1. DECLARATION
I hereby declare that the study entitled “WORKING
CAPITAL MANAGEMENT” in the context of “HEEP B.H.E.L.”
being submitted by me in the partial fulfillment of the requirement
for the award of POST GRADUATE DIPLOMA IN
MANAGEMENT is a record of my own work. The study was
conducted at finance department HEEP, B.H.E.L. The matter
embodied in this project report has not been submitted to any other
university or institution for the award of degree. This project is my
original work and it has not been presented earlier in this manner.
This information is purely of academic interest.
Date:
Madhu Singh
WORKING CAPITAL MANAGEMENT 1

2. DECLARATION
It is certified that above statement made by the candidate is
correct to the best of my knowledge.
Prof. R. S. Yadav
Director,
FIMS, Lucknow
WORKING CAPITAL MANAGEMENT 2

3. PREFACE
"No learning can be complete without practicing"
The conceptual knowledge acquired by management students
is best manifested in the projects and training they undergo. As a part
of curriculum of P.G.D.M., I have got a chance to undergo practical
training in HEEP (B.H.E.L.) Haridwar. The present project gives a
perfect vent to my understanding of the financial management specially
the most modern concept of “Economic Value Added” and organization
behaviour.
The project report entitled “WORKING CAPITAL
MANAGEMENT” is based on theme of BHEL Haridwar performance
on the basis of economic value addition made by the BHEL in the last 5
years.
The report will provide all the information regarding the
WORKING CAPITAL MANAGEMENT and their importance in
HEAVY ELECTRICAL EQUIPMENT PLANT – B.H.E.L.,
HARIDWAR.
I also hope that this report will be beneficial for the
students, academician and Managers those who are related to this topic.
WORKING CAPITAL MANAGEMENT 3

4. ACKNOWLEDGEMENT
I express my sincere thanks to the Management of HEEP
(Heavy Electrical Equipment Plant) of BHEL, Ranipur, and Haridwar
Unit for giving me an opportunity to gain exposure on matter related to
Project under the esteem guidance of Mr. S.K.Arya (Sr.Accounts
Officer).
I hereby take this opportunity to put on records my sincere
thanks to Mr. S.K.Arya under the light of whose able guidance I could
complete this project in an effective and successful manner.
I am also indebted to Mr. Subhash Malik (Accounts officer )
for their valuable information's and inputs, which added dimensions
and meaning to my project.
I am also thankful to the rest of the staff of the SALES section
& CASH section for their valuable suggestion and cooperation to
achieve the task.
WORKING CAPITAL MANAGEMENT 4

5. With sincere thanks
Madhu Singh
CONTENTS
 B.H.E.L. - AN OVERVIEW…………………………..
……….07
 B.H.E.L. - HARDWAR UNIT…………………….….
………..12
 WORKING CAPITAL MANAGEMENT……………..
……..27
• Meaning Of Working Capital Management
• Classification Of Working Capital Management
• Needs & Objectives Of Working Capital Management
• Importance Of Working Capital Management
• Factors Determining The Working Capital Requirement
• Working Capital Management in B.H.E.L.
• Management Of Components Of Working Capital
 Debtors Management
 Inventory Management
 Cash Management
 Cash Flow Statement
WORKING CAPITAL MANAGEMENT 5

6. SUGGESTIONS………………………………………………..65
CONCLUSION………………………………………………...66
ANNEXURES………………………………………………….67
BIBLIOGRAPHY………………………………………...……73
WORKING CAPITAL MANAGEMENT 6

7. B.H.E.L. A CORPORATE GIANT
Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED (BHEL)
is a name which is recognized across the industrial world. It is one of the largest engineering
and manufacturing enterprises in INDIA and is one of the leading international companies in
the power field. BHEL offers a wide spectrum of products and services for core sectors like
power transmission, industrial transportation, oil and gas, telecommunication etc. Besides
supply of non-conventional energy systems. It has also embarked into other areas including
defense and civil aviation. A dynamic 63000 strong team embodies the BHEL philosophy
excellence through continuous striving for state of the art technology. With cooperate
headquarters in NEW DELHI, fourteen manufacturing units, a wide spread regional services
network and projects sites all over India and even abroad, BHEL is India's industrial
ambassador to the world with export presence in more than 50 countries.
BHEL's range of services extent from project feasibility studies to after sales services,
successfully meeting diverse needs through turnkey capability.
BHEL has had a consistent track record of growth, performance and profitability. The
World Bank in its report on the Indian Public Sectors, has described BHEL as “one of the
most efficient enterprises in the industrial sector, at par with international standards of
efficiency". BHEL has acquired ISO 9000 certificate for most of its operations and has taken
up Total Quality Management (TQM).
WORKING CAPITAL MANAGEMENT 7

8. All the major units/divisions of BHEL have been upgraded to the latest ISO-9001:
2000 version quality standard certification for quality management. All the major
units/divisions of BHEL have been awarded ISO-14001 certification for environmental
management systems and OHSAS-18001 certification for occupational health and safety
management systems.
BHEL occupies an all-important niche as evident by its ranking by CII amongst top
eight PSUs based on financial performance. Recently in survey conducted by business India,
BHEL has been rated as seventh Best Employer in India.
B.H.E.L. IN INTERNATIONAL
BUSINESS
BHEL has, over the years, established its references in over 60 countries of the world.
These references encompass almost the entire range of BHEL products and services, covering
Thermal, Hydro and Gas based turnkey power projects, substation projects, and rehabilitation
projects; besides a wide variety of products like: Transformers, Compressors, Valves and Oil
field equipment, Electrostatic Precipitators, Insulators, Heat Exchangers, Switchgears,
Castings and Forgings etc. Some of the major successes achieved by BHEL have been in Gas-
based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka,
China, Kazakhstan; Thermal Power Projects in Cyprus, Malta, Libya, Egypt, Indonesia,
Thailand, Malaysia; Hydro power plants in New Zealand, Malaysia, Azerbaijan, Bhutan,
Nepal, Taiwan and Substation projects & equipment in various countries. Execution of these
overseas projects has also provided BHEL the experience of working with world-renowned
Consulting Organizations and Inspection Agencies. The Company has been successful in
meeting demanding requirements International markets, in terms of complexity of the works
as well as technological, quality and other requirements viz. HSE requirement, financing
package, associated O&M services to name a few. BHEL has proved its capability to
WORKING CAPITAL MANAGEMENT 8

9. undertake projects on fast-track basis. BHEL has also established its versatility to successfully
meet the other varying needs of various sectors, be it captive power, utility power generation
or for the oil flexibility to exhibited adaptability by manufacturing and supplying intermediate
products.
B.H.E.L. IN INDIA
# REGIONAL OFFICES (POWER SECTORS)
***********************************
1. NEW DELHI (NORTHERN REGION)
2. CALCUTTA (EASTERN REGION)
3. NAGPUR (WESTERN REGION)
4. CHENNAI (SOUTHERN REGION)
# BUSSINESS OFFICES
*******************
1. BANGLORE
2. BARODA
3. BHUBANESHWAR
4. MUMBAI
5. CALCUTTA
6. CHANDIGARH
7. GUWAHATI
8. JABALPUR
9. JAIPUR
10. LUCKNOW
11. CHENNAI
12. NEW DELHI
13. PATNA
14. RANCHI
15. SECUNDRABAD
# MANUFACTURING UNITS
***********************
1. BANGALORE
2. BHOPAL
WORKING CAPITAL MANAGEMENT 9

10. 3. GOINDWAL
4. HARIDWAR
5. HYDERABAD
6. JAGDISHPUR
7. JHANSI
8. RUDRAPUR
9. RANIPET
10. TIRUCHIRAPALLY
# SERVICE CENTRES
******************
1. BANGLORE
2. BARODA
3. CALCUTTA
4. CHANDIGARH
5. SECUNDRABAD
6. NEW DELHI
7. NAGPUR
8. PATNA
9. VARANASI
MAJOR MILE STONES
1975 Job Redesign concept launched for FIRST time in India.
1978 Well documented Suggestion Scheme launched.
1982 Launched Productivity Movement & Quality Circle.
1993 Concept of ISO 9001 quality System.
1995 Adopted EFQM model of TQM for achieving Business Excellence.
1997 BHEL one of the 9 PSE’s declared “Navratna” by Govt. of India.
1997 National Productivity Award for HEEP by the President of India.
1998 Certificate of Merit by National Productivity Council for Outstanding
Performance for 2 nd consecutive year.
1998 Accreditation of U stamp.
1999 Accreditation of R Stamp from National Board of Boiler and Pressure Vessel
Inspector, USA.
1999 AD-Merkblatt HPO Recertification by RWTUV for Gas Turbine Combustion
Chambers.
1999 INSAAN Award for Excellence in Suggestion for 9 th consecutive year.
1999 Launching of 5s concept.
WORKING CAPITAL MANAGEMENT 10

