INTRODUCTION

INTRODUCTION ON FINANCEFinance is one of the major elements that activate the overall growth of the economy. Finance is the

life blood of economic activity. A well - knit financial system directly contributes to the growth of

the economy. An efficient financial system calls for the efficient performance of institution, financial

instruments and financial markets.

Finance which acts as the lifeblood in the modern business types is one of the most important

consideration for an entrepreneur-company. While Implementing, expanding, diversifying,

modernizing or rehabilitating any project the meaning of finance is better understood. In this section

we have covered finance related information and the process of managing the same.

Finance is a science of managing money and other assets. It is the process of channelization of funds

in the form of invested capital, credits, or loans to those economic agents who are in need of funds

for productive investments or otherwise. E.g. On one hand, the consumers, business firms, and

governments need funds for making their expenditures, pay their debts, or complete other

transactions. On the other hand, savers accumulate funds in the form of savings deposits, pensions,

insurance claims, and savings or loan shares, etc which becomes a source of investment funds. Here,

finance comes to the fore by channeling these savings into proper channels of investment,

In general, finance is that business activity which is concerned with acquisition and Conservation of

capital funds in meeting financial needs and over all objectives of a business entrepreneur.

Finance is the common denominator for a vast range of corporate, projects and the major part of any

corporate plan must be expressed in financial terms”.

The main reasons a business needs finance are to:

• Start a business

• Finance expansions to production capacity

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• To develop and market new products

• To enter new markets

• Take-over or acquisition

• Moving to new premises

• To pay for the day to day running of business

MEANING OF WORKING CAPITAL

Working capital refers to the management of current assets.

Working capital refers to that part of total capital which is used for carrying out the routine or

regular business operation. In other words, it is the amount of funds used for financing the day-to

day operation. In short, it is the capital with which the business is worked over.

Thus, the capital invested and locked up in various current assets, such as stocks of raw material,

work in progress, stocks of finished goods account receivable and cash and bank balances constitutes

the working capital.

Working capital may be regarded as life blood of a business. Its effective provision can do much to

ensure the success of a business while its in provision can do much to ensure the success of a

business while its in efficient management can lead not only to loss of profits but also to the ultimate

downfall of what otherwise might be considered as a promising concerns.

> According to shoo-in, “Working Capital is the amount of funds necessary to cover the cost of

operating the enterprise”. Working Capital is also known as Revolving or Circulating Capital.

> According to Genesterberg, “Circulating Capital means current assets of a company that are

changed in the ordinary cause of business from one to another form. Example: From cash to

inventory, inventories to bills receivable and bills receivable to cash.

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Concept of working capital

There are five concepts of working capital:-

Gross Working Capital

Net Working Capital

Negative working capital

Permanent working capital

Variable working capital

On the basis of the components or items comprised in working capital, working capital can be

classified into the following types:

Gross Working capital: Simply called as working capital, refers to the firms investment in

current assets. Current assets which can be converted in to cash with in the accounting year (or

operating cycle) and includes cash, short term securities, debtors, Bills receivable and stock

(inventory) .

Net Working Capital: Refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders, which are expected to mature for payment with in a

year and include creditors, Bills payable and outsider’s expenses.

Negative working capital or working capital deficit: means the excess of current

liabilities over the current assets. It accurse when the current liabilities exceed the current assets

Permanent working capital or fixed working capital: refer to the minimum amount of

investment in current assets required throughout the year for carrying out the business. In other

words, it is the amount of working capital which remains in the business permanently in one form or

other.

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Variable working capital or fluctuating working capital: refer to the amount of

working capital which goes on fluctuating or changing from time to time with the change in the

volume of business activities.

Ratios:The term ratio simply means one number expressed in terms of another. It describes in mathematical

terms the quantitative relationship that exists between two numbers.

NEED FOR WORKING CAPITALEvery business undertaking requires funds for two purposes, investments in fixed assets &

investment in current assets.

Funds required for investing in inventory, debtors & other current assets keep changing in shape &

volume. Company has some cash in the beginning; this cash may be the source of raw material,

keeping the labor cost & other overheads. These three combined would generate work in progress,

which will be converted into finished goods on the completion of the production process into debtors

& when the debtor pay, the firm may generate cash. Working capital is needed for sustaining (i.e.,

maintaining) the sales activities. If adequate working capital is not maintain for this period ,the firm

will not be able to sustain or maintain the sales , since it may not be in a position to purchase raw

material and pay wages and other expenses ands produce the goods required for the sales.

NATURE OF WORKING CAPITALIn ordinary parlance, Working Capital is taken to be the fund available for meeting day-to-day

requirements of enterprises. It cannot be denied that a part of the fixed or permanent capital is

invested in assets, which are kept in the business or for a long period for the purpose of earning

profit. These are usually known as fixed assets viz. Land & buildings, plant & machinery, furniture

& fitting & intangibles like goodwill, patents, trademarks & long-term investment.

Another part of permanent capital left in the business for supporting the day-to-day normal operation

is known as the “Working Capital”. This Working Capital generates the important element of cost

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viz. Material, wages & expenses. These cost usually lead to production & sales in case of

manufacturing concerns & sales alone in others. These costs occur gradually in a flow & do not

come into being abruptly at a given moment.

Hence the initial investment of cash as working capital for this specific purpose has to be continued

until the sales revenue commences flowing in substantially & in a regular way. From this stage the

business is found to acquire a momentum of its own. The flow of revenue is expected to continue to

replace the cost lost in its day-to-day out flow for the generation of the revenue mentioned above.

SOURCE OF WORKING CAPITALThe financial manager is always interested in obtaining the working capital at the right time, at a

reasonable cost and at the best possible favorable terms. A part of the working capital investment are

permanent investments is fixed assets. The following is snapshot of various source of working

capital.

Sources of working capital divided into two

• Long –term

• Short –term

Sources of long term working capital

• Issue of shares

• Floating of debentures

• Ploughing back of profit

• Loans

• Public deposit

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Sources of short-term working capital

Internal sources

• Depreciation

• Taxation

• Accured expenses

External sources

• Trade credit

• Credit papers

• Bank credit

• Customer’s credit

• Govt. Assistances

• Loans from director

• Security of employees

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WORKING CAPITAL CYCLE:-

The working capital of a concern goes on changing in shape and volume. For Instance, a concern

may have some cash in the beginning. The cash may be used by the concern for the purpose of

purchase of raw material, payment of wages and other expenses’. These elements of cost or items of

expenses, raw material , wages and overheads , will result in work- in-progress during the process of

manufacture. On the in compilation of the production process, the work- in –progress becomes

finished goods

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Meaning The length of time involved in this cycle of conversion of cash into raw material, raw material into

work-in progress, work-in-progress into finished goods, finished goods into debtors and debtors into

cash again is called the operating cycle or working capital cycle of the firm, in other words, it is

period between the date raw material are purchased and the date the sale proceeds of finished goods

are realized by concern.

INTER-DEPENDENCE AMOUNG COMPONENTS OF WORKING CAPITAL

OPERATING CYCLE:

A company starting with cash purchase raw materials, components etc., on a cash or credit basis.

These materials will be converted into finished goods after undergoing various stages of work-in-

process. For this purpose the company has to make payments towards wages, salaries and

manufacturing costs. Payments to suppliers have to be made on purchases in the case of cash

purchases and on the expiry of the credit purchases. Further, the company has to meet other

operating costs such as selling and distribution costs, general administration costs and non-operating

costs described as financial costs (interest on borrowed capital). In case the company sells its

finished goods on cash basis, it will pass through one more stage, viz, accounts receivable and gets

back cash along with profit on expiry of credit period. Once again the cash will be used for the

purchase of materials and / or payments to suppliers and the whole cycle is termed as working

capital or operating cycle repeats itself. This process indicates the dependents of each stage or

components of working capital on its previous stage or component.

