Download - Summer Training Report on WCM for BHEL

SUMMER TRAINING REPORT ON

WORKING CAPITAL MANAGEMENT IN B.H.E.L.

For

BHARAT HEAVY ELECTRICAL LIMITED

By

ARVIND KUMAR

F-08

In particle fulfillment for the award of the degree

Post Graduate Diploma in Business Management

2009-2011

New Delhi Institution of ManagementF -13, Okhla Phase -1, New Delhi, Pin: 110020

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NEW DELHI INSTITUTION OF MANAGEMENT

WORKING CAPITAL MANAGEMENT IN B.H.E.L.

FOR

BHARAT HEAVY ELECTRICAL LIMITED

Under the supervision

Of

Mr. Ashok Kumar Srivastava

Submitted By- Submitted to- Arvind Kumar Monika Nijhawan

F-08

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PREFACE

“Learning categorizes you and practicing on that learning specializes you”.

Theoretical concepts taught and discussed in the classroom prove useful if they have to remain relevant. Practice orientation of management student is must generating competence to deal with issues at grass root level it is for this reason that training & project study is prescribed as a part of syllabus for MBA Degree in Delhi.

This training is the mode of imparting practical training to the student. The objective is to provide a deep insight into practical aspects of the functioning of the organization. The train apprises the student to the actual function, responsibility and problem faced by an organization. It provides him with the knowledge of the various kind of problem that crop up in the day to day functioning of the organization .The way they are solved by the departments and appraisal of the crucial decision taken by the manager at the crucial time.

I was fortunate enough to complete my Financial training at Bharat Heavy Electrical Limited (BHEL, HERP), Shivpur Tarna Varanasi. This has given me an altogether new experience, which would be immense help to me in my days to come.

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ACKNOWLEDGEMENT

I wish to acknowledge my specific indebtness to director “New Delhi Institution of Management”, who made this opportunity to perform financial training as a part of MBA degree Course. I wish to extend my Sincere Gratitude towards “Mr. Ashok Shrivastav” Accounts Officer (BHEL – HERP, Varanasi) for accepting me as a summer trainee and assigning this project to me.I am extremely grateful to Mr. R.K. Sharma for their valuable guidance and best possible help during course of study.

I am deeply grateful to my parents who have given me every help and moral support and their constant advice which enabled me to pursue my academic aim.

Thanks to other summer trainees for their co-operation and suggestions throughout this project.

ARVIND KUMAR MBA 2009-2011

DECLARATION

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I Arvind Kumar student of New Delhi Institution of Management 2009 – 2011 declare that every part of the Project Report on Working capital management in Bharat Heavy Electrical Limited that I have submitted is original.

I was in regular contact with the nominated guide and contacted from 2pm to5pm for discussing the project.

Date of project submission:_______________

Signature of the Student (Arvind Kumar)

Faculty’s Comment ________________________________________________

_______________________________________________________________________________________________________________________________________________________________________

Signature of Faculty

Name

S.NO TOPIC PAGE

1 INTRODUCTION OF PROJECT 8

2 OVERVIEW OF B.H.E.L 10

3 UNIT DETAILS 32

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4 WORKING CAPITAL MANAGEMENT 37

5 COMPONENTS OF WORKING CAPITAL 47

6 MAJOR OF LEARNING 61

7 OBJECTIVE OF LEARNING 62

8 RESEARCH METHODOLOGY 63

9 RECOMMENDATION & SUGGESTION 64

10 CONCLUTION 65

11 BIBLIOGRAPHY 67

TABLE OF CONTENTS

Executive summery

Working capital is the capital required for maintenance of day-to-day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for this is attributed to the fact that an ineffective working capital

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management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets & current liabilities but also in maintaining a satisfactory level of working capital.

Holding of current assets in substantial amount strengthens the liquidity position & reduces the riskiness but only at the expense of profitability. Therefore achieving risk-return trade off is significant in holding of current assets. While cash outflows are predictable it runs contrary in case of cash inflows. Sales program of any business concern does not bring back cash immediately. There is a time lag that exists between sale of goods & sales realization. The capital requirement during this time lag is maintained by working capital in the form of current assets. The whole process of this conversion is explained by the operating cycle concept.

This study gives in detail the working capital management practices in BHEL. Management of each current asset, namely inventory management, cash management, accounts receivable management is studied permanent to BHEL. Similarly management of accounts payable is studied to understand the managing of current liabilities. A part from this concept of operating cycle is studied.

The research methodology adopted for this study is mainly from secondary sources of data which include annual reports of BHEL, & website of the company. The use of primary sources is limited to interviews with few of the employees in finance department.

The study of working capital management has shown that BHEL has a strong working capital position. The company is also enjoying reasonable profits. BHEL has corporate tie up with maximum leading Banks in India for providing short and medium term finance to the company. For financial requirement of projects outside India, BHEL has arranged for ex funds. BHEL sales position is also very good. Its excellent performance is attributed to reduced cost of product The overall position of BHEL is good & the same is expected by continuum of existing management policies, checking exchange rate risk, competing with domestic and global players

in terms of quality & quantity.

Introduction

Capital is essential for the setting up and smooth running of any business. Investments made on fixed assets will yield excess cash inflows apart from the payback amount and is spread over a longer period of time. Hence the cash inflows (or) benefits associated are not immediate but are expected in the future. Cash inflows & outflows occur on a continuous basis in case of

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current assets. Credit forms an essential feature in the business (credit given to customers & credit from suppliers). Since there is some time lag from the time of sales & sales realization current assets & current liabilities, which together constitute the net working capital, supports the business in its normal of operations. This calls for an efficient management of working capital.

The policies, procedures and measures taken for managing of working capital gain further importance in an organization like BHEL where the working capital requirements runs in crores of rupees. Any mismanagement on the part of authority will not just cause loss but may even impair business operations. It is in this context working capital has gained importance.

The growth of any organization depends on overall performance of all the departments. A firms financial performance reflects its strength, weaknesses, opportunities and threats of the organization with respect to profits earned, investments, sales realization, turnover, turn on investment, net worth of capital. Efficient management of financial resources and analysis of financial results are prerequisite for success of an enterprise. In that working capital management is one of the major areas of financial management. Managing of working capital implies managing of current assets of the company like cash, inventory, accounts receivable, loans and advances and current liabilities like sundry creditors, interest payment and provision.

HISTORICAL BACKGROUND AND MILESTONES OF BHEL

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December 1946 : Scope of setting up Heavy Electrical Industry in India.

August 1952: Project revived by the ministry of production.

August 1952 : Gadkari Committee formed of examining Feasibility of state owned Heavy Electrical Industry.January 1955 : Gadara Committee recommends establishing of State owned factory.

November1955 : Collaboration agreement entered with EI,UK For 15 years.

29th Aug 1956: BHEL registered.

15th NOV. 1958: Foundation stone laid.

1st July 1960: Production started in Bhopal.

1972-1973: Break even reached.

1st Jan 1974: Merger with BHEL and ISO 9001 certificate.

23rd to 28th 1998 : TQM assessment undertaken that is the first Among all the BHEL units.

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BHEL as an overview

BHEL is largest engineering and manufacturing enterprise in India in the energy related/infrastructure sector. BHEL was established more than four decades ago ushering in the indigenous Heavy Electrical Equipment industry in India. BHEL has built over the years, a robust domestic market position by becoming the largest supplier of power plant equipment in India, and by developing strong market presence in select segment of the industry sector and the Railway. Currently, 80% of the Nuclear power generation in the country is through BHEL sets.

BHEL caters to core sector of the Indian Economy viz.., power Generation and Transmission, Industry, Transportation Renewable Energy, Defense, etc. The wide network of BHEL’s 14 manufacturing division, 4 power sector regional centers, 8 service center, 15 regional offices, one subsidiary co., joint Venture and a large number of Project Sites spread all over India and abroad enable the Company to promptly serve its customer and provide them with suitable product, system service- efficiently and at competitive prices.

BHEL has

Installed equipment for over 90000MW of power generation-for utilities, captive and industrial users.

Supplied over 225000MW a transformer capacity and other equipment operating in transmission and distribution network up to 400Kv (AC& DC)

Supplied over 25000 motors with drive control system to power projects, petro chemicals, refineries, steel, aluminum, fertilizers, cement plants etc.

