An Analysis of Working Capital Management at BHEL

Executive Summary..................................................................................................3

CHAPTER 1................................................................................................................5

INDUSTRY AND COMPANY OVERVIEW.................................................................5

Chapter 1....................................................................................................................6

The Industry and Company Overview.....................................................................6

Industry Overview:.................................................................................................6

Global Scenario......................................................................................................7

Indian Scenario......................................................................................................9

Company Overview..............................................................................................11

Main manufacturing facilities.............................................................................14

Products:..............................................................................................................14

SWOT Analysis....................................................................................................18

Key Players in the Market...................................................................................20

Chapter 2..................................................................................................................21

INTRODUCTION TO THE PROJECT.......................................................................21

INTRODUCTION TO THE PROJECT.......................................................................22

Statement of Problem..........................................................................................22

Background of the research topic:....................................................................22

Review of literature in the Area of Study...........................................................23

Working Capital Financing at BHEL-EDN:.........................................................24

Working Capital Management Practices:...........................................................28

CHAPTER-3..............................................................................................................31

DESIGN OF THE STUDY.........................................................................................31

Objectives of the study.......................................................................................32

OPERATIONAL DEFINITIONS OF THE CONCEPTS IN THE AREA OF STUDY:...............................................................................................................................32

RESEARCH METHODOLOGY.............................................................................42

Scope of the study:..............................................................................................42

Research Design..................................................................................................42

Plan of Analysis...................................................................................................43

Limitation of the Study........................................................................................44

Chapter 4..................................................................................................................45

Analysis and Interpretation....................................................................................45

Analysis and Interpretation....................................................................................46

WORKING CAPITAL MANAGEMENT..................................................................47

Trend Analysis.....................................................................................................64

CHAPTER 5..............................................................................................................66

FINDINGS AND SUGGESTIONS.............................................................................66

FINDINGS:............................................................................................................67

Suggestions.........................................................................................................68

Conclusion:..........................................................................................................69

Annexure..................................................................................................................70

Executive SummaryIn a perfect world, there would be no necessity for current assets and

liabilities because there would be no uncertainty, no transaction costs, information

search costs, scheduling costs, or production and technology constraints. The unit

cost of production would not vary with the quantity produced. Borrowing and lending

rates shall be same. Capital, labour and product market shall be perfectly

competitive and would reflect all available information, thus in such an environment,

there would be no advantage for investing in short term assets.

However the world we live is not perfect. It is characterized by considerable

amount of uncertainty regarding the demand, market price, quality and availability of

own products and those of suppliers. There are transaction costs for purchasing or

selling goods or securities. Information is costly to obtain and is not equally

distributed, there are spreads between the borrowings and lending rates for

investments and financing of equal risks. Similarly each organization is faced with its

own limits on the production capacity and technologies it can employ. There are

fixed as well as variable costs associated with production of goods. In other words,

the markets in which real firm operated are not perfectly competitive.

These real world circumstances introduce problem’s which require the

necessity of maintaining working capital. For example, an organization may be faced

with an uncertainty regarding availability of sufficient quantity of crucial input in future

at reasonable price. This may necessitate the holding of inventory. Similarly an

organization may be faced with an uncertainty regarding the level of its future cash

flows and insufficient amount of cash may incur substantial costs. This may

necessitate the holding of reserve of short term marketable securities, again a short

term capital asset. In the management of working capital the time factor is not a

crucial decision if the size of such assets is large, the liquidity position would

improve, but profitability would be adversely affected because of idle funds.

Conversely, if the holdings of such assets are relatively small, the overall profitability

will increase, but it adversely affected on the liquidity position and makes the firm

more risky. So the working capital management should aim at striking a balance

such that there is an optimum amount of short term assets.

The project explains in detail the concepts of working capital management which

serves as a platform for the study conducted. Various ratios have been taken out on

the basis of the data so as to find out the trends of components of working capital at

BHEL EDN. This analysis studies the different techniques used by BHEL to manage

THEIR Working Capital and the effectiveness of these.

A company like BHEL is expected to have a good management of its Working

Capital. Working Capital of a company is the difference between its current assets

and the current liabilities. It includes the company’s debtors, bank/cash, creditors,

inventory, outstanding and other miscellaneous expenses. Each of these needs to

be managed separately so as to have a control over the liquidity of business.

Management of Working Capital includes various sub-components at the operational

level of the company which directly affect the level of Working Capital. These include

study of Letter of Credit, Bill Discounting, Factoring through Receivable Purchases,

Channel Financing, and Overdraft management. Proper Working Capital

Management depends on how well these sub-components are handled. The

company needs to overcome the shortcomings in this respect.

CHAPTER 1

INDUSTRY AND COMPANY OVERVIEW

Chapter 1

The Industry and Company Overview

Industry Overview:

The Electrical Equipment Industry consists of companies that make a range

of products for a diverse customer base. This sector is fragmented, but there are a

few members that lay claim to a sizable portion of sales. Products include electrical

motors, commercial and industrial lighting fixtures, heating, ventilation and air

conditioning systems and components, and, among others, electrical power

equipment, Operating structures involve high fixed costs. Too, copper, aluminium

and steel are essential raw materials used in the manufacture of products. The

industry spans all corners of the world, and it is subject to the influence of the

macroeconomic cycle.

Equipment companies primarily serve the mature markets of North America and

Europe, but they have found growth venues in the emerging world. Expansive global

coverage helps to smooth the effects of the broader business cycle. Capable

management is required to oversee long distribution networks and far flung

operations. In recent years, companies have established more overseas brick-and-

mortar facilities, which have allowed them to better serve local markets economically

and limit the negative impact of foreign currency exchange. Emerging nations have

provided an impetus for growth and low-cost labour, production and land. The

electrical equipment manufacturing companies manufacture the range of products

required, that is mostly used in almost 90 % of world’s power and energy sector.

The products range from circuits to control equipments to power generating volts and

other small and medium components, which are directly used in nuclear power

plants as well as electrical appliances.

Global Scenario

The global competition in this sector is very tough and India is currently a

marginal player in the global context. India’s exports do not even constitute 1% of

global exports of electrical equipment. Most Indian manufacturers have not focussed

on developing a long term strategy for exporting their products. The domestic

industry has doubled, or even tripled in some cases, its capacities over last 7-8 years

in anticipation of the huge demand arising out of government’s plan for adding

substantial capacities in electricity generation, transmission and distribution sectors.

The industry now has a diversified, mature and strong manufacturing base, with

robust supply chain, fully equipped to meet domestic demand / capacity addition; but

in absence of the anticipated demand the industry is suffering from over capacity

leading to cut-throat competition in domestic market. Therefore, exports should be

looked at seriously by Indian companies as a significant opportunity for growth.

Indian products have a rugged performance design to meet the nation’s tough

network demand. Technology wise also, Indian products can compete globally. But,

where we lose out in the global market broadly is on the price front, especially vis-à-

vis China. Chinese products in many segments of this sector enjoy significant price

advantage because of the export subsidies extended by their government to their

manufacturers. Additionally, the Chinese Government also provides very soft long

term loans and aid to many countries to buy Chinese products. Also, China has

entered into several free trade agreements with different countries across the globe

on account of which Chinese products enjoy duty free or preferential access in these

countries. But, the Indian electrical equipment industry is also witnessing an

emerging global reputation for sourcing of base products and components and is

slowly but surely establishing a global footprint by building Brand India. The global

electrical equipment market includes the global electrical components and

equipment market, and the global heavy electrical equipment market. The global

electrical components and equipment market is deemed to be the revenues accruing

to companies from the sale of electric power cables and wires and electrical

switchgear. The market does not include electronic components or equipment

classified in the heavy electrical equipment sub-industry. The global heavy electrical

equipment market is deemed to be the revenues accrued by manufacturers from the

production of power-generating equipment and other heavy electrical equipment,

including power turbines, heavy electrical machinery intended for fixed-use and large

electrical systems. Any currency conversions used in this report are at constant 2011

annual average exchange rate.

The global electrical equipment market grew by 4.4% in 2011 to reach a value of

$202.0 billion, representing a compound annual growth rate of 1.1% for the period

spanning 2007-2011.Power Cables sales proved the most lucrative for the global

electrical equipment market in 2011, with total revenues of $62.6 billion, equivalent

to 31% of the market's overall value. The performance of the market is forecast to

accelerate, with an anticipated CAGR of 4.7% for the five-year period 2011 - 2016,

which is expected to drive the market to a value of $254.7 billion by the end of 2016

Indian ScenarioIndian Electrical Equipment Manufacturing industry has been growing over the years.

India was ranked among top 10 manufacturing industry by US. The Indian market

this year has experienced a fall of 11 % revenue this is due to the Mirroring problems

in the power sector. The industry saw a 10.5% fall during the quarter ending

December 2012 compared to the corresponding period of FY12.

Though almost all sub-sectors decelerated during the third quarter, only transformers

and capacitors were able to arrest their declining trend to some extent. Power cable

and energy meter sectors were hit the most during Q3 FY13. The situation of the

T&D sector is turning extremely grim and the Government needs to tackle the

situation on a war-footing, failing which it will become difficult for many players to

survive in the business.