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WORKING CAPITAL MANAGEMENT

IntroductionWorking capital management is one of the most important aspects of financial management. It forms

a major function of the finance manager.

Meaning:

Working capital management means management or administrating of all aspect of working capital,

i.e., currents assets and currents liabilities.

In other words of Smith, “working capital management is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and the inter-relationship that exists

between them”.

BASIC OBJECTIVE OF WORKING CAPITAL MANAGEMENT:The basic objective of working capital management is to manage the firm’s working capital (i.e.,

currents assets and currents liabilities) in such a way that a satisfactory level of working capital (i.e.,

neither excessive nor inadequate working capital) is maintained. This is necessary because, if the

working capital is excessive or large, the liquidity position of the firm would, no doubt, improve, but

its profitability would be adversely affected, as funds would remain idle. Conversely, if the working

capital is too small, the, profitability of the firm may improve, but the liquidity position of the firm

would be adversely affected.

Advantages of working capital:• It helps the business concern in maintaining the goodwill.

• It can arrange loans from banks and others on easy and favorable terms.

• It enables a concern to face business crisis in emergencies such as depression.

• It creates an environment of security, confidence, and over all efficiency in a business.

• It helps in maintaining solvency of the business.

Disadvantages of working capital:

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• Rate of return on investments also fall with the shortage of working capital.

• Excess working capital may result into over all inefficiency in organization.

• Excess working capital means idle funds which earn no profits.

• Inadequate working capital can not pay its short term liabilities in time.

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OBJECTIVES OF THE STUDY

To identify the financial strengths & weakness of the company.

Through the net profit ratio & other profitability ratio, understand the profitability of the

company.

Evaluating company s performance relating to financial statement analysis.

To know the liquidity position of the company with the help of current ratio.

To find out the utility of financial ratio in credit analysis & determining the financial capacity

of the firm.

Analysis and evaluate working capital management.

To study the importance of working capital for a concern.

To suggest measure to increase the efficiency of working capital management of BHEL

Delhi.

To maintain the adequate working capital every time.

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SCOPE OF THE STUDY

The main scope of the study is evaluated, analyze and understand the current asset of management

and to know the influence of components of working capital in the year 2011-12 and 2012-2013.

The study is based on secondary data collected from the Reports and account BHEL Delhi as

published; therefore the quality of the study depends purely upon the accuracy, reliability and quality

of the secondary data source.

The study is based on only one company. Therefore, the accuracy of results is purely based on the

data of sample unit. If one takes sample units of say ten the results may go slightly differently.

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IMPORTANCE OF THE STUDY

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

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 significance for all firms but it is

very critical for small firms.

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

COMPANY PROFILE

BHARAT HEAVY ELECTRICAL LIMITED-

BHEL is India's largest engineering company and one of its kinds in this part of the hemisphere. It

manufactures a wide range of state of the art power generation equipment and systems besides

equipment for industry, transmission, defence, telecommunication and oil business. The first plant

of BHEL was set up in Bhopal in 1956, which signaled the dawn of the heavy electrical industry in

India. In the early 60's three more major plants were set up in Hardwar, Hyderabad and

Tiruchirapalli. The company now has 14 manufacturing divisions, 10 services centers and power

sectors regional centers besides project sites spread all over India and also abroad to provide prompt

and effective service to customers.

BHEL's business broadly covers conversions, transmission, utilizations and conservation of energy

in core sectors of economy that fulfill vital infrastructure needs of the country. Its product have

established an enviable reputation of high quality and reliability, which is largely due to emphasizes

placed all along on contemporary some of the best technologies of the world from the leading

companies in U.S.A., EUROPE, and JAPAN together with technologies from its own R&D centers

technologies B.H.E.L. has consistently upgraded its design and manufacturing facilities to

international standards by acquiring and assimilating.

HISTORICAL PROFILE:- The construction of heavy electrical equipment Plant commenced in Oct.1963after indo-soviet

technical co-operation agreement in Sept.1959 The first product to roll out from the plant was an

electric motor in January 1967.This was followed by first 100 MW Steam Turbine in Dec.1969and

first 100MW Turbo Generator in August 1971.

The plant’s “break even” was achieved in March 1974.BHEL went in for technical collaboration

with M/s Siemens, Germany to undertake design and manufacture to large size thermal sets upto a

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unit rating of 1000 MW in the year 1976.First 200 MWTG set was commissioned at Obra in 1977.

The continum of technological advancement subsequently saw the commissioning of 500 MW TG

Set in 1984 .The technical cooperation of Gas Turbine manufacture was also signed with M/s

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

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

operation for over 150 days and notching up a record plant load factor greater than 100%.

B.H.E.L A CORPORATE GIANT Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED (BHEL) is a name

which is recognized across the industrial world. It is one of the largest engineering and

manufacturing enterprises in INDIA and is one of the leading international companies in the power

field. BHEL offers a wide spectrum of products and services for core sectors like power

transmission, industrial transportation, oil and gas, telecommunication etc. Besides supply of non-

conventional energy systems. It has also embarked into other areas including defence and civil

aviation. A dynamic 63000 strong team embodies the BHEL philosophy excellence through

continuous striving for state of the art technology. With corporate headquarters in NEW DELHI,

fourteen manufacturing units, a wide spread regional services network and projects sites all over

India and even abroad, BHEL is India's industrial ambassador to the world with export presence in

more than 50 countries.

BHEL's range of services extent from project feasibility studies to after sales services, successfully

meeting diverse needs through turnkey capability.

BHEL has had a consistent track record of growth, performance and profitability. The World Bank

in its report on the Indian Public Sectors, has described BHEL as “one of the most efficient

enterprises in the industrial sector, at par with international standards of efficiency". BHEL has

acquired ISO 9000 certificate for most of its operations and has taken up Total Quality Management

(TQM).

All the major units/divisions of BHEL have been upgraded to the latest ISO-9001: 2000 version

quality standard certification for quality management. All the major units/divisions of BHEL have

been awarded ISO-14001 certification for environmental management systems and OHSAS-18001

certification for occupational health and safety management systems.

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

based on financial performance. Recently in survey conducted by business India, BHEL has been

rated as seventh Best Employer in India.

VISION, MISSION AND VALUES

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MAJOR MILE STONES

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1975 Job Redesign concept launched for FIRST time in India.

1978 well documented Suggestion Scheme launched.

1982 Launched Productivity Movement & Quality Circle. Concept

1993 Accreditation of ISO 9001 quality System.

1995 Adopted EFQM model of TQM for achieving Business Excellence.

1997 BHEL one of the 9 PSE’s declared “Navratna” by Govt. of India.

1997 National Productivity Award for HEEP by the President of India.

1998 Certificate of Merit by National Productivity Council for

Outstanding performance for 2nd consecutive year.