Supplied traction electrics and AC/DC locos to power over 12000kms railway network.

Supplied over one million valves to power plants and other industries.

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of

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BHEL's 14 manufacturing divisions, four Power Sector regional centers, over 100 project sites, eight service centers and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centers.

BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management.

BHEL has

Installed equipment for over 90,000 MW of power generation - for Utilities, Captive and Industrial users.

Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC).

Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc.

Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network.

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

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BUSINESS AREAS

BHEL's operations are organised around three business sectors, namely Power, Industry - including Transmission, Transportation, Telecommunication & Renewable Energy - and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market.

1. Transmission BHEL also supplies a wide range of transmission products and systems of up to 400KV class. These include high voltage power & instrument transformers, dry type transformers, shunt & series reactors switch gear, 33KV gas insulated sub-station capacitors, insulators etc. for economic transmission of bulk power over long distances, High Voltage Direct Current (HVDC) systems are supplied. Series and shunt compensation systems, to minimize transmission loses, have also been supplied.

2. Industry sector IndustriesBHEL is a major contributor of equipment and systems to industries: 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, industrial boilers and axillaries, waste heat recovery boilers, gas turbines, heat exchangers and pressure vessels, centrifugal compressors, electrical machines, pumps, valves, seamless steel tubes and process controls, control systems for process industries, and control and instrumentation systems for power plants, defense and other applications. The company has commenced manufacture of large scale desalination plants to help augment the supply of drinking water to people.

3. Transportation

Mostly of the trains operated by the Indian railways, including the metro in Calcutta, are equipped with BHEL’s traction electrics and traction control equipment. The company supplies electric locomotives to Indian Railways and diesel shunting locomotives to various industries. 5000/4600 hp ac/dc locomotives developed and manufactured by BHEL have been supplied to Indian railways. Battery powered road vehicles are also manufactured by the company.

BHEL also supplies traction electrics and traction control equipment for electric locos, diesel electric locos, and EMUs/ DEMUs to the railways.

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http://www.bhel.com/bhel/overseasbusiness/international.htm

4. Telecommunication

BHEL also caters to telecommunication sector by way of small, medium, and large switching systems.

5. Renewable energy

Technologies that can be offered by BHEL for exploiting non-conventional and renewable resources of energy includes: wind electric generators, solar power based water pumps, lighting and heating systems. The company manufactures wind electric generators of unit size up to 250 KW for wind farms, to meet the growing demand for harnessing wind energy.

6. International operations

BHEL has, over the years established its references in over 50 countries of the world, ranging from the united-states in the west to new-Zealand in the far-east. These references encompass almost the entire product range of BHEL, covering turnkey power projects of thermal, hydro and gas based type sub-station projects, rehabilitation projects, besides a wide variety of products, like switch gear, transformer, heat exchangers, insulators, castings and forgings. Apart from over 1100MW of boiler capacity contributed in Malaysia, some of the other major successes achieved by the company have been in Oman, Saudi Arabia, Libya, Greece, Cyprus, Malta, Egypt, Bangladesh, Azerbaijan, Sri lanka, Iraq etc. execution of overseas projects has also provided BHEL the experience of working with world renowned consulting organizations and inspection agencies.

Technology Up gradation and research and development

To remain competitive and meet customers’ expectations, BHEL lays great emphasis on the continuous up gradation of products and related technologies, and development of new products. The company has upgraded its products to contemporary levels through continuous in house efforts as well as through acquisitions of new technologies from leading engineering organizations of the world. The corporate R&D division at Hyderabad leads BHEL’s research efforts in a number of areas of importance to BHEL’s product range. Research and product development centers at each of the manufacturing divisions play a complementary role. BHEL’s investment in R&D is amongst the largest in the corporate sector in India. Products developed in house during the last five years contributed about 8% to the revenues in 2007-08.

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BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player.

The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management – all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness.

PRODUCT

Thermal Power Plants

Steam turbines, boilers and generators of up to 800 MW capacity for utility and combined-cycle applications;Capacity to manufacture boilers and steam turbines with supercritical system cycle parameter and matching generator up to 1000 MW unit size.

Steam turbines, boilers and generators of CPP applications; capacity to manufacture condensing, extraction, back pressure, injection or any combination of these types of steam turbines.

Nuclear Power Plants

Steam generator & Turbine generator up to 700 MW capacity.

Gas-Based Power Plants

Gas turbines of up to 280 MW (ISO) advance class rating. Gas turbine-based co-generation and combined-cycle systems of industry and utility

applications.

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There are other products given as follows:

Hydro Power Plants, DG Power Plants, Industrial Sets, Boiler, Boiler Auxiliaries, Piping System, Heat Exchangers and Pressure Vessels Pumps, Power Station Control Equipment, Switchgear, Bus Ducts, Transformers, Insulators, Industrial and Special Ceramics, Capacitors, Electrical Machines, Compressors, Control Gear, Silicon Rectifiers, Thyristor GTO/IGBT Equipment , Power Devices, Transportation Equipment

Oil Field Equipment, Casting and Forgings, Seamless Steel Tubes, Distributed Power Generation and Small Hydro Plants

Achievements

BHEL has put in place a number of initiatives, as follows,

1. Strengthening company’s core businesses of Power Generation, Transmission & Distribution, Transportation and Industrial Systems & Products, through accelerated project completion and consequent benefits to customers , along with new initiatives in marketing, technology, facility up-gradation and modernization, enhancing operational effectiveness etc.

2. Business Development efforts in related and allied areas utilizing the organizational strengths and forming customer focused specialized business groups e.g. formation of Oil Sector R&M Business Group to address business in Renovation and Modernization of off-shore and on-shore oil platforms, downstream petroleum refining areas and Power Plant Operational Services Group to provide Operations and Maintenance (O&M), Services for Power Plants.

3. After Market Services being the areas for future growth, spares and R&M services business have been integrated into one focused group. R&M for hydro sets is an area having major growth opportunity which BHEL is poised to tap.

4. Exploring Business opportunities in areas like Energy Conservation, Water Management, Pollution Control and Waste Management, Ports, LNG terminals etc.

5. Positioning for Information technology Business leveraging the domain knowledge in Power Sector& Engineering field to provide IT enabled services for Power Sector and software services for Engineering Industry.

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Sustain and Enhance Exports for products and services through multi-pronged approaches like entering new territories, focus on product sales, entry into IPP segment, offering O&M and LTSA, EPC, becoming a service center for international Original Equipment Manufacturers (OEMs) and setting up of manufacturing assembly and repair centers in the regions of demand etc.

BHEL is also taking steps to re-position it-self to meet the demands of the new market economy through suitable strategies keeping in view the ultimate objective of enhancing value for its stakeholders.

RECENT ACHIEVEMENTS OF BHEL

1. BHEL got Shram Bhushan Award.2. BHEL’s Finance got ICWAI Award for Excellence in Cost Management.3. BHEL's R&D contributed Rs 50,270 crore turnover in 2007-08. 4. BHEL manufactured 800 MW thermal sets. 5. BHEL net profit up 60

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BALANCE SHEET

INCOME STATEMENT

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CASH FLOW STATEMENT

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Expansion of BHEL facilities

BHEL has embarked upon a plan of enhancing its manufacturing capacity and capability for preparing itself to meet the country’s power demand, for providing “Power to all by 2012”andto contribute fully for meeting the power forecast of the 11th Plan and beyond. Towards this end, BHEL has been augmenting its capacity and capability and has already enhanced its power generating equipment manufacturing capacity from 6000 MW per annum in 1999-2000 to 10,000 MW per annum w.e.f. 1st January, 2008. This manufacturing capacity is being further enhanced to 15,000 MW per annum by the end of March, 2010 with an investment of approximately Rs. 4200 crore, which is funded entirely through internal resources. It is further planned to increase the capacity to20,000 MW per annum by March, 2012.

