Summer Training Project Report

ON

“WORKING CAPITAL MANAGEMENT IN NTPC”

Submitted in the partial fulfillment of the requirement for the

award Of MASTER OF BUSINESS ADMINISTRATION Degree

From

Gautam Buddh Technical University, Lucknow

Formerly U.P.Technical University, Lucknow

Batch (2009-11)

UNDER THE GUIDENCE OF

SUBMITTED BY

Mr. K.R.SRIVASTAV RAVINDRA NATH

(FINANCE MANNAGER,NTPC/ OBRA) M.B.A. III Sem

Roll no. 0901670090

SUBMITTED AT:

RAKSHPAL BAHADUR MANAGEMENT INSTITUTE

BAREILLY U.P.

1

U.P. RAJYA VIDYUT UTPADAN NIGAM Ltd.

P.O. OBRA, DISTI- SONEBHADRA – 321219

NO. -214 TTI/UPRVUNL/V.2 Dated

06-08-2010

CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that Ravindra Nath S/of Sir Rajendra, (MBA I Year)

hasundergone

Apprenticeship Training. Vocational training at Obra Thermal Power complex,

Obra during the period ……22-06-2010 to 02- 08- 2010 .

He was deputed for training in CPAD, (A) TPS OBRA. Performance of the

Trainee during the period was found to be Very Good.

DEPUTY DIRECTOR

THERMAL TRANINGINSTITUTE

231219

2

DECLARATION

I RAVINDRA NATH student of MBA RBMI, Bareilly do hereby

declare that this piece of project report entitled “Working capital

Management in NTPC” is the result of research undertaken.

This project work is the result of effort undertaken by me and has

neither been submitted nor published elsewhere.

RAVINDRA NATH

ACKNOWLEDGEMENT

3

The project title “WORKING CAPITAL MANAGEMENT” has been

conducted by me during 22.06.2010 and 02.08.2010 at NTPC Ltd., OBRA

Sonebhadra. I have completed this project, based on the secondary research,

under the guidance of Mr. K.R. Srivastva.

I owe enormous intellectual debt towards my guides Mr. K.R. Srivastva , who

have augmented my knowledge in the field of working capital management.

They have helped me learn about the process and giving me valuable insight

into the field of management of short term capital.

I am obliged to all the employees of the finance department and employees of

NTPC for their cooperation during the Internship. My increased spectrum of

knowledge in this field is the result of their constant supervision and direction

perspectives.

Last but not the least, I feel indebted to all those persons and organizations who

have provided helped directly or indirectly in successful completion of this

study.

TABLE OF CONTENTS

Sr. No. Contents Page No.

4

1. Declaration 3

2. Acknowledgement 4

3. Preface 7

4. Executive Summary 8

5. NTPC Ltd.- Overview 10

(A). NTPC Business 27

(B). Capacity of Addision Programme 32

(C). Obra Thermal Power Station 42

6. Objective Of The Research 46

7. Research Methodology and Scope Of Study 47

8. Introduction of working capital 48

9. Working capital management 57

10. Working capital of Ratio Analysis 62

11. Inventory Management 76

12. Data Analysis and Interpretation 91

13. Sort Analysis of NTPC 94

14. Limitation 95

15. Conclusion 96

16. Suggestion 97

5

17. Bibliography 98

6

PREFACE

To start any business, First of all we need finance and the success of that

business entirely depends on the proper management of day-to-day finance and

the management of this short-term capital or finance of the business is called

Wor king capital Management.

Working Capital is the money used to pay for the everyday trading activities

carried out by the business - stationery needs, staff salaries and wages, rent,

energy bills, payments for supplies and so on.

I have tried to put my best effort to complete this task on the basis of skill that I

have achieved during the last one year study in the institute.

I have tried to put my maximum effort to get the accurate statistical data.

However I would appreciate if any mistakes are brought to my by the reader.

7

EXECUTIVE SUMMARY

This report presents the facts discovered by studying the working capital of

NTPC Ltd. to enable knowledge sharing. The study aims at understanding the

efficiency of management in proper utilization of short term capital.

The project deals with the intricacies involved at the people and process level

before major investment is made at the technology aspect. KMS being a major

investment for an organization needs to be followed by a groundwork done at

the basic level of people so that the hesitation and fear to share information

amongst employees can be removed.

Our ignorance exceeds our knowledge where issues of motivation and

commitment of knowledge workers are concerned in context of knowledge

Management System (KMS) implementation. Knowledge management

becomes basic to one’s work in light of the massive knowledge bases available

in this era where information multiplies so rapidly.

Within this environment, decision making is a highly prized skill for clarifying

the options within a knowledge base.

“We have to get away from this idea that there is a right answer to find.

Knowledge is bout understanding our choices and the consequences of those

choices, then making a decision not about what is right, but about what we can

live without.”

8

Motivation and commitment of knowledge workers, employees, professionals

and managers are being increasingly realized as critical success factors for the

implementation of enterprise knowledge management system.

After talks within organizations with KM initiative it was observed that

unsuccessful KM projects had “struggled to get organization members to

contribute success factor for virtually all knowledge management projects.”

NTPC Ltd is the largest thermal power generating company of India. Its core

business is engineering, construction and operation of power generating plants

and also providing consultancy to power utilities in India and abroad.

The project involved three stages:

The first stages consist of the choice of the project topic and its limits. Browsing

through the intranet of NTPC, talking to employees and then finalizing the

study area from amongst the various issues which were a concern for NTPC.

The second stage consisted of a survey across all hierarchical levels of the

organization on a random basis. The total sample size was hundred in which all

levels of employees were attempted to be covered. The data collected was

analysed by using descriptive statistical tools for getting in depth view of the

findings.

9

NTPC Ltd. - Overview…

10

At the time of independence in 1947, India had a meager power generating

capacity of 1,352 MW which has since increased to 155,859 MW as of

November 30, 2009. After independence, electricity was made subject to the

concurrent jurisdiction of the state and central governments, although

Parliament was given the ability to exercise pre-emptive power. The Electricity

(Supply) Act, 1948 (the “Supply Act”) led to the creation of the SEBs. The

SEBs are state government agencies with the sole responsibility for generation,

transmission and distribution of electricity within each state. Many of the SEBs

have since been unbundled into state utilities for generation, transmission and

distribution. As of November 30, 2009, the SEBs and the state utilities own or

control approximately 50.3% of India's total generating capacity and have

substantial control of most of the distribution assets. The MoP is primarily

responsible for the development of the power industry in the country. The GoI

has made a series of investments to develop the power sector in India, to

supplement the efforts of the states.

The year 1975 witnessed the birth of an organization that went on to

achieve great feats in performance in a sector that was, until then, characterized

largely by lack of investment, severe supply shortage and operational practices

that made the commercial viability of the sector unsustainable. On November 7

1975, NTPC came into being and with it came a bold way of looking at the

power infrastructure that could support the economy, then reeling under the oil

crisis. Since then, NTPC has led the power sector with the creation of an

immensely efficient and reliable power generation infrastructure which was till

then largely in the hands of state electricity boards. NTPC was set up in the

central sector to build, own and operate large thermal power stations which unit

size of 200 MW and 500MW. Capacity addition by NTPC was meant to

supplement the efforts of state electricity boards (SEBs).

11

The first four projects, namely, singrauli, Korba, Ramagundam, Farakka, in four

different regions of the country, were already on the drawing board and were to

be set up as pit-head stations. There were challenges aplenty. The expectations

were high and so were the risks. NTPC symbolized hope of the country

suffering from crippling power black-outs, the government of India, which was

trying to put an ailing, economy back on track and the World Bank, which was

supporting the country in many development initiatives. Thus, NTPC was

created not only to redraw the power map of India but also to excel in its

performance and set benchmarks for others to follow. It succeeded on both

counts.

In 1978 it was a clean state. Until the first sketches of an idea were

scribbled on it. And them, in no time, it seems, what was a dream became a

reality –power. Today, Singrauli stands tall among India’s foremost power

plants. Cleared by the Government of India on 8th Dec.76, the project began to

take shape in early’78. An intrepid group of site engineers, supervisors and

workmen braved the elements to lay the foundations of what at the time was

thought to be a dream.

By mid 1978, the first T.G raft connecting, a very precise and massive task was

completed. By Nov. 78, the erection of the first steam generator had

commissioned. In Nov.’79, the first major mile-stone in the erection of the main

plant was reached with the boiler drum of unit – I being lifted successfully,

signaling the commencement of pressure parts erections. By June’80 the turbine

installation work had already begun, and in Sept.’81, the boiler was lit up and

the cleaning process completed by Oct.’81.

12

Finally on 13th Feb.’1982 the turbine was steam rolled and the first unit of

NTPC was successfully synchronized with the Northern Grid at Shaktinagar.

The peak load of 200MW was touched in April’82. The fifth and last one on

20th Feb.’84, bringing the curtain down on stage –I of the project . National

Thermal Power Corporation is the largest power generation company in India.

The Forbes Global 2000 ranking for 2005 ranks it as the 5th leading company in

India and the 486th leading company in the world.

It is a public listed (Bombay Stock Exchange) Indian public sector company,

with majority shares owned by the Government of India. India. At present,

Government of India holds 89.5% of the total equity shares of the company and

the balance 10.5% is held by FIIs, Domestic Banks, Public and others. NTPC

ranks amongst the top five companies, in terms of market capitalizations.

NTPC's core business is engineering, construction and operation of power

generating plants and also providing consultancy to power utilities in India and

abroad. As on date the installed capacity of NTPC is 26, 404 MW through its 14

coal based (21,395 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects

(1,054 MW).

NTPC’s share on 31 Mar 2007 in the total installed capacity of the country was

19.51% and it contributed 27.68% of the total power generation of the country

during 2007-08. Thus, every fourth home in India is enlightened by NTPC. A

total of 170.88 BUs of electricity was produced across all the stations of the

company in the financial year 2005-2006.

13

The Net Profit after Tax on March 31, 2008 was INR 58, 202 million. Net Profit

after Tax for the quarter ended June 30, 2006 was INR 15528 million, which is

18.65% more than the same quarter in the previous financial year (2006-2007)

where the profit was INR 13087 million.

Pursuant to special resolution passed by the Shareholders at the Company’s

Annual General Meeting held on September 23, 2005 and the approval of the

Central Government under section 21 of the Companies Act, 1956, the name of

the Company "National Thermal Power Corporation Limited" has been changed

to "NTPC Limited" with effect from October 28, 2005.The company, which has

completed its thirty years of existence on November 7, 2008, has made its foray

into hydro-power and is planning to go into nuclear too). Within a span of 31

years, NTPC has emerged as a truly national power company, with power

generating facilities in all the major regions of the country. Based on 1998 data,

carried out by Datamonitor UK, NTPC is the 6th largest in terms of thermal

power generation and the second most efficient in terms of capacity utilization

amongst the thermal utilities in the world.

