A Report

on

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL

FULFILLMENT OF POST GRADUATE DIPLOMA IN INTERNATIONAL
BUSINESS

Working Capital
Management

1
 PREFACE

As a matter of fact every management student has to

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

To fulfill the said objective I was sent to the BHEL,

Jhansi for my “On the Job” practical Training by our Training
Coordinator. The duration of my training was from 07 Aug.
2009 to 25 Sept. 2006. During this period I visited various
departments of BHEL, Jhansi to study their process of
functioning & organization and also doing a project on “The
study of Working Capital Management” to know the
procedure of working Capital Management in BHEL.

Place: - BHEL, Jhansi

2
 ACKNOWLEDGEMENT

We offer our gratitude to all those who have spent their

precious time, expressed keen interest and given continued
encouragement throughout the study enabled the
successful completion of my “ON THE JOB” practical
training in BHEL, Jhansi.

Special thanks are due to our project co-ordinator Mr.

Shailendra (Accounts Officer) for his inspiring guidance,
valuable help and angelic support for the completion of our
project in “WORKING CAPITAL MANAGEMENT IN BHEL,
Jhansi”.

We would like to extend our gratitude to the management

and staff of BHEL, Jhansi for their co-operation during our
training.

3
 TABLE OF CONTENTS

1. INTRODUCTION

(i) BHEL as a whole

(ii) BHEL, JHANSI

2. DEPARTMENTATON IN BHEL, JHANSI

3. FINANCE DEPARTMENT IN BHEL, JHANSI

4. INTRODUCTION OF WORKING CAPITAL

5. CASH MANAGEMENT

(i) Introduction

(ii) Cash management in BHEL, Jhansi

6. RECEIVABLE MANAGEMENT

(i) Introduction

(ii) Receivable management in BHEL, Jhansi

7. INVENTORY MANAGEMENT

(i) Introduction

(ii) Inventory management in BHEL, Jhansi

8. ANALYSIS OF WORKING CAPITAL

4
 BHARAT HEAVY ELECTRICALS

A Brief Introduction

In the post Independence era when India was moving

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

Three more plants were subsequently setup Tiruchy,

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

BHEL has now become the largest Engineering and

Manufacturing Company. Its headquarters is located at Delhi
and there are 14 manufacturing units.

5
 BHEL OBJECTIVES

A dynamic is one which keeps its aim high adopts itself

quickly to changing environment. So here we are in BHEL.

The objectives of the company have been redefined in the

corporate plan for the 90’s.

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

Utilize company’s capabilities and resources to extend

business into allied areas and other priority sector of the
economy like defense, communication and electronics.

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

6
PROFITABILITY
• To provide a reasonable and adequate return on capital
employed, primarily through improvement in
operational, efficiency, capacity utilization and
productivity and generate adequate internal resources
to finance the company’s growth.

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

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

• To invest in human resources and continuously and

alive to there need.

TECHNOLOGY
• To achieve technological excellence in operation by
development of indigenous technologies and efficient
absorption and adoption of imparted technologies to

7
 suit business and priorities and provide competitive
advantage to the company.

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

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

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

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

INDUSTRY
Offers a comprehensive range of electrical, electronic and
mechanical equipment for a host of industries fertilizers,
petrochemicals, refineries, paper, sugar, rubber, cement,
coal, steel, aluminum and mining.
8
TRANSPORTATION
BHEL offers a variety of transportation equipment to meet
the growing needs of country. 65% of Indian Railways are
equipped with BHEL manufactured traction equipment.
Underground metro also runs on drives and control supplied
by BHEL.

BHEL has taken up the manufacturing of locomotive to

provide a pollution free transportation. BHEL also offers a
battery operated passenger van to Delhi Government.

OIL AND GAS

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

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

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

MANUFACTURING TECHNOLOGIES

9
BHEL has 14 manufacturing plants, which are spread
different parts of the country having unique manufacturing
and testing facilities, CNC machines, turbine blade shape
system, system bener, 8000-ton hydraulic press, heavy-duty
lathe mailing machines and many more are available.

ACTIVITY PROFILE OF BHEL

POWER SECTOR PROJECTS
 Thermal sets and auxiliaries.

 Steam generators and auxiliaries.

 Industrial fans.

