ADISSERTATION REPORT

ON

“MANAGEMENT OF WORKING CAPITAL”

SUBMITTED TOWARDS THE PARTIAL FULFILLMENT FORAWARD OF THE DEGREE

OFMASTER OF BUSINESS ADMINISTRATION

U.P.TECHNICAL UNIVERSITYSESSION - (2012-2014)

UNDER GUIDANCE OF: SUBMITTED BY: - MR SATISH KUMAR SONI SHARMAASSISTANT PROFESSOR MBA-IV SEMESTER

ROLL NO:1203870149

DECLARATION

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I Here By Declared That This DISSERTATION REPORT project entitled “MANAGEMENT OF WORKING CAPITAL” Submitting for partial fulfillment of the requirement for the degree of M.B.A. from U.P TECHINICAL UNIVERSITY, LUCKNOW is of my original work. This report is only for education purpose and not for any other purpose.

Date ………….

Place……………

SONI SHARMA

ACKNOWLEDGEMENT

“When a person is Helped, Guided and cooperated his or her heart is bound to pay Gratitude”

First of all I am thankful to my project guide Mr. SATISH KUMAR under whose guidance I was able to complete the project. I am whole heartedly thankful to him for giving me his valuable time, attention & for providing me a systematic way to complete the project in time.

While making this project report I have relied upon the valuable assistance and help of several people without whom this project report would not have been possible. I am sincerely indebted to my teachers for there valuable suggestions and inspiration to undergo this study.

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I wish to place hearty thanks to all those who have spent their precious time, expressed their keen interest and given continued encouragement throughout the study

PREFACE

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PREFACE

Management of Working capital is finding of data, relevant to specific industry. This

project is a written presentation with observation and references derived from the

secondary data.

The report starts by giving an industry profile, internal view about the company and

their product line. In order to achieve the objective and better under stand the

problem of industry, it was decided to collect the secondary data concerning to

particular industry.

Industry profiling was aimed to know the status of working capital. All the findings are

analysed through tabulation data and ratios. At the last of the report you can find the

suggestions and the recommendations based on the information gathered by data.

SONI SHARMARoll No. – 1203870149MBA – IVth Sem

TABLE OF CONTENTS S.no TOPICS

1. ABSTRACT

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2. AIM AND PURPOSE OF THE STUDY 3. REVIEW OF THE LITERATURE 4. RESEARCH METHODOLOGY 5. DATA INTERPRETATION 6. DATA ANALYSIS 7. FINDINGS AND CONCLUSION 8. LIMITATIONS9. RECOMMENDATIONS 10. LIST OF REFERENCE 11. APPENDICES

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ABSTRACT

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ABSTRACT

Finance is the lifeblood of an industry. The subject matter of Financial Management has been changing at a rapid pace. About a decade ago, the scope of Financial Management was circumscribed to the raising of funds, whenever needed & the financial decision-making & problem solving. The summer training program is designed to give the future managers the feel of the corporate happenings and work culture. These real life situations are entirely different from the stimulated exercise enacted in an artificial environment inside the classroom and it is precisely because of this reason that this summer training has been designed, so that the manager of tomorrow does not feel ill in the case when the time comes to shoulder responsibilities. The summer training is a bridge between the institution and organization to make us understand how theoretical knowledge will be applied in the practical field.

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INTRODUCTION

WORKING CAPITAL MANAGEMENT

“Working capital refers to firm investment in short term assets-cash. Short term securities, accounts receivable & inventories.”. It is the difference that a firm maintains between its current assets and current liabilities. It also assists the firm in meeting its day to day operations. Working capital can be classified regularly on its requirement.There are two concepts of working capital

1) Gross working capital 2) Net working capital

GROSS WORKING CAPITAL

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Gross working capital may be defined as a firm’s investment in total current assets. Current assets are the assets which can be easily converted into cash and include cash, short term securities, debtors (accounts receivable or book debts) bill receivable and stock. Therefore we can also say that the gross working capital is the total of the current assets of the firm.

NET WORKING CAPITAL The net working capital of the firm is the difference between the current assets and the current liabilities. NWC = CA – CL. Net working capital refers to:- (1) Conversion of cash into raw materials; (2) Conversion of raw materials into work-in-process; (3) Conversion of work-in-process into finished goods; (4) Conversion of finished goods into accounts receivable, and (5) Conversion of accounts receivable into cash.

OBJECTIVES OF WORKING CAPITAL MANAGEMENT

The basic objective of working capital is to provide adequate support for smooth functioning of business operation of a company. The term

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adequate working capital is subjective depending on management’s attitude towards uncertainty/ risk.1. Maintenance of working capital.2. Availability of ample fund at the time of need.

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SAFETY LIQUIDITY PROFITABILITY

EXCESS CASH

CREDIT MANAGEMENT

ACCOUNT RECEIVABLE MANAGEMENT

BANK MANAGEMENT

ACCOUNT PAYBLE MANAGEMENT

GOALS OF WORKING CAPITAL MANAGEMENT

BALANCED WORKING CAPITAL

The firm should maintain a sound working capital position. There are two cases one is excess cash and other is inadequate cash. Excessive working capital means holding idle funds which earn no profits to the firm. Dangers facts of excessive working capital.

