projects in working capital management

8/7/2019 projects in working capital management

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CHAPTER 1

INTRODUCTION

INTRODUCTION ABOUT FINANCE

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

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

the growth of the economy. An efficient financial system calls for the efficient performance of

institution, financial instruments and financial markets.

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

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

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

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

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

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

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

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

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

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

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

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

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


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

part of any corporate plan must be expressed in financial terms.

The main reasons a business needs finance are to:

Start a business

Finance expansions to production capacity

To develop and market new products

To enter new markets

Take-over or acquisition

Moving to new premises

To pay for the day to day running of business

REVIEW OF LITERATURE

MEANING OF WORKING CAPITAL

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

regular business operation. In other words, it is the amount of funds used for financing the day-today operation. In short, it is the capital with which the business is worked over.

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

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

constitutes the working capital.

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

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

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

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


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

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

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

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

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

Concept of working capital

There are five concepts of working capital :-

o Gross Working Capital

o Net Working Capital

o Negative working capital

o Permanent working capital

o Variable working capital

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

classified into the following types:

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

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

cycle) and includes cash, short term securities, debtors, Bills receivable and stock (inventory) .


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

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

year and include creditors, Bills payable and outsiders expenses.

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

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

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

in current assets required throughout the year for carrying out the business. In other words , it is the

amount of working capital which remains in the business permanently in one form or other.

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

which goes on fluctuating or changing from time to time with the change in the volume of business

activities.

Ratios :

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

mathematical terms the quantitative relationship that exists between two numbers.

NEED FOR WORKING CAPITAL

Every business undertaking requires funds for two purposes, investments in fixed assets &

investment in current assets.

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

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

material, keeping the labour cost & other overheads. These three combined would generate work in

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

into debtors & when the debtor pay, the firm may generate cash. Working capital is needed for

sustaining (i.e., maintaining) the sales activities. If adequate working capital is not maintain for this


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

purchase raw material and pay wages and other expenses ands produce the goods required for the

sales.

NATURE OF WORKING CAPITAL

In ordinary parlance, Working Capital is taken to be the fund available for meeting day-to-

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

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

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

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

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

operation is known as the Working Capital. This Working Capital generates the important element

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

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

come into being abruptly at a given moment.

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

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

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

continue to replace the cost lost in its day-to-day out flow for the generation of the revenue

mentioned above.

SOURCE OF WORKING CAPITAL

The financial manager is always interested in obtaining the working capital at the right time,

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

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

working capital.


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Sources of working capital divided into two

Long -term

Short term

Sources of long term working capital

Issue of shares

Floating of debentures

Ploughing back of profit

Loans

Public deposit

Sources of short-term working capital

Internal sources

Depreciation

Taxation

Accured expenses

External sources

Trade credit

Credit papers

Bank credit


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Customers credit

Govt. Assistances

Loans from director

Security of employees

WORKING CAPITAL CYCLE:-

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

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

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

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

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

finished goods.

Meaning

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

material into work-in progress, work-in-progress into finished goods, finished goods into debtors anddebtors into cash again is called the operating cycle or working capital cycle of the firm, in other

words, it is period between the date raw material are purchased and the date the sale proceeds of

finished goods are realized by concern.

INTER-DEPENDENCE AMOUNG COMPONENTS OF WORKING CAPITAL

OPERATING CYCLE :

A company starting with cash purchase raw materials, components etc., on a cash or creditbasis. These materials will be converted into finished goods after undergoing various stages of work-

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

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

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

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


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

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

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

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

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

components of working capital on its previous stage or component.

WORKING CAPITAL MANAGEMENT

Introduction

Working capital management is one of the most important aspects of financial management.

It forms a major function of the finance manager.

Meaning :

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

i.e., currents assets and currents liabilities.

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

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

between them.

BASIC OBJECTIVE OF WORKING CAPITAL MANAGEMENT :

The basic objective of working capital management is to manage the firms working capital

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

(i.e., neither excessive nor inadequate working capital) is maintained. This is necessary because, if

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

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

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

the firm would be adversely affected.


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Advantages of working capital:

It helps the business concern in maintaining the goodwill.

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

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

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

It helps in maintaining solvency of the business.

Disadvantages of working capital:

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

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

Excess working capital means idle funds which earn no profits.

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

CHAPTER 2

PROFILE OF THE COMPANY (BHEL)

BHEL was founded in 1950s. The first plant of BHEL was set up at Bhopal in 1956, which

signaled the beginning of the Heavy Electrical Industry in India. In before 1960 three more major

plants were set up at Haridwar, Hyderabad and Trichy.

Its operations are organized around three business sectors: Power, Industry - including

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


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Today, BHEL has a wide-spread network comprising 14 manufacturing divisions, 8 service centres,

4 power sector regional centres, 18 regional offices, and a large number of project sites spread all

over India and abroad. Its registered and corporate office is situated at New Delhi.