 Electrostatic Precipitators.

 Air pre-heaters.

 Nuclear power equipment.

 Hydro sets and auxiliaries.

 Motors

 Transformers

 Rectifiers

 Pumps

 Heat exchange

 Capacitors

10
  Porcelain/Ceramic insulators

 Seamless steel tubes

 Castings and forgings

SYSTEM/SERVICES
 Turnkey power station

 Data acquisition system

 Power system

 HVDC commissioning system

 Erection and commissioning system

 Modernization and rehabilitation

TRANSPORTATION SECTOR
 Diesel electric generators

 AC/DC locomotives and loco shunters

 Traction system for Railways

 Electric trolley buses

INDUSTRY SECTOR
 Boilers

 Valves
11
 T G Sets

 Power devices

 Solar cells

 Photo Voltaic cells

 Gas turbines

 Off rigs

 Blow out preventers

 Wind mills

 Control system for electric devices

12
BHARAT HEAVY ELECTRICALS LIMITED
JHANSI UNIT
By the end of 5th five-year plan, it was envisaged by the
planning commission that the demand for power
transformer would rise in the coming years. Anticipating the
country’s requirement BHEL decided to set up a new plant,
which would manufacture power and other type of
transformers in addition to the capacity available at BHEL,
Bhopal. The Bhopal Plant was engaged in manufacturing of
transformers of large rating and Jhansi unit would
concentrate on power transformer upto 50 kVA, 132 kV
Class and other transformers like Instrument Transformers,
Traction Transformers for Railway etc.

This unit of Jhansi was established around 14 km from

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

This plant of BHEL is equipped with the most modern

manufacturing processing and testing facilities for the
manufacture of power, special transformer and Instrument
13
transformers, Diesel shunting Locomotives and AC/DC
Locomotives. The layout of the plant is such that it is well
streamlined to enable smooth material flow from the raw
material stages to finished goods. All the feeder bays have
been laid perpendicular to main assembly bay and each
feeder bay raw material smoothly gets converted to sub
assemblies which after inspection are sent to main assembly
bay.

The raw material that are produced for manufacture are

used only after thorough material testing in the testing lab
and with strict quality checks at various stages of
productions. This unit of BHEL is basically engaged in the
production and manufacture of transformers of various type
and capacities with the growing competition in the
transformer section, in 1985-88 it under took the re-
powering of diesel, but it took a complete year for the
manufacturing to began. In 1987-88, BHEL has progressed a
step further in undertaking the production of AC
Locomotives and subsequently it is manufacturing AC/DC
Locomotives also.

14
 SECTIONS OF BHEL JHANSI UNIT
BHEL has many departments, while production and
Administrative departments are separate.

Broadly speaking BHEL, Jhansi has two production

categories.

1. Transformer Section
2. Loco Section

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

Bay 0, 1& 2: These are fabrication shops established in

1978 and mainly deals with fabrication work of transformers
and locomotives.

15
Bay 3: It is splitted into two parts, half is the machine
shop and the second half is for bus duct. Bus duct are used
to transformer electricity from the generator to transformer.

Bay 4: Here is the winding work of the power

transformer & dry type transformer carried out.

Bay 5: Basically it is core and punch section but in a

part of it cast resin coil encapsulation plant is situated. The
coils of dry type transformer are casted, cut and finally
prepared.

Bay 6: It is also engaged in two processes, one

half is the traction transfer assembly.

Bay 7: In this bay, the dry transformers are

manufactured and various types of insulation are prepared
to be used in the transformers.

Bay 8: This bay was established in the year

1974. It is one of the earliest bays to setup. It is involved in
the manufacturing of instruments, transformers like 132 kv
and 220 kv voltage/current transformers. ESP transformers
are also manufactured here.

Bay 9: This is one of the largest bay in the unit

engaged in the assembly of power and rectifier
transformers. The time taken for assembly ranges from 4-12
weeks.

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

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

The unique modern machines available in Jhansi unit are as

follows:

• CNC cropping line machines

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

PROFILE OF BHEL JHANSI UNIT

Products Rating
1. Power Transformer Upto 220 kV Class 250 MVA
2. Special Transformer Upto 110 kV
3. ESP Transformer 100 kV, 1400 mA

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

GROWTH OF PRODUCTION AND

MILESTONES
Year Milestone
1976-77 Start of Instrument Transformer production.