Unnecessary accumulation of inventories. Defective credit policy and slack collection period.

Inadequate working capital is also dangerous because it interrupts in normal working of the business.Dangers facts of inadequate working capital –

Stagnates growth. It becomes difficult to implement operating plans Fixed assets are not efficiently utilized Firm loses their reputation in front of customer and society

A management should maintain the right amount of working capital on a regular basis. A firm’s net working capital position is not only important as an index of liquidity but also as an measure of firm’s risk taking position.

FACTORS DETERMINING WORKING CAPITAL

The total working capital requirement is determined by a wide variety of factors :

Nature of industry

General nature of business

Business cycle

Production cycle

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Operational and financial efficiency

Growth and expansion

Volume of sales

Credit control

Liquidity and profitability

Inventory turnover

Receivable turnover

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SCOPE OF THE STUDY

FROM THE COMPANY POINT OF VIEW

The study enables to analyse the financial performance, the liquidity position and its various drawbacks.

HELPS IN DECISION MAKING

Financial statements are prepared primarily for decision making. The help of ratio analysis is used to take effective decision.

HELPS IN FINANCIAL FORECASTING AND PLANNING

Ratio analysis is one of the powerful tool which helps in financial forecasting and planning. Planning is looking ahead and ratio calculated for the number of year’s work as guide for the future.

HELPS IN CONTROL

Ratio analysis even helps in making effective control. standard ratio can be based upon financial statements and variance can be found by comparing actual data with standards. If there is any deviation found corrective action can be taken by comparing actual data with standards.

IMPORTANCE TO SHAREHOLDERS / INVESTORS

Investors are interested in knowing the financial position of the organization. His interest lies in the security of his investment and the return in the form of dividend. For that purpose he will try to assess the value of fixed assets and the loan raised against them. Profitability ratios are used to determine profitability position of the organization.

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IMPORTANCE TO CREDITORS The creditor’s or the supplier extends short-term credit to the concern. They are interested in knowing whether financial position of the firm warrants their payments.

IMPORTANCE TO EMPLOYEES The employees are interested in financial position of the concern especially profitability. Their wages increase and amount of fringe benefits depends on profits earned by the organization.

IMPORTANCE TO THE GOVERNMENT Government is interested in knowing the overall strength of the industry and various financial statements published by industrial units.

SOURCES OF FUNDS FOR WORKING

CAPITAL REQUIREMENT

1. CASH CREDIT FROM BANKSThe requirements of working capital will be met either from internal

sources or borrowings from banks.All banking transactions are centralized through corporate office, New Delhi. The corporate office will negotiate with consortium of banks for total cash credit required by the company as a whole.

2. WORKING CAPITAL LOAN FROM GOVT 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 the working capital requirements is also met through

advances from customers in accordance with the contract conditions

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as approved by the board. The receipts are deposited in the centralized account.

4. FIXED DEPOSITS FROM MEMBERS OF PUBLICSubject to the approval of the govt and board of director, the funds

may be raised from public by obtaining fixed deposit under the provisions of the company law to meet the working capital requirements 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.

6. OTHER SOURCES OF FUNDSa) Bill rediscounting scheme of IDBI:

The scheme was introduced in 1965. The manufacturer of indigenous Capital equipment can push up the sales of their products by offering the prospective purchaser deferred payments facilities. The IDBI does not itself discount bill of exchange but re-discount these by any approved banker.b) Bill market scheme:

RBI providing rediscounting facility for bills having maturity of not more then 120 days. This facility enables the supplier to get the payments for their supplies at a reduced rate of interest.

CASH MANAGEMENT

Cash is the important current assets for the operation of business. Cash is the amount which a firm can disburse immediately without any restriction.

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Cash management is concerned with managing of 1) Cash inflow and outflow of the firm.2) Cash balances held by the firm at particular point of time.

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CASH MANGEMENT CYCLEError: Reference source not found

MOTIVES FOR HOLDING CASH

Transaction motive - transaction motive involves to hold cash to conduct business.

Precautionary motive – precautionary motive involves to hold cash to meet contingencies in the future.

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Cash Collection

Business Operation

Information and Control

Deficit Surplus

Borrow Invest

Cash Payment

Speculative motive - speculative motive involves to hold cash for investing in profit making opportunities as and when they arise.

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TECHNIQUES TO MANAGE CASH

Cash planning

Cash forecasting & budgeting

CASH MANANGEMENT IN BHEL Jagdishpur, Sultanpur

In BHEL, the centralized cash credit system is followed.i.e From 24-07-75 all the banking transaction of the company have been centralized from corporate office,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. For meeting day to day expenses, the units have to prepare the estimates of such expenses, which are sent to corporate office weekly, monthly or both. At unit level, the cash budget is prepared on yearly basis The sale proceeds cannot be directly utilized. Based on the requisition, the corporate office allocate the funds.

For cash credit corporate office will negotiate with consortium of banks for total cash credit required for the company as a whole. A consortium deed for hypothecation of stocks is executed by corporate office. All the information, documents etc required in this connection will be sent by division to the corporate office .

Arrangement have already been made with state bank of India , HDFC bank, Canara bank, Bank of Baroda for centralizing cash credit limit at Delhi.