The industry is reeling under the twin onslaught of the slowdown in the country’s

power sector, which has depressed domestic demand, and the rapidly escalating

imports of electrical equipment. Both of which have resulted in gross under-utilisation

of the manufacturing capacity for electrical equipment in the country.

The delays in project and order finalisation due to precarious financial health of state

distribution utilities, coupled with uncertainty and credit crunch and high borrowing

costs for private sector buyers, has led to this grim situation. The cash flow position

of equipment manufacturers is under tremendous pressure as it is facing

underutilization of capacities.

Indian electrical equipment manufacturing industry is facing a huge threat

from the new entrants in the market. These competitors are basically emerged in

Middle East and had occupied all over Asia and global markets. These competitors

are giving the cut throat competition to the Indian manufacturers. They are

technologically advanced and are successful in grabbing the orders from different

countries. Indian government itself is one among such customers to the Competitors.

The Government of India usually gives orders to Indian PSU’s for equipments used

in Defence, Shipping, Nuclear power plants and other core sector of the country i.e.

transmission and renewable energy . Nowadays Government is ignoring the Indian

Electrical Equipment Manufacturers, the main reason could be the lack of funds and

the new entrants can manufacture the same equipments for much cheaper costs in

less time. The country may face a huge set back because of one such mistake by

the Government. Due to the Sluggish demand and higher imports it has resulted in

the electrical equipment industry registering a negative growth of 8 per cent in FY13

The negative growth of this magnitude has been witnessed for the first time in the

last 10 years.

In FY12, the industry registered a growth of 6.6 per cent and was facing massive

project execution delays, mostly by the state-run transmission and distribution

companies and an unprecedented credit squeeze due to economic slowdown.

The electrical equipment manufacturing industry requires the focused attention of the

government to protect our interests by providing us a level playing field that would

equip the industry to fight imports.

Slackening demand in the power sector, continuous rise in imports of electrical

equipment, especially in China and South Korea and an absence of a level playing

field is threatening the existence of the Indian players.

Company Overview

Bharat Heavy Electricals Limited (BHEL) is an Indian state-owned

integrated power plant equipment manufacturer and operates as engineering and

manufacturing company based in New Delhi, India. BHEL was established in 1964,

ushering in the indigenous Heavy Electrical Equipment industry in India. The

company has been earning profits continuously since 1971-72 and paying dividends

since 1976-77.It is one of the only 7 mega Public Sector Undertakings (PSUs) of

India clubbed under the esteemed 'Maharatna' status. On 1 February 2013,

the Government of India granted Maharatna status to Bharat Heavy Electricals

Limited.

It is engaged in the design, engineering, manufacture, construction, testing,

commissioning and servicing of a wide range of products and services for the core

sectors of the economy, viz. Power, Transmission, Industry, Transportation,

Renewable Energy, Oil & Gas and Defence. It has 15 manufacturing divisions, two

repair units, four regional offices, eight service centres, eight overseas offices and 15

regional centres and currently operates at more than 150 project sites across India

and abroad. Most of its manufacturing units and other entities have been accredited

to Quality Management Systems (ISO 9001:2008), Environmental Management

Systems (ISO 14001:2004) and Occupational Health & Safety Management Systems

(OHSAS 18001:2007).

It is the 7th largest power equipment manufacturer in the world. In the year 2011, it

was ranked ninth most innovative company in the world by US business magazine

Forbes. BHEL is the only Indian Engineering company on the list, which contains

online retail firm Amazon at the second position with Apple and Google at fifth and

seventh positions, respectively. It is also placed at 4th place in Forbes Asia's

Fabulous 50 List of 2010.

BHEL has a share of 59% in India’s total installed generating capacity contributing

69% (approx.) to the total power generated from utility sets (excluding non-

conventional capacity) as of March 31, 2012. The company has been exporting its

power and industry segment products and services for over 40 years. BHEL’s global

references are spread across 75 countries. The cumulative overseas installed

capacity of BHEL manufactured power plants exceeds 9,000 MW across 21

countries including Malaysia, Oman, Iraq, the UAE, Bhutan, Egypt and New Zealand.

Its physical exports range from turnkey projects to after sales services.

The company's Corporate R&D division at Hyderabad leads BHEL's research efforts

in a number of areas of importance to its product range. Research and Product

Development (RPD) centres at all its manufacturing divisions play a complementary

role. BHEL has introduced, in the recent past, several state of the art products.

Commercialisation of products and systems developed by way of in-house Research

and Development contributed Rs.95, 120 Million corresponding to around 19.3% of

the company's total turnover in 2011-12. In 2011-12, BHEL filed 351 patents and

copyrights, enhancing the company's intellectual capital to 1,786 patents and

copyrights filed, which are in productive use in the company's business. The

company established four new Centres of Excellence, taking the total tally to 13.

Significantly, BHEL is one of the only four Indian companies and the only Indian

Public Sector Enterprise figuring in 'The Global Innovation 1000' of Booz & Co., a list

of 1,000 publicly traded companies which are the biggest spenders on R&D in the

world.

The company boasts of a dedicated team of highly skilled and committed workforce

of 49,390 employees.

BHEL works along a pre-determined CSR Scheme and its Mission Statement on

CSR is "Be a Committed Corporate Citizen, alive towards its Corporate Social

Responsibility". BHEL's contributions towards Corporate Social Responsibility till

date include adoption of villages, free medical camps/charitable dispensaries,

schools for the underprivileged and handicapped children, ban on child labour,

disaster/natural calamity aid, employment for the differently able, widow

resettlement, employment for ex-serviceman, irrigation using treated sewage,

pollution checking camps, plantation of millions of trees, energy saving and

conservation of natural resources through environmental management. As part of

social commitment, BHEL provides financial assistance to various

NGOs/Trusts/Social Welfare Societies that are engaged in social welfare activities

throughout the country. 56 villages having nearly 80,000 inhabitants have been

adopted. In June 2012, BHEL commissioned 250 MW power generating unit at

Harduaganj in Uttar Pradesh. This would add six million units of electricity on a daily

basis.

Vision:

A World-class engineering enterprise committed to enhancing stakeholder value.

Mission:

To be an multinational Engineering Enterprise providing Total business solutions

through quality products, systems and services in the fields of Energy,

Transportation, Industry, infrastructure and other potential areas.

Values:

Meeting communications made to external and internal customers.

Faster learning, creativity and speed of response.

Respect for dignity and potential of individuals.

Loyalty and pride in the company.

Zeal to Excel.

Integrity and fairness in all matters.

Major Achievements of BHEL

Acquired certifications for Quality Management Systems (ISO 9001),

Environmental Management Systems (ISO 14001) and Occupational Health &

Safety Management Systems (OHSAS 18001).

BHEL becomes the first PSU to win the CII-Exim Business Excellence Prize.

Installed equipment for over 90,000 MW of power generation.

Supplied over 2,25,000 MVA transformer capacity and other equipment

operating in Transmission & Distribution network up to 400 kV (AC & DC).

Supplied over 25,000 Motors with Drive Control System to Power projects,

Petrochemicals, Refineries, Steel, Aluminium, Fertilizer, Cement plants, etc.

Supplied Traction electrics and AC/DC locos to power over 12,000 km

Railway network. Supplied over one million Valves to Power Plants and other

Industries.

Space panels supplied for ISRO.

Supply of defence products.

Main manufacturing facilities

Bhopal (Madhya Pradesh)

Ranipur , Haridwar (Uttarakhand)

Hyderabad (Andhra Pradesh)

Jhansi (Uttar Pradesh)

Tiruchirapalli (Tamil Nadu)

Ranipet (Tamil Nadu)

Bangalore (Karnataka)

Jagdishpur (Uttar Pradesh)

Goindwal (Punjab)

Bharat Heavy Plates and Vessels Limited (Vizag)

ASSCP Gurgaon.

Besides these manufacturing units there are four power sectors which undertake

EPC contract from various customers. The Research and Development arm of BHEL

is situated in Hyderabad and two repair shops are at HERP (Heavy Equipment

Repair Plant), Varanasi and EMRP (Electric machines repair plant) Mumbai.