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1977-78 Start of Traction Transformer and Power
Transformer (upto 132 kV)
1978-79 Start of HFTT type freight Loco
1979-80 Commissioning of 2,500 kV DG Set (due to
server Power Cuts).
1980-81 Start of ESP Transformer.
1981-82 Start of 220 kV Power Transformer.
1982-83 Achieved Break Even.
1983-84 Start of Bus-duct
1984-85 Start of dry type transformer.
1985-86 Re-powering of Diesel Loco Started.
1986-87 Start of new Diesel Loco Manufacturing.
1987-88 Manufacturing facilities for AC Loco.
1988-89 Crossed 100 crore target.
1990-91 Successful design and manufacturing of 450 HP
3 Axel Diesel CCI
1991-92 Manufacturing of first 2600 HP Diesel for NTPC.
1992-93 Successful Design and Development of 5000 HP
Thyristor control Locomotive.
1993-94 Unit has been awarded ISO-9001 certificate for
quality systems.
1994-95 240 MVA Power Transformer Produced first time.
1995-96 AC/DC Locomotive first time in India.
1996-97 100th Loco Manufactured.
1997-98 250 MVA Transformer produced first time.

1998-99 Developed overhead equipment test

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 Exported one DESL loco to Malaysia

1999-00 Diesel

20
FINANCE DEPARTMENT IN BHEL, JHANSI

A sound financial management is the crux of the

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

According to its various functions the Finance/ Account

Department is divided into following sections: -

i) Price Store Ledger(PSL)

ii) Supply Bill

iii) Cash

iv) Pay

v) Books Budget and MIS

vi) Sales

vii) Miscellaneous and Revenue

viii) Internal Audit

ix) Export Incentives, Sales Tax and Income Tax

21
 x) Provident Fund

xi) Works

xii) Travelling Allowance

 Price Store Ledger(PSL)

PSL section is entrusted with the job of material

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

SRV – Store Receipt Voucher

MIV – Material Issue Voucher

SRN – Store Return Note

MTV – Material Transformer Note

RCDV – Receipt cum Dispatch Voucher

Passing of Bills

The Bills Passing process starts after the account

section gets the purchase order, SRV’s and bills from
suppliers. The accountant’s section then makes payment.

Terms of Payment are of three kinds: –

i) 10% in advance payment

22
 ii) 100% after receipt and acceptance

iii) Partial advance and the remaining after the receipt

and acceptance

Foreign Purchase

There are certain items, which are to be imported. A

license is required for such items. The license can be
acquired from DGTD. There is also a provision for forward
cover.

 Cash

This section is responsible of banking of all the money

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

It is also concerned with payment of salaries, wages

and other personal payments of employees.

Cash section prepares these statements for management

information: -

 Daily – cash flow > Direction collection of sales.

23
 Weekly – Cash inflow > outflow – during week

 Statement of pending bills of cash section status of

margin money.

 Monthly – cash flow forecast for 3 months.

 Operating result statement.

 Statement of outstanding letter of credit & bank

guarantee.

 Daily bank transfer statement.

 Bank reconciliation statement is also prepared.

BHEL has centralized cash credit system.

 Pay Section

It is assigned the job of payment of salaries and other

personal payments to employees it looks after provident
fund, gratuity and bonuses insurance facilities extend to
employees.

Employees leave encashment, official travelling

reimbursement and this section deals other welfare
expenses. It is also entrusted with clearance of medical
claims.
24
  Books, Budget and MIS

General ledger is the consolidated list of general

entries. As soon as the general voucher is received, the
general ledger is prepared.

In the general ledger, receipt and expenditure both

are recorded. This section prepares section wise and
monthly Trial Balance.

After the preparation of general ledger and trial

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

Two types of Audits are done by the BHEL: –

i) Internal Audit

ii) Government Audit

 Budget

Budget is a target setting for operations.

There are two types of Budget prepared by BHEL: –

25
 1. Revenue Budget: – It consists of consolidated
production programmed &related expenses to carry out
that programme.