11. 1999 PCRI recognized as Environmental Lab by Haryana State Board for Prevention
and
Control of Pollution.
1999 Accreditation of ISO 14001-Enviornment management system
2000 CII Site Visit for CII-EXIM Business Excellence Award-2000
2001 Top Management TQM Workshop at Rishikesh and HRDC.
2001 INSAAN Award for excellence in Suggestion for 11th consecutive year.
2001 Launching of QTM & RCA at HEEP Hardwar by CMD.
2002 Launching of delivery Index, Turnover Index and Manufacturing Index.
2002 JBE Workshop of Apex TQM Group at Tehri to evolve Business policy
2003 Commendation for Strong Commitment to Excel in CII-EXIM Bank Award.
2004 Commendation for Significant Achievement in CII-EXIM Bank Award.
2005 Award given by Institute of Cost and Works Accountants of India for
"Excellent Work in the field of Management Accounting and Cost Concepts".
B.H.E.L., HARIDWAR
WORKING CAPITAL MANAGEMENT 11

12. B.H.E.L., HARIDWAR
WORKING CAPITAL MANAGEMENT 12

13. Ultra modern blade shop at BHEL’s
Haridwar plant
WORKING CAPITAL MANAGEMENT 13

14. WORKING CAPITAL MANAGEMENT 14

15. HEAVY ELECTRICAL EQUIPMENT
PLANT, HARDWAR
The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of the major
manufacturing plants of BHEL. The core business of HEEP includes design and manufacture of
large steam and gas turbines, turbo generators, hydro turbines and generators, hydro turbines and
generators, large AC/DC motors and so on.
Heavy Electrical Equipment Plant, Hardwar of this Multi-unit corporation with 7467
strong highly skilled technicians, engineers, specialists and professional experts is the symbol of
Indo Soviet and Indo German Collaboration. It is one of the four major manufacturing units of the
BHEL. With turnover of 164059 lacks and PBT of Rs.32489 lacks HEEP added 3000 MW of
power to the National grid during 2005-06.
HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW, Hydro
Sets up to HT Runner dia 6300mm, associated Apparatus Control gears, AC& DC Electrical
machines and large size Gas Turbine of 60-200 MW. HEEP Hardwar contributes about 44% of
India’s total installed capacity for power generation with total capacity of Thermal, Nuclear &
Hydro Sets of over 45000MW currently working at a Plant Load Factor of 76% and Operational
Availability of 86%. In spite of acute recession in economy, BHEL Hardwar received recent
orders for Mejia-5&6, Sipat, Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, and Dholpur.
HISTORICAL PROFILE
The construction of heavy electrical equipment Plant commenced in Oct.”1963” after
indo - soviet technical co-operation agreement in Sept.”1959”The first product to roll out from the
plant was an electric motor in January 1967.This was followed by first 100 MW Steam Turbine in
Dec.1969and first 100MW Turbo Generator in August 1971.The plant’s “break even” was achieved
in March 1974.BHEL went in for technical collaboration with M/s Siemens, Germany to undertake
design and manufacture to large size thermal sets up to a unit rating of 1000 MW in the year
1976.First 200 MWTG set was commissioned at Obra in 1977.
The continuum of technological advancement subsequently saw the commissioning of
500 MW TG Set in 1984 .The technical cooperation of Gas Turbine manufacture was also signed
with M/s Siemens Germany.First 150 MW ISO rating gas Turbine was exported to Germany in
15

16. Feb”1995”.Our 250 MW thermal set up at Dahanu Plant of BSES made a history by continuous
operation for over 150 days and notching up a record plant load factor greater than 100%.
COMPANY PROFILE
BHEL is India's largest engineering company and one of its kinds in this part of the
hemisphere. It manufactures a wide range of state of the art power generation equipment and
systems besides equipment for industry, transmission, defense, telecommunication and oil business.
The first plant of BHEL was set up in Bhopal in 1956, which signaled the dawn of the heavy
electrical industry in India. In the early 60's three more major plants were set up in Hardwar,
Hyderabad and Tiruchirapalli. The company now has 14 manufacturing divisions, 10 services
centers and power sectors regional centers besides project sites spread all over India and also
abroad to provide prompt and effective service to customers. BHEL's business broadly covers
conversions, transmission, utilizations and conservation of energy in core sectors of economy that
fulfill vital infrastructure needs of the country. Its product have established an enviable reputation
of high quality and reliability, which is largely due to emphasizes placed all along on contemporary
some of the best technologies of the world from the leading companies in U.S.A., EUROPE, and
JAPAN together with technologies from its own R&D centers technologies B.H.E.L. has
consistently upgraded its design and manufacturing facilities to international standards by acquiring
and assimilating.
“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 and Industry Sector.
VISION
A WORLD-CLASS ENGINEERING ENTERPRISE COMMITTED TO ENHANCING
STAKEHOLDER VALUE.
MISSION
TO BE AN INDIAN MULTINATIONAL ENGINEERING ENTERPRISE PROVIDING TOTAL
BUSINESS SOLUTIONS THROUGH QUALITY PRODUCTS, SYSTEM AND SERVICES IN
THE FIELDS OF ENERGY, TRANSPORTATION, INDUSTRY, INFRASTRUCTURE AND
OTHER POTENTIAL AREAS.
16

17. VALUES
• ZEAL TO EXCEL AND ZEST FOR CHANGE
• FOSTER LEARNING, CREATIVITY AND TEAMWORK.
• RESPECT FOR DIGNITY AND POTENTIAL OF INDIVIDUALS.
• LOYALTY AND PRIDE IN THE COMPANY.
• INTEGRITY AND FAIRNESS IN ALL MATTERS.
• STRICT ADHERENCE TO COMMITMENTS.
DIVISIONS OF BHEL
There are 20 Divisions of BHEL, they are as follows:
1. HEEP, Haridwar
2. HPEP, Hyderabad
3. HPBP, Tiruchy
4. SSTP & MHD, Tiruchy
5. CFFP, Haridwar
6. BHEL, Jhansi
7. BHEL, Bhopal
8. EPD, Bangalore
9. ISG, Bangalore
10. ED, Bangalore
11. BAP, Ranipet
12. IP, Jagdishpur
13. IOD, New Delhi
14. COTT, Hyderabad
15. IS, New Delhi
16. CFP, Rudrapur
17. HERP, Varanasi
18. Regional Operations Division ARP, New Delhi
19. TPG, Bhopal
20. Power Group (Four Regions and PEM)
MAJOR COMPETITORS OF BHEL
1. Ansaldo Italy
2. Asea Brown Boueri Switzerland
17

18. 3. Beehtel USA
4. Block & Neatch USA
5. CNMI & EC China
6. Costain U.K.
7. Electrim Poland
8. Energostio Russia
9. Electro Consult Italy
10. Franco Tosi France
11. Fuji Japan
12. GEC Alsthom U.K.
13. General Electric USA
14. Hitachi Japan
15. LMZ Russia
16. Mitsubishi Japan
17. Mitsui Japan
18. NEI U.K.
19. Raytheon USA
20. Rolls Royce Germany
21. Sanghai Electric Co. China
RECENT ACHIEVEMENTS OF BHEL
1. BHEL's R&D ops contribute Rs 1,151 cr to turnover in 2005-06 [May 19 2006]
2. BHEL to manufacture 800 mw thermal sets [Apr 14 2006]
3. BHEL inks agreement with IIT Madras for new courses [Apr 25 2006]
4. BHEL secures Rs 80 cr export order from EETC [May 10 2006]
5. BHEL net profit up 62 pc (the tribune, 3 June 2006).
6. Workers’ participation in management yields savings at BHEL, Hardwar
CORPORATE CITIZEN
HEEP Hardwars Strategic plans and its policy & strategy are commensurate with BHEL
Corporate / strategic Plan . As first PSU to adopt Corporate Planning as a process . Board
meetings for long –range development , BHEL has always guided other PSU’s in their Corporate
planning process .Board meeting , monthly Management Committee meetings, Annual Revenue
Budget exercise , Mid term reviews , Apex TQ council reviews, Personnel Heads Meet, Quality
18