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 forecast &

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budget are the principle tools of cash management. Forcasting helps manger to know how much cash will be held in balance, to what extent the firms should rely on bank financing and how to invest in marketable securities.

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ADVANTAGES OF CENTRALISED SYSTEM

Excess cash at various units can be efficiently used for various purposes and improvement.

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

Idle cash at units is avoided

RECEIVABLES MANAGEMENT

The customers from whom receivable or book debts have to be collected in the future are called trade debtors. Trade credit always create trade debtors or accounts receivables The trade credit arises when a firm sell its product or services on credit and cash is not received immediately.

Business firms generally sell goods on credit to facilitates sales. When a firm makes an ordinary sale of goods on services and does not receive payments. The firm grants trade credit and create accounts receivable that would be collected in the future.

The characteristics of credit sales are It involves an element of risk It is based on economic value

Credit policy are prepared in the receivable management it is the combination of three decision variables.

Credit standards Credit terms Collection efforts

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GOALS OF CREDIT POLICY BHEL follows two type of credit policy

Lenient credit policy- To sell on credit to customers on my liberal terms and standards

Stringent credit policy- To sell on credit on selective basis only to those who have good credit worthiness and able to pay in future

MONITORING RECEIVABLEA firm need to continuously monitor and control its receivable to

ensure success of collection efforts.Two methods to monitor management of receivables

Average collection period Average collection period = Debtors *360/credit sales

Aeging schedule – it break down receivables according to the length of time for which they have been outstanding.

RECEIVABLE MANAGEMENTThe main products of BHEL are heavy industrial goods with long

operating cycle. BHEL grant liberal term regarding trade credit to lure the potential customers to buy its products at favourable prices.

To utilize its excess capacity, BHEL is granting liberal strade 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 ( RODs ) primarily to Carry out with the job of recovery from 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 keep track of money received from customers as advances, as against dispatch of finished good and money recoverable on account of price variation. The aging schedule of

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customers if also prepared which gives the picture regarding period of outstanding balances.

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

While laying down of credit policy by corporate office, industry conditions are taken into consideration. Seeing huge investment in execution of work order. BHEL demands considerable payments 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 Govt bodies, which are very casual in clearance of dues.

INVENTORY MANAGEMENT

Inventories are the most significant part of current assets of companies in India. The large size of inventory maintained by the firms a considerable amount of funds is required to be committed to them. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately.

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

NATURE OF INVENTORIES Inventories are stock of the product a company is manufacturing for sale and components that make up the product. Different types of inventory are

Raw material Work in progress Finished goods

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Supplies or stores and spares

NEED FOR INVENTORY It have also same need as receivable management

Transaction motive Precautionary motive Speculative motive

TECHNIQUES OF INVENTORY MANAGEMENT EOQ (Economic order quantity)

a) Ordering cost – order placing , transportation. b)Carrying cost – warehousing , handling. Reorder point

Safety stock

INVENTORY CONTROL SYSTEM ABC inventory control system – This analytical approach tends to measure

the significant of each item of inventories in terms of its value JIT system – Japanese firm popularize that system it eliminates the

necessity of carrying large inventories and thus, saves carrying and other expenses.

Computerized inventory control system – it is an automatic system of counting inventories These costs of holding inventories are 1.Material cost2.Order cost3.Carrying cost4.Cost of funds tied up in inventory5.Cost of running out of goods

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INVENTORY MANAGEMENT

The investment in inventory in proportion to total is a dominant determinant of working capital management. It holds much importance in context to company 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 required to PPC department. In BHEL the inventory control is perform in the following manner –

1. Planning –This is done by PPC department is consultation with purchase;

commercial, manufacturing department prepares the planning schedule. The schedule along with information provided by engineering and design department help 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 scattered delivery is received over a period of time. This method helps in obtaining cash and quantity discount and saves carrying cost.

3. Receipt & 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 detail of all the purchase by issuing store receipt voucher and material issue voucher

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4. Issue-

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

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

every department is kept. These records give the overall view.

Method Use For Inventory Control IN BHEL, PLANNING AND CONTROL OF INVENTORY IS DONE BY USING FOLLOWING METHODS –

(1). ABC analysis (2). Slow moving and non-moving goods analysis. (3). Budgeting material requirements. (4). Fixation of raw material levels. (5). Variety reduction.

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DOCUMENTS USED FOR INVENTORY CONTROL

The various documents used for control of inventory are discussed below:

1. STORE RECEIPT VOUCHER This is issued when raw materials purchased reach the store. It is issued store in charge.

2. MATERIAL ISSUE VOUCHER This is an authorization to the store-keeper to issue raw material. Any material ordered for a specific work-order will be recorded on MIV and details of material requisition are entered on the Bin-card.

3. MATERIAL TRANSFER NOTE This is issued when the material booked to one particular order is transferred to another work-order.

4. MATERAIL RETURN NOTE This is an authorization to the store –keeper regarding raw material finished parts or other store 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.

5. BIN CARD

Materials are kept in appropriate bins and drawers. 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 balances of materials, material ordered, material allocated and closing balance of materials. As a result, the Bin Card shows the full cycle of material control like the order of new supplies, allocation of material to jobs, receipt and issue of material, stock in hand and balance available.

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Inventory Valuation

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

(2). Finished goods in plants 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.

(3). 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.