EXPANSION OF MANUFACTURING CAPACITY

BHEL has embarked upon a plan of enhancing in manufacturing capacity and capability for preparing itself to meet the country’s power demand, for providing “Power to all by 2012” and to contribute fully for meeting the power forecast of the 11th Plan and beyond

Towards this end, BHEL has been augmenting its capacity and capability and has already enhanced its power generating equipment manufacturing from 6000MW in 1999-2000 to 10,000 MW per annum w.e.f.1st January, 2008. This manufacturing capacity is planned to be enhanced to 15,000 MW per annum by end of March, 2010. This will further go up to 20,000

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MW per annum by March, 2012.A new transformer manufacturing facility at Bhopal Unit to produce an additional 12,000 MVA of transformers per annum was dedicated to the nationBy Honorable Union Minister HI&PE on 17.11.2009.With this, transformer manufacturing capacity of Bhopal Unit stands enhanced to 30,000 MVA per annum.

PERFORMANCE ACHIEVEMENTS

The company has ended the year 2008-09 with a turnover of Rs. 28,033 crore, and is likely to achieve a turnover of Rs. 32,000 crore in 2009-10, as envisagedin MOU for Excellent rating.

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Order book position of BHEL has substantially improved. The company has received order ofRs. 36,400 crore up to December, 2009 and is likely to receive orders of Rs 59,900 crore in 2009-10 as against Rs. 59,687 crore of orders in 2008-09. Against opening balance Rs. 1, 17, 000 crore of orders outstanding, company is likely to have Rs. 1,44,000 crore as on1.4.2010 for execution in 2010-11 and beyond.

During the year, the company has received highest ever Private Sector orders of Rs. 25,918 crore for Power Projects.

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Major orders received during 2009-10 are :-

_ Super-critical orders received for 3x660 MW electricity from Prayagraj Power Generation Company Limited (PGCL), a Jaypee Group company.

_ Order for 10 Sets of 270 MW from a single customer i.e. Elena Power and Infrastructure Ltd (EPIL- India Bull Group Company). The order consist of 5x270 MW

for Nasik and 5x270 MW for Amravati.

_ Orders for 16x270 MW, 2x525 MW and5x600 MW of recently introduced new ratings (270 MW, 525 MW and 600 MW).

_ Repeat order of 4 steam Generators for 700MWe Nuclear Set for Rajasthan Atomic Power Project of Nuclear Power Corporation of India Ltd.

_ Orders for 1739 MW Hydro sets received, which include 3x110 MW for Kishan ganga Project of Hindustan Construction Company and 3x99 MW+ 4x96 MW + 5x121.5 MW for Pranhita Lift Irrigation Scheme Projects of Megha Engineering & Infrastructures Limited.

_ Order for 1x160 MW Gas based Combined Cycle Power Project for Ramgarh of Rajasthan Rajya Vidhyut Utpadan Nigam Ltd (RRVUNL).

_ Order for 6 units of 150 MW from HINDALCO Industries Ltd for their upcoming captive power plant at Aditya Aluminium in Sambalpur district, Orissa.

_ Order for 2x150 MW sets from OPG Power Gujarat and 2x180 Tones per Hour (TPH) Bubbling Fluidised Bed Combustion (BFBC) Boilers from Jindal Steel & Power Limited (JSPL) Angul, Orissa.

_ Order for 150 nos. electric locomotives (25 KV, Type WAG7) from Indian Railways in the transportation segment.

_ Order for 14 Sets Electrics for HHP DEMU from ICF, Chennai and 51 Sets AC EMU Traction Electrics from Railway Board, Delhi.

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_ 1st & 2nd orders for 3 nos. 126 MW GTG sets received under price agreement entered during2008-09 with Petroleum Development, Oman.

_ Overseas order for Gas turbine based cogeneration plant received for 100, 130 MWco -generation Power Project, Belarus. This is the first ever order from Belarus making an entry in a new country.

CORPORATE SOCIAL RESPONSIBILITY

_ BHEL as a socially conscious organization and a responsible Corporate Citizen have undertaken various socio-economic and community development programmes throughout the country. The Company is committed to carrying out various Community Development programmes, in addition to its normal business activities. BHEL’s Mission Statement on CSR as committed in the Scheme for implementing the Corporate Social Responsibility is - “Be a Committed Corporate Citizen, alive towards its Corporate Social Responsibility “.

_ The Eight Thrust areas under the CSR Scheme are Self-employment generation, Environment Protection, Community Development, Education, Health Management and Medical Aids, Orphanages & Old-age Homes, Infrastructural development and Disaster / Calamity Management.

Bharat Heavy Electricals Ltd. (BHEL)

During the year, a turnover of Rs. 5571 crore was achieved by commercializing products andSystems developed through in-house R&D. Credit for products and systems which have beenCommercialized during the last five years only has been taken. An amount of Rs. 690 crore was spent on R&D activities. Of this, Rs.677.3 crore was spent on revenue expenditure, focusing on new product and system developments and improvements in existing products for cost

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effectiveness and 52 higher reliability, efficiency, availability, quality etc. In addition, an expenditure of Rs. 12.7 crore has been incurred for purchase of capital assets for R&D.Some significant developments carried out during the year are as follows:

_ Consistently offering tailor-made designs to suit customer needs, BHEL has developed a new design of a Steam Turbine in the 120-150 MW range. Apart from reduced manufacturing cycle time, the new Single Cylinder Reheat Turbine offers improved load efficiency with a compact design leading to reduced installation costs.

_ Extending the range of exciters for meeting customer requirements, a more reliable Brushless Exciter with Permanent Magnet Generator has been designed, developed and manufactured for 250 MW Turbo Generators. The new exciter offers benefits like reduced manufacturing cycle time, better dynamic behavior and more efficient site operation.

_ Following successful testing of in-house developed 320kN/420kN HVDC Disc Insulators at STRI, Ludvika, Sweden, and BHEL has become the sole manufacturer of such insulators in the world. Also to augment its range of disc insulators for meeting customer requirements, BHEL has developed 800 kV Hollow Insulators for the first time in the country. These insulators will be used in 765 kV Ultra High Voltage AC transmission systems.

_ State-of-art controllers for Electrostatic Precipitator (ESP). These controllers are capable of handling multiple inputs for generating necessary feedback signals so as to optimize ESP operation, minimizing the dependence on operator’s intervention and ensure consistent performance.

_ As part of its Endeavour to establish technology for the entire spectrum of products for supercritical power plants, BHEL has designed and developed a deaerator for 1,000 MW power plants.

To address the demand and technology trend for compact, economical and more efficient 2-cylinder turbines, BHEL have developed a combined HP-IP module to cover the range of 500-650 MW TG Sets. The development of this module will enable BHEL to

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offer a technically more competitive design, enhancing its business potential in the output range of 500-650 MW with sub-critical parameters.

· _ Developed technical expertise and demonstrated for the 1st time, islanding operation with 3 units of 120 MW rating simultaneously for captive power plant customer. This development addresses availability of power and enables customer to avail un-interrupted power from the captive plant in the event of grid failure.

· _ Developed design for Radial Fan (BAB1 series-NDV 20 BAB1) for FD application. The Fan is backward aerofoil bladed one, having higher efficiency compared to plate bladed design.

· _ Aimed at significantly reducing erection cycle time in hydro projects, BHEL has developed a new compact design of site welded stay ring for hydro turbines whichGives multiple advantages like 45% weight reduction for medium/high head stay ringsAnd permits accommodation of semiumbrella bearing arrangement in the limited space in underground caverns. This concept can also be applied in large size projects.

· _ In a bid to enhance reliability of its boilers for the benefit of its customers, BHEL hasEstablished a supercritical test advanced research facility to conduct heat transferStudies at super critical pressure conditions. This facility is also capable of analyzing ultra supercritical boiler 53 requirements being considered worldwide for economical power generation. The facility will cater to the technology requirement of supercritical boilers in India for the next two decades.

· _ Established a new “Magnetically Impelled Arc Butt (MIAB)” automated weldingProcess capable of welding irregular or non-circular components as circular. Thisis a new development and apart from improving process efficiency, it will alsoResult in a low distortion welds, free from inclusions and impurities.

· _ As its contribution to the armed forces, BHEL has developed a compact 2.4 TPDRO-based desalination plant skid (water filtration system suitable for sea water) forIndian Navy submarines.

· _ BHEL has achieved the unique distinction of becoming part of an elite group of few27


Companies who possess ‘PTFE Bonding Process”. This technology is used for liningPads of thrust bearing for hydro generators.