2. Capital Budget: – It includes the fixed assets.

Preparation of budget is done at three levels:

i) Internal Level: – Each department is sent

information about the budgeted expenses
provided to the department. It is necessary for
control.

ii) Corporate Level: – Budget of BHEL unit is sent

to the corporate office.

iii) Government Level: – Budget of BHEL is also

sent to Government level.

 Management Information System

Three types of information system are generated in

the BHEL: –

i) Internal for the Unit

ii) For the Corporate Office

iii) For Government

Every month information is generated regarding

allocation of funds on various aspects for each department

26
and is sent to every department. Information is generated
mainly for control purpose. Other information generated is: –

i) Cash Flow

ii) Inventory Level (non moving and slow moving

items)

iii) Inventory of finished goods

 Cost Section

This section is responsible for accounting and reporting of

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

1. Profitability – Product wise/ Order wise.

2. Variance _ Estimated and Actual Cost

3. Performance – Efficiency and operating results

27
  Sales Section

The accounting of sales is done in this section. The

activity of this section starts when the commercial
department issues a work order. Work order part II
(Financial) summarizes the financial terms of the contract. It
contains the information like the name of customer &
consignee, description of goods to be produced and sold,
quantity, sales value, terms of delivery and payment, price
variation clause, sales tax, excise duty, liquidates damages,
Bank guarantee, fight etc. with the part II W.O. details. Apart
from that the terms and conditions embodied in W.O. part II
as regard adjustment of advances, deferred debts and
calculation of PVC, Excise duty and Sales tax must also be
complies with. Sales section submits the bills to the
customers as desired by Commercial either direct or through
Financial such as Banks.

This Section does the necessary accounting for the

bills raised; money collected from customers in form of
advance or sale proceeds.

 Miscellaneous and Revenue

Miscellaneous wing of this section deals with the

payment of advances to employees going on official tours,
LTC etc. Payment to transporters, welfare activities, security
28
services, repairs and maintenance, daily wages, furniture,
departmental and other petty expenses.

The revenue wing of this section with recovery of

rent, electricity and water charges for other facilities from
the salary of the employees.

 Internal Audit

BHEL is having its own team of internal auditors, who

to unearth the discrepancies in accounting, check
periodically the books of accounts as well as schedules
forming part of accounts.

 Export Incentives, Sales Tax and

Income Tax

This section deals with export procedures of finished

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

29
 It also assesses of sales tax, income tax and other
matters related to custom duty.

30
 INTRODUCTION TO WORKING
CAPITAL
“Working capital refers to a firm’s investment in short
term assets-cash, short term securities, accounts receivable
and inventories.”

- Weston &
Brigham

Working capital can be classified either on the basis of

its concept or on the basis of periodicity of its requirement.

(I) On the basis of concepts there are two concepts of

working capital: -

1. Gross Working Capital

2. Net Working Capital

Gross Working Capital

Gross working capital refers to the firm’s investment in

current assets. Current assets are assets that can be
converted into cash within an accounting year. Current
assets include cash and bank balance, Short-term securities,
debtors, bills receivables and inventory.

31
The Gross Working Capital concept focuses attention on two
aspects of current assets management.

(a) Optimum investment in current assets

(b) Financing of current assets.

NET WORKING CAPITAL

Net working capital refers to the difference between

current assets and current liabilities. Current liabilities are
those claims of outsiders, which are expected to mature for
payment within an accounting year and include bills payable
and outstanding expenses. Net working capacity indicates
the liquidity position of the firm. Generally net working
capacity is referred to as working capital.

(II) On the basis of requirement – According to Gestenberg,

the working capital can be classified into permanent or
regular working capital and variable working capital.

NEED FOR WORKING CAPITAL

A firm required as sufficient amount of working

capital to run its day-to-day business. We can hardly find a
firm that does not have any amount of working capital. But
32
firms differ in their requirement for working capital. The firm
needs working capital because sales do not convert into cash
instantaneously. There is always a time duration required to
convert sales, after the conversion of resources into
inventories, into cash. This time duration is called Operating
Cycle of the firm. Firms like BHEL must maintain an adequate
amount of working capital because of a long operating cycle.

Operating Cycle: - It is clear that working capital is

required because of the time gap between the sales and
their actual realization in cash. This time gap is technically
termed as “operating cycle” of the business.