14

VISION

“A world class integrated power major, powering India’s

growth, with increasing global presence"

MISSION

"Develop and provide reliable power, related products and

services at competitive prices, integrating multiple energy

sources with innovative and eco – friendly technologies and

contribute to society"

15

CORE VALUES

B- BUSINESS ETHICS

C – CUSTOMER FOCUS

O – ORGANIZATIONAL & PROFESSIONAL PRIDE

M – MUTUAL RESPECT AND TRUST

I – INNOVATION & SPEED

T – TOTAL QUALITY FOR EXCELLENCE

16

Coal Based Power Stations

  Coal based State Commissioned Capacity

(MW)

1. Singrauli Uttar Pradesh 2,000

2. Korba Chattisgarh 2,100

3. Ramagundam Andhra Pradesh 2,600

4. Farakka West Bengal    1,600

5. Vindhyachal Madhya Pradesh 3,260

6. Rihand Uttar Pradesh    2,000

7. Kahalgaon Bihar 1,340

8. NTCPP Uttar Pradesh 840

9. Talcher Kaniha Orissa  3,000

10. Unchahar Uttar Pradesh 1,050

11. Talcher Thermal Orissa 460

12. Simhadri Andhra Pradesh 1,000

13. Tanda Uttar Pradesh 440

14. Badarpur Delhi 705

15 Sipat Chattisgarh 500

Total (Coal) 23395

17

Gas/Liq. Fuel Based Power Stations

  Gas based State Commissioned Capacity

(MW)

16. Anta Rajasthan 413

17. Auraiya Uttar Pradesh 652

18. Kawas Gujarat 645

19. Dadri Uttar Pradesh 817

20. Jhanor-Gandhar Gujarat 648

21. Rajiv Gandhi CCPP

Kayamkulam Kerala 350

22. Faridabad Haryana 430

Total (Gas) 3,955

18

Projects under Implementation

  Coal / Hydro State Fuel

Additional Capacity

Under

Implementation

(MW)

1. Kahalgaon Stage II (Phase I)

(Phase II)Bihar Coal

500

500

2. Sipat (Stage I) (Stage II) Chhattisgarh Coal1980

1000

3. Barh Bihar Coal 1980

4. Bhilai (Exp. Power Project-JV

with SAIL)Chhattisgarh Coal 500

5. Korba (Stage III) Chhattisgarh Coal 500

6. Farakka (Stage III) West Bengal Coal 500

7. NCTPP (Stage II) Uttar Pradesh Coal 980

8. Simhadri (Stage II) Andhra Pradesh Coal 1000

9. Koldam (HEPP)Himachal

PradeshHydro 800

10. Loharinag Pala (HEPP) Uttarakhand Hydro 600

11. Tapovan Vishnugad (HEPP) Uttarakhand Hydro 520

Total (Coal + Hydro) 11,360

19

Subsidiary Companies:

1. NTPC Vidyut Vyapar Nigam Limited has been incorporated as a wholly

owned subsidiary of NTPC to tap the vast potential of Power Trading for

optimization of capacity utilization.

2. NTPC Hydro Limited has been incorporated as a wholly owned

subsidiary of NTPC for development of small and medium scale hydro

power projects.

3. NTPC Electric Supply Company Limited has been incorporated as a

wholly owned subsidiary of NTPC for taking up power distribution

activities.

4. Pipavav Power Development Co. Ltd. has been incorporated under

Presidential Directive to acquire land and other site-related development

activities to set up 2000 MW Pipavav Mega Power Project in the state of

Gujarat.

Joint Venture Companies:

1. Utility Powertech Limited a 50:50 Joint Venture Company of NTPC and

Reliance Energy Limited has been incorporated to take up assignments of

construction, erection and supervision in power sector and other sectors

in India and abroad.

2. NTPC-Alstom Power Services Private Limited a 50:50 Joint Venture

Company of NTPC and Alstom Power Generation AG, Germany has

been incorporated for taking up renovation and modernization

assignments of power paints both in India and abroad.

20

3. NPTC India Ltd., in which NTPC holds 8% equity, is engaged in the

business of purchasing power from power projects and selling the same to

SEBS requiring power.

4. NTPC-SAIL Power Company Private Limited – a 50:50 Joint Venture of

NTPC and SAIL is operating and maintaining the Captive Power Plants

(CPP-II) of Durgapur and Rourkela Steel Plants (120 MW each).

5. Bhilai Electricity Supply Company Private Limited – another 50:50 Joint

Venture company of NTPC and SAIL is operating and maintaining the

CPP-II (74 MW) of Bhilai Steel Plant. The company is also setting up 2 x

500 MW units as expansion of the CPP.

6. NTPC Tamil Nadu Energy Company Limited – a 50:50 Joint Venture

company of NTPC and Tamil Nadu Electricity Board has been

incorporated to establish and operate a 1000 MW thermal power project

in Tamil Nadu.

7. vii) Ratnagiri Gas and Power Private Limited a Joint Venture Company

which has taken over the assets of Dabhol Power Project from India

Lenders. Currently, each of NTPC, GaAIL and Financial Institutions are

holding 28.33% equity share capital of the Company and MSEB is

holding balance 15%.

21

Establishing a Global Presence

To become a truly global company serving global markets, it is essential

for NTPC toestablish its brand equity in overseas markets. NTPC would

continue to focus on offering Engineering & Project Management

Services, Operations & Maintenance services, and Renovation &

Modernization services in the international market.

Establishing a successful services brand would be a precursor to taking

higher investment decisions in different markets. Going forward, NTPC

would continue to evaluate various options for strengthening its presence

in global markets including setting up power generation

capacity, acquisition of gas blocks etc.

By the year 2017, NTPC would have successfully diversified its

generation mix, diversified across the power value chain and entered

overseas markets. As a result NTPC would have altered its profile

significantly. Elements of the revised profile that NTPC would seek to

achieve are:

Amongst top five market capitalization in the Indian market

An Indian MNC with presence in many countries

Diversified utility with multiple businesses

Setting benchmarks in project construction and plant availability &

efficiency

Preferred employer

Have a strong research and technology base

Loyal customer base in both bulk and retail supply

A leading corporate citizen with a keen focus on executing its social

responsibility

22

Services offered by NTPC

An entire gamut of services is offered in the areas mentioned above.

These are:

Owner's Engineer Services

Lender's Engineer Services

Environment Engineering and Management

Procure

Project Management

Quality Assurance and Inspection Services

Materials Management

Construction Management, Erection and Commissioning

Financial Systems and Modeling

Operation and Maintenance

Restoration, Efficiency Improvement and Renovation and

Modernization

HRD and Training

Research and Development

Information Technology

Management Consultancyment Services

23

24

In October 2004, NTPC launched its Initial Public Offering (IPO)

consisting of 5.25% as fresh issue and 5.25% as offer for sale by

Government of India. NTPC thus became a listed company in November

2004 with the government holding 89.5% of the equity share capital.

The rest is held by Institutional Investors and the Public. The issue was a

resounding success.

NTPC is among the largest five companies in India interms capitalization.

25

At NTPC people before Plant Load Factor is the mantra that guides all

HR related policies.

NTPC has been awarded No.1, Best Workplace in India among large

organizations for the year 2008, by the Great Places to Work Institute,

India Chapter in collaboration with The Economic Times .The concept of

Corporate Social Responsibility is deeply ingrained in NTPC's culture.

through its expansive CSR initiatives. NTPC strives to develop mutual

trust with the communities that surround its power stations. Right from

social to developmental work of the community and welfare based

dependence to creating greater self reliance;

The constant endeavor is to institutionalize social responsibility on

various levels.

26

NTPC’S BUSINESS

We are the largest power generating company in India. As of September 30,

2009, our owned installed power generating capacity is approximately 18.6% of

India's total installed capacity. In Fiscal 2009, we contributed 28.6% of the total

power generation of India. (Source: CEA). In 2009, we were the top IPP in

Asia, and ranked second in the world, on the basis of asset worth, revenues,

profits and return on invested capital, according to a study conducted by Platts,

a division of the McGraw-Hill Companies. Prior to this Offer, the GoI owns

approximately 89.5% of our Equity Share capital. As of September 30, 2009,

our total installed power generation capacity was 30,644 MW, including 28,350

MW of generation capacity through 112 units owned by us and 2,294 MW of

capacity through two joint venture companies.

Of our owned capacity, 86.0% is coal-based, operated through 15 coal based

power stations, and 14.0% is gas-based, operated through seven gas-based

power stations (including one naphtha-fired station). In Fiscal 2009, we

generated 206.9 billion units of electricity through our owned stations, We

operate our stations at a level of efficiency that exceeds the average in India,

based upon availability factor (which is a measure of how often a station is

available to generate power) and average plant load factor (“PLF”) (which is a

measure of how much of its capacity a plant actually uses to generate

electricity). In Fiscal 2009, our coal-based stations operated at an average

availability factor of 92.5%, and they achieved an average PLF of 91.1%,

compared to the all-India average PLF for coal-based stations of 77.2%. In

Fiscal 2009, of our 15 coal-based power stations, four operated at a PLF of

greater than 95.0% and one operated at a PLF of 99.4%.

27

In Fiscal 2009, our gas-based stations operated at an average availability of

86.7% and an average PLF of 67.0%, compared to the all-India average PLF for

gas-based stations of 57.6%. PLF of our gas-based stations has improved to

78.4% in the first half of Fiscal 2010 due to increased gas availability. Our

average selling price of electricity was Rs. 2.12 per unit in Fiscal 2009. We

have developed a long term technology roadmap for the induction of high

efficiency equipment, including supercritical and ultra-supercritical machines at

our new plants. We also intend to use other advanced technologies in the

renovation and modernization of our aging power stations. We believe that

these technologies will help us to achieve higher efficiency and availability.

As of September 30, 2009, we have added 3,240 MW during the Eleventh Plan,

and we are presently engaged in construction activities for projects representing

17,930 MW(including 4,000 MW undertaken by our joint venture companies).

We are also pursuing a basket of projects for approximately 33,000 MW of

capacity which are in various stages, including projects for which tender has

been invited, a FR prepared, or a FR is under preparation and approval, in order

to achieve our stated goal of 75,000 MW

capacity by Fiscal 2017. We take up new projects upon establishing the

availability of inputs such as land, water, fuel, off-take arrangements and

environmental clearances. We have begun to progressively diversify our fuel

mix. We are currently constructing hydroelectric power projects. As of

September 30, 2009, 1,920 MW of capacity is under construction and 552 MW

is under bidding. We are also preparing FRs and detailed project reports for

hydroelectric power projects to achieve hydroelectric capacity of approximately

9,000 MW by Fiscal 2017. We are also seeking other renewable energy

projects, such as wind and solar, to have 1,000 MW of our generating capacity

from other renewable sources by Fiscal 2017.