Products:

Steam turbine

Gas turbine

Steam Generators

HRSG- Heat recovery steam generator

Locomotives

Circuit Breakers

Pumps

Motors

Generators

ESP - Electrostatic precipitator

Pulverisers

Oil field equipments

Valves

Boiler drum

http://en.wikipedia.org/wiki/Valves

http://en.wikipedia.org/wiki/Pulveriser

http://en.wikipedia.org/wiki/Electrostatic_precipitator

http://en.wikipedia.org/wiki/Generator

http://en.wikipedia.org/wiki/Motors

http://en.wikipedia.org/wiki/Pump

http://en.wikipedia.org/wiki/Circuit_Breaker

http://en.wikipedia.org/wiki/Locomotive

http://en.wikipedia.org/wiki/HRSG

http://en.wikipedia.org/w/index.php?title=Steam_Generator&action=edit&redlink=1

http://en.wikipedia.org/wiki/Gas_turbine

http://en.wikipedia.org/wiki/Steam_turbine

http://en.wikipedia.org/wiki/Vizag

http://en.wikipedia.org/w/index.php?title=Bharat_Heavy_Plates_and_Vessels_Limited&action=edit&redlink=1

http://en.wikipedia.org/wiki/Punjab_(India)

http://en.wikipedia.org/wiki/Goindwal

http://en.wikipedia.org/wiki/Uttar_Pradesh

http://en.wikipedia.org/wiki/Jagdishpur

http://en.wikipedia.org/wiki/Karnataka

http://en.wikipedia.org/wiki/Bangalore

http://en.wikipedia.org/wiki/Tamil_Nadu

http://en.wikipedia.org/wiki/Ranipet

http://en.wikipedia.org/wiki/Tamil_Nadu

http://en.wikipedia.org/wiki/Tiruchirapalli

http://en.wikipedia.org/wiki/Uttar_Pradesh

http://en.wikipedia.org/wiki/Jhansi

http://en.wikipedia.org/wiki/Andhra_Pradesh

http://en.wikipedia.org/wiki/Hyderabad,_Andhra_Pradesh

http://en.wikipedia.org/wiki/Uttarakhand

http://en.wikipedia.org/wiki/Haridwar

http://en.wikipedia.org/wiki/Bharat_Heavy_Electrical_Limited,_Ranipur

http://en.wikipedia.org/wiki/Madhya_Pradesh

http://en.wikipedia.org/wiki/Bhopal

Headers

Economizer

Water wall panel

Super heater

Re-heaters

Heat exchangers

Pressure vessels

Armed recovery vehicle

Wind mill

Fan (mechanical)

Super rapid gun mount

Non-conventional energy – Solar

Hydro Turbine

Besides manufacturing these products, BHEL also takes up the onsite erection,

commissioning and testing of these equipments.

BHEL EDN (Bangalore)

BHEL Electronics Division (EDN) along with Electronic Systems Division situated

in Bangalore is a leading supplier of new Generation Power Plant Automation and

Control Systems. The Electronics Division has also emerged as a leading player in

the field of power transmission and distribution, industry, transportation and non-

conventional energy sources. The state of the art equipment and systems

manufactured, meet the demanding requirements of both the national and

International markets in terms of technical specification and quality.

The Division has established references both in India and overseas by successful

installation of Power Plant Automation and Photovoltaic systems. Besides providing

unified solutions for various control system applications, the Division proudly holds

the largest market share for Power Plant Automation systems in India.

http://en.wikipedia.org/wiki/Otobreda_76_mm

http://en.wikipedia.org/wiki/Fan_(mechanical)

http://en.wikipedia.org/wiki/Wind_mill

http://en.wikipedia.org/wiki/Heat_exchangers

Their Presence

Power Plant and Industries: Advanced control & automation equipment and

systems for power plants & process industries.

Transmission and Distribution: Providing solutions for improving the

efficiency, quality of power and system stability.

Transportation: IGBT based Traction Drive Systems for Locomotives.

Defence: Simulation systems and Controls for Naval Ships

Non-Conventional Energy: Photovoltaic Cells, Modules, MW size Power

Plants, Space Grade Solar Panels, Space Batteries and provide system level

solutions.

Product excellence, commitment to Quality, relentless efforts and unwavering

commitment to in-house solutions, along with Technical collaborations with

international leaders, strategic investment in new ultra modern facilities and capacity

expansion, have been the main factors for the rapid growth of the Division.

Certifications

ISO 9001: Quality systems and procedures

ISO 14001: Environment Management System Certification

OHSAS 18001: Occupational Health and Safety Assessment Series.

ISO 27001: Information Security Management System( ISMS) Standard.

BHEL EDN has the technical expertise to meet the stringent requirement of overseas

market and has successfully installed equipment meeting international standards, in

more than 40 countries across the globe.

THE Products manufactured at BHEL EDN includes

1.Automation and Control Systems

Steam Generator

Steam Turbine Controls

Boiler Feed Pump Drive Turbine Control

Station Control and Instrumentation / DCS

Offsite/ off base Controls/ Balance of plant Controls

Hydro Power Plant Control System.

Gas Turbine Control System

Nuclear Power Plant Turbine & Secondary Cycle Control System.

2. Power Electronics Systems

Excitation System

AC Drive System

Static Starters

Induction Heating Equipment

3. Transmission System Controls

4. Traction Drive Systems

5. Power Semiconductor Devices

6. Solar Photovoltaic

7. Defence Electronics.

8. Software System Solutions.

SWOT Analysis

STRENGTHS:

PSU, Brand name and well known for its Quality.

Well established units and skilled labour force.

Its innovation and integrity.

International certifications

The only company recognized in international market, with Apple and Google.

It is well known for its Quality and assurance

High operational efficiency.

All the units are controlled by the Head Office

A 0 debt company.

WEAKNESSES:

It is well known for its quality because of which the cost involved in manufacturing

goods are high, resulting in high pricing of goods.

As it is ISO certified organization, it has to strictly adhere to the rules and

regulation laid by the parliament

PSU, President is Supreme, his actions are final.

OPPORTUNITIES:

Global demand is high, its overseas operations has given more opportunities

to make their mark.

Exposure to new technology gives an opportunity for every individual to learn

something new.

Innovation is the key for success, the filing of new patents every year makes

them unique and explore further.

THREATS:

New competitors have entered the market.

The goods offered by them are much cheaper and they carry most advanced

technology

Increase is imports of goods by the Government.

Key Players in the MarketLarsen & Toubro Limited

L&T is an Indian multinational conglomerate with business interests in technology,

engineering, construction and manufacturing. It is one of the largest and most

respected companies in India's private sector with a turnover of US$ 13.5 billion in

2012. It has a dominant presence in India's infrastructure, power, hydrocarbon,

machinery, shipbuilding and railway sectors. In addition to this, L&T continues to

grow its global footprint, with offices and manufacturing facilities in multiple countries.

Its customers include global majors in over 30 countries.

Chart showing the Sales, Market capitalization and Net Profit of Key Players in

Electrical Equipment Manufacturing Industry.

Larsen BHEL ADANI PORTS SIEMENS0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

SalesMarket capitalNet Profit

From the above chart we can conclude that Bhel stands second in the Market in

terms of sales, Net Profit and Market Capitalization.

Chapter 2

INTRODUCTION TO THE PROJECT

INTRODUCTION TO THE PROJECT

Statement of ProblemAn Analysis of working capital management is undertaken to understand the

policy and practices used in managing short term requirements at BHEL EDN.

Because for a manufacturing Industry ,it is very important to manage their Working

Capital because, too much or too less Working Capital affects the company

drastically, as one process results in another, it is a cycle where if one component is

affected it results in changes in another components of working capital.

Background of the research topic:

Working capital management is the process of planning and controlling the

level and mix of current assets of the firm as well as financing these assets. Thus

this involves managing the relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital management is to ensure that the

firm is able to continue its operations and that it has sufficient cash flow to satisfy

both maturing short-term debt and upcoming operational expenses.

The dynamic business environment demands a framework for an efficient

working capital management system in order to be more competitive.

Finished goods

Trade debtors

CashSundry

Creditors

Raw Materials

Work In Progress

Every business concern aims at having adequate or optimal amount of working

capital to run its business operations. Both excess as well as shortage of working

capital situations are bad for any business. Too much of working capital means that

large sum of money is tied up in accounts receivable and inventory and inadequate

working capital can adversely affect the production and business operation, which is

more dangerous.

Review of literature in the Area of StudyMehmet Sen EDA ORUC 2005 19: In the study “Relationship between the efficiency

of working capital management and company size”, As it is known one of the

reasons which causes change in working capital from one period to another is the

change in management efficiency will affect the change in working capital in increase

or decrease from one period to another. In this study the effect of change in

management efficiency in working capital management in to the change in working

capital is compared by company size and the sector.

Dubey 2008: Working capital in a firm generally arises out of four basic factors

like sales volume, technological changes, seasonal, cyclical changes and policies of

the firm. The strength of the firm is dependent on the working capital but the in fact

the working capital itself is dependent on the level of sales volume of the firm. The

firm requires current assets to support and maintain operational and functional

operations.

Thachapilly 2009: “Working capital management manages flow of funds” 2009,

describes that Working capital is the cash needed to carry on operations during the

cash conversion cycle, i.e. the days from paying for raw materials to collecting cash

from customers. Raw materials and operating supplies must be bought and stored to

uninterrupted production. Wages, salaries, utility charges and incidentals must be

paid for converting the materials into finished goods. Customers should be allowed a

credit period that is standard in the business. Only at the end of the cycle does cash

flow in again.

Working Capital Financing at BHEL-EDN:BHEL-EDN uses external sources for financing its working capital.

External sources:

a) Trade credit: The major external source of working capital financing at BHEL-

EDN is trade credit. Approximate 30% of the financing is done using trade

credit. This always has been a popular source because the company has

always proved it creditworthiness.

b) Advances: generally 10% of the order value is taken as advance from the

customer which work as good pool of financing working capital. It is used to

purchase raw materials and also utilized for other operating expenses.