19. Heads Meet , Technology Meets , Product committees meetings, Inter-Unit Quality Circle Meets
etc. are the some of crore strengths of BHEL Corporation’s vast network.
KEY CUSTOMERS AND SUPPLIERS
HEEP’s customer profile ranges from State Electricity Boards,Government Power
utilities like NTPC, NPC, NHPC to IPPs like Reliance Energy. HEEP has also supplied Gas
Turbine sets to overseas customers in Libya & Iraq. Power Sector Regions of BHEL are its key
internal customers. In view of expected market scenario,BHEL has strategically decided that
HEEP will concentrate on coal based Higher Rating Thermal Sets for domestic market to fulfil
the country’s vision of adding 107,000 MW capacity to achieve ‘Power on Demand’ by 2012.
Our key customer, NTPC has drawn up plan for capacity addition of 20,000MW by 2012. HEEP
has planned for execution of 34,619MW by 2012.
FAVOURABLE BUSINESS
ENVIRONMENT
Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus, the
demand for thermal sets will remain high. Central Electricity Authority (CEA) is the guiding
authority for Power Sector strategies in our country. BHEL representatives, along with
representatives from various domestic customers, are an integral part of various committees
formed by CEA. This enables us to guide and understand the market requirements and future
challenges. To meet the 11th Five Year Plan target of adding 61,000MW, CEA has planned
addition of 23 nos. standardized 500MW sets for faster project execution and cost reduction.
BHEL, including HEEP, is a part of this process. CEA has standardized for the next capacity of
800MW sets and has asked BHEL to prepare itself for manufacturing and supply in the 11th Five
Year Plan. BHEL has tied up with Siemens for upgradation of technology. Further CEA’s stress
on R&M of ageing Power Plants is also providing business opportunity to unit.
MAJOR CHALLENGES
19

20. The favorable business scenario has given the unit a major challenge of establishing
Power Infrastructure of the country in close co-ordination with its key customers. HEEP has
committed itself to meet the country’s requirements. To cater to the needs of higher rating sets of
800MW, HEEP has collaboration with Siemens.
STRATEGIC CHALLENGES
• Key Business
• Cycle time reduction
• State of the art technology
• Cost reduction
• Operational
• Timely delivery
• Material cost reduction
• Productivity improvement
• Effective utilization of machines
• Human Resource
• Motivation of employees
• Skill & Knowledge management
OVERVIEW OF FINANCE
FUNCTIONS
Role of finance function :-
Finance function is the backbone of any organization. The finance function plays a very
critical role in the maximization of shareholders who provide the funds to the company. This
objective is being achieved by the finance department, which provides the carious information on
the financial parameters such as cash flows, profitability, cost and margin, assets, working capital
and shareholder value for the purpose of efficient utilization of resources resulting in better
profitability of the company.
20

21. The various activities undertaken by the finance department achieve the aforesaid
objectives, may be summarized as follows-
• Maintenance of account books, cost records.
• Preparation of salary bills and other related payment to employees: PP, bonus, TA,
departmental advances of PF accounts etc.
• Preparation of Profit & Loss a/c and Balance Sheet.
• Generation of various MIRs for management use: MIRs relating to turnover, profitability,
cash
requirements, inventory.
• Coordination with company auditors, Govt. auditors, cost auditors and tax auditors.
• Decisions relating to purchase and sales.
• Investment decisions: capital investment decisions and working capital management
decisions.
• Financing decisions: decisions relating to financing-mix or capital structure or leverage.
• Dividend policy decisions.
COST SECTION:-
Cost- section of the company is divided into following two sections viz,
PRODUCT COST & CENTRAL COST and these deals with the following functions: -
(i) Determination of periodic profits including inventory valuation.
(ii) Determination of pricing policy of the company.
(iii) Work related to capital expenditures of the company.
(iv) Developing variance Management Information report for different parts of management for
purpose of cost control and reduction.
(v) Valuation of work in progress and finished goods.
(vi) Interaction with management of top management link for achieving cost control and cost
reduction and thereby improving bottom line of the company.
(vii) Preparation of cost sheet of different product and their analysis for future planning.
SALES SECTION:-
Sales accounts section will deal mainly with the following items:-
(i) Scrutiny and vetting of estimates / quotation for sale of products / services, wherever
financial concurrence is required.
(ii) Scrutiny and vetting of agreements for sales of products and services
(iii) Invoicing for sale / advance or progressive payment / erection income and other.
21

22. (iv) Maintenance of subsidiary records like sales journals / sales daybook, sundry debtors
ledgers, advances from customer ledger etc.
(v) Payments, recovery and accounting of sales tax, excise duty.
(vi) Accounting of claims on carriers/ insurance companies for missing items / damages on
outward consignments.
(vii) Scrutiny, payments and accounting of bills of carriers and insurers and other miscellaneous
claims relating to the outwards consignments.
(viii) Calculation and scrutiny of data for payments of royalties to the collaborators.
(ix) Review and reconciliation as well as follow up of recovery of outstanding dues from the
customers in coordination with the commercial department.
STORES SECTION:-
For the convenience of performance of various functions it is divided in to further three
sections which are as follows: -
a) Stores bills.
b) Stores review.
c) Foreign payment.
They deal mainly with the following items of works:
(i)Payment of supplier’s bills including bills for advances -indigenous and foreign.
(ii)Pricing of stores receipt vouchers including fixed assets vouchers and fixed assets receipt
vouchers.
(iii)Maintenance of accounts of advances to suppliers, claims recoverable, claims for short
suppliers, rejections and rectifications of materials and sundry creditors.
(iv)Opening of letter of credit and arranging payments to foreign suppliers under foreign credit /
differed payment agreements.
(v)Payment of bills for ocean freight, port trust dues, custom duty, local agents commission and
clearing agents bills, transit insurance bills, bills of contractors for transport /handling etc.
and accounting of such payments are made at regional offices.
(vi)Maintenance of accounts of material issued on loan and materials issued to subcontractors.
(vii)Keeping account of earnest money and security deposits received from tender and suppliers.
(viii)Adjustment of stores in transit to be made at the close of the year.
PAYROLL SECTION:-
22

23. This section deals mainly with the following functions:
(i) Preparation of monthly wage bills.
(ii) All account work related to personal payments and discloses profit and loss account of the
company.
(iii) Dealing with income tax authority with regard to personal taxation of employee.
(iv) Dealing with other statutory authority such as P.F. Commissioner, ESI (employee state
insurance).
(v) To ensure correct payment of salary and wages and other benefits to employees in,
telephone
and miscellaneous payments.
(vi) Preparation of monthly wage bills.
(vii) All account work related to personal payments and discloses profit and loss account of the
company.
(viii) Dealing with income tax authority with regard to personal taxation of employee.
(ix) Dealing with other statutory authority such as P.F. Commissioner, ESI (employee state
insurance).
WORKS SECTION:-
Works section of the company is dealing with the following functions:
(i) Payments of contractor’s bills including bills for advance.
(ii) Maintenance of accounts of contractors with regard to security deposits, earnest money,
progressive payments.
(iii) 215 maintenance of accounts of materials issued on loans to contractors.
(iv) All accounting work related to capital expenditure in progress on erection of plant &
machinery and building.
(v) All other miscellaneous work relating to hiring of various facilities.
23

24. STRENGTH (S): -
• Low cost producer of quality equipment due to cheap labour and fully depreciated plants.
• Flexible manufacturing set up.
• Entry barrier due to high replacement cost of its manufacturing facilities.
WEAKNESSES (W): -
• High working capital requirement due to its exposure to cash starved SEBs (State electricity
boards) and High WIP.
• Inability to provide project financing.
OPPORTUNITIES (O): -
• High-expected growth in power sectors (7000 MW/p.a.needs to be added)
• High growth forecast in India’s index of industrial production would increase demand for
industrial equipment such as motors and compressors.
THREATS (T): -
• Technical suppliers are becoming competitors with the opening up of the Indian economy.
24

25. • Fall in global power equipment prices can affect profitability.
OBJECTIVE OF THE STUDY :-
• To analyse the working capital management of BHEL Hardware unit
The sub objective of the project include-
o To calculate & analyze the working capital, debtors, inventory and cash management
of the company.
o To analyze the various five years ratios, cash flow statements and balance sheet of
the company.
Limitations of the study :-
• The data is collected on secondary basis.
• The time was short to cover the whole information.
• The management was reluctant in providing there data as they where only for office use.
B.H.E.L., HARIDWAR
25

26. OBJECTIVE OF RESEARCH
The main idea behind the research is to study the objectives of the research design and to
ensure that data collected is relevant to the objectives. The main aim thus to research is to find out
the truth, which is hidden, and which has not been discovered as The purpose of research is to
discover an answer to question through the application of specific procedures.
26

27. RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the problem. In it researcher
generally adopt studying the research problem along with logic behind them. It is necessary for the
researcher to know not only the research method/ techniques but also the methodology.
When we talk of research methodology, we not only talk of research method but also
consider the logic behind the method we use in context of our research study and explain why we
are not using others. So the research result is capable of being evaluated either by the researcher
himself or by others.
RESEARCH PROCESS
Identify the problem
Set the objective
Develop the Research Plan
Data collection
Analysis of Data
27

28. Finding (results)
All these steps are done systematically as one by one to find out the results. The first step in the
research process is to identify the problem and set objective carefully and agree on the research
objective.
The second step to research process is to develop the most efficient research plan for gathering
the needed information. Designing the research plan call for gathering the primary data, secondary
data, or both, research instruments, sampling plan & contacts methods
The next step in the research process is data collection. It is most expensive and most prone to
error. Data collection methods are rapidly improving, thanks to modern computer and tele
communication.
The forth step in research process is to analyze the collected data. In this step researcher tabulate
the data and develop the frequency distribution.
The last step in the research process is that the researchers present their findings to the relevant
parties. The researcher should present the major findings that are pertinent to major marketing
decision facing management.
Research methodology constitute of research method.
The methodology which I have adopted in my report:
Research methodology is a way to systematically solve the research problem.
Collection of data:-
Collection of data is one of the important aspects of research methodology. This consists of
gathering the data from various sources.
Secondary data:-
Data is important to collect the necessary information. Data may be of two types: primary and
secondary data.
28

29. Secondary data is one of the parts of research methodology through which information about the
project can be collected. For this research data is collected through internet and various books.
Different financial data like annual report, balance sheet, books and bank manual, books and budget
manual were used.
Analysis and interpretation :-
Analysis and interpretation of data is the next step of research methodology in this we have
analyses the working capital and cash management of the company. Through this we were able to
find out the reasons of stock piling and other related issue affecting the working capital
management in the organization. Various graphs, pie chart and table were used to present and
interpret the results.
29

30. MANAGEMENT OF WORKING
CAPITAL
Management of working capital means management of all aspects of current assets and
current liabilities. Basically, Working capital management is concerned with the problems that
arise in attempting to manage the current assets, current liabilities and the inter relationship
that exist between them.
Financial management should determine the quantum and structure of current assets. It
should also see that current assets are financed from the proper sources. Management should also
see that current liabilities are paid in time, while managing the working capital.
The main objective of working capital management is to manage current assets and
current liabilities in a manner so that working capital can be kept in a satisfactory level. It is also
taken in to account that the working capital should be neither excessive nor inadequate. The amount
of current assets should be adequate to pay the current liabilities in time and adequate security
margin can be maintained. Accordingly, proper balance among the different constituents of current
assets is maintained so that no current has more than require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the business
significantly. Management should, therefore, maintain proper balance among these factors while
managing working capital. If the quantum of working capital is more, it will increase liquidity, but
30

31. decrease profitability and risk. If working capital relatively declines, it will decrease liquidity but
cause an increase in profitability and risk. If business wants to earn more profit, it will have to bear
higher risk. Risk means inability of the firm to pay current liabilities in time.
CLASSIFICATION OF WORKING CAPITAL
Working Capital may be classified on two bases: -
a) On the basis of Concept: -
On the basis of concept, working capital can be classified as:-
• Gross Working Capital
• Net Working Capital
b) On the basis of Time: -
On the basis of time, working capital can be classified as:-
• Permanent or Fixed Working Capital
• Temporary or Variable Working Capital
Gross Working Capital :-
The Gross Working Capital is the Capital invested in the total current assets of the enterprises.
Current assets are those assets, which can be converted into cash within a short period, normally an
accounting year.
Gross Working Capital = Total Current Assets
Net Working Capital:-
The term Net Working Capital refers to the excess of current assets over current liabilities, or say,
Net Working Capital = Current Assets – Current Liabilities
Net Working Capital can be positive or negative. When the current assets exceed the current
liabilities the working capital is positive and the negative working capital results when the current
liabilities are more than the current assets. Current liabilities are those liabilities, which are
31

32. intended to be paid in the ordinary course of business within a short period of normally one
accounting year out of the current assets of the income of the business . The gross working capital
concept is financial or going concern concept whereas net working capital is an accounting concept
of working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital for the following
reasons:
• It enables the enterprise to provide correct amount of working capital at correct time.
• Every management is more interested in total current assets with which it has to operate then
the sources from where it is made available.
• It takes into consideration of the fact every increase in the funds of the enterprise would
increase its working capital.
• The concept is also useful in determining the rate of return on investments in working capital .
• The net working capital concept, however, is also important for the following reasons:-
i.
It is a qualitative concept, which indicates the firm’s ability to meet its operating expenses
the short-term liabilities.
ii.
It indicates the margin of protection available to short term creditors.
iii.
It is an indicator of financial soundness of enterprise.
iv.
It suggests the need of financing a part of working capital requirement out of the permanent sources
of funds.
Permanent or Fixed Working Capital :-
Permanent or fixed capital is the minimum amount, which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to
maintain a minimum level of current assets is called permanent or fixed working capital as this part
of working capital is permanently blocked in current assets. As the business, grow the requirement
of working capital also increases due to increase in current assets.
Temporary or Variable Working Capital :-
Temporary or variable working capital is the amount of working capital, which is required
to meet the seasonal demands and some special exigencies. Variable working capital can further be
classified as seasonal working capital and special working capital. The capital required to meet the
seasonal need of the enterprise is called the seasonal working capital. Special working capital is
32

33. that part of working capital which is required to meet special exigencies such as launching of
extensive marketing campaign for conducting research etc.
Temporary working capital differs from permanent working capital in the sense that it is
required for short periods and cannot be permanently employed gainfully in business
NEEDS AND OBJECTIVES FOR WORKING
CAPITAL
Every business needs some amount of working capital. The needs for working capital,
arises due to time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and
production, production and sales, and realization of cash.
Thus, working capital is needed for the following purposes: -
• For the purchase of raw material, component and spares.
• To pay wages and salaries.
• To incur day- to- day expenses and overhead costs such as fuel, power and office expenses
etc.
• To meet the selling costs such as packing, advertising etc.
• To provide credit facilities to the customers.
• To maintain the inventories of raw material, work in progress, store, spares, and finished
stock.
For studying the need of working capital in a business, one has to study the business
under varying circumstances such as new concern, as a growing and one, which has attained
maturity. A new concern requires a lot of funds to meets its initial requirement such as promotion
and formation etc. These expenses are called preliminary expenses and are capitalized. The amount
needed for working capital depends upon the size of the company and the ambition of its
promoters. Greater the size of the business unit generally will be the requirement of the working
capital. The requirement of the working capital goes on increasing with the growth and expansion
of the business until its gains maturity. At maturity, the amount of working capital required is
called normal working capital.
33

34. IMPORTANCE OF WORKING CAPITAL
1. Time devoted to working capital management:-
The largest portion of financial manager's time is devoted to day to day internal operation the
firm. This may be appropriately sum up under the heading "WORKING CAPITAL
MANAGEMENT".
2. Investment in current assets:-
Current assets represent more than half of the total assets of a business firm. Because they
represent largest investment and because this investment tends to relatively volatile, current assets
are worthy for the financial manager's careful attention.
3. Importance for small firm:-
Current assets are similarly important for the financial manager's of small firm. Further small
firm are relatively limited access to the long term markets, it must necessarily rely on the trade
credit and short term bank loan, both of net effect on net working capital by increased current
liabilities.
FACTORS DETERMINING THE WORKING
CAPITAL REQUIREMENT
1. NATURE OF BUSINESS :-
The requirement of working capital is very limited in public utility undertaking such as
Electricity, Water Supply and Railways because they offer cash sales only and supply services not
products and no funds are tied up in inventories and receivables. On the other hand, the trading and
financial firm requires less investment in fixed assets but have to invest large amounts in current
assets. The manufacturing undertaking requires sizable amount of working capital along with fixed
investments.
2. PRODUCTION POLICY :-
34

