raw material purchased reaches the store. It is

issued by store in charge.

(ii) Material Issued Voucher This is an authorization to the storekeeper to issue raw material.

Any material ordered for a specific work order will be recorded on MIV details of material

requisition is entered on the Bin card.

(iii) Material Return Note This is an authorization to the storekeeper regarding raw material,

finished parts or other stores no longer required by the factory. The various stock records and

cost accounts are adjusted in due course from the details given on the form.

(iv) Material Transfer Note This is issued when the material booked to one particular order is

transferred to another work order.

(v) Material is kept in appropriate bin and draws. For each kind of material a bin card is

maintained showing details. A bin card assists the storekeeper to control the stock. The bin card

incorporates all information viz. opening balance of materials, materials ordered, materials

allocated and closing balance of materials. As a result the bin card shows the full cycle of

material like the order of few supplies, allocation of material to jobs, receipt and issued of

material, stock in hand and balance available.

RATIO ANALYSIS

Meaning of ratio

“A ratio is an expression of the quantitative relationship between tow numbers”.

Wixon, kell & beoford

“ According ratio is used to describe significant relationship which exit between figures shown

on a balance sheet, P&L a/c or in a budgetary control system”.

-J.Batty

“Ratio analysis is a study of relationship among the various financial factors in a business”.

-Jhon.N.Myer

A financial ratio is the relationship between two accounting figure

expressed as a proportion. Ratio provides clues to the financial position of a concern. These are

the pointers or indicators of financial strength, soundness, position or weakness of an enterprise.

Ratio analysis is one of the methods of analyzing financial statements. It is an attempt to present

the information of the financial statements in simplified, systematized and summarized form. It

measures the profitability, efficiency and financial soundness of the business. Ratio analysis is

therefore, a toll to present the figures of financial statements in simple, concise and intelligible

form.

There are a number of ratios, which can be calculated from the information

given in the financial statements, but the analyst has to select the appropriate data and calculate

only a few appropriate ratios from the same, keeping in mind the objectives of analysis.

Calculation of ratios is comparatively simple, routine clerical in nature but

interpretation of ratios is highly sophisticated and intricate phenomenon. The benefit of ratio

analysis depends on a great deal upon the correct interpretation. It needs skill, intelligence,

training, farsightedness and intuition of high order on the part of the analyst.

Factor to be kept in mind while undertaking ratio analysis are:

Quality of financial statements

Purpose of analysis

Selection of ratios

Standard to be applied

Capability of the analyst

Significance of the ratio analysis:

Ratio as a tool of financial analysis provides symptoms with the help of which an

analyst is in a position to diagnose the financial health of the unit. Financial analysis can be

compared with biopsy conducted by the doctor on the patient in order to diagnose the cases of

illness so that treatment may be prescribed to the patient to help in recover. As there are different

groups of interested parties so significance to them are different.

Management

Management needs information regarding the profitability, operational efficiency and financial

soundness of the business, so that weakness of the business may be identified and effective

business plans may be formulated. Ratio analysis helps the management in decision making,

financial forecasting and planning. It helps in communicating the desired information to the

relevant parties and facilitates coordination. Ratios provide actual basis, which can be compared

with the standards, thus helps in effective control.

Shareholders

The shareholders, the virtual owners of business corporate units have an interest in the welfare

and progress of business. They want to know about the profitability and future prospects of the

enterprise. The requisite information is available from the analysis of financial statements.

Workers

Employees of the business are interested in the profit of business. Workers in the business are

paid bonus on the basis of productivity and profitability, so they have an interest in the fianancial

analysis of the business.

Creditors

Creditors of the enterprise are interested in the short term and long term financial soundness of

the business. They want to ensure themselves, whether their funds are safe and secure and the

business is capable of making payment of interest regularly .

KEY WORKING CAPITAL RATIOS

The following, easily calculated, ratios are important measures of working capital utilization.

Ratio Formulae Result Interpretation

Stock

Turnover

(in days)

Average Stock *

365/

Cost of Goods

Sold

= x days

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.

Obsolete stock, slow moving lines will extend

overall stock turnover days. Faster production,

fewer product lines, just in time ordering will

reduce average days.

Receivables

Ratio

(in days)

Debtors * 365/

Sales = x days

It take you on average x days to collect monies

due to you. If your official credit terms are 45

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.

Payables

Ratio

(in days)

Creditors * 365/

Cost of Sales (or

Purchases)

= x days

On average, you pay your suppliers every x days.

If you negotiate better credit terms this will

increase. If you pay earlier, say, to get a discount

this will decline. If you simply 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.

Current

Ratio

Total Current

Assets/

Total Current

Liabilities

=

x

times

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 months.

For example, 1.5 times means that you should be

able to lay your hands on $1.50 for every $1.00

you owe. Less than 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.