It is to be noted BHEL being a very cash rich company it is not dependent on any

kind of bank financing or government assistance for financing of its working capital.

The working capital requirement is financed by the corporate office.

Analysis of the current policies related to management of individual

component of working capital

Handling Receivables:

Handling receivables can result in a better cash position and liquidity for the firm and

is truer in case of big organizations like one under study i.e. BHEL electronics

division, who can least afford a slow payment from the debtors, which may have a

crippling effect on the business.

This has been rightly said that if you don't manage debtors, they will begin to

manage your business as the company will gradually lose control due to reduced

cash flow and, of course, could experience an increased incidence of bad debt.

An analysis of the existing policy of BHEL-EDN related to receivables management

reveals some important points that need to be considered for effective management

of receivables; these are

a) Credit policy:- BHEL- EDN has a liberal credit policy which tend to push

turnover and attract more customers. But this is accompanied by higher

incidence of bad debt, very large investment in accounts receivable.

b) Credit period: The credit period is 6 months or more. In case of Govt. SEbS and

NTPC the credit period has even been years where due to liquidity crunch of this

companies it was not possible to recover the amount. Being a PSU BHEL

continues to work with these companies even if it has lead a lot current asset to

be blocked in Accounts Receivable.

c) Cash discount: As the collection is centralized cash discount is also provided by

the corporate office to motivate debtors to make prompt payment. But no cash

discount is provided by BHEL-EDN since turnkey contracts form major portion of

the turnover.

d) Collection: BHEL works on the basis of turnkey contracts, so as all units fulfill

the required job, no recovery is debt possible, so most of the time BHEL-EDN

has to wait a longer period of time to recover the debt.

Managing Payables:

Creditors are a vital part of effective cash management and should be managed

carefully to enhance the cash position. Management of creditors and suppliers is just

as important as the management of debtors as it has been pointed out that if you

can buy well then you can sell well, but BHEL does not produce standardized

products and the vendors are also customer approved.

Some of the important points related to creditor’s management are as follows:

Purchase of raw material is done using e-tendering and reverse auction basis.

The purchasing function is handled separately for the separate plants and

divisions of the company.

For some of the major items of raw material, company is dependent on a few

numbers of the suppliers because of the non availability of the local suppliers of

the material.

Sometimes purchases happen in anticipation of the demand or order and due to

some or the other reasons if the order gets delayed or cancelled, it results in carrying

of excess inventory, costing opportunity and carrying cost for the company apart

from material purchase cost.

Inventory Management:

Managing inventory is a juggling act. On the one hand excessive stocks can place a

heavy burden on the cash resources of a business while on the other hand the

insufficient stocks can result in lost sales, delays for customers etc. thus the basic

challenge is to determine the optimum stock level.

Estimation: The requirement of raw material is estimated on the basis of each

order, so the estimation is more order specific than time specific. Estimation is also

done for any anticipated order and inventory is acquired if there is a chance of hike

in the material price.

Acquisition: Inventory is acquired using e-tendering or reverse acquisition method

to get the best available price. In several occasion the price is fixed with the supplier

but the order is received on a later date which helps to reduce the carrying cost.

Inventory management technique: The inventory management technique used

here is FSND where the stocks are segregated on the basis of their movement

speed.

Inventory Valuation: The valuation of inventory holds a very important part of

inventory management.

Inventory is valued at actual/estimated cost or net realizable value whichever

is lower

Finished goods in Plant and WIP involving hydro and thermal sets including

gas based power plants, boilers; boiler auxiliaries, compressor and industrial

turbo set are valued at actual/estimated factory cost or 97.5% of the realizable

value, whichever is lower.

The raw materials, components, loose tools, stores and spares are issued at

weighted average cost.

The components and other materials purchased/ manufactured against

production orders but declared surplus are charged off to revenue residual

value based on technical assessment.

Levels of inventory – Minimum, maximum, re-ordering level-MOQ levels of

suppliers force hoarding of inventory.-customer approved vendors.

Bunching of requirements for raw material amongst bhel units- non

customized orders.

Sourcing from sister units helps in better utilization, better costs, and better

delivery.

Development of ancillaries

In – house development and commercialization

Cash Management:

Cash the most liquid asset, is of vital importance to the daily operation of business

operations Even though the proportion of cash help in BHEL-EDN is

approximately.005%, its efficient management is crucial

Budgeting: There are two types of budgeting or forecasting is done, both short term

and long term forecasting. The long term forecasting is done for period ranging from

1 to 3 years but short term forecasting is done on monthly, weekly and daily basis.

The daily forecasting is sent to the corporate office and the corporate office finances

the requirement on daily basis. So every day the work starts with a zero balance in

hand. The daily forecasting deals with day to day operational requirement but

requirement for any capital expenditure has to be sanctioned by the corporate office.

Method of forecasting: The daily expenditures are taken into consideration for cash

forecasting. As for examples:

Particulars Period

1. Materials --------

2. Payment of accounts payable(if any) ---------

3. Miscellaneous cash purchase ---------

4. Employee remuneration ----------

5.Manufacturing Expenses ----------

6.General, Administrative and selling

expenses

---------

7.Tax ---------

Total ---------

Cash collection: Cash collection from debtors is done mostly at the head office and it

is allocated, but in several occasion the amount is also collected at BHEL-EDN.

Working Capital Management Practices:Debtors:

The main business is in power sector. Orders are obtained by the Head quarters

and distributed to the units. Units manufacture and supplies to the customer. Billing

is done by the units/head quarters based on the agreement between the customer

and unit like advances, payable on dispatches, payable against material receipt at

site, against commissioning etc. Normally advances, and commissioning are done by

the head quarters for the project as a whole and for the others it is the units

responsibility to bill and collect the same.

Cash management:

The cash is maintained centrally. All the deposits are accumulated and transferred to

the Corporate Office and the end of the day. Hence there is no opening or closing of

Balance in the units. In the same was funds are allocated to the units based on

requirements and only memorandum accounts are maintained. The Cheques issued

are debited to the Corp Bank at the end of the day. By this the cash operations are

fully controlled by the corporate office and outflow is controlled by allocation to the

needs. All the payments except very few are through NEFT/RTGS only.

Inventory management:

The unit is in ERP (SAP) system. Production orders are floated for manufacturing.

This in turn triggers the MRP and the requirements are consolidated and indents are

generated taking into account the stock, POs placed etc. The Purchase orders are

placed with staggered delivery so that the inventory is kept the minimum. All the

purchased are backed by orders and as per the internal system, no procurement can

be made without the customer order. Non-moving and slow moving stocks are

analyzed and action has been taken to liquidate them.

Inventory can be classified as

Raw Materials : Raw materials are procured by the Materials Management

Department , basically, the MM dept has been classified into two groups

Indigenous and imports, Indigenous group is engaged in procurement of raw

materials through local suppliers and import group buys raw materials from

international suppliers. BHEL’S imports 45% raw materials and 55 % are from

local suppliers.

Work- in- progress: WIP is a long cycle activity were in the goods are held,

the Company’s projects are for long term and so does the goods held in WIP .

Finished Goods: Finished goods are delivered to the customer on time,

incase if they complete the project before the time, it will be stored in the

warehouse and shown as sales in the balance sheet.

Sundry Creditors:

Once the goods are accepted by the stores after Quality inspection, sundry creditors

are generated and they are linked with the vendor invoices and queues for payment.

Payments are made as per the due date and as per the queue except for MSME

vendors.

CHAPTER-3

DESIGN OF THE STUDY

Objectives of the studyThe study is conducted with reference to BHEL [EDN]. The main objective of the

study is to have an idea of the practical application of the working capital

management whose theoretical aspect is known.

To determine the managerial aspects of working capital in BHEL-EDN.

To understand how efficiently the working capital is being managed in BHEL-

EDN.

To understand the short-term solvency as well as the effectiveness of working

capital in the operation of business.

To study the policies and the procedures adopted by BHEL-EDN for

managing the various components of working capital.

To comprehensively evaluate the inventory, receivables, creditors and cash

Management performances.

To undertake a study of the various sources of working capital financing,

employed by BHEL-EDN.

To suggest on the basis of findings, improvements in the management of

working capital, at BHEL-EDN.

OPERATIONAL DEFINITIONS OF THE CONCEPTS IN THE AREA OF STUDY:

Definitions:

According to Western and Brigham, “Working capital refers to a firm’s investment in

short term assets- cash, short term securities, accounts receivables and inventories”.

According to Hoagland, “working capital is descriptive of that capital which is not

fixed. But the more common use of the working capital is to consider it as the

difference between the book value of the current assets and the current liability.

Types of Working capital

There are two concepts that are currently accepted about working capital. They are

a) Gross working capital concept=Total of current assets

b) Net working capital concept=Excess of current assets over current liabilities

Gross working capital concept:

This thought says that total investment in current assets is the working capital

of the company. This concept does not consider current liabilities at all.