35. The determination of working capital needs depends upon the production policy of the business.
The demand for certain products is seasonal i.e.; such products are purchased in certain months of a
year. For such industries, two types of production policy can be followed. Firstly they can produce
the goods in the months of demand or secondly, they produce for the whole year. If the second
alternative were followed, it would mean that until the time of demand finishes, product would
have to be kept in stock. It would require additional working capital.
3. LENGTH OF PRODUCTION CYCLE :-
The longer the manufacturing time, the raw material and other supplies have to be carried for a
longer time in the process with progressive increment of labor and service costs before the final
product is obtained. Therefore, working capital is directly proportional to the length of the
manufacturing process.
4. RATE OF STOCK TURNOVER :-
There is an inverse co-relationship between the quantum of working capital and the velocity or
speed with which the sales are affected. A firm having a higher rate of stock turnover will need
lower amount of working capital as compared to a firm having a low rate of turnover.
5. CREDIT POLICY:-
Credit policy affects the working capital requirements in two ways:
(a) Terms of credit allowed by customer to the firm,
(b) Terms of credit available to the firm.
A concern that purchases its requirements on credit and sells its product/services on cash requires
lesser amount of working capital and vice-versa.
6. WORKING CAPITAL CYCLE :-
The speed with which the working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working capital.
DEBTORS
FINISHED
CASH GOODS
35

36. WORK IN PROGRESS
RAW MATERIAL
7. RATE OF GROWTH AND EXPANSION OF BUSINESS : -
The larger size businesses require more permanent and variable working capital in comparison to
small business. If a company is growing, its working capital requirements will also go on
increasing. Thus, the growing concerns require more working capital as compared to the stable
industries.
8. SEASONAL VARIATION : -
Generally, during the busy season, a firm requires larger working capital than in the slack
season.
9. BUSINESS FLUCTUATION : -
In period of boom, when the business is prosperous, there is a need for larger amount of
working capital due to rise in sales, rise in prices, optimistic expansion of business etc. On the
contrary in time of depression, the business contracts, sales decline, difficulties are faced in
collection from debtors and the firm may have a large amount of working capital idle.
10. EARNING CAPACITY AND DIVIND POLICY :-
Some firms have more earning capacity than other due to quality of their products, monopoly
conditions, etc. Such firms may generate cash profits from operations and contribute to their
working capital. The dividend policy also effects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profit needs more working capital
than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.
11. PRICE LEVEL CHANGES : -
Price level changes also affect working capital needs. If the prices of different goods increase, to
maintain same level of production, more working capital is needed.
36

37. 12. AVAILABILITY OF RAW MATERIAL : -
Availability of raw material on the continuos basis affects the requirement of working capital.
There are certain types of raw materials, which are not available regularly. In such a situation firm
requires greater working capital to meet the requirements of production. Some raw materials are
available in particular season only for example wool, cotton, oil seeds, etc. They have to keep
greater working capital.
13. MAGNITUDE OF PROFIT :-
Magnitude of profit is different for different businesses. Nature of product, control on the market
and ability of managers etc. determine the quantum of profit. If the profit margin is high, it will
help to arrange funds internally, which will also increase the working capital.
14. OTHER FACTOR: -
a. Operating efficiency
b. Management ability
c. Irregularities of supply
d. Import policy
e. Asset structure
f. Importance of labor
EXISTING SYSTEM OF WORKING CAPITAL IN
BHEL, HARIDWAR
37

38. To maintain the optimum level of working capital in such a big organization is really a
challenging task. The three basic components that determine the level of working capital in any
organization are: -
• Cash
• Debtors B/R
• Inventory.
On the basis of our research in the BHEL Hardwar, these basic components are managed in the
organisation, in the under mentioned manner.
TABLE OF WORKING CAPITAL
(Rs. in Lacs)
YEARS 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
PARTICULARS Actual Actual Actual Actual Actual Actual
Current Assets
Debtors 54076 50904 41417 55866 48552 64709
Inventory 47369 43461 32370 39214 58976 69798
Cash 17 23 527 10 9 9
Loan and Advaces 13367 6573 5730 5581 5299 5152
Total 114829 100962 80044 100671 112836 139668
Current Liabilities
Sundry Creditors 18630 19718 15562 13953 16205 16674
Adv.from Customers 27107 33275 29360 45214 55048 61889
Other liabilities 2665 1966 1980 8457 9250 12370
Provisions 15963 16682 14473 14572 18887 19990
Total 64365 71641 61375 82196 99390 110923
Net Working Capital 50463 29320 18668 18475 13446 28745
Turnover 71799 108811 101335 97432 140697 164059
Working Capital to 327D 98D 67D 69D 35D
Turnover
38

39. Working capital to turnover=net working capital/turnover*365
D stands for no. of days
Graphical Representaion Of Working Capital In
BHEL
60000
50463
50000
40000
29320 28745
30000
18668 18475 WORKING
20000 CAPITAL (RS. in
13446
Lacs)
10000
0
2006- 2007- 2008- 2009- 2010- 2011-
2007 2008 2009 2010 11 12
39

40. Graphical presentation of current assets of the
company
80000
70000
60000
50000 Debtors
40000 Inventory
30000 Cash
20000 Loan and advance
10000
0
2006- 2007- 2008- 2009- 2010- 2011-12
2007 2008 2009 2010 2011
Interpretation: -
If we see from the above table, it can be clearly seen that net working capital has continuously
come down to 13446 Lacs in 2010-11 from 50463Lacs in 2006-07.But in 2011-12 it is increased
but it is good for the company because of its turnover is also increased. Moreover if we compare
no. of days of net working capital to turnover, it has also comes down to 99 days from 256 day in
previous years.
40

41. This improvement does not come accidentally but considerable measures have been taken to
control working capital in organization
There is direct relation of working capital requirement with Debtors and Inventory. Above data
indicates that company has taken certain strategic measures to manage its Debtor and Inventory.
Following are the measures: -
• Special task forces were built up from debtors and Inventory Management at senior level.
• Regular follow up at senior level.
• A close contact with the customers.
• Proper age- wise analysis of the debtors.
• Proper classification between collectible Debtors and bad debts.
• Bad debts written off as early as possible after making all efforts for its collection.
• Product cycle minimized so that cost of the product does not become high to the agreed
amount because of time factor.
• Formation of specific group in each area to identify the wastage elements and seek
participation of all.
• Formulation of action plan to eliminate/minimize wastage.
• Identification of corrective actions and their implementation.
.
41

42. INTRODUCTION
It is very difficult for the organization to sell always on cash basis in today’s competitive
market. In almost every business, we have to sell on credit basis. The basic objective of
management of sundry debtor is to optimize the return on investment on this asset. It is obvious that
if there are large amounts tied up in sundry debtors, working capital requirement would be high and
consequently interest charges will be high. In such cases, the bad debts and cost of collection of
debts would be high. On the other hand if the credit policy is very tight, investment in sundry
debtors is low but the sale may be restricted, since the competitors may offer more liberal credit
term.
We have limited resources and therefore every resource has its own opportunity cost. Therefore,
the management of sundry debtors is an important issue and requires proper policies and efficient
execution of such policies. Debtors and cost of debtors have direct relation; cost will increase due
to increase in debtors and vice versa. It depends on the credit sale of concern and credit period
(collection period) allowed to customer. It is in interest of customer to pay as late as possible, and
company whom made sales, would like to collect their debtor as early as possible. There is a
42

43. conflict between the two aspects. Debtor management is the process of finding the equilibrium at
which company agrees to receive its payment without hampering or having any adverse effect on
its sales and customer agree to pay at their economical buying concept.
Sundry debtor level depends on two measure issues: -
One is volume of credit sales and another is credit period allowed to customer. It is the essence of
every business that to sale on credit and allow credit period to the customer in such a competitive
market, following factors may be considered before allowing credit period to the customer: -
• Nature of the product
• Credit worthiness of the customer, which varies from customer to customer.
• Quantum of advance received from customers
• Credit policy of company, say number of days allowed to customer for payment to the
customers.
• Cost of debtors
• Manufacturing cycle time of the product etc.
Debtors Management:-
There are mainly three aspects of Management of Debtors
1. Credit Policy: -
The credit policy is to determine. It involves a trade off between the profits on additional sale that
arises due to credit being extended on one hand and the cost of carrying those debtors and bad debts
losses on the other.
2. Credit Analysis:-
This requires determining as how risky is to advance credit to a particular customer.
43

44. 3. Control of Receivables: -
This requires to the firm to follow up debtors and decide about a suitable credit collection policy.
It involves both lying down of credit policy and execution of such policies.
There is a cost of maintaining receivables, which comprises Cost of: -
• The company require additional funds as resources are blocked in receivables which involves
a cost in the form of interest (loan fund) or opportunity cost (own fund).
• Administrative cost which includes record keeping, investigation of credit worthiness etc.
• Collection cost
• Defaulting cost or Bad debts
DEBTORS MANAGEMENT IN HEEP –
HARIDWAR
B.H.E.L Hardwar is engaged in the manufacturing business of heavy electrical equipments, where
cycle time of the product is 18- 24 months and most of the contracts take approximately 3-5 years
to complete. Customers of B.H.E.L. Hardwar are broadly divided into following categories: -
• State electricity board
• Power Project
• Public Sector Under takings
44