· _ As a capability building initiative, BHEL has successfully developed new in-houseCompact design of “1326 KVA, Transformer for 3 Phase IGBT based Electrics for EMU”. The development has improved “output to weight” ratio, an important criterion for the equipment. BHEL has also successfully completed in house design of ‘Development of Thermal cycle for new rating 600 MW power plants”.

· _ BHEL has successfully completed for the first time “PG Test scheme and MethodFor computation of Heat Rate for BHAVINI 500MWe PFBR project’. The developmentWill lead to reduction in engineering cycle time for Nuclear power projects.

Dividend Paid by the CPSEs under the Department of Heavy IndustryFor the year 2008-09

BHEL Rs. 563.57 CroreHPC Rs. 12.95 CroreEPI Rs. 7.08 CroreB&R Rs. 0.55 CroreBBUNL Rs. 0.05 Crore

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CMD, BHEL presenting the interim dividend cheque for 2009-10 to Shri Vilasrao Deshmukh, Union Minister of Heavy Industries & Public Enterprise

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SWOT (Strength, Weaknesses, Opportunities and Threats) analysis of BHEL: Strengths:

Sound engineering base and ability to assimilate relatively stable industrial relationship

Access to contemporary technologies with the support from renowned collaborators.

Ability to set up power plants on turnkey basis,

Complete know- how for manufacture of entire equipment is available with the company.

Ability to manufacture or procure to supply spares. Fully equipped to take capital maintenance and servicing of the power plants.

Largest source of domestic business leading to major presence and influence in the market.

Ability to successfully overhaul and renovate power stations equipment of different international companies.

Low labor cost.

For non- BHEL products, services and spares are not easily available and if they are, price charged are very high.

Sound financial position in terms of profitability and solvency.

Low debt equity ratio (even lower than 0.5:1) for all the years under study, enabling company to raise capital.

Weaknesses:

Difficulty in keeping up the commitments on the product delivery and desired sequence of supplies.

Larger delivery cycles in comparison with international suppliers of similar equipment.

Inability to provide supplier’s credit, soft loans and financing of power projects.

Lack of effective marketing infrastructure.

Due to poor financial position of state electricity boards, which are the major customers of BHEL in India, liquidity position of BHEL is not satisfactory.

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http://maheshchandraiimtmeerutpgdm.blogspot.com/2009/09/swot-strength-weaknesses-opportunities.html

Being a public sector company BHEL is suffering from sub optimality of control due to:1. Displacement of social objectives by political objectives, which may lead to redundant costs and also rising costs.2. Direct political intervention in managerial decision over an arm length relationship that would restrict government’s task of setting appropriate managerial incentive structure.3. Private goals that lead to budget growth and employment growth.

Opportunities:

Demand for power and hence plant equipment is expected to grow.

Private sector power plants to offer expanded market as utilities suffers resource crunch.

Ageing power plants would give rise to more spares and services business.

Life expansion program for old power stations.

Export opportunities.

Easy processing of joint ventures/ collaboration/import/ acquisition of new technology.

Threats:

Increased competition both national and international.

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UNIT DETAIL

(Heavy about BHEL: HERP Varanasi Equipment Repair Plant)

Varanasi is endowed with five universities; Lord Buddha’s first preaching center and many religion / cultural centers, situated near the holy Ganga, with Lord Kashi Vishwanath Temple at the heart of it. HERP is located at Shivpur, 11 Kms from main railway station and 15 Kms from Varanasi Airport. HERP is also situated at the center of the largest power belt of northern region. This power belt supplies 10650 MW of power to the country. In the line with BHEL’s of providing constant service at their doorsteps, the idea of establishing repair shop in the vicinity of power station was mooted objective. Accordingly, two repair plants at Bombay & Varanasi came into existence; the foundation equipment repair plant sprawling in 29.8 acre area at Varanasi was laid on 20 th

September 1984 by Chief Minister of U.P. Shri Narayan Dutt Tiwari within a short span of 21 month much before the schedule. Starting a manufacturer of O&M spares for the boiler and boiler auxiliaries, repair activities got a real break in 1990 when rebabitting of TG set bearing was taken up in the plant. Since than rebabitting of different type of bearing including an unconventional synchronous condenser has been carried out to the entire satisfaction of the customers. Now HERP manufactures turbine spares, tools & tackles complete spares of bowl mill XRP 623,803,883 & 1003. The unit has a plan to add Constant load hanger, Variable load hanger & condensate polishing unit in near future. Through small in size, HERP has been in adequate attention to all the facts of plant operation like computerization, inventory control, quality assurance. In order to channel lies the creative energy of employees suggestion scheme and quality circle and productivity improvement project are in operation. HERP takes pride in being one of the best among BHEL unit in term of value added per employee. it has a track reward of continuing harmonious industrial relations. Being a public sector, HERP is aware of social responsibility as a corporate citizen as quality of like for the residents of nearby area.

Bharat Heavy Electricals Limited - A Corporate Giant

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BHEL was established nearly 40 years ago to become the most important symbol of Heavy Electrical Equipment Industry in India and ranks amongst the first few in the world. It is the largest heavy engineering and manufacturing enterprise of its kind in India with a well-recognized track record of performance, making profits continuously since 1971-72. The company achieved a turnover of Rs. 8610 crores and PBT of Rs 947 crore in 2003-04. BHEL caters to core sectors of the Indian economy viz. Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewal Energy, Defense etc. The wide network of BHEL's 14 manufacturing divisions, 4 power sector regional centers, over 100 project sites & 8 service centers and 18 regional offices enable the company to be closer to its customer and provide them with suitable products, systems and services at competitive prices. Having attained ISO 9001, 14001 certifications in all major Units, BHEL is now on its journey towards TQM. The company's inherent potential coupled with its strong performance over the years has resulted in it being chosen as one of the Navratna PSUs, which enjoy the support from the government in their endeavors to become global players. With its prudent financial management BHEL occupies an all-important niche as evident by its ranking by CII amongst top eight PSUs based on financial performance.

Heavy Equipment Repair Plant, Varanasi

Heavy Equipment Repair Plant, Varanasi has highly skilled & dedicated technicians, engineers & specialist catering the requirements of various power plants of their mill and turbine O&M spares. HERP has contributed a lot in refurbishing of various units of NTPC after taking it over from SEB’s and is a major player in Govt of India PIE program.

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Historical Profile

In line with BHEL's objective of providing consistent service at doorstep, HERP was established in the vicinity of power stations, thus laid at Varanasi. The foundation stone of HERP sprawling in 29.8 acres area at Varanasi was laid on 26th September 1984. Within a short span of 21 months, production activities were started in the plant from 1st April'1986. Having achieved break-even point in the second year of its existence itself, HERP progressed by leaps & bounds. Starting as a manufacturer of O&M spares for boiler auxiliaries, repair activities took off on firm footing in 1990 when rebabbitting of TG set bearings was taken up. Since then, rebabbiting of different kinds of bearings including import substitution (NCL Bearings) as well as bearings of unconventional synchronous condenser have been carried out to the entire satisfaction of the customers. HERP Varanasi has taken up various critical jobs from nearby power plants viz: NTPC Tanda, Unchahar, UPRVUNL Obra, Anpara, and Parichha and helped them to achieve maximum availability of their units.

Range Of Products/Services Provided By H ERP

Bowl Mill XRP/XRS 623, 703HP, 783, 803, 803HP, 883, 1003 spares

Turbine fasteners

Repair/Rebabbiting of TG bearings

Rotor machining

Spares for Boiler Auxiliaries like Coal Burners, Fuel Piping, ESP, and Air Preheater & R.C. Feeder etc.

Hydro Turbine component machining like Guide Vanes, Guide Bearings.

Tools & Tackles of Steam Turbines

Limiter Assembly, Oil Filter Assembly & Speed Changer Assembly of Governing System.

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CustomersHERP's customers are various SEBs viz. APGENCO, BSEB, CSEB, MSEB, MPEB, PSEB, RVUNL, TNEB, UPRVUNL, NTPCs, and OPPs & Private Power Plants.

Partners

Our partners & suppliers include our sister units viz. Haridwar, Bhopal, Tiruchy, Hyderabad, Varanasi as well as various ancillaries developed by various units of BHEL.