28

Currently, all of our total sales of electricity are made pursuant to long term

PPAs. More than 90% of our sales of electricity are to SEBs and state owned

distribution companies for which payments are secured through LCs and the

Tripartite Agreements (“Tripartite Agreements”). For private distribution

company customers, payments are secured through letters of credit backed by a

first charge created on their receivables in our favor.

In order to capitalize on the opportunity from the sale of merchant power, we

are implementing 2,120 MW of power projects, as merchant power plants for

selling power outside long-term PPAs at a market-based price.

As provided by the National Electricity Policy, 2005, up to 15% of new

generating capacity may be sold outside long-term PPAs. However, some of

the power generation from our merchant capacity may also be sold under PPAs.

As of September 30, 2009, we have signed long term CSAs covering 12 of our

15 coal-based stations. We have also executed gas supply agreements with

GAIL for the supply of gas for our gas-based power stations, which are valid up

to 2021. We are also continuing to diversify our business to become an

integrated power company. In order to secure our fuel supply, we have

diversified into coal mining.

We have been awarded eight coal mining blocks by the GoI, including two

blocks awarded for development under a joint venture with Coal India Limited.

In 2002 we incorporated our power trading subsidiary, NVVN, which has

grown to become the second largest power trader in India. In order to

incentivize the development of solar power in India, the GoI has designated

NVVN as the nodal agency for the purchase of up to 1,000 MW of solar power

commissioned by Fiscal 2013 under the National Solar Mission and sale after

bundling an equivalent MW capacity from our stations. We have developed a

consulting business to leverage our technical and operational skills and

knowledge base, domestically and internationally.

29

Total revenues from our consulting business has increased to Rs. 1,325 million

in Fiscal 2009 from Rs. 341 million in Fiscal 2004. Through our consulting

business we are currently supporting capacity addition, operation and

maintenance, renovation and modernisation and performance improvement of

approximately 26,000 MW of generating capacity in India. The other businesses

we are developing include equipment manufacturing, to ensure supply of

critical equipment and spare parts, and an electricity distribution business. In

line with the increase in our supply and generation capabilities over the last two

years, we have achieved significant growth in our gross income and profit after

tax. Our gross revenue increased to Rs. 452,728 million in Fiscal 2009 from Rs.

400,177 million in Fiscal 2008. Our profit after tax was Rs. 82,013 million in

Fiscal 2009 and Rs. 74,148 million in Fiscal 2008.

30

DEMAND OF POWER:

Demand for energy grows in tandem with the growth of the economy. This can

be seen from the following table, which shows the growth in real GDP from

Fiscal 2003 through Fiscal 2009 and the growth in demand for energy in the

same period.

Real GDP Growth and Growth in Demand for Energy

Fiscal Year Real GDP growth Growth in Demand for Energy

2003 3.8% 4.5%

2004 8.5% 2.4%

2005 7.5% 5.7%

2006 9.5% 6.8%

2007 9.7% 9.3%

2008 9.0% 7.1%

2009 6.7% 4.7%

Future Electric Energy Requirements:-

Fiscal Year Electrical Energy Requirement at Annual Peak

Power Station Bus Bars (GWh) Electric Load at PowerStation

Bus Bars

2012 968,659 152,746

2017 1,392,066 218,209

2022 1,914,508 298,253

31

CAPACITY ADDITION PROGRAMME

At India’s current projected GDP growth rate of between seven and eight

percent, power demand is expected to grow significantly. We expect that a large

energy deficit will exist as has occurred in the past. We have embarked on an

aggressive capacity addition program, in line with the GoI’s policy of adding

capacity to meet the demands for energy in India. We have a stated goal to be a

75,000 MW company by Fiscal 2017. We have also begun to progressively

diversify our fuel mix. We are planning a capacity addition of approximately

9,000 MW through hydroelectric power, 2,000 MW through nuclear power and

1,000 MW through renewable energy resources by 2017. We have adopted a

multi-pronged strategy that includes capacity addition through green field

projects, brown field expansions, joint ventures and acquisitions. We first

identify new potential sites or existing sites that could potentially be expanded.

We then seek to establish project viability through FRs.

We currently have 17,930 MW of additional capacity under construction. We

have also identified a basket of projects for approximately 33,000 MW of

capacity in various stages, through which we believe we can achieve our stated

goal of 75,000 MW capacity by Fiscal 2017. We classify our basket of projects

for capacity in the following categories:

• Projects under construction

• Projects for which we have invited bids from vendors

• Projects for which the FR s are approved

• Projects for which FRs are under preparation.

32

PROJECT UNDER CONSTRUCTION:

We are presently engaged in construction activities for projects representing

17,930 MW, including 4,000 MW undertaken by joint venture companies,

which are in different stages of completion:

Projects under construction – owned capacity

Name State CaP(MW) Approved Cost (Rs. In Mill) Fuel Typ

Sipat –I* Chhatisgarh 1,980 83,234 Coal

Barh –I* Bihar 1,980 86,930 Coal

Korba- III Chhatisgarh 500 24,485 Coal

NCTPP- II Dadri# UP 980 51,353 Coal

Farakka-III W.B. 500 25,704 Coal

Simhadri-II A.P. 1,000 50,385 Coal

Bongaigaon Assam 750 43,754 Coal

Barh-II* Bihar 1,320 73,410 Coal

Mauda-I Maharashtra 1,000 54,593 Coal

Rihand-III U.P. 1,000 62,30 Coal

Vindhyachal-IV M.P. 1,000 59,150 Coal

Kol Dam H.P. 800 45,272 Hydro

Loharinag Pala Uttarakhand 600 28,951 Hydro

Tapovan Vishnugad Uttarakhand 520 29,785 Hydro

Subtotal-owned (A) 13,930 719,314

*Indicates projects using super-critical technology #Unit I (490 MW) of this

project commenced commercial operation w.e.f. January 31, 2010

33

Projects under construction – joint ventures:

Name of Project State Capacity Fuel

Type

Vallur – I, Phase – I, JV with TNEB Tamil Nadu 1,000 Coal

Vallur – I, Phase – II, JV with TNEB Tamil Nadu 500 Coal

Indira Gandhi STPP Haryana 1,500 Coal

Nabinagar, JV with Railways Bihar 1,000 Coal

Subtotal-joint ventures (B) 4,000

Total-owned and joint ventures (A+B) 17,930

Projects for which we have invited bids from vendors:

B. Projects for which we have invited bids from vendors owned capacity

Name of Project State Capacity (MW) Fuel Type

Sholapur Maharashtra 1,320 Coal

Mauda II Maharashtra 1,320 Coal

North Karanpura Jharkhand 1,980 Coal

Singrauli III Uttar Pradesh 500 Coal

Rupsiyabagar Khasiabara Uttarakhand 261 Hydro

Renewable Energy Various Locations 100 Wind

Subtotal-owned capacity (A) 5,481

34

2. Projects for which we have invited bids from vendors- joint

ventures and subsidiaries

Name of Project state capacity (MW) fuel type

Meja Urja Nigam Pvt. Ltd. Uttar Pradesh 1,320 Coal

Nabinagar Power Generating Co Pt . Ltd . Bihar 1,980 Coal

Kanti Bijlee Utpadan Nigam Limited Bihar 390 Coal

Lata Tapovan Uttarakhand 171 Hydro

Rammam-III West Bengal 120 Hydro

Subtotal-joint ventures and subsidiaries 3,981

Capacity Addition Programme:

Growth Strategy Total Installed capacity envisaged

• Multi-pronged approach to

Capacity addition 1982- 200mw

• Greenfield projects 1987- 3100mw

• Joint ventures / 1992- 11333mw

Acquisitions

• Diversification in related 1997- 16795mw

Business areas

• Hydro projects 2002- 20249mw

• Coal Mining 2002- 20249mw

• Power trading 2006- 2500mw

• Oil / gas exploration 2007- 28890mw

• LNG value chain 2012- 40000mw

• Consultancy services 2017- 75000mw

ENERGY TECHNOLOGIES:

NTPC has set up Energy Technologies Centre with a well-defined mandate to

35

develop and innovate cutting edge technologies to meet the ever-changing

scenario in power sector. The centre is working in both fundamental and applied

fields with the ultimate objective of commercializing the technologies both

within and outside. Setting up of this centre by NTPC meets a long-term need of

such a centre in the power sector in India.

Energy Technologies has already started its research activities in-house and

through networking with established research institutes in India.

ENVIRONMENT MANAGEMENT:

• All NTPC stations have been certified with ISO-14001 by reputed

International certifying agencies.

• NTPC has planted a total of more than 18.2 Million trees till March-07

including more than 0.28 million trees planted during the current year 2006-07.

ASH UTILIZATION:

we are required to ensure that by 2014, 100% of fly ash produced through our

generation activities is gainfully utilised. New stations and units must utilize the

entire quantity of ash they produced in four years from the date of

commissioning. The GoI also has interim ash utilisation requirements. Our

actual ash utilisation has increased from 0.3 million tonnes in Fiscal 1992 to

24.4 million tonnes in Fiscal 2009 (or 56.7% of our total ash production) which

is more than the present ash utilization targets. We utilize ash for ash dyke

rising, mine filling, bricks/blocks/tiles manufacturing and landfills.

At present, we supply ash free of cost to consumers of ash, who use it in cement

and asbestos industry, building products, land development and road

construction.

In order to provide fly ash in dry form to various users, dry ash extraction

facilities have been provided at all our stations. Recently, the Go has allowed

sale of fly ash to certain users such as cement and asbestos industries, etc.

36

However, the proceeds from the sale of fly ash are to be utilized only for

development of infrastructure and promotional activities for ash utilisation. The

Go has given directions to mining companies and the construction industry for

mandatory use of ash. We believe that these directions may further increase ash

utilisation.

CORPORATE SOCIAL RESPONSIBILITY (CSR):

We follow the global practice of addressing Corporate Social Responsibility

(CSR) issues in an integrated multi stake-holder approach covering the

environment and social aspects. We have joined Global Compact, a United

Nations initiative for corporate social responsibility committed to basic

principles in the areas of human rights, labour standards, the environment and

anti-corruption, and we submit Communication on Progress (“COP”) to UN

Global Compact on an annual basis. In line with our CSR – Community

Development (CSR – CD) Policy, we have taken up various activities

addressing the socio-economic issues at the national level as well as in the neigh

bourhood area of operating stations. We currently work in the areas of Primary

Education, Community Health, Basic Infrastructure Development and

Vocational Training. We also facilitate distributed generation, which involves

the use of non-conventional energy sources to provide electricity to remote and

rural areas.