1998 Accreditation of U stamp.

1999 Accreditation of R Stamp from National Board of Boiler and Pressure Vessel Inspector, USA.

1999 AD-Merkblatt HPO Recertification by RWTUV for Gas Turbine Combustion Chambers

1999 INSAAN Award for Excellence in Suggestion for 9th consecutive year

1999 Launching of 5s concept

1999 PCRI recognized as Environmental Lab by Haryana State Board for Prevention and Control of

Pollution

1999 Accreditation of ISO 14001-Enviornment management system

2000 CII Site Visit for CII-EXIM Business Excellence Award-2000

2001 Top Management TQM Workshop at Rishikesh and HRDC

2001 INSAAN Award for excellence in Suggestion for 11th consecutive year

2001 Launching of QTM & RCA at HEEP Hardwar by CMD

2002 Launching of delivery Index, Turnover Index and Manufacturing Index

2002 Accreditation of ISO 9000-2k

2002 JBE Workshop of Apex TQM Group at Tehri to evolve Business policy and CSF

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TOTAL QUALITY FOCUS:To face the increased competition from MNCs (due to liberalization policy of Government) in early

90’s and to enter European market we moved towards ISO 9000 Certification.Concept of Business

Excellence through EFQM Model was launched in entire BHEL on pilot scale in Oct.”1995” In 1997

HEEP launched TQM in the entire Plant and since then Self-Assessment is done every year in

September.Based on feedback Report of Assessment, critical success factors are identified.and TQ

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

Hardwar for ultimately achieving “BUSINESS EXCELLENCE”. HEEP Hardwar plant is accredited for

ISO 9001 and ISO 14001 and is now on March towards TQM.5-S was launched in March 1999 in a big

way and now it has become a way of life in the organisation. In 2000 HEEP applied for CII-EXIM

Business excellence award and site visit was conducted Bu CII team in Seot.”2000.Cii feedback has

gone a log way in carrying out further improvement plans and giving a structured thrust to TQM

movement.

In July 2001, Unit’s TQ Council reviewed the TQ Action Plans 2001-02 for its effectiveness and

impact on accelerating the pace of improvement and consequent TQ Score. Executive Director laid the

challenge of achieving the TQ score of 650.With an objective to bring awareness about he CII-EXIM

Business Excellence Model amongst the Sr. Executives, the first ‘Top Management TQM Workshop’s

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

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

Management TQM Workshop steered again by Ed was held at HRDC on Oct’29,2001.Subsequantly

the third Top Management TQM Workshop was held in Nov’2001,where-in Sr. Counselor, CII

deliberate the detail on Best practices of TATA STEEL-the winner of ‘CII-EXIM Business Excellence

Award 2000’.Simultaneously ,TQ Assessors training program for the select group of young

managers(to be developed as Think Tanks)was organized in Nov’2001.To give further boost Apex

Group was formed. Apex Group developed “Roadmap to Business Excellence” based on Criteria

Linkage of CII-EXIM Business Model and the initiatives taken at Hardwar was drawn by the group and

it was widely circulated amongst the employees through special issue of Hardwar Current in April

2002.It followed by JBE workshop of Apex TQM Group held at Tehri on June 30 and July 1,02 where-

in following business policy and critical factors was evolved.

BHEL has acquired certifications to Quality Management System ( ISO 9001 ), Environmental

Management System ( ISO 14001 ) and Occupational Health & SAFETY management System

(OHSAS 18001 ) and is also well on its journey towards Total Quality Management.

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BHEL has Installed equipment for over 90,000 MW of power generation – for Utilities , Captive and

Industrial users.

Supplied over 225000 MV. A transformer capacity and other equipment operating in

Transmission & Distribution network up to 400 Kv (AC&DC).

Supplied over 25000 Motors with Drive Control System to Power projects, Petrochemicals,

Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc.

Supplied Traction electrics and AC/DC locos to power over 12000 kms Railway network.

Supplied over one million Valves to Power Plant and other Industries.

BHEL’s operations are organized around three business sectors, namely Power, Industry – including

Transmission, Transportation, Telecommunication & Renewable Energy and Overseas Business.

This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond

quickly to the changes in the market.

PRODUCT RANGE:This list is intended as a general guide and does not represent all of BHEL’s product and systems.

THERMAL POWER PLANTS Steam turbines and generators of up to 500 MW capacity for utility and combined – cycle

applications; up to 1000 MW unit size.

Steam turbines for CPP application; capability to manufacture condensing, extraction, back

pressure, injection or any combination of these types.

GAS BASED POWER PLANT Gas turbine of up to 255MW (ISO) rating.

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Gas turbine based co-generation and combined – cycle systems for industry and utility

applications.

HYDRO POWER PLANTS Custom-built conventional hydro turbines of Kaplan, Francis and Pelton types with matching

generators, pump turbines with matching motor-generators.

Mini/micro hydro sets.

Spherical, butterfly and rotary valves and auxiliaries for hydro station.

DG POWER PLANTS USD, LDO, FO, LSUS. natural – gas/biogas based diesel power plants, unit rating up to

20MW and voltage up to 11Kv, for emergency, peaking as well as base load operations on

turnkey basis.

INDUSTRIAL SETS Industrial turbo – sets of rating from 1.5 to 120MW.

Gas turbines land matching generators ranging from 3 to 255MW (ISO) rating.

Industrial stream turbines and gas turbines for drive applications.

BOILERS Combination of these fuels: capability to manufacture boilers with super critical parameters

up to 1000 MW unit size.

Steam generators for industrial applications, ranging from 40 to 450 t/hour capacity using

coal, natural gas, industrial gases, biomass, lignite, oil, biogases or a combination of these

fuels.

Pulverized fuel fired boilers.

Stoker boilers.

Atmospheric fluidized bed combustion boilers.

Circulating fluidized bed combustion boilers.

Waste heat recovery boilers.

Chemical recovery boilers for paper industry, ranging from capacity of 100 to 1000 t/day of

dry solids.

Pressure vessels.

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BOILER AUXILIARIES Fan

Air-Pre-heater

Gravimetric Feeders

Pulverizes

Pulse Jet and Reverse Air Type Fabric Filters ( Bag Filters )

Electrostatic Precipitators

Mechanical Separators

Soot Blowers

Valves

HEAT EXCHANGERS AND PRESSURE VESSELS Air – cooled heat exchangers.

Surface condensers.

Reactors, drums.

PUMPS Pumps for various applications to suit utilities up to a capacity of 660MW.

Boiler feed pumps (motor or steam turbine driven).

Boiler feed booster pumps.

Emergency oil pumps.

Lubricating oil pumps.

POWER STATION CONTROL EQUIPMENT Microprocessor-based distributed digital control systems.

Data acquisition systems.

Man-machine interface.

SWITCHGEARS

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SF6 circuit breakers (132 Kv –400 Kv).

Vacum circuit breakers (3.3 Kv – 33k Kv).

BUS DUCTS Bus – ducts with associated equipment to suit generator power output of utilities of up to 500 MW

capacities.

TRANSFORMERS Special transformers: earthing; furnace; rectifier; electrostatic precipitator; freight loco and

ACEMU and traction transformers.

INSULATORS High- tension ceramic insulator

CAPACITORS Coupling/CVT capacitors for voltages up to 400 Kv.

Low Tension Thyristor Switched Capacitors (LTTSC) for dynamic power factor correction.

ENERGY METERS Single phase, Poly Phase and Special – purpose electro – mechanical and electrical meters.

BUSINESS POLICY

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“In-line with Company’s Vision, Mission and values, we dedicate ourselves to sustained growth

with increasing positive Economic Value Addition and Customer focussed business leadership in the

Power and Industry Sector.

CRITICAL SUCCESS FACTORS: Increase Orders of Spares/Services to 230 Cr.

Decrease Capital employed by Rs. 120 Cr.

Saving in Material Cost by 16 Cr. i.e. 5%- Rs. 4 Cr.

Decrease in indirect material +miscellaneous expenses by 5%- Rs. 4 Cr.

Effective implementation of QTM/RCA/CTQ

Strengthening Internal customer concept

Development of an Incentive Scheme

Reward Scheme including EXCEL Awards

Effective implementation of PMS

Effective Contract Management

Technology Upgradation

‘Excellence triangle’ for each Critical Success Factor is now being drawn comprising improvement

projects. These projects will be centrally registered under On-line Central Registration system to be

developed for it. While CSF Champion will take the total stock of position in the improvement projects

undertaken in his respective CSF, progress of individual projects will be reviewed by Area TQ Council

(ATQC) and Functional TQ Council (FTQC).