45. • Railways
• Government Departments
• Private Sectors
• Exports
In most of the contracts, payments of B.H.E.L. Hardwar are made in following stages: -
Payment Terms
Advance from customers: -
-At the time of dispatch of goods
-At the time of MRC (material receipt at site) Deferred payment after
Commissioning of project with certain test
However, the above terms may vary from contract to contract.
Based on the above payment terms, B.H.E.L. Hardwar categories their debtors into two parts: -
• Collectible debtors
• Deferred debtors
Collectible debtors are those, which are due for payment as on now and there is no credit time
allowed to the customer say payment at the time of dispatch.
Deferred debtors are those, which will become due on the occurrence of a particular event such
as issuing of MRC (material Receipt Certificate) from customer or completion of contract with
certain tests etc.
ANALYSIS OF DEBTORS
MANAGEMENT WITH THE HELP OF CERTAIN
RATIO’S
45

46. DEBTORS TURN OVER RATIO:-
Debtor’s turn over ratio establishes a relationship between net credit sales and average trade
debtors. The major objective to calculate ratio is to determine the efficiency with which the trade
debtors are managed. We can easily calculate this ratio with the help of the following formula:
Debtors turn over ratio =Net credit sales/average debtor
(Rs.in lacs)
YEAR 2007-08 2008-09 2009-10 2010-11 2011-12
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
Turnover 71799 108811 101336 97432 140697
Average Debtors 55713 52490 46160 48642 52200
Ratio 1.3 2.1 2.2 2.0 2.7
Graphical presentation of debtor turnover ratio
3
2.7
2.5
2.1 2.2
2 2
DEBTOR TURNOVER 1.5 1.3
RATIO 1
0.5
0
2007- 2008- 2009- 2010- 2011-
08 09 10 11 12
YEARS
46

47. INTERPRETATION:
It indicates the speed with which the debtors turnover an average each year. In general a high
ratio indicates the shorter collection period which implies prompt payments by debtors and a low
ratio indicates a long collection period which implies delayed payment by debtors. So we can see
from the graph and the table above that in the last five years the company is trying to improve the
debtors’ turnover ratio. In 2007-08 it is the least i.e. 1.3 but it again started improving in 2008-09
2.1:1, in 2009-10 2.4:1,in 2010-11 2:1 & in 2011-13 2.9:1. It depicts that how efficiently debtors
are collected
AVERAGE COLLECTION PERIOD:-
AVERAGE COLLECTION PERIOD = 365 .
Debtor's Turnover
Year 2007-08 2008-09 2009-10 2010-11 2011-12
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
Turnover 71799 108811 101336 97432 140697
Debtors 55713 52490 46160 48642 52200
Ratio 1.3 2.1 2.2 2.0 2.7
Days of Inventory 281 173 166 183 135
47

48. Graphical representation of average collection period
DEBTOR COLLECTION PERIOD
300 281
250
173 183
NO. OF DAYS
200 166
135
150
100
50
0
2007- 2008- 2009- 2010- 2011-
08 09 10 11 12
YEARS
Interpretation
We can check the managerial efficiency with the help of this ratio by the comparison of average
collection period and credit policy of the company form the table we can clearly see that in the
year 2007-08 to 281 days , but in year 2008-09 & 2009-10 there was a decrease and it falls down
to 174 & 176 respectively . This indicates that the company was following a very liberal policy in
2005-06 & 2006-07 but it improved in the succeeding years. If the days are increasing it indicates
that the bad debts are also increasing. It is difficult to lay down a standard collection period, it
depends upon the nature of the business. As a general rule the receivables should not exceed 4 to 5
months of credit sales.
48

49. STEPS INVOLVED IN MANAGEMENT OF DEBTS : -
The following steps are involved in debtors’ management
• There should a close contact with the customers.
• There should be proper age- wise analysis of the debtors.
• There should be proper classification between collectible Debtors and bad debts.
• Bad debts should be written of as early as possible after making all efforts for its collection.
• Product cycle should be minimized so that cost of the product should not become high to the
agreed amount because of time factor.
• There must be a provision of discount for early payment of debts by the customers.
• Regular checking of the records of the debtors is essential so as to analysis the current
position of that organization.
• While making a policy, regarding the debtors the point should be considered that customer
having excellent past record, follow the lenient policy is adopted for doubtful customers
Manage the working capital according to need as recovering the debt from customer as early as
possible while, get extension of payment of dues on the company of others as suppliers of raw
material as late as possible.
CREDIT GRANTING DECISIONS : -
CREDIT GRANTING
DECISIONS
NO GRANT
CREDI CREDIT
T 49

50. 50

51. Introduction
Inventories constitute most significant part of current assets, in most of the companies in India.
To maintain a large size of inventory, a considerable amount of fund is required. It is, therefore,
absolutely imperative to manage inventories efficiently and effectively in order to avoid
unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its
long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of
inventories to a considerable degree, e.g.10% to 20%, without any adverse effect on production and
sales, by using inventory planning and control techniques. The reduction in ‘excessive’ inventories
carries a favorable impact on a company’s profitability.
There are at least three motives for holding inventories:
1-To facilitate smooth production and sales operation (transaction motive).
2-To guards against the risk of unpredictable changes in usage rate and delivery time
(precautionary motive).
3- To make advantage of price fluctuations (speculative motive).
OBJECTIVE:-
Inventories represent investment of a firm’s funds. The objective of the inventory management
should be the maximization of the value of the firm. The firm should therefore consider:
(a) Costs,
(b) Return, and
(c) Risk factors in establishing its inventory policy.
Two types of costs are involved in the inventory maintenance:
1- Ordering costs : - Requisition, placing of order, transportation, and staff services.
Ordering costs are fixed per order size increases.
51

52. 2- Carrying costs : - Warehousing, handling, clerical and staff services, insurance and
taxes. Carrying cost increases.
The firm should minimize the total cost (ordering cost + carrying cost). The economic order
quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The following
formula can be used to determine EOQ:
EOQ= (2AO/C) ^1/2
Where,
A= Annual requirement.
O= Per order cost.
C= Per unit carrying cost.
WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH
INVENTORY?
The inventory level at which the firm places order to replenish inventory is called reorder point. It
depends on (a) the lead time and (b) the usage rate.
Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead time0, the
reorder point will be equal to:
Lead-time *Usage rate + Safety stock.
The firm should strike a trade-off between the marginal rate of return and marginal cost of funds
to determine the level of safety stock.
INVENTORY ANALYSIS:-
Altogether the company deals with stock of thousands of items raising a serious problem of how
one can keep control of track of all items also, where it is necessary to have some extent of control
on each and every item. Different types of analysis each having its own advantages and purpose
help in bringing a particular solution to the control of inventory. The most important of all such
analysis is ABC analysis. The other one -
 ABC analysis
 VED analysis
52

53.  SDT analysis
 HML analysis
 FSN analysis
ABC ANALYSIS
A formal way of classifying inventory items so that important ones will be given the most
attention. Through this analysis the professional inventory manager will concentrate his efforts on
where they will yield the greatest rewards. The ABC of ABC analysis refers to the classes, A, B
and c into which the inventory is divided.
(A) Are high value items whose rupee volume typically account for 75-80% of the value of
total inventory while representing only 10-15% of the inventory items.
(B) Class is lesser value items whose rupee volume accounts for 15-20% of the value of
inventory, while representing 15-20% of the inventory items.
(C) Class items are low value items whose volume accounts for 10-15% of the inventory
values but 75-80% of the inventory items.
The same degree of control is not justified for all the three classes of items. Class [A] requires the
greatest attention and class [C] items require least attention. Class [C] items need no special
calculations since they represent a low inventory investment. The order might be placed once a year
and periodically reviewed once a year, class [B] items are paid more attention then, proper CODs
are developed and semi annual review of variables must be done.
Class [A] items needs direct attention to the inventory items, EOQ's are to be developed each
time an order is placed. The major concern of an ABC classification is to give direct attention to the
inventory items that represent the largest amount of expenditure. If inventory levels can be reduced
for claim of items it result in a significant reduction in inventory investment.
ABC INVENTORY CLASSIFICATION
Percentage of inventory items Category of classes Value of the total inventory (rupee
volume in %)
10 A 75
53