We have also set up NTPC Foundation to help the physically challenged and

other marginalized communities. This foundation has set up information and

communication technology centres for the visually challenged, provided

management services to a rehabilitation centre, and is running observable

treatment centres for tuberculosis patients.

SAFETY:

Looking into the necessity and to ensure the best health and safety performance

and the accident free environment, all NTPC Projects/ Stations have obtained

37

the OHSAS – 18001 (Occupational Health & Safety Management Systems)

certification. NTPC Ramagundam, Dadri, Kahalgaon and Korba station have

won the first “Safety Innovation Award 2006” for implementing innovative,

Safety and Quality Procedures and Practices. The award is instituted by the

Safety and quality forum of Institution of Engineers (India). The award has been

conferred to Ramagundam for second year in succession.

HUMAN RESOUR CE MANAGEMENT:

Our success depends to a great extent on our ability to recruit, train and retain

high quality professionals. We believe that our strong brand name, industry

leadership position, wide range of growth opportunities and focus on long-term

professional development give us significant advantages in attracting and

retaining highly skilled employees. We follow a “people first” approach to

leverage the potential of our employees. In 2009, we were ranked as one of the

top 10 Best Companies to work for by the Great Place to Work and Economic

Times survey. We have 24,979 employees as of September 30, 2009, including

employees in our subsidiaries and joint ventures.

We encourage our employees to develop management and technology skills

through internal training programs, industry affiliations and external

programmers. For continuous honing of these skills we maintain development

and assessment centres, comprehensive feedback mechanisms and a number of

other learning initiatives including e-learning.

As a part of our commitment to training, we have set up the Power

Management Institute (PMI), which is a training centre for our middle and

senior level management personnel.

TRAINING AND DEVELOPMENT:

The Power Management Institute (PMI), NTPC’s apex Training and

Development Centre conducted 325 training programmers, the number of

38

participants trained both internal and external was 8689. In its effort to go

global PMI has organized an international seminar on “Developing Global

Business Competencies” at Manchester Business School, UK. In its effort to

provide training support to NTPC’s customers, PMI has hosted 15 nos.

Distribution Reforms and Upgrades Management Programmes which were

attended by 263 SEB participants.

EMPLOYEE RELATIONS:

Industrial Relations in NTPC continued to be cordial and harmonious during the

year. Workshops for employee representatives from projects were held, at the

apex as well as regional level, to sensitize them of the opportunities, threats and

challenges facing the company in the dynamics of an uncertain business

environment and to reiterate their significant role in synergizing the potential of

the human resource – the sole differentiating factor of competitive advantage in

today’s knowledge economy.

OPERATIONAL PERFORMANCE:

In Fiscal 2009, we generated 206.9 billion units of electricity, 183.3 billion units

or 88.6%, through our coal-based stations and 23.6 billion units or 11.4%

through our gas-based stations. The operating efficiency of our power stations

has improved over the years. The availability factor of our coal-based stations

has increased from 86.5% in Fiscal 1994 to 92.5% in Fiscal 2009. The

availability factor of our gas-based stations has increased from 60.2% in Fiscal

1994 to 86.7% in Fiscal 2009. The average PLF of our coal-based stations has

increased from 78.1% in Fiscal 1994 to 91.1% in Fiscal 2009. In Fiscal 2009,

the average PLF for coal-based power stations in India was 77.2%. The average

PLF of our gas-based stations has increased from 50.3% in Fiscal 1994 to

39

67.0% in Fiscal 2009. In Fiscal 2009, the average PLF for gas-based power

stations in India was 57.6%.

The following table presents certain company-wide operating data for the

last five Fiscal years:

Fiscal Year 2009 2008 2007 2006 2005

Installed Capacity (MW) 27,850 27,350 26,350 23,935 23,435

Generation (Billion Units) 206.9 200.9 188.7 170.9 159.1

Sales (Billion Units) 193.7 188.0 176.5 159.0 147.8

Average availability (%)

Coal-fired: 92.5 92.1 90.1 89.9 91.2

Gas-fired: 86.7 85.9 85.1 82.2 82.4

Average PLF (%)

Coal-fired: 91.1 92.2 89.4 87.5 87 .5

Gas-fired: 67.0 68.1 71.9 65.8 65.4

∗ Includes generation during pre-commissioning phase.

REALIZATION OF DEBT:

40

• The realization of monthly bills from April, 2006 to March, 2007 was 100%.

All the customers have opened and are maintaining LC equal to 105% of

average monthly billing as per One – Time Settlement Scheme and are making

full payment of current bill.

The One Time Settlement (“OTSS”) addressed these problems. Tripartite

agreements (“Tripartite Agreements”) were signed under which the past dues

from the SEBs were securitised by the issue of 8.5% Tax Free State

Government special bonds issued under the OTSS (the “Tax Free Bonds”)

(maturing in various stages, from October 1, 2006 until April 1, 2016). In

addition, the Tripartite Agreements have improved the situation by requiring the

SEBs to establish letters of credit (LCs) to cover 105% of current payments. In

addition to the Tripartite Agreements, beyond 2016, our sales are secured

through supplementary agreements with our customers under which the

customers have agreed to create a charge over their own receivables in our

favour and in the event of a payment default, assign their receivables into an

escrow account. If receivables of these customers are not received into such

escrow accounts for any reason whatsoever or if the security over such

receivables is flawed, our payment would not be secured. Any change that

adversely affects our ability to recover our dues will adversely affect our

financial position as we do not have a diverse customer base.

In Fiscal 2008, the SEBs had incurred losses of approximately Rs. 340,950

million. In addition, there have also been instances of state governments

promising free power to certain sections of society, such as farmers. The

adoption of such policies by state governments would adversely affect the

financial health of the SEBs, which would in turn adversely affect their to.

41

OBRA THERMAL

POWER STATION

42

43

OBRA THERMAL POWER STAION

Obra Thermal Power Station is situated at Obra in Sonebhadra district in Uttar

Pradesh. The plant is 125 km away from Varanasi. This Uttar Pradesh thermal

power plant is equipped with thirteen units, each of which is coal. The units are

divided into four stages:

The 1st stage comprises 5 Units

The 2nd stage comprises 3 Units

The 3rd stage comprises 3 Units

The 4th stage comprises 2 Units

This thermal power plant in Uttar Pradesh had power generating capacity of

1,500 MW that has decreased to 660mw. w now.

Obra Thermal Power Station

U.P. Rajya Vidyut

Utpadan Nigam Ltd.

P.O. Obra

Distt.

Sonebhadra

Uttar Pradesh

44

PLANT LOCATION

It is in district Sonebhadra about 13km from Chopan Railwey Station, about

8km of Shaktinagar road. It is about125km from Varanasi, which is connected

by air/rail and road route from all major cities.

ABOUT GENERATING UNITS AT OBRA THERMAL POWER

STATION

All units of this power station are coal fired thermal power plants, having a total

generating capacity of 1322 MW. The power station consists of following units

-

STAGE UNITS

NO.

ORIGINAL

CAPACITY

DERATED

CAPACITY

DATE OF FIRST

COMMISSIONING

ORIGINALE

EQUIPMENT

MANUFACTURER

1 1 50 MW 0 MW   BOILERS FROM M/S

TAGANROG & M/S L M Z OF

USSR

2 50 MW 40 MW 11.03.1968  -DO-

3 50 MW Deleted   -DO-

4 50 MW Deleted   -DO-

5 50 MW Deleted   -DO-

2 6 100 MW 94 MW 04.10.1973 M/S BHARAT HEAVY

ELECTRICALS LTD.

7 100 MW 94 MW 14.12.1975 -DO-

8 100 MW 94 MW 05.09.1975 -DO-

3 9 200 MW 200 MW 26.10.1980 -DO-

10 200 MW 200 MW 20.10.1979 -DO-

11 200 MW 200 MW 31.12.1977 -DO-

4 12 200 MW 200 MW 28.03.1981 -DO-

13 200 MW 200 MW 21.07.1982 -DO-

 

45

OBJECTIVE OF RESEARCH

My objective of doing research on working capital management in

NTPC Obra is as follows:-

1. Find out the relationship between working capital and profitability.

2. Determine the profitability of various component of working

capital and their relation to profitability and sales.

3. Find out the effect of working capital on capital expenditure.

4. To find out the cost and expenditure which are occurring during

maintaining working capital

46

RESEARCH METHODLOGY

 

SECONDARY DATA COLLECTIONL:

 When I do the research on working capital management, first I will collect the

data of last five years and various internal sources from company.

Tabulations of data and its graphical representation & its conclusions.

Using various method of accounting which determine actual point of working

capital then I use some documents that are given below:-

1-      NTPC Financial Reports.

2-      News Magazine of NTPC.

3-      Journals of NTPC (SSTPS).

4-      Shakti Sadness Magazine.

5-      Reports of NTPC.

6-      NTPC annual Reports

47

Introduction- Working capital

Working capital management is concerned with the problems arise in

attempting to manage the current assets, the current liabilities and the inter

relationship that exist between them. The term current assets refers to those

assets which in ordinary course of business can be, or, will be, turned in to cash

within one year without undergoing a diminution in value and without

disrupting the operation of the firm. The major current assets are cash,

marketable securities, account receivable and inventory. Current liabilities ware

those liabilities which intended at there inception to be paid in ordinary course

of business, within a year, out of the current assets or earnings of the concern.

The basic current liabilities are account payable, bill payable, bank over-draft,

and outstanding expenses.

The goal of working capital management is to manage the firm s current assets

and current liabilities in such way that the satisfactory level of working capital

is mentioned. The current should be large enough to cover its current liabilities

in order to ensure a reasonable margin of the safety.

Definition:-

1. According to Guttmann & Dougall- “Excess of current assets over current

liabilities .”

2 .According to Park & Gladson- “The excess of current assets of a business

(i.e. cash, accounts receivables, inventories) over current items owned to

employeesand others (such as salaries & wages payable, accounts payable, taxes

owned to government).”

48

The working capital has the following components, which are in several

forms of current assets:

Stock of Cash

Stock of Raw Material

Stock of Finished Goods

Value of Debtors

Miscellaneous current assets like short term investment loans & AdvancesThe

same may be designated in the following equation: 

WORKING CAPITAL= CURRENT ASSETS – CURRENT

LIABILITIES:

Funds thus invested in current assets keep revolving fast and are being

constantly converted in to cash and this cash flows out again in exchange for

other current assets. Thus it is known as revolving or circulating capital or short

term capital.

Constituents of Current Assets and Current Liabilities

Current Assets

Inventories – Raw materials and components, Work in progress, Finished

goods, other.