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

continuous improvement evident from the participation of employees in Suggestions and Quality

Circles. To recognize their efforts various productivity drives and competition are organized throughout

the year and Executive director awards the winners in the special Award Distribution Functions.

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

Award for excellence in Energy Conservation as an “Energy Efficient unit” by CII, CMD’s Rolling

Trophy for 3rd consecutive year, ‘Well known Forge Shop “ by Central Boiler Board etc. are some Vir

Award 2001” and 12 employees honored with “Vishwakarma Rashtriya Puraskar”during 2001-02.

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

indeed is not the limit for perfection. The transition has strongly experienced a silent internalization

with a blend of commitment of the existing human resource for creating benchmarks for excellence.

The emergence of role models and clear-cut driving force at the top provide an anvil to unleash the

potential, which remain unexplored in search of “Attitude to perform”. The surge has started and is

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

LITERATURE REVIEW

Miss. Mohanapriya, M.B.A, in her research on “Working capital management of Tanjore co-

operative milk supply society Ltd.” Which is the partial fulfillment of the requirements for the

award of her degree submitted to Bharathidasan University, in the year November – 2012. Outlined

the following objectives and findings.

Her Objectives were:

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Know the project of Co-operative milk supply society.

Analysis the short term liquidity position of the study unit during the period 2010-2011 to

2011-2012.

Analysis and evaluate working capital management.

Her Findings were:

The size of current assets has increased during the study period.

During the study period the working capital turnover ratio were 210.51;

194.60; 45.44 and 11.86 times respectively the higher ratios in the 2 year 2010-2011 and

2011-2012 indicates sufficient amount of working capital and effective utilizations of

working capital.

The cash turnover ratio is to be increasing times.

Miss. Abiramisundhari, in her research on “Working capital management of TSRM Limited

Trichy”. Which is the partial fulfillment of the requirements for the award of her M.Com degree

submitted to Bharathidasan University, in the year November – 2012. Outlined the following

objectives and findings.

Her Objectives were:

To study the importance of W/c management for a concern.

To assess the proportion of the components of W/c of TSRM Ltd, Trichy.

To suggest measures to increases the efficiency of W/c management of TSRM Ltd,

Trichy.

Her Findings were:

The company has been taken for sufficient care for the maintenance of adequate

accounting period.

The proportion of net W/c to total assets showed on increasing trend through out the

five years.

The overall performance of receivables management showed a satisfactory position

throughout the past 5 years.

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Mr. Kamaraj, M, Phil, in his research on “Working capital management of Dalmia Cement

Limited Trichy”. Which is the partial fulfillment of the requirements for the award of her degree

submitted to Bharathidasan University, in the year November – 2012. Outlined the following

objectives and findings.

His Objectives were:

To know the Financial Performance of Dalmia Cement.

To examine the practice follow into Management of cash.

To know the techniques of Inventory Management in D.C.B.C.

His Findings were:

Raw Material Consumption over the study period in terms of quantity and value has showed

an incise trend.

Operating ratio is considered to be yardstick of operating efficiently of the concern.

The concern has show dormant and fast moving inventories during the 5 years a study period.

Performance of the co should be judged on the basis of return on equity capital. It is

satisfactory positive

Mr. Kushagra Dabur, in his research on “Working capital management of Kotak Mahindra Life

Insurance Company”. Which is the partial fulfillment of the requirements for the award of her

degree submitted to Amity University, Uttar Pradesh, in the year February – 2012. Outlined the

following objectives and findings:

His Objectives were: s

To meet the cash disbursement needs (payment schedule);

To minimize funds committed to cash balances.

The present study is limited to one Co., i.e. Kotak Mahindra Life Insurance, and covers a

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period from 2011 and 2012 due to limitation of time and accessibility to data base.

The authenticity of the suggestions and recommendations depend upon the rationality of the

data provided to me.

His Findings were:

The relative growth rate of short term trade credit and value industrial production.

The relative growth rates of short term trade credit & inventories with industry & trade.

The diversion of short-term credit for fixed asset acquisition & for lower and Investments.

The incidence or multiple financing,

The elongation of credit period.

RESEARCH METHOLOGY

General MethodologyThe study was carried on an explorative basis using accounting and financial data.

The procedures followed in this study consist of following steps:

1) The research includes figurative and diagrammatic interpretation for the ease of comparison.

2) Understanding of aluminium industry in global and domestic scenario.

28

3) Determining the demand and supply in near future to understand the future prospect of the

industry.

4) Analysis of Government Policy toward aluminium industry.

5) Evaluating BHEL, HARIDWAR’S position in aluminium industry.

Research Methodology Research methodology that is used here was purely exploratory because we know it is used

when one is seeking insight in to the general nature of the problem possible decision

alternatives and relevant variables that need to be considered.

This resistance also help full / use full for establishing priorities among research questions

and for learning about practical problems of carrying out the research.

ANALYSIS 0F DATA COLLECTED (PRESENTATION AND

INTERPRETATION)

Data source

29

Data collection was through literature survey and expert opinion. Literature survey includes the

collection of data from various sources like bank agreement and statement, handbooks as well as

study material.

A part of data` s was collected from primary data and other was collected from the secondary data.

Primary sourcesInformation gathered by interview and discussions with the head and employees of various

departments and my project guide.

Secondary sources Company annual report.

Published information on finance.

Internal circulation booklets.

Company Websites

DATA ANALYSIS AND INTERPRETATION

Ratio Analysis is a powerful tool o financial analysis. Alexander Hall first presented it in 1991 in

Federal Reserve Bulletin. Ratio Analysis is a process of comparison of one figure against other,

which makes a ratio and the appraisal of the ratios of the ratios to make proper analysis about the

strengths and weakness of the firm’s operations. The term ratio refers to the numerical or

quantitative relationship between two accounting figures. Ratio analysis of financial statements

stands for the process of determining and presenting the relationship of items and group of items in

the statements.

Ratio analysis can be used both in trend analysis and static analysis. A creditor would like to know

the ability of the company, to meet its current obligation and therefore would think of current and

liquidity ratio and trend of receivable.

Major tool of financial are thus ratio analysis and Funds Flow analysis. Financial analysis is the

process of identifying the financial strength and weakness of the firm by properly establishing

relationship between the items of the balance sheet and the profit account

30

The financial analyst may use ratio in two ways. First he may compare a present ratio with the ratio

of the past few years and project ratio of the next year or so. This will indicate the trend in relation

that particular financial aspect of the enterprise. Another method of using ratios for financial analysis

is to compare a financial ratio for the company with for industry as a whole, or for other, the firm’s

ability to meet its current obligation. It measures the firm’s liquidity. The greater the ratio, the

greater the firms liquidity and vice-versa.

A ratio can be defined as a numerical relationship between two numbers expressed in terms of (a)

proportion (b) rate (c) percentage. It is also define as a financial tool to determine an interpret

numerical relationship based on financial statement yardstick that provides a measure of relationship

between two variable or figures.

Meaning and Importance:Ratio analysis is concerned to be one of the important financial tools for appraisal of financial

condition, efficiency and profitability of business. Here ratio analysis id useful from following

objects.

1. Short term and long term planning

2. Measurement and evaluation of financial performance

3. Stud of financial trends

4. Decision making for investment and operations

5. Diagnosis of financial ills

6. Providing valuable insight into firms financial position or picture

ADVANTAGES & DISADVANTAGES OF RATIO ANALYSIS:

31

Advantages:

The following are the main advantages derived of ratio analysis, which are obtained from the

financial statement via Profit & Loss Account and Balance Sheet.

a) The analysis helps to grasp the relationship between various items in the financial statements.

b) They are useful in pointing out the trends in important items and thus help the management to

forecast

c) With the help of ratios, inter firm comparison made to evolve future market strategies.

d) Out of ratio analysis standard ratios are computed and comparison of actual with standards reveals

the variances. This helps the management to take corrective action.

e) The communication of that has happened between two accounting the dates are revealed effective

Action.

f) Simple assessments of liquidity, solvency profitability efficiency of the firm are indicted by ratio

analysis. Ratios meet comparisons much more valid.