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

(5). The components and other materials purchased / manufactured against Production order but declared surpluses are charged off to revenue Retaining residual value based on technical estimates.

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OBJECTIVES OF STUDY

MAJOR OBJECTIVES

To understand the financial position of company

ANCILLARY OBJECTIVES

To identify the financial soundness of company To identify the liquidity position of company To identify the trend of sales during last five years of company. To identify the trend of working capital for last five years of company

To enable the researcher to have an insight with the financial position of the organization.

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OBJECTIVE

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

Values: Strike adherence to commitments Foster learning, creativity and team work. Ensure speed of response Respect for dignity and potential for individual Loyalty and pride in the company Zeal to excel and zest for change Integrity and fairness in all matters Most of them have been rephrased.

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"Zest for change" has been added as change has been integral with success and the rate at which change is needed is very high compared to earlier period.

Business mission To be a leading engineering enterprises providing quality product,

systems and services in the field of energy, transportation, industry, infrastructure, and their potential areas

GrowthTo ensure steady growth by enhancing the competitive edge of BHEL in

existing, new areas and international operations so as to fulfill national expectation for BHEL.

ProfitabilityTo 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.

Customer Focus To build a high degree of customer confidence by providing increased value for his money through international standards of product performance superior customer service.

People Orientation To enable each employee 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 continuously and be alive to their needs.

Technology

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To achieve technological excellence in operations by development of indigenous technologies and efficient absorption and provide competitive advantage to the company.

Image To fulfill the expectations of stakeholders like government as owner, employees, customers.

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FINANCE DEPARTMENT

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FINANCE DEPARTMENTS

The finance department is very broad in this unit and has also many sub department under finance department

Administration Pay Sales and sales bill Cash , P.F , T.A P.S.L, Costing Budget & books Miscellaneous expenses Price bill

ADMINISTRATION In this section main focus is to manage the functions of finance section. And to provide the facility to employee working in department.

PAY In this section they credit the salary on every months 25th the salary calculate under that date 15th of a month up to 14th of next month for crediting the salary in there in 2 mode -

1) CASH2) BANK

To prepare salary accounts section needed some data

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1) staff no. 2) Master data 3) Attendance 4) Any bill remaining like medical bill, conveyance bill.

SALES & SUPPLY BILL It include all sales made in an organization the process starts when accounts section gets purchase order SRV’s bills from supplier. Terms of payment are of three kinds

1) 10% in advance payment 2) 100% after receipt and acceptance 3) Partial advance and the remaining after receipt and acceptance.

In case of foreign purchase a license is required from DGTD This license is of 2 type

1) Quantity base2) Value base

Value base license changes according to change in market variation but quantity base are fixed for appropriate quantity BHEL have quantity base license.

CASH, P.F, T.AThis section is responsible for banking of all the money worth received by the customer and disbursement of all authorized payment on the behalf of the company to suppliers, contractors in the form of cheque, cash, drafts, postal orders etc.Cash section prepares these statements for management information DAILY-CASHFLOW >DAILY COLLECTION OF CASH WEEKLY-CASH INFLOW > OUTFLOW – DURING WEEKCash flow forecast for 3 months Operating result statement Statement of outstanding letter of credit & bank guaranteeDaily bank transfers statement.

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P.F stands for provident fund that was that was started from 1952 the rate of interest decided by time to time rate of reduction is 8.33%-12% the whole amount is received by employee at the time of retirement. P.F includes same contribution of employee as well as company.T.A stands travel allowance in this section all conveyance of tours and travel company runs two thing under this

L.T.C Leave travel concession L.T.A Leave travel assistance In this section also check whether paper are appropriate or not To check whether the claim is according to company rules or not

PSL PSL stands for price store ledger through this we get a current status of material in the market. We calculate cost of a product and offer product to a customer some terms comes under this are as followsSRV- Store receipt voucher MIV- Material issue voucherSRN- Store return note MTV- Material transfer noteRCDV- Receipt cum dispatch voucherSIV – Store issue voucherDIV- direct material issue voucher

PSL’s monthly information report are prepared & sent to different HOD’s and users.

In the MIR details regarding 1. Reciept issue2. Direct & Indirect material3. Suspense balance status4. Non-moving & slow moving items

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COST SECTION

This section is responsible for calculating the cost incurred on a product and some expenses like

1) Material cost 2) Labour cost 3) Direct expenses4) Overheads

Material cost is calculated through formula Material cost = MIV* PSL Labour cost is calculated through total number of labours on particular job, there respective rate and the cost of job.Pre-determined overhead also matters in it.

MISCELLANEOUS EXPENSES

This section deals with miscellaneous expenses which are out of routine work like payment of contract worker, gifts etc.

BOOKS AND BUDGET Budget section deals with preparing revenue and capital budget and to match all predetermined cost with its actual. Budget is a coordinating agency that provides as an interface with other units as well as corporate.

Books section deals with maintaining books of accounts regularly by which records are kept for future reference. This section also check whole recording of books as per company law.

PRICE BILL

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This section is new section in this unit which checks SRV pricing on the basis of purchase order according to there terms and conditions approximately 12000 SRV’s are processed under this section.