Trade Debtors.

Loans and Advances.     

Investments.

Cash and Bank balance.

49

Current Liabilities

Sundry Creditors.

Trade Advances.

Borrowings.

Provisions.

These are two concepts of working capital :-

1. Gross working capital –

Gross working capital refers to the firm s investment I current assets. Current

assets are the assets which can be convert in to cash within year includes cash,

short term securities, debtors, bills receivable and inventory.

2. Net working capital-

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 within an accounting year and include creditors, bills

payable and outstanding expenses. Net working capital can be positive or

negative Efficient working capital management requires that firms should

operate with some amount of net working capital, the exact amount varying

from firm to firm and depending, among other things; on the nature of

industries.net working capital is necessary because the cash outflows and

inflows do not coincide. The cash outflows resulting from payment of current

liabilities are relatively predictable. The cash inflow are however difficult to

predict. The more predictable the cash inflows are, the less net working capital

will be required.

50

The concept of working capital was, first evolved by Karl Marx. Marx used the

term variable capital means outlays for payrolls advanced to workers before the

completion of work. He compared this with constant capital which according to

him is nothing but dead labor .

This variable capital is nothing wage fund which remains blocked in terms of

financial management, in work- in-process along with other operating expenses

until it is released through sale of finished goods. Although Marx did not

mentioned that workers also gave credit to the firm by accepting periodical

payment of wages which funded a portioned of W.I.P, the concept of working

capital, as we understand today was embedded in his variable capital

Type of working capital

The operating cycle creates the need for current assets (working capital).

However the need does not come to an end after the cycle is completed to

explain this continuing need of current assets a destination should be drawn

between permanent and temporary working capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash

cycle. To carry on business certain minimum level of working capital is

necessary on continues and uninterrupted basis. For all practical purpose, this

requirement will have to be met permanent as with other fixed assets. This

requirement refers to as permanent or fixed working capital

2) Temporary working capital

Any amount over and above the permanent level of working capital is

temporary, fluctuating or variable, working capital. This portion of the required

working capital is needed to meet fluctuation in demand consequent upon

51

changes in production and sales as result of seasonal changes Graph shows that

the permanent level is fairly castanet; while temporary working capital is

fluctuating in the case of an expanding firm the permanent working capital line

may not be horizontal.

This may be because of changes in demand for permanent current assets might

be increasing to support a rising level of activity.

The working capital needs of a business are influenced by

numerous factors. The important ones are discussed in brief as

given below:

Nature of Enterprise

The nature and the working capital requirements of an enterprise are interlinked.

While a manufacturing industry has a long cycle of operation of the working

capital, the same would be short in an enterprise involved in providing services.

The amount required also varies as per the nature; an enterprise involved in

production would require more working capital than a service sector enterprise.

Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own production policy, some

follow the policy of uniform production even if the demand varies from time to

time, and others may follow the principle of 'demand-based production' in

which production is based on the demand during that particular phase of time.

Accordingly, the working capital requirements vary for both of them.

52

Working Capital Cycle  

In manufacturing concern, working capital cycle starts with the purchase of raw

materials and ends with realization of cash from the sale of finished goods. The

cycle involves the purchase of raw materials and ends with the realization of

cash from the sale of finished products. The cycle involves purchase of raw

materials and stores, its conversion in to stock of finished goods through work

in progress with progressive increment of labor and service cost, conversion of

finished stick in to sales and receivables and ultimately realization of cash and

this cycle continuous again from cash to purchase of raw materials and so on.

Operations

The requirement of working capital fluctuates for seasonal business. The

working capital needs of such businesses may increase considerably during the

busy season and decrease during the slack season. Ice creams and cold drinks

have a great demand during summers, while in winters the sales are negligible.

Market Condition

If there is high competition in the chosen product category, then one shall need

to offer sops like credit, immediate delivery of goods etc. for which the working

capital requirement will be high. Otherwise, if there is no competition or less

competition in the market then the working capital requirements will be low.

Credit Policy

The credit policy is concerned in its dealings with debtors and creditors

influence considerably the requirements of the working capital. A concern that

purchases its requirements on credit and sells its products/services on cash

requires lesser amount of working capital. On the other hand a concern buying

53

its requirements for cash and allowing credit to its customers, shall need larger

amount of funds are bound to be tied up in debtors or bills receivables.

Business Cycle

Business Cycle refers to alternate expansion and contraction in general business

activities. In a period of born i.e. when the business is prosperous there is a need

for larger amount of working capital due to increase in sales, rise in prices,

optimistic expansion of business etc. On the country at he time of depression i.e.

when there is a down swing of the cycle, business contracts, sales decline,

difficulties are faced in collections from debtors and firms may have a large

amount of working capital lying ideal.

Availability of Raw Material

If raw material is readily available then one need not maintain a large stock of

the same, thereby reducing the working capital investment in raw material

stock. On the other hand, if raw material is not readily available then a large

inventory/stock needs to be maintained, thereby calling for substantial

investment in the same.

Growth and Expansion

Growth and expansion in the volume of business results in enhancement of the

working capital requirement. As business grows and expands, it needs a larger

amount of working capital. Normally, the need for increased working capital

funds precedes growth in business activities.

Earning Capacity and Dividend policy

Some firms have more earning capacity than others due to the quality of their

products, monopoly conditions etc. Such firms with high earning capacity may

54

generate cash profits from operations and contribute to their capital. The

dividend policy of a concern also influences the requirements of the working

capital. A firm that maintains steady high rate of cash dividend irrespective of

its generation of profits needs more capital than the firm retains larger part of its

profits and does not pay high rate of cash dividend.       

Price Level Changes

Generally, rising price level requires a higher investment in the working capital.

With increasing prices, the same level of current assets needs enhanced

investment.

Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw material and is

completed with the production of finished goods. If the manufacturing cycle

involves a longer period, the need for working capital would be more. At times,

business needs to estimate the requirement of working capital in advance for

proper control and management. The factors discussed above influence the

quantum of working capital in the business. The assessment of working capital

requirement is made keeping these factors in view. Each constituent of working

capital retains its form for a certain period and that holding period is determined

by the factors discussed above. So for correct assessment of the working capital

requirement, the duration at various stages of the working capital cycle is

estimated. Thereafter, proper value is assigned to the respective current assets,

depending on its level of completion.

55

Other Factors

Certain other factors such as operating efficiency, management ability,

irregularities a supply, import policy, asset structure, importance of labor,

banking facilities etc. also influences the requirement of working capital. 

Component of Working Capital Basis of Valuation

Stock of raw material Purchase cost of raw materials

Stock of work in process At cost or market value, whichever is lower

Stock of finished goods Cost of production

Debtors Cost of sales or sales value

Cash Working expenses

Each constituent of the working capital is valued on the basis of valuation

Enumerated above for the holding period estimated. The total of all such

valuation becomes the total estimated working capital requirement.

The assessment of the working capital should be accurate even in the case of

small and micro enterprises where business operation is not very large. We

know that working capital has a very close relationship with day-to-day

operations of a business. Negligence in proper assessment of the working

capital, therefore, can affect the day-to-day operations severely. It may lead to

cash crisis and ultimately to liquidation. An inaccurate assessment of the

working capital may cause either under-assessment or over-assessment of the

working capital and both of them are dangerous.

WORKING CAPITAL MANAGEMENT56

Working Capital Management refers to management of current assets and

current liabilities. The major thrust of course is on the management of current

assets .This is understandable because current liabilities arise in the context of

current assets. Working Capital Management is a significant fact of financial

management. Its importance stems from two reasons:-

Investment in current assets represents a substantial portion of

total investment.

Investment in current assets and the level of current liabilities have to be

geared quickly to change in sales. To be sure, fixed asset investment and

long term financing are responsive to variation in sales. However, this

relationship is not as close and direct as it is in the case of working capital

components.

The importance of working capital management is effected in the fact that

financial manages spend a great deal of time in managing current assets and

current liabilities. Arranging short term financing, negotiating favorable credit

terms, controlling the movement of cash, administering the accounts receivable,

and monitoring the inventories consume a great deal of time of financial

managers. The problem of working capital management is one of the

“best” utilization of a scarce resource.

Thus the job of efficient working capital management is a formidable one, since

it depends upon several variables such as character of the business, the lengths

of the merchandising cycle, rapidity of turnover, scale of operations, volume

and terms of purchase & sales and seasonal and other variations.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING

CAPITAL

57

o Growth may be stunted. It may become difficult for the enterprise to

undertake profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult and

consequently the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieved due to

non availability of the working capital.

o The business may fail to honors its commitment in time, thereby

adversely affecting its credibility. This situation may lead to business

closure.

o The business may be compelled to buy raw materials on credit and sell

finished goods on cash. In the process it may end up with increasing cost

of purchases and reducing selling prices by offering discounts. Both these

situations would affect profitability adversely.

o Non-availability of stocks due to non-availability of funds may result in

production stoppage.

o While underassessment of working capital has disastrous implications on

business, over assessment of working capital also has its own dangers.

58

CONSEQUENCES OF OVER ASSESSMENT OF WORKING

CAPITAL

o Excess of working capital may result in unnecessary accumulation of

inventories.

o It may lead to offer too liberal credit terms to buyers and very poor

recovery system and cash management.

o It may make management complacent leading to its inefficiency.

o Over-investment in working capital makes capital less productive and

may reduce return on investment. Working capital is very essential for

success of a business and, therefore, needs efficient management and

control. Each of the components of the working capital needs proper

management to optimize profit.

The working capital in certain enterprise may be classified into

the following kinds.

1. Initial working capital. The capital, which is required at the time of the

commencement of business, is called initial working capital. These are the

promotion expenses incurred at the earliest stage of formation of the enterprise

which include the incorporation fees. Attorney's fees, office expenses and other

expenses.

2. Regular working capital. This type of working capital remains always

in the enterprise for the successful operation. It supplies the funds necessary to

meet the current working expenses i.e. for purchasing raw material and supplies,

payment of wages, salaries and other sundry expenses.

59

3. Fluctuating working capital. This capital is needed to meet the

seasonal requirements of the business. It is used to raise the volume of

production by improvement or extension of machinery. It may be secured from

any financial institution which can, of course, be met with short term capital. It

is also called variable working capital.

4. Reserve margin working capital. It represents the amount utilized at

the time of contingencies. These unpleasant events may occur at any time in the

running life of the business such as inflation, depression, slump, flood, fire,

earthquakes, strike, lay off and unavoidable competition etc. In this case greater

amount of capital is required for maintenance of the business.

