The study of working capital management

Projectsformba.blogspot.com

A Report
on

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL
FULFILLMENT OF POST GRADUATE DIPLOMA IN INTERNATIONAL BUSINESS

Working Capital Management

Projectsformba.blogspot.com 1


PREFACE

As a matter of fact every management student has to undergo
practical training in an approved business or organization for not less than
six weeks normally in the summer vacation under the guidance of
Professional managers, as to become aware of the real life business
situations and the environment.

To fulfill the said objective I was sent to the BHEL, Jhansi for my “On
the Job” practical Training by our Training Coordinator. The duration of my
training was from ………………………………………... During this period I visited
various departments of BHEL, Jhansi to study their process of functioning &
organization and also doing a project on “The study of Working Capital
Management” to know the procedure of working Capital Management in
BHEL.



ACKNOWLEDGEMENT

We offer our gratitude to all those who have spent their precious
time, expressed keen interest and given continued encouragement
throughout the study enabled the successful completion of my “ON THE
JOB” practical training in BHEL, Jhansi.

Special thanks are due to our project coordinator …………………… (Accounts
Officer) for his inspiring guidance, valuable help and angelic support for
the completion of our project in “WORKING CAPITAL MANAGEMENT IN
BHEL, Jhansi”.

We would like to extend our gratitude to the management and staff of
BHEL, Jhansi for their co-operation during our training.



TABLE OF CONTENTS

1. INTRODUCTION

(i) BHEL as a whole

(ii) BHEL, JHANSI

2. DEPARTMENTATON IN BHEL, JHANSI

3. FINANCE DEPARTMENT IN BHEL, JHANSI

4. INTRODUCTION OF WORKING CAPITAL

5. CASH MANAGEMENT

(i) Introduction

(ii) Cash management in BHEL, Jhansi

6. RECEIVABLE MANAGEMENT

(i) Introduction

(ii) Receivable management in BHEL, Jhansi

7. INVENTORY MANAGEMENT

(i) Introduction

(ii) Inventory management in BHEL, Jhansi

8. ANALYSIS OF WORKING CAPITAL



BHARAT HEAVY ELECTRICALS

A Brief Introduction

In the post Independence era when India was moving towards
industrialization the major thrust of the govt. was in the core sector and
this sector was given to the public sector. With this objective, Heavy
Electricals (I) Limited was setup in Bhopal in August, 1956 with a view to
reach self sufficiency in the industrial product and power equipment. This
plant was setup under technical collaboration of M/s AEI, U.K.

Three more plants were subsequently setup Tiruchy, Hyderabad and
Haridwar with Soviet and Czechoslovakian assistance in May 1965, Dec
1965 and Jan 1967 respectively. As there was need for an integrated
approach for the development of power equipment to be manufactured in
India, Heavy Electronics Ltd. Bhopal was merged into BHEL in 1974.

BHEL has now become the largest Engineering and Manufacturing
Company. Its headquarters is located at Delhi and there are 14
manufacturing units.



BHEL OBJECTIVES

A dynamic is one which keeps its aim high adopts itself quickly to
changing environment. So here we are in BHEL.

The objectives of the company have been redefined in the corporate plan
for the 90’s.

BUSINESS MISSION
• To maintain leading position as supplier of quality equipment,
systems and services in the field of conversion, transmission,
utilization and conversion of energy for application in the areas of
electric power, transportation, oil & gas explorations and industries.

Utilize company’s capabilities and resources to extend business into allied
areas and other priority sector of the economy like defense,
communication and electronics.

GROWTH
• To ensure a steady growth by enhancing the competitive edge of
BHEL in existing business new areas and international market so as to
fulfill national expectation from BHEL.



PROFITABILITY
• To provide a reasonable and adequate return on capital employed,
primarily through improvement in operational, efficiency, capacity
utilization and productivity and generate adequate internal resources
to finance the company’s growth.

FOCUS
• To build a high degree of customer confidence by providing increased
value for his money though International standards of product
quality performance and superior customer service.

PEOPLE ORIENTATION
• To enable each employees to achieve his potential, improve his
capabilities perceive his role and responsibilities and participate and
contribute to the growth and success of the company.

• To invest in human resources and continuously and alive to there
need.

TECHNOLOGY
• To achieve technological excellence in operation by development of
indigenous technologies and efficient absorption and adoption of
imparted technologies to suit business and priorities and provide
competitive advantage to the company.

IMAGE
• To fulfill the expectation which stakes holders like government as
owner. Employees, customers and the country at large have from
BHEL.



BUSINESS AREAS
BHEL covers a wide area of business. These areas are mentioned below.

POWER
Provide a gamut of equipment for Thermal, Hydro and Nuclear
Power Plants. Range includes products and systems for the power
generation, transmission and utilization.

TRANSMISSION
BHEL is manufacturing transmission equipments for all voltage rating
including the 400 KV class transformers switch gears, control and relay
panel, insulators, capacitors and other substation equipments.

INDUSTRY
Offers a comprehensive range of electrical, electronic and mechanical
equipment for a host of industries fertilizers, petrochemicals, refineries,
paper, sugar, rubber, cement, coal, steel, aluminum and mining.

TRANSPORTATION
BHEL offers a variety of transportation equipment to meet the growing
needs of country. 65% of Indian Railways are equipped with BHEL
manufactured traction equipment. Underground metro also runs on drives
and control supplied by BHEL.



BHEL has taken up the manufacturing of locomotive to provide a
pollution free transportation. BHEL also offers a battery operated
passenger van to Delhi Government.

OIL AND GAS
Equipment for oil and gas exploration and transportation is manufactured
by BHEL. The range covers super deep drill rigs with matching draw works
and hosting equipment.