Disadvantages:

Ratio analysis is to calculate and easy to understand and such statistical calculation stimulation

thinking and develop understanding. But there are certain drawbacks and dangers they are.

i) There is a trendy to use to ratio analysis profusely.

ii) Accumulation of mass data obscured rather than clarifies relationship.

iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and product unit.(for

example) one firm may purchase the asset at lower price with a higher return and another firm

witch purchase the asset at asset at higher price will have a lower return)

2. Both the inter period and inter firm comparison are affected by price level changes. A change in

price level can affect the validity of ratios calculated for different time period.

32

3. Unless varies terms like group profit, operating profit, net profit, current asset, current liability

etc., are properly define, comparison between two variables become meaningless.

4. Ratios are simple to understand and easy to calculate. The analyst should not take decision

should not take decision on a single ratio. He has to take several ratios into consideration.

STANDARDS OF COMPARISION:

1. Ratios calculated from the past financial statements of the same firm.

2. Ratio developed using the projected or performs financial statement of the same firm

3. Ratios of some selected firm especially the most progressive and successful, at the same point of

time.

4. Ratios of the industry to which the firm belongs.

IMPORTANCE OF RATIO ANALYSIS

In the preceding discussion in the form, we have illustrated the compulsion and implication of

important ratios that can be calculated from the Balance Sheet and Profit & Loss account of a firm.

As a tool of financial management, they are of crucial significance. The importance of ratio analysis

lies in the fact and enables the drawing of inferences regarding the performance of a firm. Ration

analysis is a relevant in assessing the performance of a firm in respect of the following aspect.

CAUTION IN USING RATIOS:

1. It is difficult to decide on the proper bases of comparison.

2. The comparison rendered difficult because of difference in situation of two companies or of one-

company for different years.

33

3. The price level change makes the interpretation of ratios invalid

4. The difference in the definition of items in the balance sheet and Profit & Loss statement make the

interpretation of ratios difficult.

5. The ratios calculated at a point of time are less informative and defective as they suffer from sort

term changes.

6. The ratios are generally calculated from the past financial statement and thus are no indicators of

future.

CURRENT RATIO: The relationship of current assets to current liabilities is known as current

ratio. It is also known as banker’s ratio or working capital ratio.

1. CURRENT RATIO

It is relationship between firm’s current assets and current liability.

Current assets

Current ratio = _______________________________

Current liability

TABLE – 1STATEMENT SHOWING CURRENT RATIO

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CURRENT 1032002 1442000 2002230 2833290 3244172

34

LIABILITIES

CURRENT

RATIO

1.58 1.46 1.38 1.30 1.32

Rs in lakhsSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION The current ratio is a test of the short term solvency of the business enterprise since this ratio

assumes current assets could be converted into cash to meet current liabilities.

It is often accepted that current assets should be 2times the current liabilities.

Current ratio during the year 2008-2009 was 1.58 and it’s come down in 1.46 at 2009-2010 and its

again decreased 2010-2011 and 2011-2012 and it’s slightly increased in 1.32 at 2012-2013. The

standard norm for this ratio is 2:1 required.

BHEL should maintain sufficient amount of current assets in order to maintain the standard form of

current ratio.

CHART – 1

35

CURRENT RATIO

QUICK RATIO: It establishes the relationship of a company’s current assets that can be quickly

converted into cash and its current liabilities.

1. QUICK RATIO

It is relationship between liquid assets and current liabilities.

36

Liquid assets

Quick ratio = _________________________

Liquid Liabilities

TABLE –2STATEMENT SHOWING QUICK RATIO

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

LIQUID

ASSETS

1258640 1684600 2216978 2906405 3369935

LIQUID

LIABILITIES

1032002 1442000 2002230 2833290 3244172

LIQUID RATIO 1.22 1.17 1.10 1.03 1.04

Rs in lakhsSOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

It is in fact the measure of the “Instant” debt paying ability of the business enterprise.

The quick ratio in the year 2008-2009 was 1.22 and its decreased 0.04% at 2009and 2010 (1.17) and

in 2010-11 get decreased 0.06% (1.10) and 2011-12 get decreased 0.063% (1.03) and its get increase

in slightly on2012-13 at 0.001%(1.04). The standard norm for this ratio is 1:1, means for every 1

rupee of current liability, company must have 1 rupee of quick assets.

CHART –2

LIQUID RATIO

37

CASH MANAGEMENT

38

Introduction:

Cash management is one of the key areas of working capital management. Cash is the liquid current

asset. The main duty of the finance manager is to provide adequate cash to all segments of the

organization. The important reason for maintaining cash balances is the transaction motive. A firm

enters into variety of transactions to accomplish its objectives which have to be paid for in the form

of cash.

Meaning of cash:

The term “cash” with reference to cash management used in two senses. In a narrower sense it

includes coins, currency notes, cheques, bank drafts held by a firm. n a broader sense it also includes

“near-cash assets” such as marketable securities and time deposits with banks.

Objectives of cash management:

There are two basic objectives of cash management. They are-

To meet the cash disbursement needs as per the payment schedule.

To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash management involves the following four basic problems.

Controlling level of cash

Controlling inflows of cash

Controlling outflows of cash and

Optimum investment of surplus cash.

Determining safety level for cash:

39

The finance manager has to take into account the minimum cash balance that the firm must keep to

avoid risk or cost of running out of funds. Such minimum level may be termed as “safety level of

cash”. The finance manager determines the safety level of cash separately both for normal periods

and peak periods. Under both cases he decides about two basic factors. They are-

Desired days of cash:

It means the number of days for which cash balance should be sufficient to cover payments.

Average daily cash flows:

This means average amount of disbursements which will have to be made daily.

Criteria for investment of surplus cash:

In most of the companies there are usually no formal written instructions for investing the surplus

cash. It is left to the discretion and judgment of the finance manager. While exercising such

judgment, he usually takes into consideration the following factors-

Security:

This can be ensured by investing money in securities whose price remains more or less

Stable.

Liquidity:

This can be ensured by investing money in short term securities including short term fixed

Deposits with banks.

Yield:

Most corporate managers give less emphasis to yield as compared to security and liquidity of

Investment. So they prefer short term government securities for investing surplus cash.

40

Maturity:

It will be advisable to select securities according to their maturities so the finance manager can

maximize the yield as well as maintain the liquidity of investments.

Cash Management in BHEL:

The cash management is carried out in seaways by CTM (Corporate Treasury Management). CTM is

a commonly followed procedure in most of the companies.

Now we see the cash ratio / quick ratio in bhel

1. CASH RATIO

It is relationship between cash and current liabilities.

Cash

Cash ratio = _______________________

Current liabilities

41

STATEMENT SHOWING CASH RATIO

TABLE – 3 Rs in lakhs

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

CASH 413398 580900 838600 1031467 979008

CURRENT

LIABILITIES

1032002 1442000 2002230 2833290 3244172

CASH RATIO 0.40 0.40 0.42 0.36 0.30

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The Cash ratio of BHEL in the 2008-2009 was fluctuation in 2012-13 it was 0.30 times and in

2008-2009 it was 0.40 times and 2010-11 it was reduced to 0.42.

The standard norms of absolute quick ratio are 0.5:1. From the above table the firms not maintain the

sufficient level of quick assets because of the day-to-day expenses .It is fluctuating between the

standard norms for this ratio is 1:2 means for every 2 rupees of current Liabilities, Company must

have 1 rupee of cash and bank balance and marketable securities.