REVIEW OF THE LITERATURE

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REVIEW OF THE LITERATURE

FINANCIAL STATEMENT

Financial statements (or financial reports) are formal records of a business' financial activities.In British English, including United Kingdom company law, financial statements are often referred to as accounts, although the term financial statements is also used, particularly by accountants.Financial statements provide an overview of a business' financial condition in both short and long term. There are four basic financial statements:

1. Balance sheet : also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and net equity as of a given point in time.

2. Income statement : also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time.

3. Statement of retained earnings : explains the changes in a company's retained earnings over the reporting period.

4. Statement of cash flows : reports on a company's cash flow activities, particularly its operating, investing and financing activities.

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PURPOSE OF THE FINANCIAL STATEMENT

"The objective of financial statements is to provide information about the

financial strength, performance and changes in financial position of an

enterprise that is useful to a wide range of users in making economic

decisions." Financial statements should be understandable, relevant,

reliable and comparable. Reported assets, liabilities and equity are

directly related to an organization's financial position. Reported income

and expenses are directly related to an organization's financial

performance.

1.Internal User

Owners and managers require financial statements to make

important business decisions that affect its continued operations.

Financial analysis are then performed on these statements to provide

management with a more detailed understanding of the figures. These

statements are also used as part of management's annual report to the

stockholders.

Employees also need these reports in making collective

bargaining agreements (CBA) with the management, in the case of

labor unions or for individuals in discussing their compensation,

promotion and rankings.

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2. External Users: are potential investors, banks, government agencies

and other parties who are outside the business but need financial

information about the business for a diverse number of reasons.

Prospective investors make use of financial statements to assess

the viability of investing in a business. Financial analyses are often used

by investors and is prepared by professionals (financial analysts), thus

providing them with the basis in making investment decisions.

Financial institutions (banks and other lending companies) use them

to decide whether to grant a company with fresh working capital or

extend debt securities (such as a long-term bank loan or debentures)

to finance expansion and other significant expenditures.

Government entities (tax authorities) need financial statements to

ascertain the propriety and accuracy of taxes and other duties declared

and paid by a company.

Media and the general public are also interested in financial statements

for a variety of reasons.

► Balance Sheet

A financial statement that summarizes a company's assets, liabilities

and shareholders' equity at a specific point in time. These three balance

sheet segments give investors an idea as to what the company owns

and owes, as well as the amount invested by the shareholders.

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The balance sheet must follow the following formula:

        Assets = Liabilities + Shareholders' Equity

Each of the three segments of the balance sheet will have many accounts

within it that document the value of each. Accounts such as cash,

inventory and property are on the asset side of the balance sheet, while

on the liability side there are accounts such as accounts payable or long-

term debt. The exact accounts on a balance sheet will differ by company

and by industry, as there is no one set template that accurately

accommodates for the differences between different types of businesses.

It's called a balance sheet because the two sides balance out. This makes

sense: a company has to pay for all the things it has (assets) by either

borrowing money (liabilities) or getting it from shareholders (shareholders'

equity). 

The balance sheet is one of the most important pieces of financial

information issued by a company. It is a snapshot of what a company

owns and owes at that point in time. The income statement, on the other

hand, shows how much revenue and profit a company has generated over

a certain period. Neither statement is better than the other - rather, the

financial statements are built to be used together to present a complete

picture of a company's finances.

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A business operating entirely in cash can measure its profits by

withdrawing the entire bank balance at the end of the period, plus any

cash in hand. However, real businesses are not paid immediately; they

build up inventories of goods and they acquire buildings and equipment.

In other words: businesses have assets and so they can not, even if they

want to, immediately turn these into cash at the end of each period. Real

businesses owe money to suppliers and to tax authorities, and the

proprietors do not withdraw all their original capital and profits at the end

of each period. In other words businesses also have liabilities.

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INCOME STATEMENT

The “income statement” (or "profit and loss" or "P & L") presents income

and expenses over a period of time. The statement starts by listing

income or “revenues” or the “top line.”

Direct costs or “cost of goods sold” are then subtracted from revenues to

arrive at “gross profit.”  Note that direct costs are generally variable in

nature; that is, these costs directly correspond to revenues and vary along

with them.  For example, a store sells a television.  The amount that the

store originally paid to the manufacturer for the television represents a

“cost of goods sold.”  This cost is directly related to the revenue that the

store earns from the customer.  To further illustrate, when the

manufacturer sells another television to the store, the labor and materials

that go into making it represent direct costs to the manufacturer.

Next, operating or “general” expenses or “overhead,” such as rent and

office supplies are subtracted to arrive at “operating profit.”  Operating

costs are generally fixed in nature, as they tend not to increase in the

short-term.  For example, a company’s rent often remains the same for

months or years at a time.  Similarly, operating costs such as rent are not

directly tied to any specific sales transactions. 