BHEL has a well recognized track record of performance making profits continuously since

1971-72 and paying dividends since 1976-77. BHEL manufactures over 180 products under thirty

major groups.

The quality and reliability of its products is due to the emphasis on design, engineering and

manufacturing to international standards best acquiring and adopting some of the best technologies

from leading companies in the world together with technologies developed in its own R&D centers.

QUALITY CERTIFICATION :

BHEL has acquired certifications from both ISO 9000 & ISO 14000 standards for its

operations and has also adopted the concepts of total quality management. BHEL has adopted

occupational health and safety standards as per OHSAS 18001. The major units of BHEL have

already acquired the ISO 14001 certification.

The companys inherit potential coupled with its strong performance over the years has

resulted in it being chosen as one of the Navratna status.

PRODUCT RANGE

THERMAL POWER PLANTS

GAS BASED POWER PLANTS

HYDRO POWER PLANTS

DG POWER PLANTS

INDUSTRIAL PLANTS


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INDUSTRIAL SETS

BOILERS

BOILERS AUXILIARIES like as Fan, Air-pre Heaters, Gravimetric Feeders etc.,

HEAT EXCHANGERS AND PRESSURE VESSELS

POWER STATION CONTROL EQUIPMENTS

SWITCHGEARS

BUS DUCTS

INSULATORS

POWER GENERATION :

Power Generation sector consists of thermal, gas, hydro and nuclear plant oriented sectors.

Though BHEL supplied sets account logs nil till 1969-70, it rises to 62,051 MV or 65% of the total

installed capacity of 95377 MV in the country.

BHEL has the capability of turning power projects from concept to commissioning. With its

technology, it has the ability to produce thermal sets with super critical parameters unto 1000 MV

unit rating and gas turbine- generator sets of upto 240 MV units rating.

POWER PROJECTS IN SOUTH ZONE

Amarkanatak TPS - 1 x 210 MW

APGENCO - Pulichinthala 4X30 MW HEP Supervision of E&C

Bellary TPS - 1 x 500 MW

BELLARY TPS UNIT 2 - 500 MW

BHAVINI -NPCIL - KALPAKKAM 1X500 Mwe


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Overall Achievements:

a) To make the most part of the high-ash content coal used in India, BHIL supplies

circulating fluidized bed combustion boilers to both thermal and combined cycle power plants.

b) The company manufactures 235 MV nuclear turbine-generator sets and obtains a

production of 500 MV in these sets.

c) Custom made hydro sets of Francis, Pelton and Kaplan types for different head-discharge

combinations are also engineered and manufactured by BHEL.

d) Until now, the company had placed orders for more than 1000 utility sets of thermal,

hydro, gas and nuclear plants. This is based on contemporary technology comparable to the best in

the world. It is also internally competitive.

INDUSTRIAL SECTOR

Industry

BHEL is a major contributor of equipment and system to industries. Its major contributions

are cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc.

The range of systems and equipment supplied includes captive power plants, DG power

plants, high-speed industrial drive turbines, electrical machines, pumps, valves etc.

Transportation

Most of the trains operated by the Indian railways, including the metro in Calcutta, are

equipped with BHELs traction electrics and traction control equipment. The company also supplies

electric locomotives to Indian railways and diesel shunting locomotives to various industries.


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The company have supplied 5000/4600 DC locomotives to Indian railways. Battery powered

road vehicles are also manufactured by the company.

Telecommunication

BHEL also give importance to telecommunication sector by way of small, medium and large

switching systems.

Renewable energy

Technologies used by BHEL for discovering non-conventional and renewable sources of

energy include, wind electric generators, solar-power based water pumps, lighting and beating

systems.

International operations

BHEL has been established in over 50 counties of the world. Its knowledge is known from

the United States in the West to the New Zealand in the far East.

BHEL in these countries covers turnkey power projects of thermal, hydro and gas based type

besides a wide variety of products like Switchgear, transformers and heat exchangers.

BHEL has contributed over 1100 MV of boiler capacity to Malaysia. Besides this, they have

also achieved successes in Oman, Saudi Arabia, Libya, Greece, Egypt, SriLanka etc.

Their development in overseas has also provided BHEL, the experience of working with

world renewed consulting organizations and inspection agencies.

The demanding requirements of both domestic and international markets have been dealt

successfully by BHEL. In terms of difficult works as well as technological, quality and other

requirements like financing package, extended warrantees have proven its capabilities.

The company has also been successful in meeting varying needs of the industry like captive

power plants, utility power generation or for the oil sector requirements.


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BHEL possesses large amount of flexibility to interface and change international companies

for large projects. The company also exhibits adaptability by manufacturing and supplying

intermediate products, like steam generator pressure parts.