Total Quality Focus

HERP has achieved certification of ISO 9001, ISO 14001 & OHSAS 18001 and targeted TQM score during 03-04. Unit level TQ council is committed towards improvement on regular basis in line with the organizational goals. The other apex level committee like HMC, PQC & PEC is also having meetings as per schedule for review as per agenda keeping in view, the interests of our Stakeholders.

Busines``````````````s Policy

"In line with Company's Vision, Mission and Values, we dedicate ourselves to sustained growth with increasing Positive Economic Value Addition and Customer focused business leadership in the Power & Industry Sector"

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WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

Defining Working Capital

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.

The term working capital refers to the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities).

Thus:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of working capital are reported under the following headings:

Current Assets

Liquid Assets (cash and bank deposits) , Inventory / stock , Debtors and Receivables , Prepaid expenses Loan & advances & Marketable securities

Current Liabilities

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http://www.investopedia.com/terms/c/cashflow.asp

Bank Overdraft , Creditors and Payables , Other Short Term Liabilities , Bank overdraft/cash credit , Short term loan (payable within 12 month) , Outstanding/accrued/owing expenses , Provision for taxes (If treated as current) , Dividend payable , Unclaimed dividend , Provision for doubtful and bed debt (If debt are suppose to be doubtful)

There are basically two concepts of working capital:-

1. Gross working capital2. Net working capital

Current assets are those which can be converted into cash within an accounting year and include cash, short-term securities, and debtors, bills receivables (accounts receivables or book debts) and stock (inventory)Current liabilities are those claim of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable and outstanding expenses.Gross working capital:-It refers to the firm’s investment in current assets.Net working capital:-It refers to the difference between current assets and current liabilities.

Net working capital is positive

When current assets >current liabilities

Net working capital is negative

When current asset<current liabilities

The Importance of Good Working Capital Management

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

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Working capital constitutes part of the Crown's investment in a department. Associated with this is an opportunity cost to the Crown. (Money invested in one area may "cost" opportunities for investment in other areas.) If a department is operating with more working capital than is necessary, this over-investment represents an unnecessary cost to the Crown.

From a department's point of view, excess working capital means operating inefficiencies. In addition, unnecessary working capital increases the amount of the capital charge which departments are required to meet from 1 July 1991.

There are many aspects of working capital management which make it an important function of the financial manager

TIME: working capital management requires much of the financial manager’s time.

INVESTMENT: working capital represents a large portion of the total investments in assets.

CRITICALITY: working capital management has great significance for all firms but it is very critical for small firms.

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

Sources of working capital

1. Sale of non-current assetsa. Sale of long term investments (shares, bonds/debentures etc.)b. Sale of tangible fixed assets like land, building, plant or equipments.c. sale of intangible fixed assets like goodwill, patents or copyrights

2. long term financinga. Long term borrowings/institutions loans, debentures, bonds etc.b. issuance of equity and preference shares

3. Short term financing such as bank borrowings.

Focusing on liquidity management

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Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. In order to protect their interests, short-term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. However, the quality of current assets should be considered in determining the level of current assets vise-a –Vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore prompt and timely action should be taken by management to improve and correct imbalances in the liquidity position of the firm.

Net working capital concept also covers the question of judicious mix of long-ter and short-term funds for financing current assets. For every firm there is a minimum amount of net working capital which is permanent. Therefore a portion of the working capital should be financed with the permanent sources of funds such as equity, share capital, debentures, long-term debt, preference share capital or retained earnings. Management must decide the extent to which current assets should be financed with equity capital or borrowed capital.

Balanced working capital position

Inadequate working capital is also bad and has the following dangers:

1. It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.

2. It becomes difficult to implement operating plans and achieve the firm’s profit target.3. Operating inefficiencies creep in when it becomes difficult even to meet day to day

commitments.4. Fixed are not efficiently utilized for the lack of working capital funds. Thus the firm’s

profitability would deteriorate.5. Paucity of working capital funds render the firm unable to avail attractive credit

opportunities etc,6. The firm loses its reputation when it is not in a position to honor its short term

obligations. As a result the firm faces tight credit terms. An enlightened management should, therefore, maintain the right amount of working capital on the continuous basis. Only then a proper functioning of business operations will be ensured. Sound financial and statistical techniques, supported by judgment, should be used to predict the quantum of working capital needed at different time periods.

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A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. Risk in this regard means chances of the firm being unable to meet its obligations on due date. The lender considers a positive networking as a measure of safety. All other things being equal, the more the networking capital a firm has, the less likely that it will default in meeting its current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position. The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive and inadequate working capital positions are dangerous from the firm’s point of view. Excessive working capital means holding costs and idle funds which earn no profits for the firm. Paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies and sales disruptions.

The dangers of excessive working capital are as follows:

1. It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling, waste, theft and losses increase.

2. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits.

3. Excessive working capital makes management complacent which degenerates into managerial inefficiency.

4. Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

Determinants of working capital

There are not set rules or formulae to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. The importance of factors also changes for a firm over time. Therefore, an analysis of relevant factors should be made in order to determine total investment in working capital. The following is the description of factors which generally influence the working capital requirements of firms.

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Nature of business

Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retail stores, for example, must carry large stocks of a variety of goods to satisfy varied and continuous demands of their customers. A large departmental store like wal-mart may carry, say, over 20,000 items. Some manufacturing businesses, such as tobacco manufacturers and construction firms, also have to invest substantially in working capital and a nominal amount in fixed assets. In contrast, public utilities may have limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are normal because they may have only cash sales and supply services, not products. Thus no funds will be tied up in debtors and stock (inventories). For the working capital requirements most of the manufacturing companies will fall between the two extreme requirements of trading firms and public utilities. Such concerns have to make adequate investment in current assets depending upon the total assists structure and other variables.

Market and demand conditions

The working capital needs of a firm are related to its sales. However, it is difficult to precisely determine the relationship between volumes of sales and working capital needs. In practice, current assets will have to be employed before growth takes place. It is, therefore, necessary to make advance planning of working capital for a growing firm on continuous basis.

Growing firms may need to invest funds in fixed assets in order to sustain growing production and sales. This will, in turn, increase investment in current assets to support enlarged scale of operations. Growing firms need funds continuously. They use external sources as well as internal sources to meet increasing needs of funds. These firms face further problems when they retain substantial portion of profits, as they will not be able to

Pay dividends to shareholders. It is, therefore, imperative that such firms do proper planning to finance their increasing needs of working capital.

Sales depend upon demand conditions. Large number of firms experience seasonal and cyclical fluctuations in the demand for their products and services. These business variations affect the working capital requirement, specially the temporary working capital requirement of the firm. When there is an upward swing in the economy, sales will increase; orrespondingly, the firm’s investment in inventories and debtors will also increase. Under boom, additional investment in fixed assets may be made by some firms to increase their productive capacity. This act of firms will require additions of working capital. To meet their requirements of funds for fixed assets and current assets under boom period, firms generally resort to substantial borrowing. On the other hand, when there is decline in the economy, sales will fall and consequently, levels of

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inventories and debtors will also fall. Under recession, firm try to reduce their short term borrowings.

Seasonal fluctuations not only affect working capital requirement but also create production problems for the firms. During peak periods of demand, increasing production may be expensive for the firm. Similarly, it will be more expensive during the slack periods when the firm has to sustain its working force and physical facilities without adequate production and sales. A firm may thus follow a policy of level production irrespective of seasonal changes in order to utilize its resources to the fullest extent. Such a policy will mean accumulation of inventories doing off season and their quick disposal during the peak season.

The increasing level of inventories during the slack season will require increasing funds to be tied up in the working capital for some months. Unlike cyclical fluctuations, seasonal fluctuations generally conform to a steady pattern. Therefore, financial arrangements for seasonal working capital requirements can be made in advance.

Technology and manufacturing policy

The manufacturing cycle comprise of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle, larger will be the firm’s working capital requirements. Therefore the technological process with the shortest manufacturing cycle may be chosen. Once a manufacturing technology has been selected, it should be ensured that manufacturing cycle must be completed within the specified period. This needs proper planning and coordination at all levels of activity. Any delay in the manufacturing process will result in the accumulation of WIP and waste of time. In order to minimize their investment in working capital, some firms, specifically those manufacturing industrial products, have a policy of asking for advance payments from their customers. Non manufacturing firms, services and financial enterprises do not have a manufacturing cycle.