54. 15 B 15
75 C 10
VED ANALYSIS
This analysis specially pertains to the classification of maintenance of spares denoting the
essentiality of blocking spares.
V - Stands for vital - items when out of stock or when not readily available, completely brings the
production a halt.
E - Is for essential - items without which we can temporarily loose our production or disclosure
of production occurs with in a week.
D - Denotes desirable items - all other items, which are necessary but do not cause any immediate
effect on production.
SDE ANALYSIS
For developing countries and especially where certain items are in scarce supply. This analysis is
very useful.
S - Refers to scarce items, especially imported items and those which are very much in short
supply.
D - Are difficult items which are available in market but not easily available.
E - Items are those which are easily available, most local items.
HML ANALYSIS
The cost per item is considered for this analysis
(H) High cost items
(M) Medium cost items
(L) Low cost items
54

55. Help in bringing controls over consumption at departments’ level and for storage.
FSN ANALYSIS
Materials are classified as
(F) Fast moving
(S) Slow moving and
(N) Non moving items
The non-moving items are of great importance. It is found that many companies maintain huge
stock of non-moving items and the number of such items running is thousands. Resulting of non-
moving items is to be made to determine where they could be used or to be disclosed off. The fast
and slow moving classification helps in arrangement of stocks in stores and their distribution
handling methods.
A manufacturing concern is sure to collapse out, if an adequate supply of raw material, process or
cash to meet the wage bill, or capacity to wait for the market for its finished products, or
commercial enterprises or merchandise to sell its vitally good is finished. Working capital thus is
the lifeblood and controlling nerve center of a business. The adequacy of working capital
contributes a lot to, raising the standing of a corporation because of better items of goods'
purchased reduces the cost of production, on account of the receipt of cash discounts, favorable
rates of interest on bank loans, etc of company. A sufficient working capital is always in a position
to take the advantage of any favourable opportunity either to purchase raw materials or to execute a
special order or to wait for better market position in the general market of the mgt. Of a corporation
is enhanced by its financial soundness. The ability to meet all reasonable demands for cash
inordinate delay is a great psychological factor to improve the all round efficiency of the busy and
create self-confidence in the press at the helm of affairs in the company. During slump the demand
for Working Capital instead of coming down shoot up of good amount is coated up in the
inventories and book debts. Concerns having sample resources can side over that period of
depression.
FUNCTION OF INVENTORY CONTROL
Functions to be performed in the field of Inventory Control are:
1 Setting up norms for carrying Inventory.
2 Determining what items to be stocked.
3 Setting rules for Inventory replenishments.
4 Receiving, storing and issuing inventory items as needed.
5 Maintaining records of inventory quantities and values.
6 Identifying and deposing of slow moving, non-moving, obsolete or damage inventories.
7 Furnishing summary information on inventory position for control purposes.
55

56. Locations of position responsible for performing each of these functions in organization structure
greatly vary from company to company.
In BHEL Hardwar determination of product material or direct work order material (what?) to be
carried in Inventory is more or less automatic result of product design formulation and is given in
material forecast for a work order. Indirect materials consumed in manufacturing process such as
electrodes, brazing alloys, tooling etc. are usually given by process engineering or at times by
design departments.
Balance great bulk of indirect materials is made up of repair parts and general supplies.
Responsibility for specific (what?) items to be carried in inventory rests with Works Engineering.
With respect to raw materials and purchased parts, responsibility for determining (when?) and
how much to buy is a sign to relevant product manufacturing i.e. production planning and material
planning groups. However a strict budgetary control and allocation to specific work order control
on high value items is exercised by Inventory control department organized separately under
Material Management. Purchase department attached to manufacturing department determines
(where?) to buy.
Determination of indirect material (when?) and how much to buy and (where?), is done by central
group under Material Management by consolidating requirements of all sections and while looking
at consumption trends over a No. Years.
Again a strict budgetary control and control on high value items for their allocation is exercised
by Inventory control group.
Receiving and storing is done by Central Stores CSX under Material Management Department.
Issuing Inventory is done by CSX on demand from manufacturing and is controlled by Material
Planning. Again some online checks are proposed to be introduced at raising of Store Issue voucher
stage itself, for high value items so that induction is controlled strictly as per requirement of
production schedule based on lead time for manufacture to keep WIP inventory under control.
Records of Inventory are maintained on a main frame computer centrally arranged having shared
access from all functions for their specific use.
Inventory Record Keeping and Related Procedures
How well Inventory records are maintained has a major bearing on the effectiveness of Inventory
control program. Mostly information recorded in B.H.E.L. system is:
• Name of the part or material
56

57. • Short description
• Identifying No called Material code
• Unit of measurement
• Location in store (custody)
• Bin no.
• Opening, received, issue, closing quantity and value.
These records are maintained in an online system on main frame computer user departments have
shared access for posting and retrieval of information.
There is a system for reserving specific items as customer specific, which is done by tagging on
the item.
Posting of withdrawals or issue from inventory is done on specific authorization by a document
called Store Issue voucher.
B.H.E.L., TIRUCHIRAPALLY
57

58. INVENTORY MANAGEMENT IN
B.H.E.L.
BHEL produces long production cycle items against the firm orders from customers.
Because of this as well as sizeable imported raw materials and compulsory bulk purchase of items
like steel and copper in line with availability from SAIL and MMTC, the company has to carry high
level of inventories.
(RS/LACS)
YEARS 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
ACT. ACT. ACT. ACT. ACT. ACT.
PARTICULARS
Raw Material & 9016 10012 7639 5338 10469 11567
components
Material with 143 152 99 155 155 306
fabricators
Stores & spares 2756 2728 2333 2092 1594 1848
Material in transit 2718 2866 1466 3819 3716 9910
Finished goods at 1050 1300 931 2603 2181 1770
plant
W.I.P 30833 25121 18488 23699 38585 42120
Transfer in transit 852 1281 1413 1508 2326 2277
Total 47368 43460 32370 39214 58976 69798
Turnover 71799 108811 101335 97432 140697 164059
Average inventory 37915 35792 49095 64387
Inventory turnover 2.67 2.7 2.87 2.55
Ratio
Days of inventory 137D 135D 127D 143D
holding
Inventory Turnover Ratio = Sales / Average Inventory
Days Of Inventory Holding = 365 / inventory Turnover Ratio
58

59. Graphical Representation of Days of Inventory
Holding
DAYS OF INVENTORY HOLDING
250
200 214
NO. OF DAYS
150 152 Days of
135 135 126 inventory
100 holding
50
0
2007- 2008- 2009- 2010- 2011-
08 09 10 11 12
YEARS
Interpretation
If we see from the above table that the days of inventory holding in the year 2001-02 has
come down to 152 days from 214 days in the previous year. In spite of increase in turnover i.e.
108811 in 2008-09 from 71799 in the year 2007-08 the days of inventory holding decreases. This
indicates that the company is using effective strategy to bring down its inventory level. This makes
very less investment in inventory.
It is in the interest of every organization to minimize its inventory level.
Following is the process through which the company can achieve the optimum inventory
level.
STANDARD TAKING COMPARISION OF
INVENTORY ACTUAL ACTUAL WITH
LEVEL INVENTORY
STANDARD
LEVEL
TAKE ANALYSING REASON VARIATION
CORRECTIV OF 59
/
E ACTIONS VARIATION/DEVIATIO DEVIATION
N

60. NEED OF INVENTORY MANAGEMENT
• Stiff competition, globalization of trade and liberalization.
• Achieving, increasing and positive EVA.
• Cost reduction.
• Energy conservation.
• Conservation of natural resources.
• Better, work environment.
• Improved health and safety.
• Enhanced public image.
Graph of inventory in BHEL
60000
50000
40000
30000
Inventory in BHEL
20000
10000
0
2007-08 2008-09 2009-2010 2010-11 2011-12
Interpretation
By the graphical representation, we can easily understand that the level of inventory is
coming down but in 2011-12 it increases due to large amount of raw material .It comes down
because company takes some effective measures to control the level of inventory. Those steps are
following steps to control its inventory: -
STRATEGIES/MEASURES
60

61. • Formation of specific group in each area to identify the wastage elements and seek
participation of all.
• Identification of wastage.
• Formulation of action plan to eliminate/minimize wastage.
• Review of status.
• Identification of corrective actions and their implementation.
• Highlighting the gains.
SUGGESTION: -
After analyzing the steps taken by the company there are some suggestions to manage the
Inventory
• There should proper analysis of requirement of raw material.
• Order should be placed according to the lead-time.
• Wastage should be avoided.
There should be proper coordination between the Inventory Department and Production
Department.
B.H.E.L. TRANSFORMER
61