BHEL can be compared with the original equipment manufactures by its success in the area

of rehabilitation and life extension of power projects.

BHELS Vision

BHELS vision is to become a world class innovation and competitive and profitable

engineering enterprise providing total business solutions.

Mission

It is an Indian multinational engineering enterprise providing total business solutions through

quality products, systems and services in the fields of energy, industry, transportation infrastructure

and other potential areas.

Values:

1. Zeal to excel and zest for change.

2. Integrity and fairness in all matters.

3. Respect for dignity and potential individuals.

4. Strict adherence to commitments.

5. Ensure speed of response.

6. Foster learning, creativity and team work.

7. Loyalty and pride of the company.


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Opportunities and threats

World

Investments made in the electricity sector have been lowered in recent years by foreign

electricity venture as foreign direct investment in the developing world. This is one of the parts of

the sluggish state of the global economy and because of unsatisfactory financial performance of

many acquisitions in the electric power sector.

These changes in the environment have led to a cautious approach by developers and its harder to

get off the new projects from the ground. Some countries have modified their plans because of the

change in restructuring electricity market and reforms.

The total worldwide order of booking has been lowered leading to aggressive marketing by

major global power plant equipment manufacturing players, who have been undergoing a phase of

consolidation.

Though there has been a decrease in overall orders in the recent times, many developing

nations are planning to expand their electricity infrastructure for the forthcoming years.

Number of promising market for new power equipment are found in South- East Asian

countries, Middle-East and Gulf cooperation council( GCC) countries.

Moreover, BHEL has the global opportunity for servicing of generating machinery as well as

distributing generation in the developing countries

Positioning for the future

BHEL has finalized a new corporate plan with the title strategic plan 2007 and steps are

taken to start the iniatives. The company has also revised the vision, mission and values statements,

which are suitably adjusted and with remodification to reflect its current aspuations.


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In corporate line the company aims to accelerate the growth with suitable strategies and focus

area the core strengths of the and company are

1) To strengthen and extend the core business of power generation power, power

transmission, transportation and industrial systems and products.

2) Areas like water management pollution control and waste management, port handling

systems, simulators [power and process], energy conservation systems, LNG terminals are newly

entered

3) To enter into continuous revenue stream business like power generation and transmission

and distribution.

BHEL, TRICHY UNIT

BHEL, Trichy unit was established in 1963 and is situated in Trichy- Tanjore highway road

around 20km from Trichy Central Bus Stand. 12,000 employees are working in this organization on

permanent basis and around 4000 employees are working on contract basis. It has an area of 2,

50,000 sq. meters and consists of a major unit namely.

BHEL Trichy ,a major manufacturing unit of BHEL family, is an ISO9001,14001 and

OHASAS 18001 company also well on its journey towards TQM. The product profile includes,

1. High Pressure Boiler Plant (HPBP)

2. Seamless Steel Tube Plant (SSTP)

3. Combined Cycle Demonstration Plant (CCDP)

Boiler Auxiliaries plant of Ranipet and piping centre of Madras (Chennai) and Goinwal come

under the control of Trichy Unit.


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Product profile of BHEL, Trichy

o Steam Generators for Power Generation and

o Industrial Applications

o Heat Recovery Steam Generators

o Industrial Boilers

o Atmosphere and Circulating Fluidized bed

o Combustion Boilers

o Nuclear Steam Generators and Reactors

o Pressure Vessels

o Hear Exchange

o Seamless Steel Tubes

o Studded tubes

o Serrated fin. Tubes

o Piping systems

o Columns

o Valves

o Boiler Auxiliaries

o Wind Electric Generators

Finance Department Of BHEL, Trichy

The following are the important operations of finance department of BHEL, Trichy.

Sales Accounting

Purchase Approvals


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Budgets

Legal Excise, Sales Tax, Income Tax & Customs

Costing

Pay Roll

Internal Audit

Foreign Trade- Imports, Exports

System

Cash and Bank

RATIO ANALYSIS

INTRODUCTION:

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

1991 in Federal Reserve Bulletin. Ratio Analysis is a process of comparison of one figure against

other, which makes a ratio and the appraisal of the ratios of the ratios to make proper analysis aboutthe strengths and weakness of the firms operations. The term ratio refers to the numerical or

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

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

the statements.

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

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

and liquidity ratio and trend of receivable.

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

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

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


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

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

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

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

firms ability to meet its current obligation. It measures the firms liquidity. The greater the ratio, the

greater the firms liquidity and vice-versa.

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

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

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

ship between two variable or figures.

Meaning and Importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of

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

following objects.