Credit policy

The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. The firm should use discretion in granting credit terms to its customers. Depending upon the individual case, different terms may be given to different customers. A liberal credit policy, without rating the credit worthiness of customers, will be detrimental to the firm and will create a problem of collection later on. The firm should be prompt in making collections. A high collection period will mean tie up of large funds in debtors. Slack collection procedures can increase the chance of bad debts. In order to ensure that unnecessary funds are not tied up in debtors, the firm should follow a rationalized credit policy

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based on the credit standing of customers and other relevant factors. The firm should evaluate the credit standing of new customers and periodically review the credit worthiness of the existing customers. The case of delayed payments should be thoroughly investigated.

Availability of credit from suppliers

The working capital requirements of a firm are also affected by credit terms granted by its suppliers. A firm will needless working capital if liberal credit terms are available to it from suppliers. Suppliers’ credit finances the firm’s inventories and reduces the cash conversion cycle. In the absence of suppliers’ credit the firm will borrow funds for bank.

The availability of credit at reasonable cost from banks is crucial. It influences the working capital policy of the firm. A firm without the suppliers’ credit, but which can get bank credit easily on favorable conditions, will be able to finance its inventories and debtors without much difficulty.

Operating efficiency

The operating efficiency of the firm relates to the optimum utilization of all its resources at minimum costs. The efficiency in controlling operating costs and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization of resources improves profitability and thus, helps in releasing the pressure on working capital. Although it may not be possible for a firm to control prices of materials or wages of laborite can certainly ensure efficient and effective utilization of materials, labor and other resources.

Price level changes

The increasing shift in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital requirement of the firm. Generally, rising price levels will require a firm to maintain a higher amount of working capital. Same levels of current assets will need increased investment when prices are increasing. However, companies that can immediately revise their product prices with rising price levels will not face a severe working capital problem. Further,

Firms will feel effects of increasing general price level differently as prices of individual

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Products move differently. Thus, it is possible that some companies may not be affected by rising prices while others may be badly hit.

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables The main sources of cash are Payables (your creditors) and Equity and loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions........ TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly,

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if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales

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If you .......Then ......

← Collect receivables (debtors) faster You release cash

from the cycle

← Collect receivables (debtors) slower Your receivables

soak up cash

← Get better credit (in terms of duration or amount) from suppliers

You increase your cash resources

← Shift inventory (stocks) faster You free up cash

← Move inventory (stocks) slower You consume more

cash

COMPONENTS OF WORKING CAPITAL

Working capital management involves arranging short term financing negotiating favorable credit terms, controlling the movement of cash administreing inventory, thus Working capital management has following three components:

Management of cash

Management of sundry debtors

Management of inventory

CASH MANAGEMENT

INTRODUCTION:-

Cash is an important current asset for the operation of the business. Cash is the basic input needed to keep the business running on a continuation basis. It is also the ultimate output realized by selling the services or product manufactured by the firm. Cash is the most liquid of all the current assets. Higher cash and bank balance indicate high liquidity position in lower profitability, as ideal cash fetches no return. Thus a major function of finance manager is maintaining sound cash position.Cash management is concerned with managing of: -(i) Cash flow in and out of the firm.(ii) Cash flow within the firm.(iii) Cash balance held by the firm at a point of time by financing deficit or investing surplus cash.

Objective of Cash Management

1) To meet day to day business requirements.2) To provide for schedule major payment i.e. Capital expenditure.3) To face unexpected cash drain.4) To maintain image of credit worthiness.

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5) To size potential opportunities for profitable long term investments.6) To meet requirement of bank relationships. Efficient cash management function calls for cash planning, evaluation of cash benefits and cost of policies, sound procedures and practices and synchronization of cash inflows and outflows. Thus for achieving goals and objectives of cash management, finance manager has to plan cash needs of the firm followed by cash flow management, determination of optimum level of cash and finally investment of surplus.

Factors Affecting Cash Requirement

(A) Internal Factors(a) Profit level(b) Dividend and Taxation policy(c) Reserve and surplus(d) Depreciation policy(e) Expansion programme(f) Operating efficiency(B) External Factors(a) Fluctuating in marketing interest rates(b) Investment avenues available in market(c) Government economic policies(d) Rules and regulations of RBI and other regulatory bodies

Cash Management in B.H.E.L.

In B.H.E.L., the centralized cash credit system is followed. From 24-07-75 all the banking transactions of the company have been centralized at corporate office, New Delhi. Under this system all the sales proceeds of the units are deposited in a centralized account. This account number is universal for all the units of ROD’s. They have to deposit the sales process if this account withdraws money from it. Only the corporate office operates it. For meeting day to day expenses, the units have to prepare the estimates of such expenses, which are then sent to corporate office weekly, or monthly, or both. At unit level, the cash budget is prepared on yearly basis for estimating the expected cash inflows and outflows. The

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yearly budget is broken down into monthly and weekly intervals. The inflows and outflows and estimated on following basis. The only source of cash inflow for unit is corporate office. The sale proceeds cannot be directly utilized. Based on the above requisitions, the corporate office allocates the funds. For cash credit, corporate office will negotiate with consortium of Bank for total cash credit required for the company as the whole. A consortium deed for hypothecation of stocks and stores of company is executed by corporate office. All the information, documents etc. required in this connection will be called for by the corporate office from the division. Arrangements have been already been made by the State Bank of India, HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank for centralizing total cash credit limits at New Delhi. Under this scheme, the units have finished the required information under the following documents. The units will send estimated, monthly cash flow statement to the corporate office by 18th of every month. Based on these cash flow statements, the corporate office will allocate the sub limits will be transferred to the consortium of the bank by 25th of the month. The unit can utilize this fund. The actual cash flow statement will be send to corporate office monthly i.e. 1st of succeeding month. The units are also required to send the weekly report of daily bank transactions to the corporate office. These reports shows the detail of daily debit and credit transaction appearing in bankbook of the company, enabling the posting of corporate bankbooks as well as verification of bank statement received from banks. These reports are sent to corporate office on 1st (showing the transaction from 25th to 30th of the previous month) 8th (showing the transaction from 1st to 7th of the current month) 16th (Showing the transaction from 8th to 15th of the current month) 25th (showing the transaction from 16th to 21st of current month) The units are required to send the comparative statement of estimated and annual cash flow of the preceding month. This report will be sent quarterly after inter-unit reconciliation meeting. The total interest payable on cash credit availed by corporate office is to be allocated among the units in the ratio of utilization of funds. Thus cash forecasting & budget are the principal tools of cash management. Forecasting helps manager to know how much cash will be held in balance, to what extent the firm should rely on banks financing and how much to invest in marketable securities.

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Cash Budget in B.H.E.L.

Cash budget is the most significance device to plan for and control receipt and payment. A cash budget is a summary statement of the firms expected cash inflows and outflows over a projected time period. In B.H.E.L., cash management is centralized and is controlled directly from corporate office, whatever requirement of fund is felt in BHEL, Varanasi it is sent to the corporate office and corporate office disburse the funds accordingly. Cash budget in BHEL, Varanasi is prepared on the basis of production schedule, which is prepared after receiving customer’s orders at the beginning of the year. There are two aspects of cash budget inflow and outflow. In flow ofCash budget is determined on the basis of receiving the customer’s orders and preparing production schedule. Outflow is determined on the basis of requirement of raw materials, payment of taxes and duties, interest on borrowings etc. Outflow in cash budget is categorized into operation and non-operation outflow consist of capital expenditure, exchange variations and supplier’s credit. Thus after determining the budgeted estimates of inflow and outflows, cash budget is prepared at the beginning of the year. The distribution of cash is determined on monthly basis in every month of that year. In the last quarter of the year cash budget is received and the last estimates are calculated and fixed. Monitoring of cash budget is done though management information system.