Reasons given for the concept is

1) When we consider fixed capital as the amount invested in fixed assets. Then

the amount invested in current assets should be considered as working

capital.

TYPES OF WORKING CAPITAL

ON THE BASIS OF CONCEPT

GROSS WORKING CAPITAL

NET WORKING CAPITAL

2) Current asset whatever may be the sources of acquisition, are used in

activities related to day to day operations and their forms keep on changing.

Therefore they should be considered as working capital.

Net working capital

It is narrow concept of working capital and according to this, the excess of

current assets over current liabilities is called as working capital. This concept lays

emphasis on qualitative aspect, which indicates the liquidity position of the

concern/enterprise.

The reasons for the net working capital method are:

1) THE material thing in the long fun is the surplus of current assets over current

liability

2) Financial health can easily be judged by with this concept particularly from the

view point of creditors and investors.

3) Excess of current assets over current liabilities represents’ the amount which

is not liable to be returned and which can be relied upon to meet any

contingency.

4) Intercompany comparison of financial position may be correctly done

particularly when both the companies have the same amount of current

assets.

Components of Working Capital:

Current Assets Current Liabilities

Cash in hand/bank

Bills receivable

Sundry Debtors

Prepaid expenses

Short term investment

Inventory

Accrued Income

Bank overdraft

Bills Payable

Sundry Creditors

Outstanding Expenses

Advance Taken

2. On the basis of Time:

On the basis of Time the working capital may be divided in to

A) Permanent or Fixed working capital

B) Variable or Temporary working capital

(A)Permanent or Fixed Working Capital:

It represents that part of capital which is permanently locked up in the current

assets and carrying out business smoothly. It is permanent in nature and will

increase as the size of business expands. In other words current assets required on

a continuing basis over the entire year are permanent working capital.

Permanent working capital can be further divided into:

a) Regular Working Capital

b) Reserve Working Capital

a)Regular Working Capital:

It is the minimum amount of liquid capital needed to keep up the circulation of

the capital form cash to inventories to receivables and again to cash. This would

include sufficient minimum bank balance to discount all bills, maintain adequate

supply of raw materials etc...

b) Reserve Working Capital:

It is the excess over the needs or regular working capital that should be kept

in reserve for contingencies that may arise at any time these contingencies include

rising prices business depression strikes special operations such as experiments

with new products.

(B)Variable or Temporary Working Capital:

Variable Working Capital changes with the increase or decrease in the

volume of business.

It may be sub-divided into.

1. Seasonal Working Capital

2. Special Working Capital

The working capital required to meet the seasonal needs of the industry is known as

seasonal working capital.

Special working capital is that part of the variable working capital with is

required to finance the special operations such as extensive marketing campaigns

experiments with the products or methods of production carry of special job etc.

Determinants of working capital:

1. Nature and Size of Business

2. Manufacturing cycle

3. Business fluctuation

4. Production policy

5. Firm’s credit policy

6. Availability credit

7. Growth of expansion

8. Profit margin and profit

appropriation

9. Price level Changes

10.Operating of efficiency

11.Cash requirements

12.Time

13.Volume of sales

14.Terms of purchases and sales

15. Inventory turnover

16. Inflation

17.Seasonal fluctuations

18.Re payment ability

19.Actives of firm

20.Demand of creditors

Advantage of adequate working capital:

Disadvantage of inadequate or Excess working capital

Working Capital Management:-

ADVANTAGE OF

ADEQUATE WORKING CAPITAL

SOLVENCY

OF BUSINESS

CONSTANT SUPPLY

OFRAW

MATERIAS

REGULARPAYMENT

OF EXPENSES

ABILITY TO FACECRISIS

REGULAR RETURN

ON INVEST- MENT

DISADVANTAGES

EXCESS WORKING CAPITAL

LOW RATE OF RETURN

LOSS OF GOODWILL

DECLINE IN EFFICIENCY

POOR TURNOVER RATIO

EVIL OF OVERCAPITALISATION

INADEQUATE WORKING CAPITAL

LOSS OF CREDITWORTINESS

UNABLE TO USE OPPORTUNITIES

ADVERSE EFFECT ON CREDIT OPPORTUNITIES

OPERATIONAL EFFICIENCY

EFFECT ON FINANCIAL CAPACITY

NON ACHIEVEMENT OF PROFIT TARGET

Working capital management is the process of planning and controlling the level and

mix of current assets of the firm as well as financing these assets. Thus this involves

managing the relationship between a firm's short-term assets and its short-term

liabilities. The goal of working capital management is to ensure that the firm is able

to continue its operations and that it has sufficient cash flow to satisfy both

maturing short-term debt and upcoming operational expenses.

Why Working Capital Management?

The dynamic business environment demands a framework for an efficient working

capital management system in order to be more competitive.

Every business concern aims at having adequate or optimal amount of working

capital to run its business operations. Both excess as well as shortage of working

capital situations are bad for any business. Too much of working capital means that

large sum of money is tied up in accounts receivable and inventory and inadequate

working capital can adversely affect the production and business operation, which is

more dangerous.

Thus the working capital management is required to maintain an optimal working

capital with a proper risk and return trade off.

This principle is based on the following assumptions: -

1. There is direct relationship between risk and profitability -- Higher is the risk,

higher is the profitability, while lower is the risk, lower is the profitability.

2. Current assets are less profitable than fixed assets.

3. Short-term funds are less expensive than long-term funds.

Working capital meets the short term financial requirement of a business enterprise

and ensures flow of fund in the business which is very necessary to maintain

business same as the circulation of blood in human body. Poor financial planning or

working capital management on the part of any company can lead to the business

failure. An active working capital management is an extremely effective way to

increase enterprise value by continuously improving cash flow, reducing inventory &

resulting capital costs, without sacrificing the business of the company.

Now need is for an integrated roadmap to better working capital management- one

that shortens the cash conversion cycle and minimizes capital lockup, which can

help the organization to face any favourable and unfavourable economic situation.

A successful business functions like an olive tree. Olive trees are remarkable for

their survival skills. Deeply rooted in Greek history, their branches crowned the

heads of the first Olympic champions. Their longevity is a case study in adaptability-

they require little water and easily uprooted and replanted. Like the olive tree, a

business must weather the elements of any economic climate. Companies must

adjust to macro business factors- economic activity, interest rates, stock market

valuations, and regulatory changes- over which they have little control. Working

capital performance is fundamental to a company’s ability to adapt in a

challenging economy, because it is both independent of macroeconomic factors

and firmly within an organization’s control. Reducing working capital fuels success by

enhancing economic value added, regardless of environmental changes. Thus

working capital optimization is a vital component of corporate strategy.

Active working capital management is an extremely effective way to increase

enterprise value. Optimizing working capital results in a rapid release of liquid

resources and contributes to an improvement in free cash flow and to a

permanent reduction in inventory and capital costs. In an average company,

decreasing working capital by 30% leads to approx. 16% increase in after-tax

returns on invested capital.

A reduction of time span during which capital is tied up releases liquidity, has a direct

impact on the company’s financial position. However return on capital will also

increase, balance sheet structures will get optimized and company financial

will get improved

Dimensions of Working Capital Management-:

1. Estimating Investment in Working Capital

2. Financing of Working Capital

3. Managing Profitability, Risk & Liquidity

Techniques used to forecast the working capital requirement:

There are basically 3 approaches used to forecast the working capital requirement.

1. Estimation of components of working capital method.

This method is based on the basic definition of working capital, excess of current

assets over the current liabilities. In other worked the amount of different constituent

of the working capital such as debtors, cash inventories, creditors etc are estimated

separately and the total amount of working capital requirement is worked out

accordingly.

2. Percent sales method

This is the most simple and widely used method in combination with other scientific

methods. According to this method a ratio is determined for estimating the future

working capital requirement. This is generally based on the past experience of

management as the ratio varies from industry to industry. For example if the past

experience shows that the amount of working capital has been 20% of sales and

projected amount of sales for the next year is Rs. 10 lakhs, the required amount of

working capital shall be Rs. 2 lakhs.

As seen from above the above method is merely an estimation based on past

experience. Their fore a lot depends on the efficiency of decision maker, which may

not be correct in all circumstances. This method assumes a linear relationship of

working capital and sales, however the relationship can also be curvilinear.

3. Operating cycle approach

The need of working capital arises mainly because of them gap between the

production of goods and their actual realization after sales. This gap is technically

referred as the “operating cycle” or the “cash cycle” of the business. If it were

possible to complete the entire job instantaneously, there would be no need for

current asset (working capital). Since it is not possible, every business organization

is forced to have current asset and hence operating cycle.

Operating cycle and cash cycle are two important components of working capital

management. Together they determine the efficiency of a firm regarding working

capital management.

Operating cycle:

Operating cycle refers to the delay between the buying of raw materials and the

receipt of cash from sales proceeds. In other words, operating cycle refers to the

number of days taken for the conversion of cash to inventory through the conversion

of accounts receivable to cash. It indicates towards the time period for which cash is

engaged in inventory and accounts receivable. If an operating cycle is long, then

there is lower accessibility to cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements:

Accounts Payable, Cash, Accounts Receivables, and Inventory Replacement.