1. Short term and long term planning

2. Measurement and evaluation of financial performance

3. Stud of financial trends

4. Decision making for investment and operations

5. Diagnosis of financial ills

6. providing valuable insight into firms financial position or picture


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ADVANTAGES& DISADVANTAGES OF RATIO ANALYSIS :

Advantages:

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

financial statement via Profit & Loss Account and Balance Sheet.

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

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

forecast

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

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

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

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

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

analysis. Ratios meet comparisons much more valid.

Disadvantages:

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

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

are.

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

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


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CAUSTION IN USING RATIOS:

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

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

company for different years.

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

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

interpretation of ratios difficult.

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

term changes.

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

future.

LIQUIDITY Vs PROFITABILITY

INTRODUCTION:-

Financial analysis is the process of identifying the financial strengths and weakness of the

firm by properly establishing relationship between the items of the balance sheet and profit loss

account. Management should particularly interest in knowing financial strengths and weakness of

the firm to make their best use and to be able to spot out financial weakness of the firm to take a

suitable corrective actions.

Financial analysis is the starting point of making plans, before using any sophisticated

forecasting and planning procedures.


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Major tools of financial analysis are ratio analysis and funds flow analysis. Financial analysis

is the process of identifying the financial strengths and weakness of the firm by properly establishing

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

Meaning and importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of

financial condition, efficiency and profitability of business. Here ratio analysis is useful from

following objectives.

1. Short term and long term planning.

2. Measurement and evaluation of financial performance.

3. Study of financial trends.

4. Decision making for investment and operations.

5. Diagnosis of financial ills.

6. Providing valuable insight into firms financial position or picture.

Type of Ratios :

1. Current Ratio2. Quick Ratio

3. Cash Ratio

4. Net Profit Ratio

5. Debtors Turnover Ratio

6. Debt Collection Period

7. Creditors Turnover Ratio

8. Debt Payment Period

9. Inventory Turnover Ratio

10. Working Capital Turnover Ratio

11. Cash Turnover Ratio

12. Cash to Current Assets Ratio


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1. CURRENT RATIO

It is relationship between firms current assets and current liability.

Current assets

Current ratio = _______________________________

Current liability

2. QUICK RATIO

It is relationship between liquid assets and current liabilities.

Liquid assets

Quick ratio = _________________________

Liquid Liabilities

3. CASH RATIO

It is relationship between cash and current liabilities.

Cash

Cash ratio = _______________________

Current liabilities

4. DEBTORS TURNOVER RATIO

It indicates the number time debtors turned over each year. Generally the higher value

of debtors turnover shows high efficiency to manage the credit management.

Total sales


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Debtors turnover ratio = ______________________________

Debtors

5. DEBT COLLECTION PERIOD

It indicates the speed with which debts are collected.

Days/months in a year

Debt collection period = _______________________________

Debtors turnover ratio

6. CREDITORS TURNOVER RATIO

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

year.

Credit purchase

Creditors turnover ratio = ________________________

Average creditors

7. DEBT PAYMENT PERIOD

Creditors turnover ratio indicates the number of days taken by the firm, to pay the

debtors to creditors.


Debt payment period = _______________________________

Creditors turnover ratio

8. INVENTORY TURNOVER RATIO

It indicates the inventories turning into receivables through sales.

Sales


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Inventory turnover ratio =__________________________

Inventory

9. INVENTORY HOLDING PERIOD

It indicates duration of holding inventories in stores.


Inventory holding ratio = ______________________________

Inventory turnover ratio

10. INVENTORY TO CURRENT ASSETS RATIO

This ratio explains about the proportion of inventory in the current assets .

Inventory

Inventory to Current Assets ratio = ______________________________ x 100

Current Assets

11. WORKING CAPITAL TURNOVER RATIO

This ratio explains the relationship between sales and working capital.

Net sales

Working capital turnover ratio = ______________________________

Net working capital

12. CASH TURNOVER RATIO


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It is the relationship between sales and cash.

Sales

Cash turnover ratio =

Cash balance

13. CASH TO CURRENT ASSETS RATIO

This ratio establishes the relationship between the cash and the current assets.

Cash

Cash ratio = _______________________

Current Assets

14. Gross Profit Ratio

This ratio is very important in ration analysis. This ratio founds company can obtain

profit on production or not.

Gross Profit

Gross profit Ratio =

Total Sales

15. Net Profit Ratio


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This ratio is also very important in ration analysis. This ratio founds company can

obtain profit on overall expenses or not.

Net Profit

Net Profit Ratio =

Total Sales

2.9 ARTICLES

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

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

award of her degree submitted to Bharathidasan University, in the year November 2003. Outlined

the following objectives and findings.

Her Objectives were:

Know the project of Co-operative milk supply society.

Analysis the short term liquidity position of the study unit during the period 96-97 to 2000-

01.

Analysis and evaluate working capital management.