NON CONVENTIONAL
BHEL is playing a vital role in helping to harness the vest renewable sources
of solar, wind and biogas energy. BHEL has supplied several water heating
system, windmills generators and photo voltaic system.

TELE COMMUNICATION
BHEL has entered the field of telecom with electronics PABX system based
on indigenous technology from C-DOT.

MANUFACTURING TECHNOLOGIES
BHEL has 14 manufacturing plants, which are spread different parts of the
country having unique manufacturing and testing facilities, CNC machines,
turbine blade shape system, system bener, 8000-ton hydraulic press,
heavy-duty lathe mailing machines and many more are available.



ACTIVITY PROFILE OF BHEL
POWER SECTOR PROJECTS
 Thermal sets and auxiliaries.

 Steam generators and auxiliaries.

 Industrial fans.

 Electrostatic Precipitators.

 Air pre-heaters.

 Nuclear power equipment.

 Hydro sets and auxiliaries.

 Motors

 Transformers

 Rectifiers

 Pumps

 Heat exchange

 Capacitors

 Porcelain/Ceramic insulators

 Seamless steel tubes

 Castings and forgings



SYSTEM/SERVICES
 Turnkey power station

 Data acquisition system

 Power system

 HVDC commissioning system

 Erection and commissioning system

 Modernization and rehabilitation

TRANSPORTATION SECTOR
 Diesel electric generators

 AC/DC locomotives and loco shunters

 Traction system for Railways

 Electric trolley buses

INDUSTRY SECTOR
 Boilers

 Valves

 T G Sets

 Power devices

 Solar cells

 Photo Voltaic cells

 Gas turbines

 Off rigs


 Blow out preventers

 Wind mills

 Control system for electric devices



BHARAT HEAVY ELECTRICALS LIMITED
JHANSI UNIT
By the end of 5th five-year plan, it was envisaged by the planning
commission that the demand for power transformer would rise in the
coming years. Anticipating the country’s requirement BHEL decided to set
up a new plant, which would manufacture power and other type of
transformers in addition to the capacity available at BHEL, Bhopal. The
Bhopal Plant was engaged in manufacturing of transformers of large rating
and Jhansi unit would concentrate on power transformer upto 50 kVA, 132
kV Class and other transformers like Instrument Transformers, Traction
Transformers for Railway etc.

This unit of Jhansi was established around 14 km from the city on the
N.H. No. 26 on Jhansi Lalitpur road. It is called second generation plant of
BHEL set up in 1974 at an estimated cost of Rs. 16.22 crores inclusive of Rs.
2.1 crores for township. Its foundation was laid by Late Mrs. Indira Gandhi
the Prime Minister on 9th January 1974. The commercial production of the
unit began in 1976-77 with an output of Rs. 53 Lacs.

This plant of BHEL is equipped with the most modern manufacturing
processing and testing facilities for the manufacture of power, special
transformer and Instrument transformers, Diesel shunting Locomotives
and AC/DC Locomotives. The layout of the plant is such that it is well
streamlined to enable smooth material flow from the raw material stages
to finished goods. All the feeder bays have been laid perpendicular to main
assembly bay and each feeder bay raw material smoothly gets converted
to sub assemblies which after inspection are sent to main assembly bay.

The raw material that are produced for manufacture are used only after
thorough material testing in the testing lab and with strict quality checks at
various stages of productions. This unit of BHEL is basically engaged in the
production and manufacture of transformers of various type and capacities
with the growing competition in the transformer section, in 1985-88 it
under took the re-powering of diesel, but it took a complete year for the



manufacturing to began. In 1987-88, BHEL has progressed a step further in
undertaking the production of AC Locomotives and subsequently it is
manufacturing AC/DC Locomotives also.



SECTIONS OF BHEL JHANSI UNIT
BHEL has many departments, while production and Administrative
departments are separate.

Broadly speaking BHEL, Jhansi has two production categories.

1. Transformer Section
2. Loco Section

TRANSFORMER SECTION:
In the transformer plant there are ten bays:

Bay 0, 1& 2: These are fabrication shops established in 1978 and mainly
deals with fabrication work of transformers and locomotives.

Bay 3: It is splitted into two parts, half is the machine shop and the
second half is for bus duct. Bus duct are used to transformer electricity
from the generator to transformer.

Bay 4: Here is the winding work of the power transformer & dry
type transformer carried out.

Bay 5: Basically it is core and punch section but in a part of it cast
resin coil encapsulation plant is situated. The coils of dry type transformer
are casted, cut and finally prepared.

Bay 6: It is also engaged in two processes, one half is the traction
transfer assembly.

Bay 7: In this bay, the dry transformers are manufactured and
various types of insulation are prepared to be used in the transformers.



Bay 8: This bay was established in the year 1974. It is one of the
earliest bays to setup. It is involved in the manufacturing of instruments,
transformers like 132 kv and 220 kv voltage/current transformers. ESP
transformers are also manufactured here.

Bay 9: This is one of the largest bay in the unit engaged in the
assembly of power and rectifier transformers. The time taken for assembly
ranges from 4-12 weeks.

LOCO SECTION
The other section, locomotives department is one of the most important
departments in factory. It deals with the manufacture and production of
following types of locomotives.