Funds required investing in inventories, debtors and other

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

DEBTO
RS SALES

33
 OPERATING CYCLE FINISHED
CASH GOODS

RAW WORK IN
MATERIAL PROGRESS

In case of a manufacturing company, the operating cycle is

the length of time necessary to complete the following cycle
of events:

(i) Conversion of cash into raw material.

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

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

(iv) Conversion of finished goods into accounts

receivables, and

(v) Conversion of accounts receivables into cash.

The operating cycle of manufacturing business can be shows

as in the following chart.

OBJECTIVES OF WORKING CAPITAL

MANAGEMENT

The basic objective of working capital is to provide adequate

support for the smooth functioning of normal business

34
 operations of a company. The term adequate working
capital is subjective depending on management’s attitude
towards uncertainity/risk.

I. Maintenance of working capital.

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

SAFETY LIQUIDITY
PROFITABILITY

CREDIT
BANK MGMT
MGMT.
MINIMIZE
MINIMIZE
TIME
CAS
EXCESS
H

ACCT RECEIVABLE
ACCT PAYABLE
MGMT
MGMT

MINIMIZE TIME OPTIMIZE TIME

MEDIA

35
 Goals of Working Capital Management

WCM: A TRADE-OFF BETWEEN LIQUIDITY AND

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

Therefore, firm should maintain its current assets at that

level where the liquidity cost is quite low and the firm is also
able to achieve adequate profitability.

DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business.

2. Manufacturing cycle.

3. Sales growth.

4. Nature of raw material used.

5. Demand condition.

6. Production policy.
36
 7. Price level changes.

8. Operating efficiency and performance.

9. Firm’s credit policy.

10.Available of credit.

11.Degree of synchronization among cash inflow and outflows.

GUIDELINES AND SOURCES OF FUNDS FOR

WORKING CAPITAL REQUIREMENTS OF BHEL

1. CASH CREDIT FROM BANKS

The requirements of working capital will be met

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

2. WORKING CAPITAL LOAN FROM GOVERNMENT

The funds for working capital over and above cash

credit limits may also be arranged through
government loans.
37
3. RECEIPTS FROM CUSTOMERS

The bulk of working capital requirements are met

from the advances from customers in accordance
with the contract condition as approved by the board.
The receipts are deposited in the centralized account.

4. FIXED DEPOSITS FROM MEMBERS OF PUBLIC

Subject to the approval of the government and Board

of Directors, the funds may be raised from public by
obtaining fixed deposits under the provisions of the
company.

5. PROVISIONS OF THE FUNDS FOR SITE OFFICES

Funds required to site offices will be provided by the

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

6. OTHER SOURCES OF FUNDS

(a) Bill rediscounting scheme of IDBI:

The scheme was introduced in 1965. The

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

(b) Bill market scheme:

RBI providing rediscounting facility for bills

having maturity of not more than 120 days
introduced this scheme. This facility enables the

38
 supplier to get the payment for their supplies at a
reduced rate of interest.

(c) EXPORT PRE-SHIPMENT/POST SHIPMENT

CREDITS:

In respect of export orders finance at

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

(d) Other Schemes: -

Discounting supply bills can also raise short-

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

Forecasting of Working capital

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

There are many popular methods available for

forecasting the working capital requirements, which follows:
-

1) Cash Forecasting Method

39
 2) The Balance Sheet Method

3) The profit & loss adjustment Method

4) Percent of Sales Method

5) The Operating cycle Method

6) Regression Analysis Method

CASH MANAGEMENT
INTRODUCTION
Cash is an important current asset for the operation
of the business. Cash is the basic input needed to keep the
business running on a continuation basis. It is also the

40
ultimate output realized by selling the services or product
manufactured by the firm. Cash is the most liquid of all the
current assets. Higher cash and bank balance indicate high
liquidity position in lower profitability, as ideal cash fetches
no return. Thus a major function of finance manager is t
maintain sound cash position.

Cash management is concerned with managing of: -

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

(ii) Cash flow within the firm.

(iii) Cash balance held by the firm at a point of time by

financing deficit or investing surplus cash.

Objective of Cash Management

1) To meet day to day business requirements.

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

expenditure.

3) To face unexpected cash drain.

4) To maintain image of credit worthiness.