Her Findings were:

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

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

194.60; 45.44 and 11.86 times respectively the higher ratios in the 2 year 1997-98 and 98-99

indicates sufficient amount of working capital and effective utilizations of working capital.


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The cash turnover ratio is to be increasing times.

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

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

degree submitted to Bharathidasan University, in the year November 2003. Outlined the following

objectives and findings.

Her Objectives were:

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

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

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

Trichy.

Her Findings were:

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

accounting period.

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

five years.

The over all performance of receivables management showed a satisfactory position

throughout the past 5 years.

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

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

submitted to Bharathidasan University, in the year November 2003. Outlined the following

objectives and findings.


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His Objectives were:

To know the Financial Performance of Dalmia Cement.

To examine the practice follow into Management of cash.

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

His Findings were:

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

an incise trend.

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

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

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

satisfactory positive

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

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

degree submitted to Amity University, Uttar Pradesh, in the year February 2006. Outlined the

following objectives and findings:

His Objectives were:

To meet the cash disbursement needs (payment schedule);

To minimize funds committed to cash balances.

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

period from 2003 and 2006 due to limitation of time and accessibility to data base.


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

data provided to me.

His Findings were:

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

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

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

The incidence or multiple financing,

The elongation of credit period.

RESEARCH METHODOLOGY

It is purely and simply the framework or a plans for the study that guides the collection and

analysis of data. Research is the scientific way to solve the problem and its increasingly used to

improve market potential. This involves exploring the possible methods, one by one, and arriving at

the best solution, considering the resources at the disposal of research.

4.2 PRIMARY DATA

The primary data is collected by observation by the researcher of the functioning of the unit.

4.3 SECONDARY DATA

It is derived from the annual reports, magazines, web sites and the internal auditing books of

BHEL.

4.4 TOOLS OF ANALYSIS

The researcher used tools to analysis the financial performance of the firm. They are

1. Ratio analysis

2. Trend analysis

4.5 SCOPE OF THE STUDY


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The main scope of the study is to evaluate, analyze and understand the current assets

management and to know the influence of the components of working capital on sales in the year

2005 2006 to 2009 2010.

4.6 PERIOD OF THE STUDY

The study analysis, the financial performance of Bharath Heavy Electrical Ltd covers the

financial years from 2005-2010 consequently.

DATA ANALYSIS AND INTERPRETATION

TABLE 1

STATEMENT SHOWING CURRENT RATIORs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CURRENT

LIABILITIES

1032002 1442000 2002230 2833290 3244172

CURRENT

RATIO

1.58 1.46 1.38 1.30 1.32

SOURCE: SECONDARY DATA FROM BHEL ANNUAL REPORTS

INTERPRETATION

Current ratio during the year 2005-2006 was 1.58 and its come down in 1.46 at 2006-2007

and its again decreased 20072008 and 2008-09 and its slightly increased in 1.32 at 2009-10. The

standard norm for this ratio is 2:1 required.


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CHART 1

CURRENT RATIO

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

YEARS

PERCENTAGE


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TABLE 2

STATEMENT SHOWING QUICK RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-09 2009-10

LIQUID

ASSETS

1258640 1684600 2216978 2906405 3369935

LIQUID

LIABILITIES

1032002 1442000 2002230 2833290 3244172

LIQUID

RATIO

1.22 1.17 1.10 1.03 1.04


INTERPRETATION

The quick ratio in the year 2005-2006 was 1.22 and its decreased 0.04% at 2006 and 2007

(1.17) and in 2007-2008 get decreased 0.06% (1.10) and 2008-2009 get decreased 0.063% (1.03)

and its get increase in slightly on 2009-2010 at 0.001%(1.04). The standard norm for this ratio is1:1, means for every 1 rupee of current liability, company must have 1 rupee of quick assets.


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CASH MANAGEMENT

Introduction:

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

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

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

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

of cash.

Meaning of cash:

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

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

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

Objectives of cash management:

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

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

To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash management involves the following four basic problems.

Controlling level of cash

Controlling inflows of cash

Controlling outflows of cash and

Optimum investment of surplus cash.

Determining safety level for cash:


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

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

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

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

Desired days of cash:

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

Average daily cash flows:

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

Criteria for investment of surplus cash:

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

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

judgment, he usually takes into consideration the following factors-

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

stable.

Liquidity:

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

deposits with banks.

Yield:

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

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


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Maturity:

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

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

Cash Management in BHEL:

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

CTM is a commonly followed procedure in most of the companies.

Now we see the cash ration / quick ration in bhel

TABLE 3

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CASH 413398 580900 838600 1031467 979008

CURRENT

LIABILITIES

1032002 1442000 2002230 2833290 3244172

CASH RATIO 0.40 0.40 0.42 0.36 0.30


INTERPRETATION

The Cash ratio of BHEL in the 2005-2010 was fluctuation in 2009-2010 it was 0.30 times

and in 2005-2006 it was 0.40 times and 2007-2008 it was reduced to 0.42.