Quick Ratio

(Total Current

Assets -

Inventory)/

Total Current

Liabilities

=x times

Similar to the Current Ratio but takes account of

the fact that it may take time to convert inventory

into cash.

Working

Capital Ratio

(Inventory +

Receivables -

Payables)/

Sales

As %

Sales

A high percentage means that working capital

needs are high relative to your sales.

KEY RATIO LEVELS

Particulars Low Risk Medium Risk High Risk

Current Ratio >1.40 1.20-1.40 <1.20

TOL/TNW <2.00 2.00-3.50 <3.50

Interest Coverage >3.50 2.00-3.50 <2.00

PAT/Sales % >10.00 4.00-10.00 <4.00

Inventory (No. of Days) <60 60-90 >90

Debtors (No. of Days) <45 45-90 >90

Debt.-Equity Ratio <1.25 1.25-1.75 >1.75

DSCR ( For TL) >2.00 1.25-2.00 <1.25

RATIO ANALYSIS OF BHEL

CURRENT RATIO: ( Rs in lakhs)

CURRENT ASSET

CURRENT LIABILITY

CU

RRENT RATIO

31-03-2010 31-03-2009

CURRENT ASSET 15855 9031

CURRENT LIABILITY 7252 4476

RATIO 2.186 2.017

QUICK RATIO:

( Rs in lakhs)

C.A.-INVENTORY

C.L.

QUICK RATIO 31-03-2010 31-03-2009

C.A.-INVENTORY 10027 4629

CURRENT LIABILITY 7252 4476

RATIO 1.382 1.034

OTHER PARAMETERS OF BHEL (HERP), VARANASI

(Rs.in lacks)

06-07

ACTUAL

07-08

ACTUAL

08-09

ACTUAL

09-10

ACTUAL

10-11

BUD

TURNOVER

(%growth over/year)

BHEL 3384 4481 10824 9277.84 12500

NON 7026 8688 9292 14822 17500

BHEL Spare Turnover

(%growth over/year)

BHEL 3284 4481 10772 9000 12500

NON BHEL

6955

8631 9209 14900 17400

Order recievedBHEL

4514 7438 7008 8302 10000

NON

BHEL

9461 6509 13779 16030 20000

Order outstanding

BHEL2843 6458 3097 7960 6412

NON

BHEL

5725 4702 10163 12335 16167

Profit before tax (PBT) 3389 3936 6522 8017 9873

Inventory 2194 2385 4407 4696 5836

NET WORKING CAPITAL 1420 2537 2803 2941 3904

Manpower 119 132 138 159 163

Sundry Debtors 1466 3760 4404 4332 5017

Value added 4482 5221 8493 10348 12861

Cash flow Inflow

10543 11353 20066 24921 30387

Outflow 8327 9125 13982 16883 21230

Capital expenditure 340 411 85 212 1264

RECOMMENDATIONS AND SUGGESTIONS

There is a great need for effective management of working capital in any firm. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analysed to determine the working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the company, a

judicious mix of short and long term finances should be invested in current assets. Since current assets involve cost of funds,they should be put to productive use.

During my project period, I have studied the working capital management in BHEL (HERP), Varanasi. 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.

Due to order base work in unit the inventories are determined after the order is received. It takes time to inform the requirement for the inventories to higher authority .unit should arrange the raw material in advance which may reduce the time and leads to overcome the outstanding orders problem and defiantly help in the expansion of capacity production..

Outstanding orders of recent past years are in increasing mode these orders should be minimize as far as possible. It shows the capacity of production of any company but with reference of past data available with us the production turnover is also increasing thus it clearly seems that the order receiving one in financial year is somewhere higher than increased production capacity.

Storage capacity should be made more reliable so that the storage of materials can be

made in safe manner which leads to faster production.

Conclusion

Any change in the working capital will have an effect on a business's cash flows. A

positive change in working capital indicates that the business has paid out cash, for example in

purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital

will have a negative effect on the business's cash holding. However, a negative change in

working capital indicates lower funds to pay off short term liabilities (current liabilities), which

may have bad repercussions to the future of the company.

The Company is focusing strict eye watch on cash management now days.

The WC is also showing an increasing trend which is attributed to the increasing profits.

Net working capital increased year on year. The factors contributing to th increase are:

a) Increase in Sundry Debtors due to relaxing of the credit policy , although the AR

days has remained more or less constant

b) Increase in Inventory.

c) Increase in Other Current Assets and Loans and Advances. However, increase in

Current Liabilities and Provisions has offset the increase in Current Assets.

The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that the

firm is highly liquid and would be able to meet itsshort term liabilities effectively.

BIBLOGRAPHY

Ave

Financial management I.M. Pandey

Financial management Presanna Chandra

Working capital Management I.M. Pandey

Financial Management R.P. Rustagi

Annual Reports of BHEL

General Articles of BHEL (HERP), Varanasi

Website: www.bhel.com, www.indianinfoline.com,

Newspapers: Economic Times of India, The Hindu.