5) To size potential opportunities for profitable long-

term investments.

6) To meet requirement of bank relationships.

Efficient cash management function calls for cash

planning, evaluation of cash benefits and cost of policies,
sound procedures and practices and synchronization of cash
inflows and outflows. Thus for achieving goals and objectives
of cash management, finance manager has to plan cash
needs of the firm followed by cash flow management,
determination of optimum level of cash and finally
investment of surplus.
41
Factors Affecting Cash Requirement
(A) Internal Factors

(a) Profit level

(b) Dividend and Taxation policy

(c) Reserve and surplus

(d) Depreciation policy

(e) Expansion programme

(f) Operating efficiency

(B) External Factors

(a) Fluctuating in marketing interest rates

(b) Investment avenues available in market

(c) Government economic policies

(d) Rules and regulations of RBI and other

regulatory bodies

Cash Management in B.H.E.L., Jhansi

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

For meeting day to day expenses, the units have to

prepare the estimates of such expenses, which are then
42
sent to corporate office weekly or monthly, or both. At unit
level, the cash budget is prepared on yearly basis for
estimating the expected cash inflows and outflows. The
yearly budget is broken down into monthly and weekly
intervals. The inflows and outflows and estimated on
following basis.

The only source of cash inflow for unit is corporate

office. The sale proceeds cannot be directly utilized. Based
on the above requisitions, the corporate office allocates the
funds.

For cash credit, corporate office will negotiate with

consortium of Bank for total cash credit required for the
company as the whole. A consortium deed for hypothecation
of stocks and stores of company is executed by corporate
office. All the information, documents etc. required in this
connection will be called for by the corporate office from the
division.

Arrangements have been already been made by the

State Bank of India, HDFC Bank, Canara Bank, Bank of
Baroda and Indian Overseas Bank for centralizing total cash
credit limits at New Delhi.

Under this scheme, the units have finished the required

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

Based on these cash flow statements, the corporate

office will allocate the sub limits will be transferred to the
consortium of the bank by 25th of the month. The unit can
utilize this fund.

The actual cash flow statement will be send to corporate

office monthly i.e. 1st of succeeding month.

43
 The units are also required to send the weekly report of
daily bank transactions to the corporate office. These
reports shows the detail of daily debit and credit transaction
appearing in bankbook of the company, enabling the posting
of corporate bankbooks as well as verification of bank
statement received from banks. These reports are sent to
corporate office on

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

month)

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

month)

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

month)

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

month)

The units are required to send the comparative

statement of estimated and annual cash flow of the
preceding month. This report will be sent quarterly after
inter-unit reconciliation meeting. The total interest payable
on cash credit availed by corporate office is to be allocated
among the units in the ratio of utilization of funds. Thus cash
forecasting & budget are the principal tools of cash
management. Forecasting helps manager to know how
much cash will be held in balance, to what extent the firm
should rely on banks financing and how much to invest in
marketable securities.

Advantages of Centralized System

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

2) Deficit of cash at various units can be sorted out

through centralized cash system.
44
 3) Idle cash at various units, may be noted or avoided.

Cash Budget in B.H.E.L., Jhansi

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

Cash budget in BHEL, Jhansi is prepared on the basis of

production schedule, which is prepared after receiving
customer’s orders at the beginning of the year. There are
two aspects of cash budget inflow and outflow. In flow of
cash budget is determined on the basis of receiving the
customer’s orders and preparing production schedule.
Outflow is determined on the basis of requirement of raw
materials, payment of taxes and duties, interest on
borrowings etc. Outflow in cash budget is categorized into
operation and non-operation outflow consist of capital
expenditure, exchange variations and supplier’s credit.

Thus after determining the budgeted estimates of

inflow and outflows, cash budget is prepared at the
beginning of the year. The distribution of cash is determined
on monthly basis in every month of that year. In the last
quarter of the year cash budget is received and the last

45
estimates are calculated and fixed. Monitoring of cash
budget is done though management information system.

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

Business firm generally sell goods on credit to facilitate

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

Cost of Maintaining Receivable

The cost associated with the maintenance of account
receivables are:

1) Capital Cost
46
 When a firm maintains receivables, there is a time lag
between the sales of good and payments by the customers.
Mean while, the firm has to pay to the employees and to the
suppliers of raw materials. These payments are made by the
use of traditional capital which alternatively could be
profitably employed elsewhere.