The following formula is used for calculating operating cycle

Operating cycle = age of inventory + collection period

Cash cycle:

It is also termed as net operating cycle, asset conversion cycle, working capital cycle

or cash conversion cycle.

Cash cycle is implemented in the financial assessment of a commercial enterprise.

The more the figure is increased, the higher is the period for which the cash of a

commercial entity is engaged in commercial activities and is inaccessible for other

functions, for instance investments. The cash cycle is interpreted as the number of

days between the payment for inputs and getting cash by sales of commodities

manufactured from that input.

The fundamental formula that is applied for the calculation of cash conversion cycle

is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Period) –

(Average Payables Period) or Operating cycle – Average Payable Period

Here

Average Receivables Period (in days) = Accounts Receivable/Average Daily

Average Stockholding Period (in days) = Closing Stock/Average Daily

Average Payable Period (in days) = Accounts Payable/Average Daily Credit

Purchases

A short cash cycle reflects sound management of working capital. On the other

hand, a long cash cycle denotes that capital is occupied when the commercial entity

is expecting its clients to make payments.

There is always a probability that a commercial enterprise can face negative cash

conversion cycle, in which case they are getting payments from the clients before

any payment is made to the suppliers. Instances of such business entities are

commonly those companies, which apply JIT or Just in Time techniques, for example

Dell, as well as commercial enterprises, which purchase on terms and conditions of

longer duration credits and perform sales against cash, for instance Tesco.

The more the manufacturing procedure is extended, the higher the amount of cash

should be kept engaged in inventories by the company. Likewise, the more time is

taken for the clients for the purpose of bill payment, the more is the accounts

receivable amount. From another viewpoint, if a company is able to detain the

payment for its internal inputs, it can decrease the amount of money required. Put

differently, the net working capital is diminished by accounts payable.

RESEARCH METHODOLOGY

Scope of the study: The scope of this project work is confined to the Working Capital

Management Practices at BHEL- EDN Division, the study has been taken to learn in

detail the policies and strategies used in maintaining working capital at BHEL EDN,

Bangalore.

Research Design In view of the objective of the study listed above, a descriptive research

design has been adopted. The Data is collected by using 2 sources.

Sources of Data:

There are two sources of collecting data (of both financial and non-financial

in nature).

1) Primary Data

2) Secondary Data

Primary Data:

The primary data was collected by visiting the Organization and by holding

informal discussions with various department heads. Information pertaining to

receivables, cash, inventory and creditors as collected from the respective

departments in the unit. The following departments provided the details.

Finance Department

Materials Management Department

Public Relations.

Secondary Data:

Secondary Data was collected from the following sources

Annual report

Journals and books

Research articles

Websites

Public relations Department

Plan of Analysis

The data is collected and analyzed and interpreted with the help of ratios

related to working capital. Tables and graphs are prepared to compare the performance

of the company from one year to another.

Ratio Analysis- Focuses on working capital policy, working capital structure and other

relevant information.

Limitation of the Study1. Time restriction was only two months of project work in the organization.

2. The finding and suggestion cannot be generalized.

3. The study covered a wide concept hence wide collection and coverage of

information was not easily possible.

4. The companies which are taken for the purpose of comparison may or

may not follow the same accounting policies, which BHEL follows; BHEL

itself changes its Auditors once in every 4 years.

5. The study is just for 4 years.

6. Working Capital Management analysis are not the only measures in order

to analyze the performance of the company.

Chapter 4

Analysis and Interpretation

Analysis and Interpretation

The analysis for the Working Capital Management of the BHEL-EDN is done by

using the following methods.

Ratio analysis is a powerful tool available to analyze the present efficiency of working capital.

Ratio analysis involves calculation and interpretation of ratios, which is the relationship between two variables and these variables need to have a logical relationship to each other.

There are two approaches used to analyze the ratios-

Time series and/or cross sectional approach Time series analysis is concerned with the behaviour of a given ratio over time. This is also called intrafirm or trend analysis. This approach is adopted to find out systematic pattern in the historic behaviour of series that can be used for prediction purposes. This approach is of immense use in evaluating past performance.

Cross sectional analysis is concerned with comparing the investigated ratios with certain norms as in a representative firm or an industry average.

Ratio analysis can be used by management as a tool to verify the level and composition of working capital held by management in the business as against its operations, the extent of liquidity present in its asset structure as well as financial structure and the efficiency with which working capital is being used in the business. In other words, management can employ ratios to analyze three facts of working capital management, namely, efficiency, liquidity and its structural health.

WORKING CAPITAL MANAGEMENT (Amount in lakh Rs)

PARTICULARS 2008-09 2009-10 2010-11 2011-12

CURRENT ASSETS,LOANS

AND ADVANCES

Inventories 25254.77 26352.16 26620.90 37893.73

Sundry Debtors 70663.70 84873.88 85470.85 111551.58

Cash and Bank 12.02 20.36 269.87 373.33

Other Current Assets

Loans and Advances 3939.97 6299.35 4989.72 4383.82

Total Current Assets 99870.46 117545.7

5

117351.34 154202.46

CURRENT LIABILITIES

AND PROVISIONS

Current Liabilities 79897.17 96299.68 91280.98 95044.32

Provisions 21567.20 14888.70

Total Current Liabilities 101464.37 111188.3

8

91280.98 95044.32

Net Current Assets

(working capital)

(1593.91) 6357.37 26070.36 59158.14

(1) Gross Working Capital: - it refers to the firm’s investment in current assets.

(Amount in lakh Rs)

Particulars 2008-09 2009-10 2010-11 2011-12

Gross Working Capital 99870.46 117545.75 117351.34 154202.46

2008-09 2009-10 2010-11 2011-120

20000

40000

60000

80000

100000

120000

140000

160000

180000

Gross Working Capital

Gross Working Capital

The GROSS WORKING CAPITAL determines the firm’s investment in current

assets, here in the graph, we can see that, there is an increasing trend in GWC, this

is due to huge investments in inventory, as they got huge orders till the year

2011-12, Debtors also form a major reason for investment in Current assets, the

major customers to BHEL are government entity, so slow in payments results in

more investments in Gross Working Capital.

(2) Net Working Capital: It refers to the excess of current assets over current assets

over current liabilities.

Net working capital= Current Assets- Current Liabilities

Particulars 2008-09 2009-10 2010-11 2011-12

Net working capital (1593.91) 6357.37 26070.36 59158.14

2008-09 2009-10 2010-11 2011-12-10000

0

10000

20000

30000

40000

50000

60000

70000

Net working capital

Net working capital

The Net Working Capital Determines the Firm’s ability to pay off its current

obligations, the year 2008-09 the company had negative WC, and after that

there is an increasing trend in the NWC, in the year 2011-12 the Firm has

highest NWC, this is because the company had high profits and there liquidity

position was high.

(3) Inventory Turnover Ratio: This ratio establishes the relationship between the cost

of goods sold during a given period and the average stock holding during that

period. It indicates the operational and marketing efficiency. It helps in evaluating

inventory policy to avoid overstocking.

Inventory Turnover Ratio = Sales

Average inventory

Particulars 2008-09 2009-10 2010-11 2011-12

Sales 126267.8 145607.14 198388.5 226787.22

Average Inventory 20528.34 25803.47 26486.53 26486.53

Inventory turnover ratio 6.1 5.6 7.4 8.5

2008-09 2009-10 2010-11 2011-120

1

2

3

4

5

6

7

8

9

Inventory turnover ratio

Inventory turnover ratio

Inventory Turnover Ratio measures company's efficiency in turning its inventory into

sales. Its purpose is to measure the liquidity of the inventory. From the graph we can

see that the inventory turnover ratio is high in 2008-09 but in the year 2009-10 its

comedown, the reason could be, less orders which impacts in less inventory, from

2010-11 to 2011-12, there is an increase which determines the firm has got more

orders. Bhel policy is that, they start procuring inventory only once they get orders

and only then they stock raw materials, the raw materials in store is only 20% and

rest will be procured once they get orders. So the high inventory turnover determines

the operating efficiency of the company.

(4) Working Capital Turnover Ratio: indicates the velocity of the utilization of

net working capital.

This ratio represents the number of times the working capital is turned over in the

course of year and is calculated as follows

Working Capital Turnover Ratio= Sales

Net working capital

Particulars 2008-09 2009-10 2010-11 2011-12

Sales 126267.8 145607.14 198388.5 226787.22

Net Working Capital (1593.91) 6357.37 26070.36 59158.14

WC turnover Ratio -79.21 22.90 7.6 3.8

2008-09 2009-10 2010-11 2011-12

-100

-80

-60

-40

-20

0

20

40

WC turnover Ratio

WC turnover Ratio

The working capital turnover ratio is negative in the year 2008-09 this is due

to negative net working capital. It indicates that the firm had insufficient

working capital. On the other hand the ratio increased to positive in the next

year due to positive working capital. It indicates that there is efficient utilization

of working capital. There by in the following years, it has seen the decreasing

amount of working capital turnover every year, it shows that the sales has

increased thereby, increase in net working capital.