1. AC locomotives
2. AC/DC locomotives
3. Thryster type locomotives
4. Diesel electric locomotives shunting locomotives (DESL)
5. Diesel shunting/Engine of various capacities and haulage

The unique modern machines available in Jhansi unit are as follows:

• CNC cropping line machines
• Vapour phase drying system
• Computer ICM 6040 and 6080 and IRISHI 40/20 with graphic facilities.
• Bogie frame machining centre
• CNC axle turning lathe
• Facing and centering machines
• Wheel forcing press
• CNC pipe bending machines



PROFILE OF BHEL JHANSI UNIT

Products Rating
1. Power Transformer Upto 220 kV Class 250 MVA
2. Special Transformer Upto 110 kV
3. ESP Transformer 100 kV, 1400 mA
4. Freight Loco Transformer 3900 to 5400 kVA & 6500 kVA
(3 Phase)
5. ACEMU Transformer Upto 1000 kVA 25 kV(1 Phase)
1385 kVA (3 Phase)
6. Dry Type Transformer Upto 3150 kVA
7. Bus-duct Upto 15.75 kV Generating
Voltage.
8. Instrument Transformer VT & CT upto 220 kV Class.
9. Diesel electric Locomotives Upto 2600 HP.
10. AC/DC Locomotive 5000 HP.
11. Over Head Equipment cum Test
Car.



GROWTH OF PRODUCTION AND MILESTONES
Year Milestone
1976-77 Start of Instrument Transformer production.
1977-78 Start of Traction Transformer and Power Transformer (upto
132 kV)
1978-79 Start of HFTT type freight Loco
1979-80 Commissioning of 2,500 kV DG Set (due to server Power
Cuts).
1980-81 Start of ESP Transformer.
1981-82 Start of 220 kV Power Transformer.
1982-83 Achieved Break Even.
1983-84 Start of Bus-duct
1984-85 Start of dry type transformer.
1985-86 Re-powering of Diesel Loco Started.
1986-87 Start of new Diesel Loco Manufacturing.
1987-88 Manufacturing facilities for AC Loco.
1988-89 Crossed 100 crore target.
1990-91 Successful design and manufacturing of 450 HP 3 Axel Diesel
CCI
1991-92 Manufacturing of first 2600 HP Diesel for NTPC.
1992-93 Successful Design and Development of 5000 HP Thyristor



control Locomotive.
1993-94 Unit has been awarded ISO-9001 certificate for quality
systems.
1994-95 240 MVA Power Transformer Produced first time.
1995-96 AC/DC Locomotive first time in India.
1996-97 100th Loco Manufactured.
1997-98 250 MVA Transformer produced first time.

1998-99 Developed overhead equipment test

Exported one DESL loco to Malaysia

1999-00 Diesel



FINANCE DEPARTMENT IN BHEL, JHANSI

A sound financial management is the crux of the efficient
management of a business enterprise and financial management on
scientific and sound lines in a prime consideration of BHEL. The
Finance/Accounts Department of the company controls all the financial
operations. That is directed at improving profitability and internal
resources generation through optional utilization of man, material,
machines, tools and money.

According to its various functions the Finance/ Account Department
is divided into following sections: -

i) Price Store Ledger(PSL)

ii) Supply Bill

iii) Cash

iv) Pay

v) Books Budget and MIS

vi) Sales

vii)Miscellaneous and Revenue

viii)Internal Audit

ix) Export Incentives, Sales Tax and Income Tax



x) Provident Fund

xi) Works

xii)Travelling Allowance

 Price Store Ledger(PSL)

PSL section is entrusted with the job of material pricing and
determination of material consumption. PSL are used for the material
accounting as well as their financial accounting. The documents involved
are: -

SRV – Store Receipt Voucher

MIV – Material Issue Voucher

SRN – Store Return Note

MTV – Material Transformer Note

RCDV – Receipt cum Dispatch Voucher

Passing of Bills

The Bills Passing process starts after the account section gets the
purchase order, SRV’s and bills from suppliers. The accountant’s section
then makes payment.

Terms of Payment are of three kinds: –



i) 10% in advance payment

ii) 100% after receipt and acceptance

iii) Partial advance and the remaining after the receipt and acceptance

Foreign Purchase

There are certain items, which are to be imported. A license is
required for such items. The license can be acquired from DGTD. There is
also a provision for forward cover.

 Cash

This section is responsible of banking of all the money worth
received by the company from the costumers and disbursement of all
authorized payment on behalf of the company to suppliers, contractors in
form cheques, cash, drafts, postal orders etc.

It is also concerned with payment of salaries, wages and other
personal payments of employees.

Cash section prepares these statements for management information: -

 Daily – cash flow > Direction collection of sales.

 Weekly – Cash inflow > outflow – during week



 Statement of pending bills of cash section status of margin money.

 Monthly – cash flow forecast for 3 months.

 Operating result statement.

 Statement of outstanding letter of credit & bank guarantee.

 Daily bank transfer statement.

 Bank reconciliation statement is also prepared.

BHEL has centralized cash credit system.

 Pay Section

It is assigned the job of payment of salaries and other personal
payments to employees it looks after provident fund, gratuity and bonuses
insurance facilities extend to employees.

Employees leave encashment, official travelling reimbursement and this
section deals other welfare expenses. It is also entrusted with clearance of
medical claims.

 Books, Budget and MIS



General ledger is the consolidated list of general entries. As soon as
the general voucher is received, the general ledger is prepared.

In the general ledger, receipt and expenditure both are recorded.
This section prepares section wise and monthly Trial Balance.

After the preparation of general ledger and trial balance, P&L
Account and the Balance Sheet are prepared yearly. The Balance sheet is
prepared in accordance with the company’s act.

Two types of Audits are done by the BHEL: –

i) Internal Audit

ii) Government Audit

 Budget

Budget is a target setting for operations.

There are two types of Budget prepared by BHEL: –

1. Revenue Budget: – It consists of consolidated production
programmed &related expenses to carry out that programme.

2. Capital Budget: – It includes the fixed assets. Preparation of budget is
done at three levels:



i) Internal Level: – Each department is sent information about the
budgeted expenses provided to the department. It is necessary for
control.

ii) Corporate Level: – Budget of BHEL unit is sent to the corporate
office.

iii) Government Level: – Budget of BHEL is also sent to Government
level.