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

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

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

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


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CHART- 3

CASH RATIO

00.1

0.2

0.3

0.4

0.5

PERCENTAGE

2005 -

2006

2006 -

2007

2007 -

2008

2008 -

2009

2009 -

2010CASH

YEARS

RECEIVABLES MANAGEMENT


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Introduction:

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

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

created. If they sell for cash no receivables created.

Meaning:

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

services in the ordinary course of business.

Purpose of receivables:

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

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

follows-

Achieving growth in sales.

Increasing profits.Meeting competition.

Factors affecting the size of Receivables:

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

Level of sales.

Credit period.

Cash discount.


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Costs of maintaining receivables:

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

Capital costs:

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

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

Administrative costs:

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

kept for maintaining accounting records relating to customers.

Collection costs:

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

Defaulting costs:

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

debts treated as bad debts.

Receivables management:

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

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

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

Increase in receivables also increases chances of bad debts. Thus, creation of receivables is

beneficial as well as dangerous. Finally management of accounts receivable means as the process of

making decisions relating to investment of funds in this asset which result in maximizing the over all

return on the investment of the firm.


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Receivables management and Ratio Analysis:

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

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

management are as follows-

DEBTORS TURNOVER RATIO: -

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

debtors to a great extent determines a firms liquidity. It shows how quickly receivables or debtors

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

The liquidity of firms receivables can be examined in two ways they are DTR and Average

Collection Period.

TABLE 4

STATEMENT SHOWING DEBTORS TURNOVER RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

TOTAL

SALES

1337403 1723753 1930464 2621233 3286144

DEBTORS 716806 969582 1197487 1597550 2068875

DEBTOR

TURNOVER

RATIO

1.87 1.78 1.61 1.64 1.59



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INTERPRETATION

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

debtors to a great extent determines a firms liquidity. It shows how quickly receivables or debtors

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

The liquidity of firms receivables can be examined in two ways they are DTR and Average

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

collected promptly. In the year 2009 - 2010 the debt is 1.59 comparing to the previous year came

downwards.

CHART- 4

DEBTOR TURNOVER RATIO

1.4

1.6

1.8

2

PERCENTAGE

2005

-

2006

2007

-2008

2009

-

2010EBTORS


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DEBT COLLECTION PERIOD

Debtors collection period is nothing but the period required to collect the money from the

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

versa.

TABLE 5

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

DAYS 365 365 365 365 365

DEBT

TURNOVER

RATIO

1.87 1.78 1.61 1.64 1.59

DEBT

COLLECTION

PERIOD

195 205 227 223 230


INTERPRETATION

The debt collection period of BHEL in the 2005-2006 was 195 days and in goes to 2009 -2010 it was increased in (0.18%) 230 days. Standard Debt Collection Period of a firm is less than 90

days. But, above tables consists of increased of DCP in rapidly.


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CHART 5DEBT COLLECTION PERIOD

160

180

200

220240

No. of Days

2005-

2006

2007-

2008

2009-

2010D

TCP

YEARS


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CREDITORS TURNOVER RATIO

TABLE 6

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CREDIT

PURCHASE709940 1018186 1182087 1762005 2067232

SUPPLIERS /

CREDITORS280409 353895 442400 585285 757980

CREDITORS

TURNOVER

RATIO

2.53 2.88 2.67 3.01 2.73


INTERPRETATION

The Creditors turnover ratio of BHEL was fluctuating during the year 2005 2010. It was

upward in (2008 2009) was 3.01 times and it was downward in 2009 2010 is 2.73 times.


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CHART -6

CREDITORS TURNOVER RATIO

5-2006

-2007

-2008

2009

2010

CTR2.2

2.4

2.6

2.8

3

3.2

PERCENTAGE

YEARS


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TABLE 7

CASH TO CURRENT ASSETS RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CASH 413398 580900 838600 1031467 979008

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CAS TO

CURRENT

ASSETS

RATIO

0.25 0.27 0.30 0.28 0.23


INTERPRETATION

The Cash to current assets turnover ratio of BHEL was fluctuating during the year 2005

2010. It was upward in (2005 2008) was 0.25 times to 0.30 times and it was downward in 2008

2010 is 0.23 times.


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CHART -7


0

0.05

0.1

0.15

0.2

0.25

0.3

PERCENTAGE

2005-062006-072007-082008-09 200

YEARS



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TABLE 8

CASH TURNOVER RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

SALES 1337403 1723753 1930464 2621233 3286144

CASH 413398 580891 838602 1031467 979008

CASH

TURNOVER

RATIO

3.24 2.97 2.31 2.54 3.36


INTERPRETATION

The cash turnover ratio in the years 2005-2010 it was on fluctuating ratios, in the year 2009-

2010 it was increased (0.037%) 3.36.