(5) Current Assets Turnover Ratio: This ratio indicates the efficiency with which

current assets turns into sales.

Current assets turnover ratio= Sales

Current assets

Particulars 2008-09 2009-10 2010-11 2011-12

Sales 126267.8 145607.14 198388.5 226787.22

Current Assets 99870.46 117545.75 117351.3 154202.46

Current asset

turnover ratio

1.26 1.23 1.69 1.47

2008-09 2009-10 2010-11 2011-120

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Current asset turnover ratio

Current asset turnover ratio

This ratio indicates, the extent to which current assets are utilized in

generating revenue to the company, from the graph we can see that there

was moderate ratio in the year 2008-2010 but there has been an increase in

the year 2011-12, this is due to high sales and so does the ratio went up, and

in the year 2011-12 the current assets has come down, resulting in less

current asset turnover ratio.

(6) Current Ratio: It gives the relationship between current assets and current

liabilities and indicates the extent to which short-term creditors are safe in terms

of liquidity of the current assets.

Higher the value of current ratio, more liquid the firm is and more ability it has

to pay its bills but a very high ratio also indicates slackness of management

practices and excessive holding of current assets.

Particulars 2008-09 2009-10 2010-11 2011-12

Total Current Assets 99870.46 117545.75 117351.3 154202.46

Total Current Liabilities101464.4 111188.38 91280.98 95044.32

Current Ratio0.98 1.05 1.28 1.62

2008-09 2009-10 2010-11 2011-120

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Current Ratio

Current Ratio

The ideal current ratio is considered to be 2:1.From the above table it is observed

that the ratios from 2008 to 2012 are .98, 1.05, 1.28 and 1.62 which signifies that the

company maintains a proper level of current assets as compared to the current

liabilities. This indicates that the firm is liquid and has the ability to pay its current

obligations in time as and when they are come due. Again the amount of current

asset is such efficiently maintained so that not huge amount of investment is blocked

in Current Asset, but there is a requirement to increase the current asset or decrease

the liability to maintain the current ratio at a satisfactory level. Moreover, the

organization itself is so well managed; it knows the future outlook to invest in current

assets.

(7) Quick Ratio: It expresses the relationship between quick assets and current

liabilities. It is more refined rule to measure the liquidity in an organization. It

represents the ability of the company to pay its debts without relying on the sale

of its inventories.

Quick ratio= Quick Assets

Current Liabilities

Particulars 2008-09 2009-10 2010-11 2011-12

Quick Assets 74615.69 91193.59 90730.44 116308.73

Total Current Liabilities 111188.38 91280.98 95044.32

Quick Ratio 0.73 0.82 0.99 1.22

2008-09 2009-10 2010-11 2011-120

0.2

0.4

0.6

0.8

1

1.2

1.4

Quick Ratio

Quick Ratio

The ideal ratio of quick assets is 1:1. But the firm’s Quick ratio is ranging from .73 to

1.22 i.e., from the year 2008-2012. The firm does not pay off the debts based on the

sales, because all the projects undertaken are long term and its conversion period

ranges to 3-4 years, so it is difficult to rely on sales. So they mostly depend on

corporate head office to finance from the advances taken from the customers.

(8) Cash Ratio/Super Quick Ratio: Since Cash is the most liquid asset a financial

analyst may examine cash ratio and its equivalent to current liabilities. Trade

investors or marketable securities are equivalent of cash; therefore they may be

included in the computation of cash ratio.

Particulars 2008-09 2009-10 2010-11 2011-12

Cash 12.02 20.36 269.87 373.33

Total Current

Liabilities

101464.4 111188.38 91280.98 95044.32

Lack of immediate cash may not matter because it can stretch its payments or

borrow money at short notice. If there is immediate requirement of cash, it has to be

brought to the notice of Head office and in turn they sanction the cash amount.

Since BHEL has centralized cash management system, this ratio for a single division

(BHEL-EDN) may not be of much relevance.

(9) Break up of Individual current Asset as a % of Total current assets

Particulars 2008-09 2009-10 2010-11 2011-12

Inventories 25.28% 22.42% 22.68% 24.57%

Sundry Debtors 70.75% 72.2% 72.83% 72.34%

Cash & Bank

balance

0.012% 0.017% 0.23% 0.24

Loans &

Advances

3.95% 5.36% 4.25% 2.84%

From the above table we can see that the high percentage of current assets in

occupied by Debtors, and second highest is by Inventories, as the company is PSU’s

the customers are mostly Government entity and they are very slow and lazy in

clearing the bills. The major customers are NTPC, Indian Defence, etc. inventories

carry a normal % its increase and decrease depends on the number of orders you

get.

(10) Debtors Turnover Ratio: this ratio shows the relationship between credit sales

and average debtors of a firm. It indicates the speed with which debtors are being

collected. The higher the turnover ratio, shorter the average collection period and

the better is the trade credit management and the liquidity of the debtors and vice

versa.

Debtors turnover ratio = Credit Sales

Average Debtors

Particulars 2008-09 2009-10 2010-11 2011-12

Credit Sales 126267.8 145607.14 198388.5 226787.22

Average Debtors 61490.9 77768.79 85172.37 98511.22

Debtors turnover Ratio 2.05 1.87 2.33 2.3

2008-09 2009-10 2010-11 2011-120

0.5

1

1.5

2

2.5

Debtors turnover Ratio

Debtors turnover Ratio

The above graph shows Debtor Turnover Ratio, this indicates that there is

less DTR; this determines that the firm is inefficient in collecting bills. This is

due to maintain the customers and provide more credit in terms of days.

Because customers are mostly Government, State utility undertaking, who

mostly delay their payments. This is also a measure to attract and keep

customers loyalty.

(11) Creditors Turnover Ratio: this ratio establishes the relationship between credit

purchases and the average amount of creditors outstanding during the year. A

low turnover ratio reflects liberal credit terms given by the suppliers, while high

ratio shows the accounts are to be settled rapidly. This ratio is very important tool

for analysis as a firm can reduce its requirement of current assets by relying on

supplier’s credit.

.

Creditors Turnover Ratio = Purchases

Average Creditors

Particulars 2008-09 2009-10 2010-11 2011-12

Purchases 56400.29 57239.83 50075.85 92934,69

Average Creditors 19815.98 20919.66 27153.55 37073.28

Creditors

Turnover Ratio

2.85 2.74 1.84 2.51

2008-09 2009-10 2010-11 2011-120

0.5

1

1.5

2

2.5

3

Creditors Turnover Ratio

Creditors Turnover Ratio

The creditor’s turnover ratio is the highest in the year 2008-09 due to increase in

purchases. It signifies the credit worthiness of the company. The creditors are being

paid promptly. Whereas it is the lowest in the year 2010-11, which is caused by the

less credit purchase it signifies that the company is not taking full advantage of the

credit facilities provided by the creditors. Also the average creditors are decreased in

the year 2011-12, this is because the company has purchased more amount of raw

materials due to increase in orders inflow.

(12) Current Assets to Total Assets Ratio: this ratio helps in determining the

investment policy adopted by the company. If the level of current assets

increases in proportion to the total assets of the firm, the management is said to

be more conservative in managing the current assets of the firm. On the other

hand lower ratio indicates highly aggressive policy this ratio helps in determining

the investment policy adopted by the company. If the level of current assets

increases in proportion to the total assets of the firm, the management is said to

be more conservative in managing the current assets of the firm. On the other

hand lower ratio indicates highly aggressive policy.

Particulars 2008-09 2009-10 2010-11 2011-12

Current Assets 99870.46 117545.75 117351.3 154202.46

Total Assets 146083.8 174024.02 347150 409299.99

Current Assets to

Total Assets

0.68 0.67 0.34 0.38

2008-09 2009-10 2010-11 2011-120

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Current Assets to Total Assets

Current Assets to Total Assets

The ratio has been decreased from 0.68 in 2008-09 to 0.38 in 2011-12. It shows that

the company does not hold current assets to meet the immediate demand. This is

true because as per the company, the orders are long term and there is sufficient

time to make preparations to meet the demand.

(13) Raw Material holding period: This ratio states that how much time (in terms of

days) raw materials have to spent in stores before sending to the production

department for work-in-progress.

Raw material holding period= Average stock of raw materials*365

Raw materials consumed

Particulars 2008-09 2009-10 2010-11 2011-12

Raw material

consumed

46947.42 56142.44 65083.68 91803.02

Average stock

of raw materials

20528.34 25803.47 26486.53 32257.32

Raw material

holding period

160 168 148 128

2008-09 2009-10 2010-11 2011-120

20

40

60

80

100

120

140

160

180

Raw material holding period

Raw material holding period

Raw materials form a life blood of any manufacturing industry, so the higher the raw

material holding period, indicates greater ability of company to recover cost incurred

in production. Less raw material holding period means increasing warehousing cost

and thus less profit. So from the above graph we can see that there is decrease in

RMHP in the year 2011-12, this due to the increase in inventory and it also reveals

that the company is unable to recover the cost incurred in production.