Finally, non-operating and extraordinary items such as interest expense

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and income taxes are subtracted to arrive at net income or the “bottom

line.”  An income statement might have the following format:

Gross Revenue (or “sales” or “income”)

Less: Returns & Allowances

Equals: Net Revenue

Less: Direct Costs (or “cost of goods sold”)

Equals: Gross Profit

Less: Operating Expenses (or “overhead”)

Equals: Operating Profit

Less: Non-Operating Expenses

Equals Net Income

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CASH FLOW STATEMENT In financial accounting, a cash flow statement or statement of cash flows is a financial statement that shows a company's incoming and outgoing money (sources and uses of cash) during a time period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.People and groups interested in cash flow statements include

accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses

potential lenders or creditors, who want a clear picture of a company's ability to repay

potential investors, who need to judge whether the company is financially sound

potential employees or contractors, who need to know whether the company will be able to afford compensation

Purpose

The cash flow statement was previously known as the statement of changes in financial position or flow of funds statement. The cash flow statement reflects a firm's liquidity or solvency.The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating

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those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non cash transactions include depreciation and write-offs on bad debts.[2] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non cash activities are usually reported in footnotes.

The cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its

ability to change cash flows in future circumstances

2. provide additional information for evaluating changes in assets,

liabilities and equity

3. improve the comparability of different firms' operating performance

by eliminating the effects of different accounting methods

4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial

statement because it eliminates allocations which might be derived from

different accounting methods, such as various timeframes for depreciating

fixed assets.

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Cash flow activities:

The cash flow statement is partitioned into cash flow resulting from

operating activities, cash flow resulting from investing activities, and cash

flow resulting from financing activities.

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Operating activities:

Operating activities include the production, sales and delivery of the

company's product as well as collecting payment from its customers. This

could include purchasing raw materials, building inventory, advertising

and shipping the product.

Under IAS 7, operating cash flows include

receipts from the sale of goods or services

receipts for the sale of loans, debt or equity instruments in a trading

portfolio

interest received on loans

dividends received on equity securities

payments to suppliers for goods and services

payments to employees or on behalf of employees

tax payments

interest payments (alternatively, this can be reported under

financing activities in IAS 7, but not in US GAAP)

payments for the sale of loans, debt or equity instruments in a

trading portfolio

Items which are added back to the net income figure (which is found on

the Income Statement) to arrive at cash flows from operations generally

include:

Depreciation (loss of tangible asset value over time)

Deferred tax

Amortization (loss of intangible asset value over time)

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Any gains or losses associated with an asset sale (unrealized

gains/losses are also added back from the income statement)

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Investing activities :

Investing activities focus on the purchase of the long-term assets a

company needs in order to make and sell its products, and the selling of

any long-term assets.

Under IAS 7, investing cash flows include

collections on loan principal and sales of other firms' debt

instruments

investment returns from other firms' equity instruments, including

sale of those instruments.

receipts from sale of plant and equipment

expenditure for purchase of plant and equipment

loans made and acquisition of other firms' debt instruments

expenditure for purchase of other firms' equity instruments (unless

held for trading or considered cash equivalents)

Items under investing activities include:

Capital expenditures , which include purchases (and sales) of

property, plant and equipment

Financing activities:

Financing activities include the inflow of cash from investors such as

banks and shareholders, as well as the outflow of cash to shareholders

as dividends as the company generates income. Other activities which

impact the long-term liabilities and equity of the company are also listed

in the financing activities section of the cash flow statement.

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Under IAS 7, financing cash flows include

proceeds from issuing shares

proceeds from issuing short-term or long-term debt

payments of dividends

payments for repurchase of company shares

repayment of debt principal, including capital leases

for non-profit organizations, receipts of donor-restricted cash that is

limited to long-term purposes

Items under the financing activities section include:

Dividends paid

Sale or repurchase of the company's stock

Net borrowings

Disclosure of non-cash activities:

Under IAS 7, non cash investing and financing activities are disclosed in

footnotes to the financial statements. Under US GAAP, non cash activities

may be disclosed in a footnote or within the cash flow statement itself.

Non cash financing activities may include.

leasing to purchase an asset

converting debt to equity

exchanging non cash assets or liabilities for other non cash assets or

liabilities

issuing shares in exchange for assets

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RESEARCH METHODOLOGY

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RESEARCH AND METHODOLOGY

SOURCE OF DATA

For the purpose of analyzing the financial position of the company The study is based on the (assumed) secondary data available with the company. SECONDARY DATA

Secondary data (assumed) is related to already published data by the company. To analyze the financial position data is taken from the published annual reports of the company. The data relating to the current asset, current liabilities, gross profit, net sales, operating profit, selling expenses, cost of good sold, shareholder fund, Capital employed, total assets, debt were collected from the annual report of BHEL.

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DATA INTERPRETATIO

N

DATA INTERPRETATION

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

The financial manager has to be very vigilant.The question to be studied and answered in connection with the analysis of working capital include the following – Whether the management is utilizing working capital effectively?Whether the amount of working capital adequate or insufficient?Does the firm have a favorable credit rating?

TOOLS OF WORKING CAPITAL ANALYSIS1. Ratio analysis 2. Fund flow analysis

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3. Cash flow analysis4. Working capital budget5. Working capital report

We are using the technique of ratio analysis how efficiently the working capital is being used in the company. These ratios would increase or decrease that measure the working capital management of BHEL Jagdishpur, Sultanpur, which are as follows –

(1) CURRENT RATIO

Current ratio represent margin of safety for creditors. The higher the current ratio, the greater the margin of safety, the larger the amount of current assets in relation to current liabilities, the more the firm ability to meet its current obligations. This ratio is calculated as follows:

Current ratio = Current assets / Current liabilities

Current ratio of 2:1 is satisfactory. In BHEL, Jagdishpur, Sultanpur unit this ratio is 1.99 in 2004-05,which has difference of only 0.01 from standard ratio. This reflects that the working capital is sufficient. Observing the current ratio of last five year 2004 to 2009 it was seen that unit is having sufficient working capital.