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CHART 8

0

0.5

1

1.5

2

2.5

3

3.5

PERCENTAGE

YEARS

CASH TURNOVER RATIO


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INVENTORY MANAGEMENT

Introduction:

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

That makeup the products. The various forms in which inventories exist in a manufacturing

company are: Raw-materials, work-in-process, finished goods.

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

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

purchased and stored for future production.

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

need more work before they become finished products for sale.

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

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

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

between production and consumption of goods.

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

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

in production. But are necessary for production process.

Need to holding inventory


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

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

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

motives for holding inventories.

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

production and sales operations.

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

unpredictable changes in demand and supply forces and other factors.

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

advantages of price influences.

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

factory for the uninterrupted production. It is not possible for a company to procure raw materialswhenever it is needed. A time lag exists between demand for materials and its supply. Also there

exists uncertainty in procuring raw materials in time on many occasions. The procurement of

materials may be delayed because of such factors as strike, transport disruption or short supply.

Therefore, the firm should maintain sufficient stock of raw materials at a given time to stream line

production.

Objective of Inventory Management

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

conflicting needs ;


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

operations.

To maintain a minimum investment in inventories to maximize profitability.

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

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

determine and maintain optimum level of inventory investment. The optimum level of inventory will

lie between the two danger points of excessive and inadequate inventories.

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

inventories. The major dangerous of over investment are,

Unnecessary tie-up of the firms funds losses of profit

Excessive carrying cost

Risk of quality

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

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

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

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

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

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

price changes.

Maintain sufficient finished goods inventory for smooth sales operations and efficient

customer service.

Minimize the carrying cost and time.


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

Inventory management techniques :

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

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

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

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

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

unprofitable.

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

1) How much should be ordered?

2) When should it be ordered?

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

quantity (EOQ), and is answered with an analysis of costs of manufacturing certain level of

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

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

is called as raw material in transit.

Example Raw material on over seas.


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

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

units of BHEL.

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

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

should be sold off to clear off the entire inventory. However, finished goods inventory is not there

for BHEL, since production is mainly done on customer order and specifications. The raw material

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

Inventory turnover Ratio:-

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

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

inventory is the average of open and closing balance of inventory.

TABLE 9

INVENTORY TURNOVER RATIO

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

SALES 1337403 1723753 1930464 2621233 3286144

INVENTORY 374437 421767 573640 783702 923546

INVENTORY

TURNOVER

RATIO

3.57 4.09 3.37 3.34 3.56


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INTERPRETATION

Inventory turnover of BHEL for 2001 2006 was fluctuation. in 2001-2002 the

inventory turnover ratio was high up to 3.81 and it was low in 2004-2005 at 3.27.

CHART 9

INVENTORY TURNOVER RATIO


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2007-08

2009-10

1

2

3

4

5

TABLE 10

INVENTORY HOLDING PERIOD

Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

DAYS / 365 365 365 365 365


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MONTH IN

YEAR

INVENTORY

TURNOVER

RATIO

3.57 4.09 3.37 3.34 3.56

INVENTORY

HOLDING

PERIOD

102 89 108 109 103


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INTERPRETATION Inventory holding period of Bhel is varying on every year. In the year of 2005-06 to

2007-08 its increased in 0.06% (102 to 108) and 2009-10 its decreased by 0.047 %.

CHART 9

INVENTORY HOLDING PERIOD


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100

200

300

400

500

600

TABLE-11

WORKING CAPITAL TURNOVER RATIO


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Rs in lakhs

YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

SALES 1337403 1723753 1930464 2621233 3286144

NET

WORKINGCAPITAL

601076 664286 788388 856817 1049309

WORKING

CAPITAL

TURNOVER

RATIO

2.23 2.59 2.45 3.06 3.13


INTERPRETATION

Working capital turnover ratio for the year 2009 - 2010 was 3.13 times. It is higher when

comparing the past four years. The working capital management has to improve by more

concentration on collection strategies.