CHART-3

42

CASH RATIO

RECEIVABLES MANAGEMENT

43

Introduction:

Receivables constitute a significant portion of the total assets of the business. When a firm

seller goods or services on credit, the payments are postponed to future dates and receivables are

created. If they sell for cash no receivables created.

Meaning:

Receivable are asset accounts representing amounts owed to the firm as a result of sale of goods or

services in the ordinary course of business.

Purpose of receivables:

Accounts receivables are created because of credit sales. The purpose of receivables is directly

connected with the objectives of making credit sales. The objectives of credit sales are as follows-

Achieving growth in sales.

Increasing profits.

Meeting competition.

Factors affecting the size of Receivables:

The main factors that affect the size of the receivables are-

Level of sales.

Credit period.

Cash discount.

Costs of maintaining receivables:

The costs with respect to maintenance of receivables are as follows-

Capital costs:

44

This is because there is a time lag between the sale of goods to customers and the payment by them.

The firm has, therefore to arrange for additional funds to meet its obligations.

Administrative costs:

Firm incur this cost for manufacturing accounts receivables in the form of salaries to the staff kept

for maintaining accounting records relating to customers.

Collection costs:

The firm has to incur costs for collecting the payments from its credit customers.

Defaulting costs:

The firm may not able to recover the over dues because of the inability of customers. Such debts

treated as bad debts.

Receivables management:

Receivables are direct result of credit sale. The main objective of receivables management is to

promote sales and profits until that point is reached where the ROI in further funding of receivables

is less than the cost of funds raised to finance that additional credit (i.e.; cost of capital). Increase in

receivables also increases chances of bad debts. Thus, creation of receivables is beneficial as well as

dangerous. Finally management of accounts receivable means as the process of making decisions

relating to investment of funds in this asset which result in maximizing the overall return on the

investment of the firm.

Receivables management and Ratio Analysis:

Ratio Analysis is one of the important techniques that can be used to check the efficiency with which

receivables management is being managed by a firm. The most important ratios for receivables

management are as follows-

DEBTORS TURNOVER RATIO: -

45

Debtors constitute an important constituent of current assets and therefore the quality of the debtors

to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtors are

converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm. The

liquidity of firm’s receivables can be examined in two ways they are DTR and Average Collection

Period.

It indicates the number time debtors turned over each year. Generally the higher value of debtor’s

turnover shows high efficiency to manage the credit management.

Total sales

Debtors turnover ratio = ______________________________

Debtors

TABLE –4STATEMENT SHOWING DEBTORS TURNOVER RATIO

46

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

TOTAL SALES 1337403 1723753 1930464 2621233 3286144

DEBTORS 716806 969582 1197487 1597550 2068875

DEBTOR

TURNOVER

RATIO

1.87 1.78 1.61 1.64 1.59

Rs in lakhs SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

Debtors constitute an important constituent of current assets and therefore the quality of the debtors

to a great extent determines a firm’s liquidity. It shows how quickly receivables or debtors are

converted into cash. In other words, the DTR is a test of the liquidity of the debtors of a firm. The

liquidity of firm’s receivables can be examined in two ways they are DTR and Average Collection

Period. .The higher the ratio, the better it is, since it would indicate that debts are being collected

promptly.

In the year 2012-13 the debt is 1.59 comparing to the previous year came downwards.

CHART4

DEBT COLLECTION PERIOD

47

Debtor’s collection period is nothing but the period required to collect the money from the customers

after the credit sales. A speed collection reduces the length of operating cycle and vice versa. The

more quickly the customers pay, the less risk from bad debts, the lower the expenses of collection

and more liquid the nature of of this asset.

It indicates the speed with which debts are collected.

Days/months in a year

Debt collection period = _______________________________

Debtor’s turnover ratio

TABLE – 5 DEBT COLLECTION PERIODS Rs in lakhs

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

DAYS 365 365 365 365 365

48

DEBT

TURNOVER

RATIO

1.87 1.78 1.61 1.64 1.59

DEBT

COLLECTION

PERIOD

195 205 227 223 230

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The debt collection period of BHEL in the 2008-2009 was 195 days and in goes to 2012-2013 it was

increased in (0.18%) 230 days. Standard Debt Collection Period of a firm is less than 90 days. But,

above tables consists of increased of DCP in rapidly.

CREDITORS TURNOVER RATIO

49

The ratio shows on an average the number of times creditors turned over during the year.

Credit purchase

Creditors turnover ratio = ________________________

Average creditors

TABLE – 6 CREDITORS TURNOVER RATIO

Rs in lakhs YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

50

CREDIT

PURCHASE709940 1018186 1182087 1762005 2067232

SUPPLIERS /

CREDITORS280409 353895 442400 585285 757980

CREDITORS

TURNOVER

RATIO

2.53 2.88 2.67 3.01 2.73

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The Creditors turnover ratio of BHEL was fluctuating during the year 2008-2013. It was upward

in (2011-2012) was 3.01 times and it was downward in 2012-13 is 2.73 times. Greater the CTR the

more time firm has to pay to their creditors.

CHART -6

CASH TO CURRENT ASSETS RATIO

51

Description: The cash to current assets ratio is useful for determining the proportion of cash within the current assets category. This is the most conservative way to measure a company's liquidity because it ignores the liquidation value of accounts receivable and inventory. It is most useful for determining the ability of a company to pay off liabilities in the extremely short term.

Formula: Add together cash and short-term marketable securities, and divide by current assets. Current assets include cash, short-term marketable securities, accounts receivable, and inventory.

The formula is:=

Cash + short term marketable securities Current asset

52

TABLE –7

CASH TO CURRENT ASSETS RATIO Rs in lakhs

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

CASH 413398 580900 838600 1031467 979008

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CASH TO

CURRENT

ASSETS RATIO

0.25 0.27 0.30 0.28 0.23

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The Cash to current assets turnover ratio of BHEL was fluctuating during the year 2008-2013. It was

upward in (2008-2010) was 0.25 times to 0.30 times and it was downward in 2010-13 is 0.23 times.

CHART -7

CASH TO CURRENT ASSETS RATIO

53

CASH TURNOVER RATIO

The cash turnover ratio equals the sales revenue generated during a year divided by the average cash

and cash equivalents during the same year. Cash equivalents are short-term investments, such as

Treasury bills, that can be quickly converted to cash. The average cash and cash equivalents balance

equals the amount at the beginning of the year plus the amount at the end of the year, divided by

two.

Indicates a firm's efficiency in its use of cash for generation of sales revenue. It is the inverse of

cash-to-sales ratio.

Formula: Sales revenue (at the end of a period) ÷ average cash balance (in the same period).

54

TABLE –8 CASH TURNOVER RATIO Rs in lakhs

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

SALES 1337403 1723753 1930464 2621233 3286144

CASH 413398 580891 838602 1031467 979008

CASH

TURNOVER

RATIO

3.24 2.97 2.31 2.54 3.36

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

The cash turnover ratio in the years 2008-2013 it was on fluctuating ratios, in the year 2012-2013 it

was increased (0.037%) 3.36.

55

INVENTORY MANAGEMENT

Introduction:

Inventories are stock of the product a company is manufacturing for sale and components. That

makeup the products. The various forms in which inventories exist in a manufacturing company are:

Raw-materials, work-in-process, finished goods.

Raw-Materials: - Are those basic inputs that are converted into finished products through the

manufacturing process. Raw-materials inventories are those units, which have been

purchased and stored for future production.

Work-In-Process inventories are semi-manufactured products. The represent products that

need more work before they become finished products for sale.

Finished Goods inventories are those completely manufactured products, which are ready

for sale. Stocks of raw-materials and work-in-process facilitate production which stock of

finished goods is required for smooth marketing operations. These inventories serve as a link

between production and consumption of goods.