2) Collection Cost

These are costs, which the firm has to in for collection

of the amounts at the appropriate time from the customers.

3) Administrative Cost

In the process of maintaining receivable company

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

4) Default Cost

When customers make default in payments, not only

the collection effort has to be increased but the firm may
also have to incur losses due to bad debts.

Objective of Receivable Management

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

Credit Policy

47
 Credit Policy of a firm can be regarded as a kind of
trade-off between increased credit sales leading to increase
in profit and the cost of having large amount of fund locked
up in the form of receivables and loss due to incidence of
bad debts.

The variables associated with credit policy are: -

(A) Credit Standard

(B) Credit Terms

(C) Collection Efforts

Credit Standards are criteria to decide the type of

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

Receivable Management in BHEL,

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

To utilize its excess capacity, BHEL is granting liberal

trade credit terms to its customers. The main customers of
BHEL are Railways, Power Industries and other Private
Parties. BHEL has overseas sales also.

All the BHEL units are having their commercial

department. Commercial department and Regional
48
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.

49
 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
50
 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

51
Objectives of Inventory Management
1. To maintain a large size of inventory for efficient and
smooth production and sales operation

2. To maintain a minimum investment in inventories to

maximize profitability.

The effective management of inventory involves a

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

The major disadvantages of over investment are: -

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

(ii) Excessive carrying cost.

(iii) Risk of liquidity.

(iv) Physical deterioration of inventory during storage.

Maintaining an inadequate level is also dangerous.

The consequences of the under investment in inventories
are: -

(i) Production hold ups.

(ii) Failure to meet delivery commitment.

Thus the aim of inventory management should be to

avoid excessive and inadequate level of inventories and to
maintain sufficient inventory for the smooth production and
sales operations. Efforts should be made to place an order at

52
 the right time with right source to acquire the right quantity
ant the right price and quality.

Factors Affecting Level of Investment in Inventories: -

(1) Seasonal nature of raw material.

(2) Length and technical nature of production process.

(3) Style factor in end product.

(4) Terms of purchase.

(5) Time factor.

(6) Supply condition.

(7) Loan facilities.

(8) Other factors.

Inventory Management in BHEL,

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

Production planning and control department plays a

pivotal role in inventory management. The engineering
department plays a supporting role and provides the
requisition regarding technology to be applied and material

53
requires to PPC department. In BHEL the inventory control is
perform with following steps: -

1. Planning-

This is done by PPC department is consultation with

purchase, commercial, design and manufacturing
department prepares the planning schedule. This schedule
along with information provided by engineering and design
department helps in material planning and inventory
control.

2. Procurement –

The procurement is done by purchase department. It is

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

12. Receipt and Custody

For the proper inventory control on receipt of material

in store, quality control department checks the material as
per specification. The cost section fills details of all the

54
purchase by issuing store receipt voucher and material issue
voucher.

13. Issue

After receiving the material and storing, the

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

14. Accounting

The record of every transaction regarding the use of

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

Methods Used For Inventory Control

In BHEL, planning and control of inventory is done by
using two methods —

(i) ABC analysis

(ii) Slow moving and non-moving goods

analysis.

(iii) Budgeting material requirements

(iv) Fixation of raw material levels

(v) Variety reduction

(vi) Codification of materials

(vii) Control of work in progress

(i) ABC Analysis

55
 In case of manufacturing company like BHEL, the
number of items of raw material run into thousands. From
the point of view of monitoring information for control, it
becomes extremely difficult to consider each one of these
items.

In this case ABC analysis becomes useful and enables

management to concentrate attention and keeps a close
watch on a relatively less number of items, which account
for a high percentage of annual usage value of all items of
inventory.

Annual usage value = Annual requirement per

unit cost

In this analysis, items are categorized into A, B, & C

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

The advantages of this system are —

• Ensures closer control on costly items.

56
 • Helps in developing scientific methods of controlling
inventories. Clerical costs are reduced and stock is
maintained at minimum level.

• Helps in achieving the main objective of inventory

control at minimum level.