Financing Working Capital

Now let us understand the means to finance the working capital. Working

capital or current assets are those assets, which unlike fixed assets change their

forms rapidly. Due to this nature, they need to be financed through short-term

funds. Short-term funds are also called current liabilities. The following are the

major sources of raising short-term funds:

i. Supplier’s Credit

At times, business gets raw material on credit from the suppliers. The cost of

raw material is paid after some time, i.e. upon completion of the credit period.

Thus, without having an outflow of cash the business is in a position to use raw

material and continue the activities. The credit given by the suppliers of raw

materials is for a short period and is considered current liabilities. These funds

should be used for creating current assets like stock of raw material, work in

process, finished goods, etc.

60

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to

businesses to help them create necessary current assets so as to achieve the

Required business level.

The loans are available for creating the following current

Assets:

Stock of Raw Materials

Stock of Work in Process

Stock of Finished Goods

Debtors

Banks give short-term loans against these assets, keeping some security margin.

The advances given by banks against current assets are short-term in nature and

banks have the right to ask for immediate repayment if they consider doing so.

Thus bank loans for creation of current assets are also current liabilities.

iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s funds.

They are long-term funds and, therefore do not require immediate repayment.

These funds increase the liquidity of the business.

61

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business.

Adequate amount of working capital is very much essential for the smooth

running of the business. And the most important part is the efficient

management of working capital in right time. The liquidity position of the firm

is totally effected by the management of working capital. So, a study of changes

in the uses and sources of working capital is necessary to evaluate the efficiency

with which the working capital is employed in a business. This involves the

need of working capital analysis.

The analysis of working capital can be conducted through a number of devices,

such as:

1.     RATIO ANALYSIS.

2.     FUND FLOW ANALYSIS.

3.     BUDGETING.

 

1.    RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The

technique of ratio analysis can be employed for measuring short-term liquidity

or working capital position of a firm. The following ratios can be calculated for

these purposes:

1. CURRENT RATIO.

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2. QUICK RATIO.

3.  ABSOLUTE LIQUID RATIO.

4.  INVENTORY TURNOVER.

5.  RECEIVABLES TURNOVER.

6.  PAYABLE TURNOVER RATIO.

7.  WORKING CAPITAL TURNOVER RATIO.

8.  WORKING CAPITAL LEVERAGE.

9.  RATIO OF CURRENT LIABILITIES TO TANGIBLE NET WORTH.

2.    FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from

which additional funds were derived and the use to which these sources were

put. The fund flow analysis consists of:

A. Preparing schedule of changes of working capital.

B.     Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position

(working capital) business enterprise between beginning and ending of the

financial dates.

3.    WORKING CAPITAL BUDGET

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A budget is a financial and / or quantitative expression of business plans and

polices to be pursued in the future period time. Working capital budget as a part

of the total budge ting process of a business is prepared estimating future long

term and short term working capital needs and sources to finance them, and then

comparing the budgeted figures with actual performance for calculating the

variances, if any, so that corrective actions may be taken in future. He objective

working capital budget is to ensure availability of funds as and needed, and to

ensure effective utilization of these resources. The successful implementation of

working capital budget involves

the preparing of separate budget for each element of working capital, such as,

cash, inventories and receivables etc.   

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

The short –term creditors of a company such as suppliers of goods of credit and

commercial banks short-term loans are primarily interested to know the ability

of a firm to meet its obligations in time. The short term obligations of a firm can

be met in time only when it is having sufficient liquid assets. So to with the

confidence of investors, creditors, the smooth functioning of the firm and the

efficient use of fixed assets the liquid position of the firm must be strong. But a

very high degree of liquidity of the firm being tied – up in current assets.

Therefore, it is important proper balance in regard to the liquidity of the firm.

Two types of ratios can be calculated for measuring short-term financial

position or short-term solvency position of the firm.

(A).     LIQUIDITY RATIOS.

(B).     CURRENT ASSETS MOVEMENTS ‘RATIOS.

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A)   LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and

when these become due. The short-term obligations are met by realizing

amounts from current, floating or circulating assts. The current assets should

either be liquid or near about liquidity. These should be convertible in cash for

paying obligations of short-term nature. The sufficiency or insufficiency of

current assets should be assessed by comparing them with short-term liabilities.

If current assets can pay off the current liabilities then the liquidity position is

satisfactory. On the other hand, if the current liabilities cannot be met out of the

current assets then the liquidity position is bad. To measure the liquidity of a

firm, the following ratios can be calculated:

1.     CURRENT RATIO

2.     QUICK RATIO

3.     ABSOLUTE LIQUID RATIO

 

1.   CURRENT RATIO

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Current Ratio, also known as working capital ratio is a measure of general

liquidity and its most widely used to make the analysis of short-term financial

position or liquidity of a firm. It is defined as the relation between current assets

and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS 

              CURRENT LIABILITES

THE TWO COMPONENTS OF THIS RATIO ARE:

1)     CURRENT ASSETS

2)     CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry

debtors, inventories and work-in-progresses. Current liabilities include

outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the

ability to pay its current obligations in time. On the hand a low current ratio

represents that the liquidity position of the firm is not good and the firm shall

not be able to pay its current liabilities in time. A ratio equal or near to the rule

of thumb of 2:1 i.e. current assets double the current liabilities is considered to

be satisfactory.

CALCULATION OF CURRENT RATIO

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 (Rupees in crore) e.g.YEAR 2003 2004 2005

CURRENT ASSETS

81.29 83.12 13,6.57

CURRENT

LIABILITIES

27.42 20.58 33.48

CURRENT RATIO 2.96:1 4.03:1 4.08:1

INTERPRETATION:-

As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2003 to 2005. The current ratio of company is more than the ideal ratio. This depicts that company’s liquidity position is sound. Its current assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio

may be defined as the relationship between quick/liquid assets and current or

liquid liabilities. An asset is said to be liquid if it can be converted into cash

with a short period without loss of value. It measures the firms’ capacity to pay

off current obligations immediately.

QUICK RATIO = QUICK ASSETS

                              CURRENT LIABILITES

WHERE QUICK ASSETS ARE:

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1)           MARKETABLE SECURITIES

2)           CASH IN HAND AND CASH AT BANK.

3)           DEBTORS.

A high ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time and on the other hand a low quick ratio represents that

the firms’ liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought

that if quick assets are equal to the current liabilities then the concern may be

able to meet its short-term obligations. However, a firm having high quick ratio

may not have a satisfactory liquidity position if it has slow paying debtors. On

the other hand, a firm having a low liquidity position if it has fast moving

inventories.

A) CALCULATION OF QUICK RATIO

(Rupees in Crore)e.g.

YEAR 2003 2004 2005

QUICK ASSETS 44.14 47.43 61.55

CURRENT LIABILITIES 27.42 20.58 33.48

QUICK RATIO 1.6 : 1 2.3 : 1 1.8 : 1

INTERPRETATION :

  A quick ratio is an indication that the firm is liquid and has the ability to meet

its current liabilities in time. The ideal quick ratio is   1:1. Company’s quick

ratio is more than ideal ratio. This shows company has no liquidity problem.

3. Absolute liquid ratio

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Although receivables, debtors and bills receivable are generally more liquid

than inventories, yet there may be doubts regarding their realization into cash

immediately or in time. So absolute liquid ratio should be calculated together

with current ratio and acid test ratio so as to exclude even receivables from the

current assets and find out the absolute liquid assets. Absolute Liquid Assets

includes :

ABSOLUTE LIQUID RATIO =      ABSOLUTE LIQUID ASSETS

  CURRENT LIABILITES

Absolute liquid assets = cash & bank balances.

  (Rupees in Crore)e.g.YEAR 2003 2004 2005

ABSOLUTE LIQUID

ASSETS

4.69 1.79 5.06

CURRENT LIABILITIES 27.42 20.58 33.48

ABSOLUTE LIQUID RATIO .17 : 1 .09 : 1 .15 : 1

INTERPRETATION :

These ratio shows that company carries a small amount of cash. But there is

nothing to be worried about the lack of cash because company has reserve,

borrowing power & long term investment. In India, firms have credit limits

sanctioned from banks and can easily draw cash.

B) current assets movement ratios

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Funds are invested in various assets in business to make sales and earn profits.

The efficiency with which assets are managed directly affects the volume of

sales. The better the management of assets, large is the amount of sales and

profits. Current assets movement ratios measure the efficiency with which a

firm manages its resources. These ratios are called turnover ratios because they

indicate the speed with which assets are converted or turned over into sales.

Depending upon the purpose, a number of turnover ratios can be calculated.

These are :

1.      INVENTORY TURNOVER RATIO

2.       DEBTORS TURNOVER RATIO

3.       CREDITORS TURNOVER RATIO

4.        WORKING CAPITAL TURNOVER RATIO

The current ratio and quick ratio give misleading results if current assets include

high amount of debtors due to slow credit collections and moreover if the assets

include high amount of slow moving inventories. As both the ratios ignore the

movement of current assets, it is important to calculate the turnover ratio.

1.   Inventory Turnover or Stock Turnover Ratio :

Every firm has to maintain a certain amount of inventory of finished goods so as

to meet the requirements of the business. But the level of inventory should

neither be too high nor too low. Because it is harmful to hold more inventory as

some amount of capital is blocked in it and some cost is involved in it. It will

therefore be advisable to dispose the inventory as soon as possible.

inventory turnover ratio =      cost of goods sold

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                          Average inventory

Inventory turnover ratio measures the speed with which the stock is converted

into sales. Usually a high inventory ratio indicates an efficient management of

inventory because more frequently the stocks are sold ; the lesser amount of

money is required to finance the inventory. Where as low inventory turnover

ratio indicates the inefficient management of inventory. A low inventory

turnover implies over investment in inventories, dull business, poor quality of

goods, stock accumulations and slow moving goods and low profits as

compared to total investment.

average stock  =   opening stock + closing stock

2  (Rupees in Crore)YEAR 2003 2004 2005

COST OF GOODS SOLD 110.6 103.2 96.8

AVERAGE STOCK 73.59 36.42 55.35

INVENTORY TURNOVER

RATIO

1.5 TIMES 2.8 TIMES 1.75 TIMES

INTERPRETATION :

These ratio shows how rapidly the inventory is turning into receivable through

sales. In 2004 the company has high inventory turnover ratio but in 2005 it has

reduced to 1.75 times. This shows that the company’s inventory management

technique is less efficient as compare to last year.

A. Inventory conversion period:

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Inventory conversion period = 365 (NET WORKING DAYS)

                                        inventoryturnover ratio

(Rupees in crore) e.g.

2003 2004 2005

DAYS 365 365 365

INVENTORY TURNOVER

RATIO

1.5 2.8 1.8

INVENTORY

CONVERSION PERIOD

243 DAYS 130 DAYS 202 DAYS

INTERPRETATION:

Inventory conversion period shows that how many days inventories takes to

convert from raw material to finished goods. In the company inventory

conversion period is decreasing. This shows the efficiency of management to

convert the inventory into cash.