CURRENT RATIOCurrent ratio = current assets / current liabilities

Years 2005-06 2006-07 2007-08 2008-09 2009-10

Current 1.90 1.83 2.10 1.66 1.49

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Ratio

It measures the short term solvency of the firm.which indicates the rupees of current assets available for each rupee of current liability. The current ratio of 2:1 is been considered satisfactory.In context of BHEL, Jagdishpur, Sultanpur the current ratio in the year 2005-06 was 1.90 and in the year 2008-09 it is 1.66. The increasing ratio always shows ability to meet current obligation. the higher the current ratio shows high liquidity.

(2) QUICK RATIO: This ratio provides a better measure of over all liquidity. A firm’s inventory cannot be easily converted into cash so it is not taken into account. A ratio of 1:1 is considered satisfactory. Ratio is computed as under –

Quick ratio= Current asset - Inventory / Current liabilities

Current Ratio

0

0.5

1

1.5

2

2.5

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Current Ratio

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In BHEL Jagdishpur, Sultanpur unit quick ratio has been decreasing during last 5 years. The inference is that the firm is having more liquidity than what is prescribed.

QUICK RATIOQuick ratio = (current assets –Inventory)/current liabilities

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

Quick Ratio 1.35 1.46 1.27 1.06 1.13

It is widely available tool to measure liquidity position of a firm. The quick ratio of 1:1 is considered satisfactory.

The ratio in BHEL is almost shows fluctuating trend if we see in year 2005-06 the ratio is 1.35 then in year 2008-09 it get changed around 16% it shows changing working capital position of BHEL Jagdishpur, Sultanpur unit.

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Inventory turnover ratio: It shows how rapidly the inventory is turning into receivable through sales. High ratio is indicator of good inventory management. Ratio should neither be low nor too high.It is computed as follows – ITR= Sales / Average inventory In BHEL,Jagdishpur, Sultanpur unit the ratio in 2005-06 is 2.30 which shows total inventory turnover of that year, during last five year there is fluctuation in inventory turnover ratio.

INVENTORY TURNOVER RATIO Inventory turnover ratio = cost of good sold / Average inventory

Year 2005-06 2006-07 2007-08 2008-09

Inventory Turnover Ratio 2.30 2. 18 2.33 2.82

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Inventory turnover

Ratio -

00.5

11.5

22.5

3

2005-06

2006-07

2007-08

2008-09

Year

Inve

ntor

y tu

rnov

er

Ratio

Inventory turnover Ratio -

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its product. In a manufacturing firm inventory of finished goods is used to calculate inventory turnover.

WORKING CAPITAL TURNOVER RATIO Working capital turnover = sales / net current assets

Year 2004-05 2005-06 2006-07 2007-08 2008-09

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WCT.Ratio 1.49 1.77 1.53 1.85 2.18

WCT.Ratio

0

0.5

1

1.5

2

2.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

WC

T. R

atio

WCT.Ratio

TURNOVER RATIO

Turnover ratio = net sales / capital employed

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Turnover Ratio 1.34 1.57 1.43 1.72 1.94

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Turnover Ratio

0

0.5

1

1.5

2

2.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Turn

over

Rat

io

Turnover Ratio

Turnover ratio is just an inter firm analysis a firm is interested to know its financial standing and to check status.

RETURN ON CAPITAL EMPLOYED

Return on capital employed = PBIT / Capital employed

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Return on Capital Employed 0.048 0.118 0.118 0.037 0.049

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Return on Capital Employed

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

2004-05 2005-06 2006-07 2007-08 2008-09

Year

ROCE Return on Capital

Employed

This ratio shows that every portion of capital has been properly invested by BHEL.

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DEBTORS TURNOVER RATIO

Debtors turnover ratio = sales / Average debtor

Average collection period(days)=365/ Debtors turnover

Year 2004-05 2005-06 2006-07 2007-08 2008-09Debtorsturnover ratio - 1.43 1.47 1.34 1.17

Debtors turnover ratio -

00.20.40.60.8

11.21.41.6

2005-06 2006-07 2007-08 2008-09

Year

DT.

Rat

io

Debtorsturnover ratio -

In this ratio we get position of debtors of BHEL Jagdishpur, Sultanpur unit. In this we included collectible debts and deferred debts. In the BHEL Jagdishpur, Sultanpur unit the ratio in 2005-06 was 1.43 and in year 2008-09 the ratio has decreased in comparison to year 2007-08

CREDITORS TURNOVER RATIO

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This ratio is also known as Payable Turnover Ratio. It depicts the relation between Credit Purchase and Creditors. This ratio indicates the conditions of an organization with regard to payment of creditors. Higher ratio indicates quicker payment and vice-versa

NET CREDIT CREDITORS TURNOVER RATIO (Rs) = --------------------------------

CREDITORS

365CREDIT PAYMENT PERIOD = -------------------------------------------------- CREDITORS TURNOVER RATIO (Rs)

BHEL’S financial performance

That graph show whole net sales, net profit, EPS of BHEL units

working in whole country this position is checked by corporate office Delhi. in this we can see that the sales is increasing which indirectly shows that net profit is also increasing.