RECEIVABLE MANAGEMENT

Introduction

Customers arising from sale of goods or services define the term receivable as debt owed to the firm in the ordinary course of business. Receivable constitute a substantial position of current assets. Granting credit and creating debtors amount to the blocking of firm’s fund. The interval between the date of sale and date of payment has to be financed out of working capital. Thus trader’s debtors represent investment. Business firm generally sell goods on credit to facilitate sales. When a firm makes an ordinary sale of goods on services and does not receive payment, the firm grant trade credit and create accounts receivable that would be collected in the future.

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

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

2) Collection CostThese are costs, which the firm has to in for collection of the amounts at the appropriate time from the customers.

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

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

Objective of Receivable ManagementThe objective of receivable management is to promote sales and profits until that point is reached where return on investment in future funding of receivables is less than cost of funds raised to finance that additional credit.Credit PolicyCredit Policy of a firm can be regarded as a kind of trade-off between increased credit sales leading to increase in profit and the cost of having large amount of fund locked up in the form of receivables and loss due to incidence of bad debts. The variables associated with credit policy are: -(A) Credit Standard(B) Credit Terms(C) Collection Efforts

Credit Standards are criteria to decide the type of customers to whom goods could be sold on credit. Credit Terms specify duration of credit and terms of payment by customers.

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Collection Efforts determine the actual collection period. The lower the collection period, the lower is the investment in accounts receivable and vice versa.

Receivable Management in BHEL.

The main products of BHEL are heavy industrial goods with long operating cycle. BHEL grants liberal terms regarding trade credit to lure the potential customers to buy its product at favorable selling prices. All the BHEL units are having their commercial department. Commercial department and Regional Operational Divisions (RDOs) primarily carry out the job of recovery from the customers. The sales section of finance department also actively takes part in receivable management by preparing and sending invoices and reminders to customers at appropriate time. They take track of money received from customers as advances, as against dispatch of finished goods and money recoverable on account of price variation claims and conversion of deferred debts into debtors. This monitoring is done work order wise. The aging schedule of customers also prepared which gives the regarding period of outstanding balances. The terms and conditions with the customers are finalized according to the credit policy laid down by corporate office BHEL. However deviations are permitted with the due approval from corporate office. While lying down of credit policy by head office, industry conditions are taken into consideration. Seeing huge investment in execution of work order, BHEL demands considerable payment in advance in different phases of completion of work i.e. erection, installation, commissioning, maintenance etc. Despite all these BHEL is presently facing cash crunch because a major chunk of BHEL’s customers consists of government bodies, which are very casual in clearance of dues.

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INVENTORY MANAGEMENT

Introduction

Inventory constitutes the most significant part of the current assets of the large majorities of the companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Inventories are stock of the product, a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in manufacturing company are raw material; work in process and finished goods.The level of above mentioned three kinds of inventories for a firm depend on the nature of its business. Manufacturing firm will have substantially high level of all three kinds of inventories, while a retail or wholesale firm will have a very high level of finished goods inventories and raw material and work in process inventories. In a manufacturing firm the level of inventory depends on the operating cycle. A manufacturing firm with a long operating cycle has to maintain a high inventory level.

Need to Hold Inventories

There are three general motives for holding inventories: -1. Transaction Motives: - Companies hold inventories to facilitate smooth production and sales operation. Company should maintain adequate stock of raw material for a continuous supply to the factory for uninterrupted production and keeping stock of finished goods as the firm cannot immediately when customers demand goods.2. Precautionary Motive: - Firm holds inventories to guard against the risk of unpredictable change in demand and supply of force and other factors. Firm may also purchase large quantities of raw material; than needed for desired production and sales level to obtain quantity discount on bulk purchases.3. Speculative Motive: - It influence the decision of the firm to increase or decrease inventory level to take advantage of price fluctuations.

Cost Associated with Inventory Holding

There are five costs associated with inventory holding. Of these, three are direct costs that are immediately connected to buying and holding goods and other two are indirect costs, which are losses of revenues .These costs of holding inventories are: -(1) Material cost(2) Order Cost(3) Carrying Cost(4) Cost of fund tied up in inventory(5) Cost of running out of goods

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Objectives of Inventory Management

1. To maintain a large size of inventory for efficient and smooth production and sales operation2. To maintain a minimum investment in inventories to maximize profitability. The effective management of inventory involves a tradeoff between having too little and much more inventory.The firm should always avoid a situation of over investment or under investment in inventories. The major disadvantages of over investment are: -(i) Unnecessary tide up of firm’s funds and losses of profit.(ii) Excessive carrying cost.(iii) Risk of liquidity.(iv) Physical deterioration of inventory during storage. Maintaining an inadequate level is also dangerous.The consequences of the under investment in inventories are: -(i) Production hold ups.(ii) Failure to meet delivery commitment.Thus the aim of inventory management should be to avoid excessive and inadequate level of inventories and to maintain sufficient inventory for the smooth production and sales operations. Efforts should be made to place an order at the right time with right source to acquire the right quantity ant the right price and quality.

Factors Affecting Level of Investment in Inventories: -

(1) Seasonal nature of raw material.(2) Length and technical nature of production process.(3) Style factor in end product.(4) Terms of purchase.(5) Time factor.(6) Supply condition.(7) Loan facilities.(8) Other factors.

Inventory Management in BHEL ,

The investment in inventory in production is a dominant determinant of working capital management. It holds much important in context of BHEL as it is having a long production cycle where a good amount of capital is tied up in form of raw material, work in progress and conversion cost. Production planning and control department plays a pivotal role in inventory management. The engineering department plays a supporting role and provides the requisition regarding technology to be applied and material requires to PPC department.

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Inventory control is perform with following steps:

1. Planning- This is done by P&D department in consultation with purchase, commercial. Manufacturing department prepares the planning schedule. This schedule along with information provided by engineering and design department helps in material planning and inventory control.

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

3. Receipt and Custody- For the proper inventory control on receipt of material in store, quality control department checks the material as per specification. The cost section fills details of all the purchase by issuing store receipt voucher and material issue voucher.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 of how and where inventories have been used.

Methods Used For Inventory Control

In BHEL, planning and control of inventory is done by using two methods —(i) ABC analysis(ii) Slow moving and non-moving goods analysis.(iii) Budgeting material requirements(iv) Fixation of raw material levels(v) Variety reduction(vi) Codification of materials(vii) Control of work in progress

(i) ABC Analysis

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In case of manufacturing company like BHEL, the numbers of items of raw material run into thousands. From the point of view of monitoring information for control, it becomes extremely difficult to consider each one of theseitems. In this case ABC analysis becomes useful and enables management to concentrate attention and keeps a close watch on a relatively less number of items, which account for a high percentage of annual usage value of all items of inventory. Annual usage value = Annual requirement per unit cost

In this analysis, items are categorized into A, B, & C category on the basis of their usage value. The more costly items are classified as ‘A’. This represents large investments items but is low in number. In BHEL ‘A’ category items amounts to 60% of investment in inventory items. Inventory items of average usage are put in B category and these accounts for 30% of total investment in inventory. Low usage items are pulling in C category. It represents 10% of degree of control and accurate planning. B category requires moderate control. As ‘C’ category represents low usage value, much importance is to pay on its control. Also the planning and control cost incurred for this category will be greater than their total cost.The advantages of this system are —· Ensures closer control on costly items.· Helps in developing scientific methods of controlling inventories. Clerical costs are reduced and stock is maintained at minimum level.· Helps in achieving the main objective of inventory control at minimum level.(ii) Slow moving and Non-moving goods analysis

Slow Moving Stock – Material which have low turnover are classified as slow moving stock. In BHEL, Varanasi an item is regarded as slow moving one, if turnover ratio is less than 10%. Non-Moving Stocks-- These items have no immediate demand but may be required in future. Here the items, which are not consumed since two years, are regarded as non-moving stock or dead inventory. This category includes mainly directly chargeable items. These items having turnover ratio of 10% or more are fast moving items and such acquire more importance.

Documents Used For Inventory ControlThe various documents used for control of inventory are discussed below(i) Store Receipt Voucher this is issued when raw material purchased reaches the store. It is issued by store in charge.(ii) Material Issued Voucher this is an authorization to the storekeeper to issue raw material. Any material ordered for a specific work order will be recorded on MIV details of material requisition is entered on the Bin card.