(ii) Slow moving and Non-moving goods analysis

It is advantageous to compare the turnover of different

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

Cost of material consumed

during period

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

Average stock of raw material

during period

Stock turnover figures the presence of slow moving stock

and helps in keeping the level of such stock to a low mark.

Slow Moving Stock – Material which have low turnover are

classified as slow moving stock. In BHEL, Jhansi an item is
regarded as slow moving one, if turnover ratio is less than
10%.

Non-Moving Stocks-- These items have no immediate

demand but may be required in future. Here the items,
which are not consumed since two years, are regarded as
non-moving stock or dead inventory. This category includes
mainly directly chargeable items.

57
 These items having turnover ratio of 10% or more are
fast moving items and such acquire more importance.

Documents Used For Inventory Control

The various documents used for control of inventory are
discussed below

(i) Store Receipt Voucher

This is issued when raw material purchased reaches

the store. It is issued by store in charge.

(ii) Material Issued Voucher

This is an authorization to the storekeeper to issue raw

material. Any material ordered for a specific work order will
be recorded on MIV details of material requisition is entered
on the Bin card.

(iii) Material Return Note

This is an authorization to the storekeeper regarding raw

material, finished parts or other stores no longer required by
the factory. The various stock records and cost accounts are
adjusted in due course from the details given on the form.

(iv) Material Transfer Note

This is issued when the material booked to one

particular order is transferred to another work order.

(v) Material is kept in appropriate bin and draws. For each

kind of material a bin card is maintained showing details. A
bin card assists the storekeeper to control the stock. The bin
card incorporates all information viz. opening balance of
58
materials, materials ordered, materials allocated and closing
balance of materials. As a result the bin card shows the full
cycle of material like the order of few supplies, allocation of
material to jobs, receipt and issued of material, stock in
hand and balance available.

ANALYSIS OF WORKING
CAPITAL
59
 The analysis working capital is primarily a test of short
term solvency. There are dangers in having too little and too
much working capital.

Therefore

The financial manager has to be very vigilant all

throughout about the trends in the items that make working
capital.

The questions to be studied and answered in

connection with the analysis of working capital including the
following –

(i) Is the management utilizing working capital

efficiently?

(ii) Is the amount of working capital is adequate,

excessive and insufficient?

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

(iv) Is the current financial position improving?

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

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

(iii) To plant the various sources of short term finance

well in advance in case of the need.

(iv) TO study the trends in the working capital

positions.

60
(v) To assess the effectiveness of management of
current assets.

(vi) To maximize the return on investment of equity

shareholders.

Inventory Valuation: -

(i) Inventory is valued at actual/estimated cost or net

realizable value, whichever is less.

(ii) Finished goods in plant and work in progress

involving hydro and thermal sets including gas based
power plants, boilers auxiliaries, compressors and
industrial turbo sets are valued at actual/estimated
factory cost or at 97.5% of the realizable value
whichever is lower.

(iii) In respect of valuation of finished goods in plant

and work in progress, cost means factory cost,
actual/estimated factory cost includes excise duty
payable on manufactured goods.

(iv) In respect of raw material, components, loose

tools, stores and spares cost means weighted average
cost.

(v) The components and other material

purchased/manufactured against production order but
declared surplus are charged off to revenue retaining
residual value based on technical estimates.

61
 BHEL AT A GLANCE

Rupees(in millions)

2006-07 2007-08
CHANGE(%)

Turnover 18739
21401 14.2

Value added 7182 8323 15.9

Employee (Nos.) 42124 43636 3.6

Profit before tax 3736 4430 18.6

Profit after tax 2415 2859 18.4

Dividend 600 746 24.4

Dividend Tax 93 127 26.8

Retained earnings 1722 1986 15.3

Total assets 22280 29352 31.7

Net worth 8788 10774 22.6

Total Borrowings 89 95 6.3

Debt: Equity 0.01 0.01 0.0

Per share (In Rupees.):

-Net worth 179.5 220.1 22.6

-Earnings 49.3 58.4 15.4

-Dividend

(US $ in million)

Turnover 4344 5419 24.8

Profit Before Tax 866 1122 29.5

Profit After Tax 560 724 29.3

62
 BIBLIOGRAPHY

• FINANCIAL MANAGEMENT
BY I M PANDEY

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

• ANNUAL REPORT 2007-08

63