 Management Information System

Three types of information system are generated in the BHEL: –

i) Internal for the Unit

ii) For the Corporate Office

iii) For Government

Every month information is generated regarding allocation of
funds on various aspects for each department and is sent to every
department. Information is generated mainly for control purpose. Other
information generated is: –

i) Cash Flow

ii) Inventory Level (non moving and slow moving items)

iii) Inventory of finished goods



 Cost Section

This section is responsible for accounting and reporting of costs. It
determines direct labour rates and Engineers rates and overheads
recovery factors of manufacturing, engineering, commercial and
administration for cost estimation. The cost accounting is done to
record and collect cost for work orders and product level information. It
prepares material/labour overheads consumption statements. It
furnishes cost reports to management about: –

1. Profitability – Product wise/ Order wise.

2. Variance _ Estimated and Actual Cost

3. Performance – Efficiency and operating results

 Sales Section

The accounting of sales is done in this section. The activity of this section
starts when the commercial department issues a work order. Work order
part II (Financial) summarizes the financial terms of the contract. It
contains the information like the name of customer & consignee,
description of goods to be produced and sold, quantity, sales value, terms
of delivery and payment, price variation clause, sales tax, excise duty,
liquidates damages, Bank guarantee, fight etc. with the part II W.O. details.
Apart from that the terms and conditions embodied in W.O. part II as



regard adjustment of advances, deferred debts and calculation of PVC,
Excise duty and Sales tax must also be complies with. Sales section submits
the bills to the customers as desired by Commercial either direct or
through Financial such as Banks.

This Section does the necessary accounting for the bills raised;
money collected from customers in form of advance or sale proceeds.

 Miscellaneous and Revenue

Miscellaneous wing of this section deals with the payment of
advances to employees going on official tours, LTC etc. Payment to
transporters, welfare activities, security services, repairs and maintenance,
daily wages, furniture, departmental and other petty expenses.

The revenue wing of this section with recovery of rent, electricity
and water charges for other facilities from the salary of the employees.

 Internal Audit



BHEL is having its own team of internal auditors, who to unearth
the discrepancies in accounting, check periodically the books of accounts
as well as schedules forming part of accounts.

 Export Incentives, Sales Tax and Income Tax

This section deals with export procedures of finished goods. It is
entrusted to get licenses for export. It is also responsible for claim of duty
draw back and export incentives. This section also looks the import of raw
materials that forms par to finished good.

It also assesses of sales tax, income tax and other matters related
to custom duty.



INTRODUCTION TO WORKING CAPITAL
“Working capital refers to a firm’s investment in short term
assets-cash, short term securities, accounts receivable and inventories.”

- Weston & Brigham

Working capital can be classified either on the basis of its concept
or on the basis of periodicity of its requirement.

(I) On the basis of concepts there are two concepts of working
capital: -

1. Gross Working Capital

2. Net Working Capital


Gross Working Capital

Gross working capital refers to the firm’s investment in current assets.
Current assets are assets that can be converted into cash within an
accounting year. Current assets include cash and bank balance, Short-term
securities, debtors, bills receivables and inventory.

The Gross Working Capital concept focuses attention on two aspects of
current assets management.

(a) Optimum investment in current assets

(b) Financing of current assets.

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 bills payable and outstanding expenses. Net working capacity
indicates the liquidity position of the firm. Generally net working capacity is
referred to as working capital.



(II) On the basis of requirement – According to Gestenberg, the working
capital can be classified into permanent or regular working capital and
variable working capital.

NEED FOR WORKING CAPITAL

A firm required as sufficient amount of working capital to run its day-
to-day business. We can hardly find a firm that does not have any amount of
working capital. But firms differ in their requirement for working capital. The
firm needs working capital because sales do not convert into cash
instantaneously. There is always a time duration required to convert sales,
after the conversion of resources into inventories, into cash. This time
duration is called Operating Cycle of the firm. Firms like BHEL must maintain
an adequate amount of working capital because of a long operating cycle.

Operating Cycle: - It is clear that working capital is required because of
the time gap between the sales and their actual realization in cash. This
time gap is technically termed as “operating cycle” of the business.

Funds required investing in inventories, debtors and other current assets
keep on changing shape and volume. Like a company has some cash in the
beginning. This cash may be to the suppliers of raw material, to meet
labour costs and other overheads. These three combined would generate
WIP, which will be converted into finished goods on completion of
production process. On sale these finished goods gets converted into
debtors and debtors pay, the firm will again have cash. This cash will again
used for financing raw materials, WIP, etc. Thus, there is a complete cycle


when cash gets converted into raw material, WIP finished goods, debtors
and finally again cash.

DEBTORS SALES

OPERATING CYCLE
CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

In case of a manufacturing company, the operating cycle is the length of
time necessary to complete the following cycle of events:

(i) Conversion of cash into raw material.

(ii) Conversion of raw material into work-in-progress.

(iii) Conversion of work-in-progress into finished goods.

(iv) Conversion of finished goods into accounts receivables, and

(v) Conversion of accounts receivables into cash.

The operating cycle of manufacturing business can be shows as in the
following chart.

OBJECTIVES OF WORKING CAPITAL MANAGEMENT


The basic objective of working capital is to provide adequate support for
the smooth functioning of normal business operations of a company. The
term adequate working capital is subjective depending on management’s
attitude towards uncertainity/risk.