CHART-11


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WORKING CAPITAL TURNOVER RATIO

0

0.5

1

1.5

2

2.5

3

3.5

PERCENTAGE

2005 - 2006 - 2007 - 2008 - 2009

YEARS

TABLE 12

WORKING CAPITAL FOR TREND ANALYSIS

Rs in lakhs


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YEAR 2005 -2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT

ASSETS1633078 2106297 2770472 3690107 4293481

CURRENT

LIABILITIES1032002 1442011 1982084 2833290 3244172

WORKING

CAPITAL 601076 664286 788388 856817 1049309


INTERPRETATION

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

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

CHART 12

WORKING CAPITAL FOR TREND ANALYSIS


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500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

YEARS

VALUES

TABLE 13

ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL

CURRENT ASSETS


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Rs in lakhs

Particulars2005

-2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

inventories 22.9343.90

25.30

0.52

7.35

20.0346.03

27.58

0.95

5.41

20.7143.22

30.27

1.52

4.28

21.2443.29

27.95

0.95

6.57

21.5248.18

22.80

0.95

6.55

Sundry debtors

C& B balance

Other assets

Loans and advances

Total 100 100 100 100 100

SOURCE: SECONDARY DATA

INTERPRETATION

In this period 2005 2010 Sundry debtors and other current assets was only maintained in

stable for the period of study. Bhel must be extra care about cash and bank balance in future. In the

period of 2007-2010 inventory ratios are increased. All about Bhel should be very care and must

maintain in adequate current assets in future.

CHART 13

ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL

GRAPH 13 .1 INVENTORY


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18.5

1919.5

20

20.521

21.522

22.5

23

PERCENTAGE

2005- 2006- 2007- 2008- 2009-

YEARS

IN

GRAPH 13 .2 SUNDRY DEBTORS

40

41

42

43

44

4546

47

48

49

PERCENTAGE

YEARSGRAPH 13 .3 CASH AND BANK BALANCES


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0

10

2030

40

PERCENTAGE

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

YEARS

GRAPH 13 .4 OTHER CURRENT ASSETS

0

0.5

11.5

2

PERCENTAGE

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

GRAPH 13 .5 LOANS AND ADVANCES


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0

2

46

8

PERCENTAGE

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

YEARS

GROSS PROFIT RATIO :

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

This ratio helps to control inventory usage and production performance and fixing unit price

of goods.

TABLE 14

ANALYSIS OF GROSS PROFIT RATIO

Rs in lakhs

Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010

Gross Profit /

Profit before tax256435 373607 443039 484885 659065

Total Sales 1337403 1723753 1930464 2621233 3286144Gross Profit ratio 0.192 0.217 0.230 0.185 0.201

GRAPH 14 - GROSS PROFIT RATIOS


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2005-06

19%

2006-07

21%

2007-08

22%

2008-09

18%

2009-10

20%


INTERPRETATION

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

Comparison of 2007-08 to 2009-10 margin profit ratio will goes down in 2 %. Firm will be control

in production cost in next coming years, such as raw material, freight and transport expenses.

Otherwise, Bhel must increase in sales unit price.

NET PROFIT RATIO:


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

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

increasing operating and non-operating expenses. This situation can easily be detected by calculating

this ratio.

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

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

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

sales leave later deducting all the expenses. The unit of expression is percentage, as is the case with

profitability ratios.

TABLE 15

ANALYSIS OF NET PROFIT RATIO

Rs in lakhs

Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010

Net Profit /

Profit after tax167916 241470 285934 313821 431064

Net Sales 1337403 1723753 1930464 2621233 3286144

Net Profit ratio 0.126 0.140 0.148 0.120 0.131

GRAPH 15 NET PROFIT RATIO


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0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

YEARS

%


INTERPRETATION

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

2008 2010 comparing previous year achievements.

Gross Profit to Net Profit Ratio:


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Analisation of ratios G.P. to N.P is very important in every firm. It helps to find out the cost

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

overall financial expenses.

TABLE 16

ANALYSIS OF G.P. TO N.P RATIO

Rs in lakhs

Particulars 2005-2006 2006-2007 2007 - 2008 2008-2009 2009-2010

Gross Profit 256435 373607 443039 484885 659065

Net Profit 167916 241470 285934 313821 431064

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

GRAPH 16 G.P. TO N.P. RATIO

0

100000

200000

300000

400000

500000

600000

700000

YEARS


INTERPRETATION


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

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

TREND ANALYSIS

Particulars 2006 2007 2008 2009 2010

Current Assets :

Inventories / Stock 100 112.64 153.20 209.30 246.65

Debtors100 135.26 167.06 222.87 288.62

Cash and Bank Balances100 140.52 202.86 249.51 236.82

Other Current Assets100 236.33 498.33 414.45 481.48

Loans & Advances100 95.08 98.87 201.99 234.50

Current Liabilities :

Liabilities100 135.08 188.20 265.19 318.17

Provisions100 166.79 214.54 329.01 292.14

INTERPRETATION

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

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

balances are fluctuating ratio in the year 2008 2010. Current Liabilities are increasing in all the

years and Provisions are fluctuating in the year 2010 compared to previous years.

ANALYSIS IN LEAST QUARE METHOD


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least squares a method of regression analysis. The line on a graph that best summarizes the

relationship between two variables is the one that ensures that there is the least value of the sum of

the squares of the deviation between the fitted curve and each of the original data points.

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