2.  Debtors turnover ratio:

A concern may sell its goods on cash as well as on credit to increase its sales

and a liberal credit policy may result in tying up substantial funds of a firm in

the form of trade debtors. Trade debtors are expected to be converted into cash

within a short period and are included in current assets. So liquidity position of

a concern also depends upon the quality of trade debtors. Two types of ratio can

be calculated to evaluate the quality of debtors.

A)       DEBTORS TURNOVER RATIO

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B)      AVERAGE COLLECTION PERIOD

Debtors Turnover Ratio = Total Sales (Credit)

                                              Average Debtors

Debtor’s velocity indicates the number of times the debtors are turned over

during a year. Generally higher the value of debtor’s turnover ratio the more

efficient is the management of debtors/sales or more liquid are the debtors.

Whereas a low debtors turnover ratio indicates poor management of

debtors/sales and less liquid debtors. This ratio should be compared with ratios

of other firms doing the same business and a trend may be found to make a

better interpretation of the ratio.

average debtors= opening debtor + closing debtor

                                                       2

(Rupees in crore) e.g.

YEAR 2003 2004 2005

SALES 166.0 151.5 169.5

AVERAGE DEBTORS 17.33 18.19 22.50

DEBTOR TURNOVER

RATIO

9.6 TIMES 8.3 TIMES 7.5 TIMES

INTERPRETATION:

This ratio indicates the speed with which debtors are being converted or

turnover into sales. The higher the values or turnover into sales . The higher the

values of debtors turnover, the more efficient is the management of credit. But

in the company the debtor turnover ratio is decreasing year to year. This shows

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that company is not utilizing its debtors efficiency. Now their credit policy

become liberal as compare to previous year.

3.   Average collection period:

AVERAGE COLLECTION PERIOD =    NO. OF WORKING DAYS

                 DEBTORS TURNOVER RATIO

The average collection period ratio represents the average number of days for

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

measures the quality of debtors. Generally, shorter the average collection period

the better is the quality of debtors as a short collection period implies quick

payment by debtors and vice-versa.

AVERAGE COLLECTION PERIOD =      365 (NET WORKING DAYS)

DEBTORS TURNOVER RATIO

YEAR 2003 2004 2005

DAYS 365 365 365

DEBTOR TURNOVER RATIO 9.6 8.3 7.5

AVERAGE COLLECTION

PERIOD

38 DAYS 44 DAYS 49 DAYS

INTERPRETATION:

The average collection period measures the quality of debtors and it helps in

analyzing the efficiency of collection efforts. It also helps to analysis the credit

policy adopted by company. In the firm average collection period increasing

year to year. It shows that the firm has Liberal Credit policy. These changes in

policy are due to competitor’s credit policy.

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4. Working capital turnover ratio:

Working capital turnover ratio indicates the velocity of utilization of net

working capital. This ratio indicates the number of times the working capital is

turned over in the course of the year. This ratio measures the efficiency with

which the working capital is used by the firm. A higher ratio indicates efficient

utilization of working capital and a low ratio indicates otherwise. But a very

high working capital turnover is not a good situation for any firm.

WORKING CAPITAL TURNOVER RATIO =         COST OF SALES

                                              NET WORKING CAPITAL

WORKING CAPITAL TURNOVER       =       SALES        

                                     NETWORKING CAPITAL

(Rupees in crore)e.g.YEAR 2003 2004 2005

SALES 166.0 151.5 169.5

NETWORKING CAPITAL 53.87 62.52 103.09

WORKING CAPITAL

TURNOVER

3.08 2.4 1.64

INTERPRETATION :

This ratio indicates low much net working capital requires for sales. In 2005,

the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the

company requires 60 paisa as working capital. Thus this ratio is helpful to

forecast the working capital requirement on the basis of sale.

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INVENTORIES

(Rupees in Crores)e.g.YEAR 2002-2003 2003-2004 2004-2005

INVENTORIES 37.15 35.69 75.01

INTERPRETATION:

Inventories is a major part of current assets. If any company wants to manage its

working capital efficiency, it has to manage its inventories efficiently. The

graph shows that inventory in 2002-2003 is 45%, in 2003-2004 is 43% and in

2004-2005 is 54% of their current assets. The company should try to reduce the

inventory up to 10% or 20% of current assets.

Cash bank balance :

(Rupees in Crores)e.g.YEAR 2002-2003 2003-2004 2004-2005

CASH BANK BALANCE 4.69 1.79 5.05

 

INTERPRETATION :

Cash is basic input or component of working capital. Cash is needed to keep

the business running on a continuous basis. So the organization should have

sufficient cash to meet various requirements. The above graph is indicate that in

2003 the cash is 4.69 crores but in 2004 it has decrease to 1.79. The result of

that it disturb the firms manufacturing operations. In 2005, it is increased upto

approx. 5.1% cash balance. So in 2005, the company has no problem for

meeting its requirement as compare to 2004.

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Debtors :

(Rupees in Crores)e.g.YEAR 2002-2003 2003-2004 2004-2005

DEBTORS 17.33 19.05 25.94

INTERPRETATION :

Debtors constitute a substantial portion of total current assets. In India it

constitute one third of current assets. The above graph is depict that there is

increase in debtors. It represents an extension of credit to customers. The reason

for increasing credit is competition and company liberal credit policy.

 Current assets

(Rupees in Crores)e.g.YEAR 2002-2003 2003-2004 2004-2005

CURRENT ASSETS 81.29 83.15 136.57

 INTERPRETATION :

This graph shows that there is 64% increase in current assets in 2005. This

increase is arise because there is approx. 50% increase in inventories. Increase

in current assets shows the liquidity soundness of company.

Current liability :

YEAR 2002-2003 2003-2004 2004-2005

CURRENT LIABILITY 27.42 20.58 33.48

(Rupees in Crores)e.g.

INTERPRETATION:

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Current liabilities shows company short term debts pay to outsiders. In 2005 the

current liabilities of the company increased. But still increase in current assets

are more than its current liabilities.

Net working capital:

(Rs. in Crores)

BBNMMNYEAR

2002-2003 2003-2004 2004-2005

NET WORKING CAPITAL 53.87 62.53 103.09

INTERPRETATION :

Working capital is required to finance day to day operations of a firm. There

should be an optimum level of working capital. It should not be too less or not

too excess. In the company there is increase in working capital. The increase in

working capital arises because the company has expanded its business.

Management of Inventory

constitute the most significant part of current assets of a large majority of

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

current assets in public limited companies in India.

Because of the large size of inventories maintained by firms maintained by

firms, a considerable amount of funds is required to be committed to them. It is,

therefore very necessary to manage inventories efficiently and effectively in

order to avoid unnecessary investments. A firm neglecting a firm the

management of inventories will be jeopardizing its long run profitability and

may fail ultimately. The purpose of inventory management is to ensure

availability of materials in sufficient quantity as and when required and also to

minimize investment in inventories at considerable degrees, without any

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adverse effect on production and sales, by using simple inventory planning and

control techniques. 

 

Needs to hold inventories:-

There are three general motives for holding inventories:-

Transaction motive emphasizes the need to maintain inventories

to facilitate smooth production and sales operation. 

Precautionary motive necessities holding of inventories to guard against

the risk of unpredictable changes in demand and supply forces and other

factors.

Speculative motive influences the decision to increases or reduce

inventory levels to take advantage of price fluctuations and also for

saving in re-ordering costs and quantity discounts etc.

  

Objective of Inventory Management:-

The main objectives of inventory management are operational and financial.

The operational mean that means that the materials and spares should be

available in sufficient quantity so that work is not disrupted for want of

inventory. The financial objective means that investments in inventories should

not remain ideal and minimum working capital should be locked in it.

The following are the objectives of inventory management:-

o To ensure continuous supply of materials, spares and finished goods.

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o To avoid both over-stocking of inventory. 

o To maintain investments in inventories at the optimum level as required

by the operational and sale activities. 

o To keep material cost under control so that they contribute in reducing

cost of production and overall purchases.

o To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralizing purchases.

o To minimize losses through deterioration, pilferage, wastages and

damages.

o To design proper organization for inventory control so that management.

Clear cut account ability should be fixed at various levels of the

organization.

o To ensure perpetual inventory control so that materials shown in stock

ledgers should be actually lying in the stores.

o To ensure right quality of goods at reasonable prices.

o To facilitate furnishing of data for short-term and long term planning and

control of inventory

 

Management of cash

Cash is the important current asset for the operation of the business. Cash is the

basic input needed to keep the business running in the continuous basis, it is

also the ultimate output expected to be realized by selling or product

manufactured by the firm.The firm should keep sufficient cash neither more nor

less. Cash shortage will disrupt the firm’s manufacturing operations while

excessive cash will simply remain ideal without contributing anything towards

the firm’s profitability. Thus a major function of the financial manager is to

maintain a sound cash position.

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Cash is the money, which a firm can disburse immediately without any

restriction. The term cash includes coins, currency and cheques held by the firm

and balances in its bank account. Sometimes near cash items such as marketing

securities or bank term deposits are also included in cash. Generally when a

firm has excess cash, it invests it is marketable securities. This kind of

investment contributes some profit to the firm.

Need to hold cash

The firm’s need to hold cash may be attributed to the following three motives:-

The Transaction Motive: The transaction motive requires a firm to hold cash

to conduct its business in the ordinary course. The firm needs cash primarily to

make payments for purchases, wages and salaries, other operating expenses,

taxes, dividends, etc.

The Precautionary Motive: A firm is required to keep cash for meeting

various contingencies. Though cash inflows and outflows are anticipated but

there may be variations in these estimates. For example a debtor who pays after

7 days may inform of his inability to pay, on the other hand a supplier who used

to give credit for 15 days may not have the stock to supply or he may not be in

opposition to give credit at present. 

Speculative Motive: - The speculative motive relates to the holding of cash for

investing in profit making opportunities as and when they arise.                         

The opportunities to make profit changes. The firm will hold cash, when it is

expected that interest rates will rise and security price will fall.  

Components of working capital are calculated as follows:

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1) Raw Materials Storage Period=Average stock of raw materials/Average cost of raw material consumption per day.

2.) W-I-P Holding period=Average w-i-p in inventory/Average cost of production per day.

3.) Stores and spares conversion period= Average stock of Stores and spares/ Average consumption per day.

4.) Finished goods conversion period= Average stock of finished goods/Average cost of goods sold per day.

5.) Debtors collection period=Average book debts/Average credit sales per day.

6.) Credit period availed=Average trade creditors/Average credit purchase per day.                            

Management of Receivables

A sound managerial control requires proper management of liquid assets and

inventory. These assets are a part of working capital of the business. An

efficient use of financial resources is necessary to avoid financial distress.