I. Maintenance of working capital.

II. Availability of ample funds at the time of need.

SAFETY LIQUIDITY PROFITABILITY

CREDIT MGMT.
BANK MGMT
MINIMIZE TIME
MINIMIZE TIME

EXCESS
CASH

ACCT RECEIVABLE
ACCT PAYABLE MGMT
MGMT

MINIMIZE TIME OPTIMIZE TIME
MEDIA



Goals of Working Capital Management

WCM: A TRADE-OFF BETWEEN LIQUIDITY AND PROFITABILITY
The two important aims of working capital management are to gain
profitability along with liquidity. Liquidity is the firm’s continuous ability to
meet maturing obligations. To ensure liquidity, the firm has to maintain a
relatively large investment in current assets holding. But there is a cost
associated with maintaining a sound liquidity position. A considerable
amount of firm’s profitability will suffer. To achieve higher profitability, the
firm can sacrifice liquidity and maintain a relatively low level of current
assets. If the firm does so, its profitability will improve as fewer funds as
tied up in the current assets, but its solvency will be threatened and
exposed to greater risk.

Therefore, firm should maintain its current assets at that level where the
liquidity cost is quite low and the firm is also able to achieve adequate
profitability.

DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business.

2. Manufacturing cycle.

3. Sales growth.

4. Nature of raw material used.

5. Demand condition.

6. Production policy.


7. Price level changes.

8. Operating efficiency and performance.

9. Firm’s credit policy.

10.Available of credit.

11.Degree of synchronization among cash inflow and outflows.

GUIDELINES AND SOURCES OF FUNDS FOR WORKING CAPITAL
REQUIREMENTS OF BHEL

1. CASH CREDIT FROM BANKS

The requirements of working capital will be met either from
internal resources or borrowings from banks. All the banking
transactions have been centralized at Corporate office, New Delhi.
The Corporate office will negotiate with consortium of banks for
total cash credit required for the company as a whole.

2. WORKING CAPITAL LOAN FROM GOVERNMENT

The funds for working capital over and above cash credit limits
may also be arranged through government loans.

3. RECEIPTS FROM CUSTOMERS



The bulk of working capital requirements are met from the
advances from customers in accordance with the contract
condition as approved by the board. The receipts are deposited in
the centralized account.

4. FIXED DEPOSITS FROM MEMBERS OF PUBLIC

Subject to the approval of the government and Board of Directors,
the funds may be raised from public by obtaining fixed deposits
under the provisions of the company.

5. PROVISIONS OF THE FUNDS FOR SITE OFFICES

Funds required to site offices will be provided by the divisions
under which they are functioning and for the purpose. Current
accounts will be authorized to be opened with branches of SBI or
any other nationalized bank.

6. OTHER SOURCES OF FUNDS

(a) Bill rediscounting scheme of IDBI:

The scheme was introduced in 1965. The manufacture of
indigenous capital equipment can push up the sales of their
products by offering to the prospective purchaser deferred
payment facilities. The IDBI does not itself discount bill of
exchange/promissory notes but rediscounts those discounted
by any other approved bankers.

(b) Bill market scheme:

RBI providing rediscounting facility for bills having maturity
of not more than 120 days introduced this scheme. This facility
enables the supplier to get the payment for their supplies at a
reduced rate of interest.

(c) EXPORT PRE-SHIPMENT/POST SHIPMENT CREDITS:



In respect of export orders finance at concessional rates is
made available by the banking system on specific conditions.
Preshipment finance at a concessional rate is granted for a
period of 180 days. Post-shipment finance is available at same
concessional rate for maximum period of 90 days. The pre-
shipment finance will form part of cash credit granted by
banking system to the customers.

(d) Other Schemes: -

Discounting supply bills can also raise short-term funds.
Another scheme related to rising of fund to the extent of 75%
or 80% of the value of inventories not required for next few
weeks/months by pledging of such inventoried with a banker
under a “Key loan or Pledge amount”.

Forecasting of Working capital
If the working capital is to be estimated for the ensuring year, then
the current requirement of the assets and the cash flow for the period is to
be estimated. The basic object of forecasting is either to measure the cash
position of the enterprise or to exercise control over the liquidity position if
the concern.

There are many popular methods available for forecasting the
working capital requirements, which follows: -

1) Cash Forecasting Method

2) The Balance Sheet Method

3) The profit & loss adjustment Method

4) Percent of Sales Method

5) The Operating cycle Method

6) Regression Analysis Method



CASH MANAGEMENT
INTRODUCTION
Cash is an important current asset for the operation of the
business. Cash is the basic input needed to keep the business running on a
continuation basis. It is also the ultimate output realized by selling the
services or product manufactured by the firm. Cash is the most liquid of all
the current assets. Higher cash and bank balance indicate high liquidity
position in lower profitability, as ideal cash fetches no return. Thus a major
function of finance manager is t maintain sound cash position.

Cash management is concerned with managing of: -

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



(ii) Cash flow within the firm.

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

Objective of Cash Management
1) To meet day to day business requirements.

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

3) To face unexpected cash drain.

4) To maintain image of credit worthiness.

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

6) To meet requirement of bank relationships.

Efficient cash management function calls for cash planning,
evaluation of cash benefits and cost of policies, sound procedures and
practices and synchronization of cash inflows and outflows. Thus for
achieving goals and objectives of cash management, finance manager has
to plan cash needs of the firm followed by cash flow management,
determination of optimum level of cash and finally investment of surplus.

Factors Affecting Cash Requirement
(A)Internal Factors

(a) Profit level

(b)Dividend and Taxation policy

(c) Reserve and surplus

(d)Depreciation policy

(e)Expansion programme


(f) Operating efficiency

(B) External Factors

(a) Fluctuating in marketing interest rates

(b)Investment avenues available in market

(c) Government economic policies

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

Cash Management in B.H.E.L., Jhansi
In B.H.E.L., the centralized cash credit system is followed. From 24-07-75 all
the banking transactions of the company have been centralized at
corporate office, New Delhi. Under this system all the sales proceeds of the
units are deposited in a centralized account. This account number is
universal for all the units of ROD’s. They have to deposit the sales process if
this account withdraws money from it. Only the corporate office operates
it.