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DATA ANALYSIS

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DATA ANALYSISStrengths:

The company has 180 products under 30 major product groups that cater to the needs of the core sector like power, industry, transmission, transportation, defense, telecommunications and oil business.BHEL's ability to acquire modern technology and make it suitable to Indian conditions has been an exceptional strength of the company.Strong relationship with NTPC is a strength as NTPC is planning a capacity expansion of Rs. 52 bn and based on the past, 85% of NTPC projects have been bagged by BHEL. The company also enjoys purchase price preference.

Weaknesses:

PSU status is a big weakness for BHEL as it is subject to their rules and regulations and is forced to carry a huge amount of labor force, which it is not able to retrench.The company offers very stringent credit facilities to the customers and this is a weakness when compared in the face of rising competition. On the other hand their customers in the power

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segment, SEBs, have a huge amount of receivables standing against their name in the company's balance sheet. This is a major weakness for the company.The company is vertically integrated, which could have been avoided by outsourcing its components for power generation and transmission. This could have reduced the cost.

Opportunities:

The power sector reforms are expected to pick up in the near future in India, which would directly benefit BHEL.Increase in defence budget will increase the topline for the company.NTPC is planning additional capacities to the tune of 2,800 MW, at a cost of Rs 52 bn. BHEL could benefit a lot as it has happened in the past that significant portion of the project of NTPC is handled by BHEL. Nearly 85% of the NTPC projects were assigned to BHEL only.The business of modernization and renovations of power plants is expected to grow in India.The disinvestment plans of the government would bring in new resources and experience into the company.Joint Venture with Siemens in the name of Powerplant Performance Improvement Ltd. (PPIL), is a major strength for the company. This tie-up will be beneficial as there is a lot of scope for business.

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THREATS

The global trend of consolidation has already resulted in a fall in turnover of the company and this will prove to be a major threat in the years to come as well.The company is dependent on NTPC to a great extent.Recently, the government has permitted the import of second hand capital goods that are 10 years old without the need for a license. This move will definitely increase competitive pressures for BHEL.

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FINDINGS & CONCLUSIONS

FINDINGS

During the training extracted the following distinctive features of BHEL.

BHEL overseas business is going to increase more in the next five years.

Market distribution in international market can be increased by entering into the new foreign countries.

BHEL is the main market holder in the domestic market but faces a fierce competition at international level.

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The quality control & quality assurance is major concerning area of BHEL.

Financial strategy adopted by BHEL is best.

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CONCLUSION

It should be borne in mind that the tool applied in the study to analyse the efficiency and effectiveness in financial management are most appropriate ones.

The firm’s Liquidity position is good.

The efficiency of the company is also good.

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LIMITATIONS

LIMITATIONS

The researcher was not able to focus on qualification factors, which influences the financial position of the organization.

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The study is limited to BHEL So the result could not be generalized on macro level.

Ratio analysis is only tools used for the financial statement analysis.

Since the finance section in the organization being sensitive, analysis is based on the assumed data of BHEL.

RECOMMENDATIONS

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RECOMMENDATIONS

During my summer training period I have studied the working capital management in BHEL, Jagdishpur, Sultanpur. On the basis of my study I am putting forward some suggestions. Implementation of which may certainly improve the efficiency of working capital management in the unit.

1. Estimation of working capital requirement should be done on the basis of the length of operating cycle of different products.

W.C Requirement = Average daily requirement of workingCapital X Length of operating cycle.

2. Working capital requirement can be minimized by decreasing the length of operating cycle of different products this can be done by adopting technology or state of art, mechanized operations and by adopting of Critical Path Method (CPM) of production operation.

a) The credit policy of BHEL, Jagdishpur, Sultanpur should be made more practical to shorten the debt collection period. The age wise schedule of debtors shows that debtors pertaining since financial year 1991-92 are outstanding. This alarming phenomenon points out that the terms and conditions of payments as well as recovery procedure is liberal. A new credit policy is the need of the hour which should specify strict terms and penalties in case of delay.

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For improvement in the area of inventory management, suggested steps are as under: The ABC analysis considers only the value of material and quantity of uses It does not considers the importance of the material in production function To over come this VED analysis can be used. Items according to their importance as vital, essential and desirable

I. The maximum and minimum level of each item should be indicated to avoid over stock or under stock.

II. Internal performance report on inventory should be prepared to study the material price variance, material uses variance and inventory level variance from the estimated figures.

III. The indenting and tendering process for purchase should be made fast to decrease the lead time and to reduce the change of stocks out situation

APPENDICESUNDER THIS:

BIBLIOGRAPHY

REFERENCE

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BIBLIOGRAPHY

ANNUAL REPORTS OF BHEL

REFERENCE SHASHI K GUPTA AND R.K SHARMA

I M Pandey (Financial management).

WEBSITES VISITED : WWW.ncfmindia.co.in

REFERENCE

COMPANY’S FINANCIAL STATEMENTS

COMPANY’S ANNUAL REPORTS

COMPANY’S FINANCIAL INFORMATION SYSTEM

COMPANY’S FINANCIAL RECORDS

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