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(iii)Material Return Note This is an authorization to the storekeeper regarding raw material, finished parts or other stores no longer required by the factory. The various stock records and cost accounts are adjusted in due course from the details given on the form.(iv) Material Transfer Note this is issued when the material booked to one particular order is transferred to another work order.(v) Material is kept in appropriate bin and draws. For each kind of material a bin card is maintained showing details. A bin card assists the storekeeper to control the stock. The bin card incorporates all information viz. opening balance of materials, materials ordered, materials allocated and closing balance of materials. As a result the bin card shows the full cycle of material like the order of few supplies, allocation of material to jobs, receipt and issued of material, stock in hand and balance available.

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RATIO ANALYSIS

Meaning of ratio

“A ratio is an expression of the quantitative relationship between tow numbers”.

Wixon, kell & beoford

“According ratio is used to describe significant relationship which exit between figures shown on a balance sheet, P&L a/c or in a budgetary control system”.

-J.Batty

“Ratio analysis is a study of relationship among the various financial factors in a business”.

-Jhon.N.Myer

A financial ratio is the relationship between two accounting figure expressed as a proportion. Ratio provides clues to the financial position of a concern. These are the pointers or indicators of financial strength, soundness, position or weakness of an enterprise. Ratio analysis is one of the methods of analyzing financial statements. It is an attempt to present the information of the financial statements in simplified, systematized and summarized form. It measures the profitability, efficiency and financial soundness of the business. Ratio analysis is therefore, a toll to present the figures of financial statements in simple, concise and intelligible form.

There are a number of ratios, which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same, keeping in mind the objectives of analysis.

Calculation of ratios is comparatively simple, routine clerical in nature but interpretation of ratios is highly sophisticated and intricate phenomenon. The benefit of ratio analysis depends on a great deal upon the correct interpretation. It needs skill, intelligence, training, farsightedness and intuition of high order on the part of the analyst.

Factor to be kept in mind while undertaking ratio analysis are:

Quality of financial statementsPurpose of analysisSelection of ratiosStandard to be appliedCapability of the analyst

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Significance of the ratio analysis: Ratio as a tool of financial analysis provides symptoms with the help of which an analyst is in a position to diagnose the financial health of the unit. Financial analysis can be compared with biopsy conducted by the doctor on the patient in order to diagnose the cases of illness so that treatment may be prescribed to the patient to help in recover. As there are different groups of interested parties so significance to them are different.ManagementManagement needs information regarding the profitability, operational efficiency and financial soundness of the business, so that weakness of the business may be identified and effective business plans may be formulated. Ratio analysis helps the management in decision making, financial forecasting and planning. It helps in communicating the desired information to the relevant parties and facilitates coordination. Ratios provide actual basis, which can be compared with the standards, thus helps in effective control.ShareholdersThe shareholders, the virtual owners of business corporate units have an interest in the welfare and progress of business. They want to know about the profitability and future prospects of the enterprise. The requisite information is available from the analysis of financial statements. WorkersEmployees of the business are interested in the profit of business. Workers in the business are paid bonus on the basis of productivity and profitability, so they have an interest in the financial analysis of the business.

Creditors Creditors of the enterprise are interested in the short term and long term financial soundness of the business. They want to ensure themselves, whether their funds are safe and secure and the business is capable of making payment of interest regularly.

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RATIO ANALYSIS OF BHEL

CURRENT RATIO: (Rs in lakhs)

CURRENT ASSET

CURRENT LIABILITY CU

RRENT RATIO31-03-2010 31-03-2009

CURRENT ASSET 15855 9031CURRENT LIABILITY 7252 4476

RATIO 2.186 2.017

QUICK RATIO:

(Rs in lakhs)

C.A.-INVENTORY

C.L.QUICK RATIO 31-03-2010 31-03-2009

C.A.-INVENTORY 10027 4629CURRENT LIABILITY 7252 4476

RATIO 1.382 1.034

Major Learning60


The main aim of any firm is to maximize the wealth of shareholders. This can be achieved only by a steady flow of profits. Which inter depend on successful sales activity. To generate sales, investment of sufficient funds in current assets is required. The need of current assets should be emphasized, as the sales don’t convert into cash immediately but involved a cycle of operations, namely operating cycle.

BHEL is multi product manufacturing unit with varying cycle for each product. The capital requirement for each department in an organization of BHEL is large which (depends on the product target for that particular year) calls for an effective working capital management. Monitoring the operation on cycle duration is an important aspect of working capital.

Some prominent issues that are to be addressed are:-

Duration of raw material stage (depends on regularity of supply, transactions time). Duration of work in progress (depends on length of manufacturing cycle, consistency in

capacity utilization). Duration at the finished goods state (depends on pattern of production & sale).

Thus a detailed study regarding the working capital management in BHEL is to be done to consider the effectiveness of working capital management, identify the shortcoming in management and to suggest for improvement in working capital management.

Objective of Learning

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To study in general the working capital management procedure in BHEL (HERP), Varanasi.

To analyze and apply operating cycle concept of working capital in BHEL (HERP), Varanasi.

To know how the working capital is being financed. To know the various methods to be followed by BHEL for inventories and accounts

receivables. To give suggestions, if any, for better working capital management in BHEL

Limitations of Learning

Although every effort has been made to study the “Working Capital Management” in detail, in an organization of BHEL size, it is not possible to make an exhaustive study in a limited duration.

It is not possible to include data of 2009- 10 as the audited financial report has not come yet (at the time of preparation of this report). However data of 2009 – 10 is included partially from the un-audited financial reports of BHEL.

Apart from the above constraint, one serious limitation of the study is, that it is not possible to reveal some of the financial data owing to the policies and procedures laid down by BHEL. However the available data is analyzed with great effort to get an insight into Working Capital Management in BHEL.

Research Methodology

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Research methodology used for study includes both primary& secondary sources of data. However most of study is conducted based on secondary sources.

Secondary sources of data mainly include annual reports of BHEL. Statement of changes in working capital for the past 5 years is done using the data taken from these financial reports. Similarly time series analysis of operating cycle and calculations of ratios is done. Apart from this, the website of BHEL is referred to know the products, product facilities, network etc.

Industry analysis is done based on the information gathered from newspapers and websites of Indian steel ministry & other sector related websites.

The use of primary sources is limited to interviews with some of the employees in finance department. The reason being, it is against the company’s policies & producers to reveal the sensitive financial information.

RECOMMENDATIONS AND SUGGESTIONS

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There is a great need for effective management of working capital in any firm. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analysed to determine the working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the company, a judicious mix of short and long term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.

During my project period, I have studied the working capital management in BHEL (HERP), Varanasi. 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.

Due to order base work in unit the inventories are determined after the order is received. It takes time to inform the requirement for the inventories to higher authority .unit should arrange the raw material in advance which may reduce the time and leads to overcome the outstanding orders problem and defiantly help in the expansion of capacity production..

Outstanding orders of recent past years are in increasing mode these orders should be minimize as far as possible. It shows the capacity of production of any company but with reference of past data available with us the production turnover is also increasing thus it clearly seems that the order receiving one in financial year is somewhere higher than increased production capacity.

Storage capacity should be made more reliable so that the storage of materials can be made in safe manner which leads to faster production.

Conclusion

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Any change in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business's cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future of the company.

The Company is focusing strict eye watch on cash management now days. The WC is also showing an increasing trend which is attributed to the increasing profits.

Net working capital increased year on year. The factors contributing to th increase are:

a) Increase in Sundry Debtors due to relaxing of the credit policy , although the AR days has remained more or less constant

b) Increase in Inventory.c) Increase in Other Current Assets and Loans and Advances. However, increase in

Current Liabilities and Provisions has offset the increase in Current Assets.The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that the firm is highly liquid and would be able to meet its short term liabilities effectively

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BIBLIOGRAPHY

Financial management I.M. Pandey

Financial management Presanna Chandra

Financial management My Khan

Working capital Management I.M. Pandey

Financial Management R.K. Sharma & S.K. Gupta

Financial Management R.P. Rustagi

Annual Reports of BHEL

General Articles of BHEL (HERP), Varanasi

Website: www.bhel.com, www.indianinfoline.com,

Newspapers: Economic Times of India, The Hindu.

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