Receivables result from credit sales.

A concern is required to allow credit sales in order to expand its sales volume.

It is not always possible to sell goods on cash basis only. Sometimes other

concern in that line might have established a practice of selling goods on credit

basis. Under these circumstances, it is not possible to avoid credit sales without

adversely affecting sales.

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The increase in sales is also essential to increases profitability. After a certain

level of sales the increase in sales will not proportionately increase production

costs. The increase in sales will bring in more profits. Thus, receivables

constitute a significant portion of current assets of a firm. But for investment in

receivables, a firm has to insure certain costs. Further, there is a risk of bad

debts also. It is therefore, very necessary to have a proper control and

management of receivables.

Needs to hold cash:

Receivables management is the process of making decisions relating to

investment in trade debtors. Certain investments in receivables are necessary to

increase the sales and the profits of a firm. But at the same time investment in

this asset involves cost consideration also. Further, there is always a risk of bad

debts too.

Thus, the objective of receivable management is to take a sound decision as

regards investments in debtors. In the words of Bolton, S.E., the need of

receivables management is “to promote sales and profits until that point is

reached where the return of investment in further funding of receivables is less

than the cost of funds raised to finance that additional credit.”

 

Important Terms Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life

blood and every manager's primary task is to help keep it flowing and to use the

cash flow to generate profits. If a business is operating profitably, then it should,

in theory, generate cash surpluses. If it doesn't generate surpluses, the business

will eventually run out of cash and expire.

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The faster a business expands , the more cash it will need for working capital

and investment. The cheapest and best sources of cash exist as working capital

right within business. Good management of working capital will generate cash

will help improve profits and reduce risks. Bear in mind that the cost of

providing credit to customers and holding stocks can represent a substantial

proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash - Inventory

(stocks and work-in-progress) and Receivables (debtors owing you money).

The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and

payables) has two dimensions ........TIME ......... and MONEY. When it comes

to managing working capital - TIME IS MONEY. If you can get money to

move faster around the cycle (e.g. collect monies due from debtors more

quickly) or reduce the amount of money tied up (e.g. reduce inventory levels

relative to sales), the business will generate more cash or it will need to borrow

less money to fund working capital. As a consequence, you could reduce the

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cost of bank interest or you'll have additional free money available to support

additional sales growth or investment. Similarly, if you can negotiate improved

terms with suppliers e.g. get longer credit or an increased credit limit; you

effectively create free finance to help fund future sales.

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

Collect receivables (debtors)

faster

You release cash

from the cycle

Collect receivables (debtors)

slower

Your receivables

soak up cash

Get better credit (in terms of

duration or amount) from

suppliers

You increase your

cash resources

Shift inventory (stocks) faster You free up cash

Move inventory (stocks) slower You consume more

cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers,

plant, vehicles etc. If you do pay cash, remember that this is now longer

available for working capital. Therefore, if cash is tight, consider other ways of

financing capital investment - loans, equity, leasing etc. Similarly, if you pay

dividends or increase drawings, these are cash outflows and, like water flowing

downs a plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than for want

of profit.

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Sources of Additional Working Capital

Sources of additional working capital include the following:

Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily

over-stretch the financial resources of the business.

This is called overtrading. Early warning signs include:

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for

early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing

Frequent short-term emergency requests to the bank (to help pay wages,

pending receipt of a cheque).

Handling Receivables (Debtors)

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Cash flow can be significantly enhanced if the amounts owing to a business are

collected faster. Every business needs to know.... who owes them money.... how

much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad

debts.

Slow payment has a crippling effect on business; in particular on small

businesses who can least afford it. If you don't manage debtors, they will

begin to manage your business as you will gradually lose control due to

reduced cash flow and, of course, you could experience an increased incidence

of bad debt.

The following measures will help manage your debtors:

1. Have the right mental attitude to the control of credit and make sure that

it gets the priority it deserves.

2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly understood by staff, suppliers

and customers.

4. Be professional when accepting new accounts, and especially larger ones.

5. Check out each customer thoroughly before you offer credit. Use credit

agencies, bank references, industry sources etc.

6. Establish credit limits for each customer... and stick to them.

7. Continuously review these limits when you suspect tough times are

coming or if operating in a volatile sector.

8. Keep very close to your larger customers.

9. Invoice promptly and clearly.

10.Consider charging penalties on overdue accounts.

11.Consider accepting credit /debit cards as a payment option.

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12.Monitor your debtor balances and ageing schedules, and don't let any

debts get too large or too old.

Recognize that the longer someone owes you, the greater the chance you will

never get paid. If the average age of your debtors is getting longer, or is already

very long, you may need to look for the following possible defects:

weak credit judgment

poor collection procedures

lax enforcement of credit terms

slow issue of invoices or statements

errors in invoices or statements

Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally

demand immediate attention. Look for the warning signs of a future bad debt.

For example........

longer credit terms taken with approval, particularly for smaller orders

use of post-dated checks by debtors who normally settle within agreed

terms

evidence of customers switching to additional suppliers for the same

goods

new customers who are reluctant to give credit references

Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons

and therefore put on the long finger because they convince themselves there is

something more urgent or important that demand their attention now. There is

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nothing more important than getting paid for your product or service. A

customer who does not pay is not a customer.

Managing Payables (Creditors)

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

carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function can

create liquidity problems. Consider the following:

Who authorizes purchasing in your company - is it tightly managed or

spread among a number of (junior) people?

Are purchase quantities geared to demand forecasts?

Do you use order quantities which take account of stock-holding and

purchasing costs?

Do you know the cost to the company of carrying stock?

Do you have alternative sources of supply? If not, get quotes from major

suppliers and shop around for the best discounts, credit terms, and reduce

dependence on a single supplier.

How many of your suppliers have a returns policy?

Are you in a position to pass on cost increases quickly through price

increases to your customers?

If a supplier of goods or services lets you down can you charge back the

cost of the delay?

Can you arrange (with confidence!) to have delivery of supplies staggered

or on a just-in-time basis?

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There is an old adage in business that if you can buy well then you can sell

well. Management of your creditors and suppliers is just as important as the

management of your debtors. It is important to look after your creditors - slow

payment by you may create ill-feeling and can signal that your company is

inefficient (or in trouble!).

Remember, a good supplier is someone who will work with you to enhance

the future viability and profitability of your company

DATA ANALYSIS AND INTERPRETATION         

A) Target Availability (%)

S.NO. Power

Station

04-05 05-06 06-07 07-08 Average 2008-09

(Target)

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I Obra-A N.A. N.A. 18.05 19.20 18.62 74

II Obra-B N.A. N.A. 51.45 51.75 51.61 80

Obra-A Obra-B0

10

20

30

40

50

60

70

80

90

Average2008-09(target)

B) Plant Load Factor (PLF) (%)

S.NO. Power

Station

04-05 05-06 06-07 07-08 Average 2008-09

(Target)I Obra-A 10.74 23.82 28.03 37.00 24.89 65II Obra-B 57.17 55.88 52.04 50.00 53.77 75

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III Panki TPS 56.71 50.39 50.51 N.A. 52.56 65IV Parichha 50.19 39.60 55.56 31.00 44.09 60

Obra-A Obra-B Panki TPS Pariccha0

10

20

30

40

50

60

70

80

Average2008-09 (target)

C) Gross Station Heat Rate (GSHR) (K.Cal/KWh)

S.NO.

Power

Station

04-05 05-06 06-07 07-08 Average

2008-09

(Target)

Designed

SHRI Obra-A 3212 3044 2985 3083 3081 2850 2824

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II Obra-B 2978 3022 3314 3081 3099 2700 2636III Panki TPS N.A. N.A 3574 3597 3586 2950 2678IV Parichha 3285 3291 3886 3378 3460 3100 2657

Obra-A Obra-B Panki TPS Pariccha0

500

1000

1500

2000

2500

3000

3500

4000

Average2008-09(target)Designed SHR

SWOT ANALYSIS OF NTPC

STRENGTHS: NTPC’s biggest strength is its size. As one of Asia’s largest

utilities, it can, in future, procure coal and other fuels in the international market

at a very competitive price. Well-trained manpower ensures that station plant

load factor are high.

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WEAKNSSES: Huge working capital requirement due to its exposure to cash

starved State Electricity Boards. Slow decision making process might come in

the way of the company taking advantage of available opportunities.

OPPORTUNITIES:India has an energy shortage of 9.2% and

peaking shortage of 18.3%. The country’s per capita consumption is

350 KWH annually against the global average of 2000KWH. Canada

consumes more than 18000KWH per capita annually. This factor

should ensure that NTPC’s station at the full capacity in the

foreseeable future.

THREATS: Due to high receivable position the World Bank and

other multinational agency funding might not be viable in the future.

Commercial bank financing would come with stringent riders, which

NTPC in the present scenario cannot meet.(This was the case of 5 yrs

before. But in Present Scenario Private Players are coming in big way

like Lance 10000MW, NTPC Energy due to private players pressure

will be for improved efficiency – Low Cost and Quality Power.

LIMITATION

On tne basis of of research activity undertaken by me tittled “workin

g cpital management in ntpc”, I found following limitation:-

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1. Working capital in NTPC is a book profit, it is not true.

2. It is based on the re-payment of owner due to the

political power.

3. It is create to the receivable problem to it.

4. It is reduces in a working capital turn over.

CONCLUSION

After studying the components of working capital management system of NTPC . It is found that the company has a sound and effective policy and its performance is very good even in this bad recession situation company has managed to post good profit.

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Company is competing well at the domestic as well as the international level and it is among the low cost producers of aluminum in the world only because of its proper management of finance, specially the short term finance known as the working capital.

The company is a matured one and it has contributed well in the countries growth and development and will also continue to perform and contribute to the whole nation.

In conclusion ,we can say that the companies management is an effective one and knows well the management of finance, its working capital management system is very good because of which only the company has got the status of NTPC company.

SUGGESTIONS

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On the basis of above research activity undertaken by me,I feel that if following

suggestion are followed by NTPC then the cold efficiently manage there short

term capital requirement :-

1. It is to be managed to effective working capital turnover.

2. Surplus and obsolete of items due to according to

managed.

3. NTPC is a consulted conclusion receivables by the

investment of a share period.

4. It is a not repayment of owner due to the political power

to it.

5. Cash to be used in effective ways.

6. It should be solved in effective manner the receivables

problem.

BIBLIOGRAPHY

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1. Financial Management……..Prasanna Chandra

2. Financial Management…….I.M. Pandey

3. Annual Report of NTPC.

4. Auditors Report, Directors Report and Investors Report.

5. NTPC website….www.ntpc.co.in

6. www.google.co.in

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