For meeting day to day expenses, the units have to prepare the
estimates of such expenses, which are then sent to corporate office weekly
or monthly, or both. At unit level, the cash budget is prepared on yearly
basis for estimating the expected cash inflows and outflows. The yearly
budget is broken down into monthly and weekly intervals. The inflows and
outflows and estimated on following basis.

The only source of cash inflow for unit is corporate office. The sale
proceeds cannot be directly utilized. Based on the above requisitions, the
corporate office allocates the funds.

For cash credit, corporate office will negotiate with consortium of
Bank for total cash credit required for the company as the whole. A
consortium deed for hypothecation of stocks and stores of company is
executed by corporate office. All the information, documents etc. required



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

Arrangements have been already been made by the State Bank of
India, HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank
for centralizing total cash credit limits at New Delhi.

Under this scheme, the units have finished the required information
under the following documents. The units will send estimated, monthly
cash flow statement to the corporate office by 18th of every month.

Based on these cash flow statements, the corporate office will
allocate the sub limits will be transferred to the consortium of the bank by
25th of the month. The unit can utilize this fund.

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

The units are also required to send the weekly report of daily bank
transactions to the corporate office. These reports shows the detail of daily
debit and credit transaction appearing in bankbook of the company,
enabling the posting of corporate bankbooks as well as verification of bank
statement received from banks. These reports are sent to corporate office
on

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

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

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

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

The units are required to send the comparative statement of
estimated and annual cash flow of the preceding month. This report will be
sent quarterly after inter-unit reconciliation meeting. The total interest
payable on cash credit availed by corporate office is to be allocated among
the units in the ratio of utilization of funds. Thus cash forecasting & budget
are the principal tools of cash management. Forecasting helps manager to


know how much cash will be held in balance, to what extent the firm
should rely on banks financing and how much to invest in marketable
securities.

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

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

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

Cash Budget in B.H.E.L., Jhansi
Cash budget is the most significance device to plan for and control
receipt and payment. A cash budget is a summary statement of the firms
expected cash inflows and outflows over a projected time period. In
B.H.E.L., cash management is centralized and is controlled directly from
corporate office, whatever requirement of fund is felt in BHEL, Jhansi it is
sent to the corporate office and corporate office disburse the funds
accordingly.

Cash budget in BHEL, Jhansi is prepared on the basis of production
schedule, which is prepared after receiving customer’s orders at the
beginning of the year. There are two aspects of cash budget inflow and
outflow. In flow of cash budget is determined on the basis of receiving the
customer’s orders and preparing production schedule. Outflow is
determined on the basis of requirement of raw materials, payment of taxes
and duties, interest on borrowings etc. Outflow in cash budget is



categorized into operation and non-operation outflow consist of capital
expenditure, exchange variations and supplier’s credit.

Thus after determining the budgeted estimates of inflow and
outflows, cash budget is prepared at the beginning of the year. The
distribution of cash is determined on monthly basis in every month of that
year. In the last quarter of the year cash budget is received and the last
estimates are calculated and fixed. Monitoring of cash budget is done
though management information system.

RECEIVABLE MANAGEMENT
Introduction
Customers arising from sale of goods or services define the term
receivable as debt owed to the firm in the ordinary course of business.
Receivable constitute a substantial position of current assets. Granting
credit and creating debtors amount to the blocking of firm’s fund. The
interval between the date of sale and date of payment has to be financed
out of working capital. Thus trader’s debtors represent investment.

Business firm generally sell goods on credit to facilitate sales. When a
firm makes an ordinary sale of goods on services and does not receive
payment, the firm grant trade credit and create accounts receivable that
would be collected in the future.



Cost of Maintaining Receivable
The cost associated with the maintenance of account receivables are:

1) Capital Cost

When a firm maintains receivables, there is a time lag between the
sales of good and payments by the customers. Mean while, the firm has to
pay to the employees and to the suppliers of raw materials. These
payments are made by the use of traditional capital which alternatively
could be profitably employed elsewhere.

2) Collection Cost

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

3) Administrative Cost

In the process of maintaining receivable company incurs some
administrative expenses in the form of salaries to clerks who maintain
records of debtors, expenses on investigating the credit worthiness of
debtors etc.

4) Default Cost

When customers make default in payments, not only the collection
effort has to be increased but the firm may also have to incur losses due to
bad debts.

Objective of Receivable Management
The objective of receivable management is to promote sales and
profits until that point is reached where return on investment in future
funding of receivables is less than cost of funds raised to finance that
additional credit.


Credit Policy
Credit Policy of a firm can be regarded as a kind of trade-off between
increased credit sales leading to increase in profit and the cost of having
large amount of fund locked up in the form of receivables and loss due to
incidence of bad debts.

The variables associated with credit policy are: -

(A) Credit Standard

(B)Credit Terms

(C)Collection Efforts

Credit Standards are criteria to decide the type of customers to whom
goods could be sold on credit. Credit Terms specify duration of credit and
terms of payment by customers. Collection Efforts determine the actual
collection period. The lower the collection period, the lower is the
investment in accounts receivable and vice versa.

Receivable Management in BHEL, Jhansi
The main products of BHEL are heavy industrial goods with long
operating cycle. BHEL grants liberal terms regarding trade credit to lure the
potential customers to buy its product at favorable selling prices.

To utilize its excess capacity, BHEL is granting liberal trade credit
terms to its customers. The main customers of BHEL are Railways, Power
Industries and other Private Parties. BHEL has overseas sales also.