62. 62

63. MANAGEMENT OF CASH
It is the duty of the finance manager to provide adequate cash to all segments of the organization.
At the same time, he /she have also to ensure that no funds are blocking in idle cash as this will
involve cost in terms of interest to the concern. A sound cash management scheme has to maintain
the twin objective of liquidity and cost.
MEANING OF CASH MANAGEMENT
The term cash management refers to the management of cash and ‘near cash assets’ while cash
includes coins, currency notes, cheques, bank drafts, and the demand deposits, the near cash assets
include marketable securities and time deposits with banks. Such securities and deposits are easily
convertible into cash.
MOTIVES FOR HOLDING CASH
In spite of the fact that cash does not earn any substantial return for the business, it is held by the
concern with the following motives.
1. Transaction motive . A Company enters a variety of business transactions resulting both
inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the
business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a
firm with the motive of making routine business payments maintains cash balance.
63

64. 2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of
unexpected contingencies such as floods, strikes, obsolesces, sharp increase in prices of raw
materials, presentation of bills for payment earlier than expected date. More amounts of cash will
be kept by the firm if there is more possibility of such contingencies.
3. Speculative motive: BHEL also keeps cash balance to take advantage of unexpected
business opportunities. Such motive is there of speculative nature.
4. Compensation motive . Banks provide certain services to their customers free of
charge. So they usually require the customers to keep minimum cash balance with them which
enables them to earn interest and compensate for the free services rendered.
Reasons of cash management :-
Cash management involves the following four basic problems.
1. Controlling level of cash. One of the basic objectives of cash management is to
minimize the level of cash balances with the firm. This objective is sought to be achieved by
means of the following:
i. Preparing cash budget.: Cash budget is the most important device for planning and
controlling the use of cash. It involves the future receipts and payments of the firm. On the
basis of this information the finance manager can determine the future cash needs of the
firm.
ii. Providing for unpredictable discrepancies: Cash budget shows discrepancies between
cash receipts and payments on the basis of normal business activities.
iii. Availability of alternative source of funds: a firm may need not keep large cash balance.
If it has arrangements with banks for borrowing money in times of emergencies.
1. Controlling of cash inflow: in order to prevent fraudulent diversion of cash receipt and
speeding up collections of cash, an adequate control on cash inflow is necessary. A properly
installed internal check system can, to a great extent, a minimize the possibility of fraudulent
diversion of cash. Speedier collection of cash can be made possible by adoption of the following
two techniques:
i) Concentration banking system: it is a system of decentralizing collection of account
receivables. According to this system, BHEL’s branch offices are authorized to collect the payment
from the customers, and deposit in the local bank accounts. This system facilities fast movement of
funds. This system is good in case of the firms having their spread over a large area.
64

65. ii) Lock box system: This system is more popular in the U.S.A. and is further step in speeding up
collection of cash. This system has been devised to element delay arising in cash of the
concentration banking system on account of a time gap between actual receipt of cheques by the
regional collection centers and its deposits in the local bank account. Under this system BHEL hires
a post office box and instruct its customers for there remits to the box. It also reduces the chances
of frauds in the cash collection process and controls the cash inflows better. In order to avoid the
unnecessary pockets of idle funds, the company should maintain minimum number of bank
accounts.
2. Controlling outflows of cash: - an efficient control over cash outflows is equally
important for conserving cash and reducing financial requirements. Control over cash outflows
signifies slow disbursement. in order to control the outflows of cash efficiently, a firm should keep
in view the following considerations:
i) Centralized system for cash payments: should be followed as compared to decentralized
system in cash of collections. All payments should be made from a single control account, i.e., from
the central office of the company. However, the local office of the company may pay local
expenses.
ii) Payment should be made on the due dates, neither before nor after. The company should
neither lose cash discount nor its prestige on account of delayed payments. The company should,
there fore, made payments within the terms offered by the suppliers.
iii) Playing float, technique should be used by the company for maximizing the availability of
funds. The term ‘float’ means the account tied up in checks which have been issued by
BHEL but not have been yet been presented for payment by the creditors. As a result of a
time lag between issue of a cheque and its actual presentation, the actual bank balance of a
firm may be more than the balance shown in the books. The difference is called ‘payment
of float’. The longer the ‘float period’ the greater would be the benefit of the firm.
TOOLS OF CASH CONTROL
1. Cash Budget: It is the most significant tool of controlling the use of cash. It provides a
comparison between actual and budgeted cash receipts and disbursements locating the points of
deviations, if any. The financial manager, after ascertaining the reasons for deviations between the
actual and budgeted figures, can take the necessary action to remove.
65

66. 2. Inflows and outflows of cash: in order to check the change in cash position of the firm
from one period to another, a cash flow statement is prepared. It helps management in controlling
inflows and outflows of cash.
3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial
ratios are used for this purpose. These ratios include current ratio, liquidity ratio, receivables
turnover ratio, and inventory turnover ratio and cash position ratios.
ANALYSIS OF CASH MANAGEMENT WITH
THE HELP OF CERTAIN RATIOS
CURRENT RATIO:-
It is the best ratio to find relationship between the current assets and current liabilities of BHEL.
We can easily calculate the current ratio with the help of the following formula:
Current ratio = current assets/current liabilities
years Calculations Ratio
2006-07 114829/64365 1.8
2007-08 100962/71641 1.41
2008-09 80044/61375 1.30
2009-10 100671/82196 1.22
2010-11 112836/99390 1.14
2011-12 139668/110923 1.26
66

67. ANALYSIS OF CURRENT RATIO
2
1.5
CURRENT RATIO
1
0.5
0
2007-08 2008-09 2009-10 2010-11 2011-12
YEARS
Interpretation: -
As we know that the current ratio of any company may be 2:1 but according to the U.S.A.
Accounting standard any company should maintain a ratio of 1.33:1. Moreover, as we can see from
the above table the current ratio of BHEL is and in 2007-08 is 1.8:1 which is highest in the last five
years.
In 2008-09, the current ratio goes down to 1.4:1 due to increase in the current liabilities and
decrease in current assets as compared to previous year. Current assets decrease due to decrease in
inventory, which is 46305 in 2007-08 & 42606 in 2008-09. It indicates the ideal stock is less, which
is favorable for the company. It indicates the company is in position to meet its liabilities. In 2009-
10 the ratio is going down to1.3:1 due to decrease in current assets and current liabilities. In 2010-
11 the ratio is 1.2:1 and in 2011-12 1.1:1 due to increase in current assets and current liabilities
LIQUIDITY RATIO:-
This ratio establishes a relationship between quick assets and current liabilities.
The major objective to compute this ratio is to measure the ability of the firm to meet its short-
term obligations as and when due without relying upon the realization stock.
We can easily calculate this ratio with the help of the following formula:
Liquidity ratio= liquid assets/current liabilities
YEARS CALCULATIONS RATIO
2006-2007 67460/64365 1.05
2007-2008 57500/71641 0.80
2008-2009 47674/61375 0.78
2009-2010 61457/82196 0.75
67

68. 2010-2011 53860/99390 0.54
2011-2012 79870/110923 0.63
Graph showing comparison on the basis of liquidity ratio
comparision of liquidity
1.2
1
0.8
0.6 Liquidity ratio
0.4
0.2
0
2007-08 2008-09 2009-10 2010-11 2011-12
YEARS
Interpretation
Liquid ratio indicates that what amounts of liquid assets are available for each rupee of
current liability. We know that the liquid ratio of any company may be 1:1, is considered to be
satisfactory. Now comparing the company's position according to the liquid ratio. In 2007-08 the
ratio is 1.05:1 which were the best liquidity position years for the company. But it followed a
downward trend in 2008-09, 2009-10, 2010-11 & 2011-12 the ratios were 0.8:1, 0.78:1, .
74:1&.54:1respectively. It means that the liquidity position of the company is constantly decreasing
it is due to large amount of current liabilities as compared to liquid assets. Also the numbers of
debtors of the company are increasing. This is not better from management's point of view. As more
of amount is blocked in the debts and chances of bad debt will increase.
CASH FLOW STATEMENT
DIVISION: HEEP, HARIDWAR.
(Rs/Lakh)
DESCRIPTION YEARS
2001-02 2002-03 2003-04 2004-05 2005-06
INFLOW (OPERATIONS)
RECEIPT AGAINST
ADVANCES
Non BHEL 21656 13435 32166 25524 20730
RECEIPT AGAINST
DESPATCHES
68