Stores and spares are also maintained by some firms. This includes office and plant cleaning

materials like soaps, brooms, oil, fuel, light, bulbs etc. These materials do not directly enter

in production. But are necessary for production process.

Need to holding inventory

The question of managing inventories arises only when the company holds inventories. Maintaining

inventories involves tying up of the company's funds and incurrence of storage and handling cost. It

is expensive to maintain inventories, why does company hold inventories? There are three general

motives for holding inventories.

1. Transaction Motive: - Emphasizes the need to maintain inventories to facilitate smooth

production and sales operations.

56

2. Precautionary motive: - Necessitates holding of inventories to guard against the risk of

unpredictable changes in demand and supply forces and other factors.

3. Speculative motive: - Influences the decision to increase or reduce inventory levels to

take advantages of price influences.

A company should maintain adequate stock of materials for a continuous supply to the factory for

the uninterrupted production. It is not possible for a company to procure raw materials whenever it is

needed. A time lag exists between demand for materials and its supply. Also there exists uncertainty

in procuring raw materials in time on many occasions. The procurement of materials may be delayed

because of such factors as strike, transport disruption or short supply. Therefore, the firm should

maintain sufficient stock of raw materials at a given time to stream line production.

Objective of Inventory Management

In the context of inventory management the firm is faced with the problem of meeting two

conflicting needs;

To maintain a large size of inventory for sufficient and smooth production and sales

operations.

To maintain a minimum investment in inventories to maximize profitability.

Both excessive and inadequate inventories are not desirable. These are two dangerous points within

which the firm should operate. The objective of inventory management should be to determine and

maintain optimum level of inventory investment. The optimum level of inventory will lie between

the two danger points of excessive and inadequate inventories.

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

major dangerous of over investment are,

Unnecessary tie-up of the firms funds losses of profit

Excessive carrying cost

57

Risk of quality

The aim of inventory management thus should be to avoid excessive and inadequate levels of

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

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

at the right price and quality. An effective inventory management should

Ensure a continuous supply of raw materials to facilitate uninterrupted production.

Maintain sufficient stock of raw materials in periods of short supply and anticipate price

changes.

Maintain sufficient finished goods inventory for smooth sales operations and efficient

customer service.

Minimize the carrying cost and time.

Control investment in inventories and keep it at an optimum level.

Inventory management techniques:

In managing inventories the firm objective should be in consonance with the shareholders' wealth

maximization principle. To achieve this firm should determine the optimum level of inventory.

Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in

unbalanced inventory and inflexibility-the firm ma sometimes run out of stock and sometimes may

pileup unnecessary stocks. This increases level of investment and makes the firm unprofitable.

To manage inventories efficiency, answers should be sought to the following two questions.

1) How much should be ordered?

2) When should it be ordered?

58

The first question how much to order, relates to the problem of determining economic order quantity

(EOQ), and is answered with an analysis of costs of manufacturing certain level of inventories. The

second question when to order arise because of determining the reorder point.

When the order is placed for raw material certain raw material is in transit, such raw material is

called as raw material in transit.

Example –Raw material on overseas.

The raw material can be transfer from unit to another unit or from one department to another is

called transfer-in –transit. It is nothing but to the transfer of raw material among the inter firm units

of BHEL.

The raw material, which is production process, is called work-in process. The work in process

becomes finished goods inventory. The finished should not be kept for a longer time. They should be

sold off to clear off the entire inventory. However, finished goods inventory is not there for BHEL,

since production is mainly done on customer order and specifications. The raw material is purchased

and the whole process is repeated again which we call it as inventory cycle.

Inventory turnover Ratio:-

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It

is calculated by dividing the cost of goods sold by the average inventory. The average inventory is

the average of open and closing balance of inventory.

59

INVENTORY TURNOVER RATIO

It indicates the inventories turning into receivables through sales.

Sales

Inventory turnover ratio =__________________________

Inventory

60

TABLE9 INVENTORYTURNOVER RATIOYEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

SALES 1337403 1723753 1930464 2621233 3286144

INVENTORY 374437 421767 573640 783702 923546

INVENTORYTU

RNOVER RATIO3.57 4.09 3.37 3.34 3.56

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORT

INTERPRETATION

This ratio indicates the liquidity of the inventory, that is, how quickly, on the average; the inventory

was sold during the year and consequently the significance of the inventory for the debt paying

purposes.

A high stock turnover ratio is generally considered desirable because it is indicative of efficient

performance since an improvement in the ratio shows hat volume of sales has been either maintained

or increased without additional investment in stock.

Inventory turnover of BHEL for 2009-2010 was 4.09. In 2010-2011 the inventory turnover ratio was

high up to 3.37 and it was high in 2012-13 at 3.56.

CHART –9

61

INVENTORY TURNOVER RATIO

62

INVENTORY HOLDING PERIOD

The formula to calculate days in inventory is the number of days in the period divided by the inventory turnover ratio. This formula is used to determine how quickly a company is converting their inventory into sales. A slower turnaround on sales may be a warning sign that there are problems internally, such as brand image or the product, or externally, such as an industry downturn or the overall economy.The numerator of the days in inventory formula is shown at the top of this page as 365 to denote 365 days in a year. However, it is important to match the period in the numerator with the period for the inventory turnover used. For example, suppose that a company is calculating the days in inventory held based on a inventory turnover of 4.32 for one year. This can be divided into 365 days of the year for an average days in inventory of 84.49. If the same company has an inventory turnover of 2.31 for 180 days, the average days in inventory would be 77.92.

63

TABLE –10

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

DAYS / MONTH

IN YEAR365 365 365 365 365

INVENTORY

TURNOVER

RATIO

3.57 4.09 3.37 3.34 3.56

INVENTORYH

OLDING

PERIOD

102 89 108 109 103

INVENTORY HOLDING PERIOD

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

Inventory holding period of Bhel is varying on every year. In the year of 2008-2009

to 2010-2011 it’s increased in 0.06% (102 to 108) and 2012-13 it’s decreased by

0.047 %.

CHART –9

64

Working Capital Turnover Ratio Formula:

Following formula is used to calculate working capital turnover ratio

Working Capital Turnover Ratio = Cost of Sales / Net Working Capital

The two components of the ratio are cost of sales and the net working capital. If the

information about cost of sales is not available the figure of sales may be taken as

the numerator. Net working capital is found by deduction from the total of the

current assets the total of the current liabilities.

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TABLE-11 WORKING CAPITAL TURNOVER RATIO Rs in lakhs

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

SALES 1337403 1723753 1930464 2621233 3286144

NET

WORKING

CAPITAL

601076 664286 788388 856817 1049309

WORKING

CAPITAL

TURNOVER

RATIO

2.23 2.59 2.45 3.06 3.13

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

Working capital turnover ratio for the year 2012-13 was 3.13 times. It is higher

when comparing the past four years. The working capital management has to

improve by more concentration on collection strategies.

CHART-11 WORKING CAPITAL TURNOVER RATIO

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TABLE –12 WORKING CAPITAL FOR TREND ANALYSIS

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

CURRENT

ASSETS1633078 2106297 2770472 3690107 4293481

CURRENT

LIABILITIES1032002 1442011 1982084 2833290 3244172

WORKING

CAPITAL 601076 664286 788388 856817 1049309

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATIONIn this current asset is increasing during the period of study. Current liability is also

increased during the period of study. And working capital is also increasing..