All the BHEL units are having their commercial department.
Commercial department and Regional Operational Divisions (RDOs)
primarily carry out the job of recovery from the customers. The sales


section of finance department also actively takes part in receivable
management by preparing and sending invoices and reminders to
customers at appropriate time. They take track of money received from
customers as advances, as against dispatch of finished goods and money
recoverable on account of price variation claims and conversion of
deferred debts into debtors. This monitoring is done work order wise. The
aging schedule of customers also prepared which gives the regarding
period of outstanding balances.

The terms and conditions with the customers are finalized according
to the credit policy laid down by corporate office BHEL. However deviations
are permitted with the due approval from corporate office.

While lying down of credit policy by head office, industry conditions
are taken into consideration. Seeing huge investment in execution of work
order, BHEL demands considerable payment in advance in different phases
of completion of work i.e. erection, installation, commissioning,
maintenance etc. Despite all these BHEL is presently facing cash crunch
because a major chunk of BHEL’s customers consists of government
bodies, which are very casual in clearance of dues.



INVENTORY MANAGEMENT
Introduction
Inventory constitutes the most significant part of the current assets
of the large majorities of the companies in India. On an average,
inventories are approximately 60% of current assets in public limited
companies in India. Inventories are stock of the product, a company is
manufacturing for sale and components that make up the product. The
various forms in which inventories exist in manufacturing company are raw
material; work in process and finished goods.

The level of above mentioned three kinds of inventories for a firm
depend on the nature of its business. Manufacturing firm will have
substantially high level of all three kinds of inventories, while a retail or
wholesale firm will have a very high level of finished goods inventories and
raw material and work in process inventories.

In a manufacturing firm the level of inventory depends on the
operating cycle. A manufacturing firm with a long operating cycle has to
maintain a high inventory level.

Need to Hold Inventories
There are three general motives for holding inventories: -

1. Transaction Motives: - Companies hold inventories to facilitate smooth
production and sales operation. Company should maintain adequate
stock of raw material for a continuous supply to the factory for
uninterrupted production and keeping stock of finished goods as the
firm cannot immediately when customers demand goods.

2. Precautionary Motive: - Firm holds inventories to guard against the risk
of unpredictable change in demand and supply of force and other


factors. Firm may also purchase large quantities of raw material; than
needed for desired production and sales level to obtain quantity
discount on bulk purchases.

3. Speculative Motive: - It influence the decision of the firm to increase or
decrease inventory level to take advantage of price fluctuations.

Cost Associated with Inventory Holding
There are five costs associated with inventory holding. Of these,
three are direct costs that are immediately connected to buying and
holding goods and other two are indirect costs, which are losses of
revenues.

These costs of holding inventories are: -

(1)Material cost

(2)Order Cost

(3)Carrying Cost

(4)Cost of fund tied up in inventory

(5)Cost of running out of goods



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

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

The effective management of inventory involves a tradeoff between
having too little and much more inventory. The firm should always avoid a
situation of over investment or under investment in inventories.

The major disadvantages of over investment are: -

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

(ii) Excessive carrying cost.

(iii) Risk of liquidity.

(iv) Physical deterioration of inventory during storage.

Maintaining an inadequate level is also dangerous. The
consequences of the under investment in inventories are: -

(i) Production hold ups.

(ii) Failure to meet delivery commitment.

Thus the aim of inventory management should be to avoid excessive
and inadequate level of inventories and to maintain sufficient inventory for
the smooth production and sales operations. Efforts should be made to
place an order at the right time with right source to acquire the right
quantity ant the right price and quality.

Factors Affecting Level of Investment in Inventories: -

(1)Seasonal nature of raw material.


(2)Length and technical nature of production process.

(3)Style factor in end product.

(4)Terms of purchase.

(5)Time factor.

(6)Supply condition.

(7)Loan facilities.

(8)Other factors.

Inventory Management in BHEL, Jhansi
The investment in inventory in production to total is a dominant
determinant of working capital management. It holds much important in
context of BHEL as it is having a long production cycle where a good
amount of capital is tied up in form of raw material, work in progress and
conversion cost.

Production planning and control department plays a pivotal role in
inventory management. The engineering department plays a supporting
role and provides the requisition regarding technology to be applied and
material requires to PPC department. In BHEL the inventory control is
perform with following steps: -

1. Planning-

This is done by PPC department is consultation with purchase,
commercial, design and manufacturing department prepares the planning



schedule. This schedule along with information provided by engineering
and design department helps in material planning and inventory control.

2. Procurement –

The procurement is done by purchase department. It is done with
the assistance of PPC and commercial department for maintaining a
tradeoff between carrying cost and ordering cost. A single purchase order
is placed for the entire quantity of a specific item and its scattered delivery
over a period of time is received. This method helps in obtaining cash and
quantity discounts and saving carrying cost. In case of foreign purchase
also one order is placed for the full requirement of an item and scattered
delivery is opted because variation caused in material cost due to
fluctuation in exchange rate is much less than the carrying cost of the
material which is approximately 25% of the total price.

12.Receipt and Custody

For the proper inventory control on receipt of material in store,
quality control department checks the material as per specification. The
cost section fills details of all the purchase by issuing store receipt voucher
and material issue voucher.

13.Issue

After receiving the material and storing, the management keeps the
information whether these material are being issued to desired
destination. Full record of every issuing of material is kept for the proper
inventory control.

14.Accounting

The record of every transaction regarding the use of material in
every department is kept. These records give the overall view of how and
where inventories have been used.



Methods Used For Inventory Control
In BHEL, planning and control of inventory is done by using two
methods —

(i) ABC analysis

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

(iii)Budgeting material requirements

(iv)Fixation of raw material levels

(v) Variety reduction

(vi)Codification of materials

(vii)Control of work in progress

(i) ABC Analysis

In case of manufacturing company like BHEL, the number of items of
raw material run into thousands. From the point of view of monitoring
information for control, it becomes extremely difficult to consider each one
of these items.