(14) WIP Conversion Period: This indicates the speed with which the company is

converting its work in progress into finished goods. If the work in progress

conversion period increase it means the company is taking more time to convert

it into finished goods i.e., production is delayed. Lesser the work in progress

holding period lesser the blockage of company’s fund in the production process.

WIP conversion period= Average stock of work in progress*365

Cost of production

Particulars 2008-09 2009-10 2010-11 2011-12

Cost of production 61072 71436 75683 117481

Average stock of

WIP

20528.34 25872 18566 11879

WIP Conversion

period

123 132 89 37

2008-09 2009-10 2010-11 2011-120

20

40

60

80

100

120

140

WIP Conversion Period

WIP turnover period

Work in progress is showing an increasing trend from 2008-09 to 2009-10. It

shows that the company is taking much time to convert the raw materials into

finished goods, when there are fewer orders the company WIP goes slowly.

On the other hand the work in progress period is lowest in the year 2011-12,

which shows that there is increase in orders. Huge amount of raw materials

are processed into the finished goods to meet the requirements of the

customer.

(15) Finished goods holding period: this ratio indicates the number of days a firm takes to

convert the finished goods inventory into sales.

Finished goods holding period= Average stock of finished goods*365

Cost of goods sold

Particulars 2008-09 2009-10 2010-11 2011-12

cost of goods sold 72406 84463 105131 139292

average stock of FG 864.97 376.93 1275.76 2700.73

FG Conversion

period

4 2 4 7

2008-09 2009-10 2010-11 2011-120

1

2

3

4

5

6

7

8

FG Conversion period

FG Conversion period

As we can see that, the graph shows that finished goods conversion period is

very less, ie a span of 4 to 7 days, which shows the finished goods are

immediately converted to sales. And the firm is efficient in doing so,Because

the goods are produced on the basis of orders and well documented

agreement.

(16) Debtors Collection Period: this ratio measures how long it takes to collect

amounts from debtors. The ratio represents the average number of days, for

which a firm has to wait before the receivables are converted into cash. It

represents the quality of debtors. The shorter average collection period

represents high quality and vice versa.

Debtors collection period = 365

Debtors Turnover Ratio

Particulars 2008-09 2009-10 2010-11 2011-12

Credit Sales 126267.8 145607.14 198388.5 226787.22

Average Debtors 61490.9 77768.79 85172.37 98511.22

Debt collection

period

178 195 156 158

2008-09 2009-10 2010-11 2011-120

50

100

150

200

250

Debt collection period

Debt collection period

Same as Debtor turnover ratio, the Debt collection period shows the time taken by the

company to realize the debt, so from the graph we can see that, in the year 2009-10

was pretty high and the customers took lot of time to settle the payment. But moving to

later years it has been consistent to 150 days to 160 days. But industry standard of

DCP is 90 days, here we can see, BHEL has doubled the DCP compared to Industry.

(17) Creditors Payment Period: this ratio shows the average time taken by the firm

to pay for goods and services purchased. The longer the credit period achieved,

the better, because delay in payment means that the operations of the company

are being financed interest free by suppliers funds. But, there will be a point

beyond which, if they are operating in sellers market, may harm the company due

to effect on the credit worthiness of the company.

Creditors turnover period= Average Creditors*365

Purchases

Particulars 2008-09 2009-10 2010-11 2011-12

Purchases56400.29 57239.83 50075.85 92934,69

Average Creditors 19815.98 20919.66 27153.55 37073.28

Creditors payment

period

128 133 198 145

2008-09 2009-10 2010-11 2011-120

50

100

150

200

250

Creditors payment period

Creditors payment period

The creditors are the people from whom the company bought raw materials and

other goods. The average payment period ratio represents the number of days by

the firm to pay its creditors. A high creditor’s turnover ratio or a lower credit period

ratio signifies that the creditors are being paid promptly. This situation enhances the

credit worthiness of the company. Here Bhel pays off their creditors in a period

ranging from 120-150 days, but in the year 2010-11 there was a tremendous

increase in the CPP. But after that year, they are paying their creditors before due

date. However a very favourable ratio to this effect also shows that the business is

not taking the full advantage of credit facilities allowed by the creditors. The industry

standard average payment is 60 days but BHEL has double the industry average

payment period.

Trend Analysis: Trend Analysis is a statistical tool to estimate the Sales for

the next year.

Year Sales

2008-09 126267.8

2009-10 145607.14

2010-11 198388.5

2011-12 226787.22

2008-092009-10

2010-112011-12

0

50000

100000

150000

200000

250000

Sales

From the above graph we can see that, there is consistent increase in sales

volume, which determines the efficiency of BHEL, the way they produce quality

goods well known in the minds of the customers. BHEL’S integrity and innovation

has led its customers to repeatedly give orders to BHEL. This may not be the same

in future, as we are in the current year 2013-14, the financial position of 2012-13 has

not been out. But as per the press release I can analyse and say that, BHEL this

year has a decline in its profits, there might be many reasons, but the highlighted

reason could be the decline in sales, i.e. not getting orders from the Government.

The new entrants in the market, i.e. Chinese and Japanese technology have been

making its mark in the market to an huge extent. The technology brought in by them

are unique and cost involved is much less, when compared o BHEL. So, to conclude

Bhel is very well known in Indian as well as Global markets for its Quality and

Innovation. But the same goods which Bhel produces to cost of 300 crores, the

competitors/ new entrants are providing it for 150 crores. This can be the huge threat

to the Indian Power Sector.

CHAPTER 5

FINDINGS AND SUGGESTIONS

FINDINGS: The Gross Working Capital is increasing every year, this shows that the firms

investments in current assets are high.

The high amount of Net Working Capital shows, an increase in Sales, there

by more profits into the firm.

The company’s current ratio and quick ratio shows an increasing trend, which

tells us that the company is more efficient in handing the short term

requirements.

To guard against foreign escalation, it resorts to hedging, it is almost a zero

debt company.

Study of inventories shows that an increase in inventory turnover ratio which

determines the operating efficiency of the company.

As company is the manufacture of heavy electrical goods and its major

customers are state electricity board telecommunication departments etc…

there exists laxness in the collection of debtors. And the company is not so

much bothered in collecting from these customers, because of huge orders

and customer loyalty.

The breakup of individual current asset as a % of total current asset reveals

that major chunk of current asset is occupied by Debtors i.e. almost 70%.

The company has now been effective in synchronizing of debtor’s turnover

ratio with creditor’s turnover ratio. It shows the company is taking full

advantage of credit facilities.

The enterprise has applied almost all management concepts in achieving it

vision. In this direction, it is concentrating on productivity programs and has

also identified areas where it has to concentrate.

The company’s inventory procurement team is highly efficient, the inventory

procurement process is appreciable.

Material management department and Finance Department go hand in hand

in managing the Working Capital requirement.

Raw material ordering process, the delegation of authority starts from the

Executive Engineer who has right to order up to 10 lakhs and there wise it

goes on until top management, where President is Supreme.

Suggestions:

The unit can outsource some of its non-core activities to specialize outside

agencies. Such as Customer relation and services.

The unit should develop alternate source of supply of materials, wherever

permitted, which will in turn, reduce the cost of inventory. The sourcing of

material should be at competitive rates and not L1 rates.

The unit has better inventory control by focusing on slow and non-moving

items. Less control should be on slow moving items and least control on fast

moving items.

The unit should tie up with financial institutions, for providing the suitable

financial package to its customers for non core products.

The unit must follow a rigorous system of credit evaluation and set credit

standards for its customers as is already done for private players.

The unit can obtain contingent commitment from the buyers as part of sales

term.

Effective follow-up by commercial departments should be made to accelerate

the collection process.

The unit must move forward to show their competitive advantage, as more

and more competitors are entering the market.

The company as a whole should address the President, for not the repeated

orders for the Government. Being the Government of India. They are

themselves ignoring the domestic companies.

The companies should implement an aggressive strategy to take up

international projects and prove there competitiveness in International market.

Conclusion: It can be concluded that the overall financial performance of the company is

reasonably satisfactory. In certain areas the company has to focus more.

BHEL-EDN should try to overcome hurdles, especially in the areas of debtors

and inventory management.

After completing this study, I felt that, in today’s world it is very hard to survive

without being able to delight/ satisfy the customers. With the entry of MNCs

like ABB, Siemens etc... There is a need for BHEL-EDN to perform better and

prove its competitiveness.

As BHEL-EDN has stepped into a liberalized marker driven environment there

is an urgent need for its managers to function like business, rather than

government officials. This is not only needs an attitudinal change on the part

of higher officials but also requires whole hearted efforts of all employees.

Though company has implemented several management techniques like total

quality management, Six-sigma etc... There is a need for sustained and

synchronous efforts to achieve such objectives and realize future growth.

It appears that BHEL is in a strong position to achieve the vision envisaged by

the nation in light of the recent development of JVs in potential areas of

development entered into by BHEL.

Annexure

Balance Sheet of BHEL EDN

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An Analysis of Working Capital Management at BHEL

Economy & Finance