CHART – 12

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TABLE –13 ANALYSES OF VARIOUS COMPONENTS IN WORKING

CAPITAL

Rs in lakhs

Particulars2008-2009 2009-2010 2010-2011 2011-2012 2012-

2013

Inventories 22.93

43.90

25.30

0.52

7.35

20.03

46.03

27.58

0.95

5.41

20.71

43.22

30.27

1.52

4.28

21.24

43.29

27.95

0.95

6.57

21.52

48.18

22.80

0.95

6.55

Sundry debtors

C& B balance

Other assets

Loans and advances

Total 100 100 100 100 100

CURRENT ASSETS

SOURCE: SECONDARY DATA

INTERPRETATIONIn this period 2008-2013 Sundry debtors and other current assets was only

maintained in stable for the period of study. Bhel must be extra care about cash and

bank balance in future. In the period of 2010-2013 inventory ratios are increased.

All about Bhel should be very care and must maintain in adequate current assets in

future.

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CHART – 13

GRAPH 13 .1 INVENTORY

GRAPH 13 .2 SUNDRY DEBTORS

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GRAPH 13 .3 OTHER CURRENT ASSETS

GRAPH 13 .4 LOANS AND ADVANCES

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GROSS PROFIT RATIO:

Gross profit margin shows the company can return income at the gross level. This ratio

helps to control inventory usage and production performance and fixing unit price of

goods.

Gross profit ratio =

Gross profit × 100

Net sales

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TABLE – 14 ANALYSIS OF GROSS PROFIT RATIO Rs in lakhs

Particulars 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Gross Profit /Profit

before tax256435 373607 443039 484885 659065

Total Sales 1337403 1723753 1930464 2621233 3286144

Gross Profit ratio 0.192 0.217 0.230 0.185 0.201

GRAPH 14 - GROSS PROFIT RATIOS

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATIONIn the analysis of Gross profit ratio Bhel must control production expenses in future.

Comparison of 2010-2011 to 2012-2013 margin profit ratio will goes down in 2 %. Firm

will be control in production cost in next coming years, such as raw material, freight and

transport expenses. Otherwise, Bhel must increase in sales unit price.

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NET PROFIT RATIO:As every business is to earn profit, this ratio is very important because it measures the

profitability of sales. A business may yield high gross income but low net income

because of increasing operating and non-operating expenses. This situation can easily be

detected by calculating this ratio.

The profits used for this purpose may be profits after/before tax. To obtain this ratio, the

figure of net profits after tax is divided by the figure of net profits after tax is divided by

the figure of sales the ratio is also known as sales margin as we can ascertain with its help

the margin which the sales leave later deducting all the expenses. The unit of expression

is percentage, as is the case with profitability ratios.

Net profit ratio =

Net profit × 100

Net sales

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TABLE – 15 ANALYSIS OF NET PROFIT RATIO Rs. In lakhs

Particulars 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Net Profit /

Profit after tax 167916 241470 285934 313821 431064

Net Sales 1337403 1723753 1930464 2621233 3286144

Net Profit ratio 0.126 0.140 0.148 0.120 0.131

GRAPH 15 NET PROFIT RATIOS

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATIONIn this period of research of study Net profit of the Bhel company goes downwards from

2011-2013 comparing previous year achievements.

Gross Profit to Net Profit Ratio:

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Analysis of ratio’s G.P. to N.P is very important in every firm. It helps to find out the

cost of expense increased in production or administrative level and other hand it helps to

control in overall financial expenses.

The Gross Profit to Net Sales ratio measures how well revenue generated from Net Sales

can cover expenses while gaining a profit

Formula=

Gross profit

Net profit

TABLE – 16 ANALYSIS OF G.P. TO N.P RATIO

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Rs in lakhs

Particulars 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Gross Profit 256435 373607 443039 484885 659065

Net Profit 167916 241470 285934 313821 431064

G.P. - N.P. RATIO 1.53 1.55 1.55 1.55 1.53

GRAPH16 G.P. TO N.P. RATIO

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATIONIn this period of research of study Gross Profit and Net Profit are equal. Bhel control his

marginal and administrative cost in his control. There is no variation and its goes to

stable.

TREND ANALYSIS

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Particulars 2009 2010 2011 2012 2013

Current Assets :

Inventories / Stock 100 112.64 153.20 209.30 246.65

Debtors 100 135.26 167.06 222.87 288.62

Cash and Bank Balances100 140.52 202.86 249.51 236.82

Other Current Assets 100 236.33 498.33 414.45 481.48

Loans & Advances100 95.08 98.87 201.99 234.50

INTERPRETATIONAbove Table Inventory and debtors goes to growth level in all the years. Loans and

Advances and Other Current assets show high level of improvement in all the years.

Cash and Bank balances are fluctuating ratio in the year 2011-2013. Current Liabilities

are increasing in all the years and Provisions are fluctuating in the year 2013 compared to

previous years.

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RECOMMENDATION

1. It can be said that overall financial position of the company is normal but it is

required to be improved from the point of view of profitability.

2. Net operating cycle is increasing that means there is a need to make

Improvements in receivables/debtors management.

3. Company should stretch the credit period given by the suppliers.

4. Company should not rely on Long-term debts.

5. Company should try to increase Volume based sales so as to stand in the

competition.

Since the BHEL is a profit making company and the interests of the investors are

also safe so for making more profit and for increasing the net profit as well as gross profit

the organization should curtail its operating, administrative & non productive expense.

Company is having good marketability, profitability and liquidity so the company can

raise its fund. Company should not forget its ‘Quality Policy’ i.e. we at BHEL, should

aim to achieve and sustain excellence in all our activities.

We are committed to total customer satisfaction by providing producers and services

which meet or exceed the customer expectation.

Modernization of the manufacturing facilities, stress on technological innovation and

training of employees at all levels shall be continuous process in BHEL.

LIMITATIONS The study does not consider the market fluctuations in all its calculations.

Analysis is very much dependent on the companies’ internal bulletin.

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CONCLUSIONS

1) Standard current ratio is 2:1 and for industry it is 1.33:1. BHEL ratio satisfactory.

2) Acid test ratio is more than one but it does not mean that Company has excessive

liquidity & firm quick ratio is declining from 2008-2009 to 2012-2013.

3) Debtors of the company were high; they were increasing year by year, so more funds

were blocked in debtors. But now recovery is becoming faster.

4) Debtors turnover ratio is fluctuating from 2008-2009 to 2012-2013, which means

inventory is not utilized in better way so it is not a good sign for the company.

5) Inventory turnover ratio is improving from 2008-2009 to 2012-2013.increase in ratio is

beneficial for the company because as ratio increases the number of days of collection for

debtors decreases.

6) Working capital turnover ratio is continuously increasing that shows increasing needs

of working capital.

7) Production capacity is not utilized to the full extent

The study is basically done to have a deep knowledge about WORKING CAPITAL of

the BHEL industries limited. BHEL, Industries limited is having an appropriate working

capital management of the organizations. NET PROFIT growth rate is 13.10% in 2009-

10, it is showing a nominal increase in net profit as compared to last year. The GROSS

PROFIT of BHEL more or less is maintaining same margin of profit.

The firm DCP is rising every year which is major concern for firm as larger the DCP

greater the chances of bad debts. DTR is also decreasing in 2005-06 it was 1.87 times

now it has drop down to 1.59times.

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Current ratio is also below the standard norm. In the financial year 2008-2009 it was 1.58

now it has decreased up to 1.32.The firm should maintain the adequate level of current

assets in order to discharge its current liabilities.

As far as cash ratio is concerned the firms not maintain the sufficient level of quick assets

because of the day-to-day expenses. It is fluctuating between the standard norms for this

ratio is 1:2 means for every 2 rupees of current Liabilities.

Company must have 1 rupee of cash and bank balance and marketable securities.

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BIBLIOGRAPHY

Reports Annual Report (2008-2013)

Bonus issue bulletin 2008

Websites

www.bhel.com

www.wikipedia.com

www.slideshare.com

www.managementparadise.com

www.ijars.in

http://money.livemint.com

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