In this case ABC analysis becomes useful and enables management to
concentrate attention and keeps a close watch on a relatively less number
of items, which account for a high percentage of annual usage value of all
items of inventory.

Annual usage value = Annual requirement per unit cost

In this analysis, items are categorized into A, B, & C category on the basis
of their usage value. The more costly items are classified as ‘A’. This
represents large investments items but is low in number. In BHEL ‘A’


category items amounts to 60% of investment in inventory items.
Inventory items of average usage are put in B category and these accounts
for 30% of total investment in inventory. Low usage items are pull in C
category. It represents 10% of degree of control and accurate planning. B
category requires moderate control. As ‘C’ category represents low usage
value, much importance is to pay on its control. Also the planning and
control cost incurred for this category will be greater than their total cost.

The advantages of this system are —

• Ensures closer control on costly items.

• Helps in developing scientific methods of controlling inventories.
Clerical costs are reduced and stock is maintained at minimum level.

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

(ii) Slow moving and Non-moving goods analysis

It is advantageous to compare the turnover of different grades and
kinds of materials as a means of detecting stock which does not move
regularly, thus enabling management to avoid keeping capital locked up in
undesirable stock. Stock turnover helps in analyzing such items.

Cost of material consumed during period

Stock turnover =
--------------------------------------------------------------

Average stock of raw material during period

Stock turnover figures the presence of slow moving stock and helps in
keeping the level of such stock to a low mark.



Slow Moving Stock – Material which have low turnover are classified as
slow moving stock. In BHEL, Jhansi an item is regarded as slow moving one,
if turnover ratio is less than 10%.

Non-Moving Stocks-- These items have no immediate demand but may be
required in future. Here the items, which are not consumed since two
years, are regarded as non-moving stock or dead inventory. This category
includes mainly directly chargeable items.

These items having turnover ratio of 10% or more are fast moving
items and such acquire more importance.

Documents Used For Inventory Control
The various documents used for control of inventory are discussed
below

(i) Store Receipt Voucher

This is issued when raw material purchased reaches the store. It is
issued by store in charge.

(ii) Material Issued Voucher

This is an authorization to the storekeeper to issue raw material. Any
material ordered for a specific work order will be recorded on MIV details
of material requisition is entered on the Bin card.

(iii)Material Return Note

This is an authorization to the storekeeper regarding raw material,
finished parts or other stores no longer required by the factory. The
various stock records and cost accounts are adjusted in due course from
the details given on the form.


(iv) Material Transfer Note

This is issued when the material booked to one particular order is
transferred to another work order.

(v) Material is kept in appropriate bin and draws. For each kind of material
a bin card is maintained showing details. A bin card assists the storekeeper
to control the stock. The bin card incorporates all information viz. opening
balance of materials, materials ordered, materials allocated and closing
balance of materials. As a result the bin card shows the full cycle of
material like the order of few supplies, allocation of material to jobs,
receipt and issued of material, stock in hand and balance available.



ANALYSIS OF WORKING CAPITAL

The analysis working capital is primarily a test of short term
solvency. There are dangers in having too little and too much working
capital.

Therefore

The financial manager has to be very vigilant all throughout about
the trends in the items that make working capital.

The questions to be studied and answered in connection with the
analysis of working capital including the following –

(i) Is the management utilizing working capital efficiently?

(ii) Is the amount of working capital is adequate, excessive and
insufficient?

(iii) Does the firm have the favorable credit rating?

(iv) Is the current financial position improving?

Objective of Analysis
(i) To maintain adequate working capital at every time.

(ii) To minimize the cost of short term finance.

(iii) To plant the various sources of short term finance well in advance in
case of the need.

(iv) TO study the trends in the working capital positions.



(v) To assess the effectiveness of management of current assets.

(vi) To maximize the return on investment of equity shareholders.

Inventory Valuation: -

(i) Inventory is valued at actual/estimated cost or net realizable value,
whichever is less.

(ii) Finished goods in plant and work in progress involving hydro and
thermal sets including gas based power plants, boilers auxiliaries,
compressors and industrial turbo sets are valued at actual/estimated
factory cost or at 97.5% of the realizable value whichever is lower.

(iii) In respect of valuation of finished goods in plant and work in
progress, cost means factory cost, actual/estimated factory cost
includes excise duty payable on manufactured goods.

(iv) In respect of raw material, components, loose tools, stores and
spares cost means weighted average cost.

(v) The components and other material purchased/manufactured
against production order but declared surplus are charged off to
revenue retaining residual value based on technical estimates.



BHEL AT A GLANCE
Rupees(in
millions)

2006-07 2007-08
CHANGE(%)

Turnover 18739 21401 14.2

Value added 7182 8323 15.9

Employee (Nos.) 42124 43636 3.6

Profit before tax 3736 4430 18.6

Profit after tax 2415 2859 18.4

Dividend 600 746 24.4

Dividend Tax 93 127 26.8

Retained earnings 1722 1986 15.3

Total assets 22280 29352 31.7

Net worth 8788 10774 22.6

Total Borrowings 89 95 6.3

Debt: Equity 0.01 0.01 0.0

Per share (In Rupees.):

-Net worth 179.5 220.1 22.6

-Earnings 49.3 58.4 15.4

-Dividend

(US $ in million)

Turnover 4344 5419 24.8

Profit Before Tax 866 1122 29.5

Profit After Tax 560 724 29.3



BIBLIOGRAPHY

• FINANCIAL MANAGEMENT
BY I M PANDEY

• PRINCIPLES OF MANAGEMENT ACCOUNTING
BY Dr. S.N.MAHESHWARI

• ANNUAL REPORT 2007-08


The study of working capital management

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