Asian School of Management, Pune

                                        Synopsis of project report

On

“WORKING CAPITAL MANAGEMENT”

 At

Bharat Heavy Electrical’s Limited

Prepared By:                                                                       Faculty Guide:

Table Of Contents

EXECUTIVE SUMMARY

         Working capital is the capital required for maintenance of day-to-day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for this is attributed to the fact that an ineffective working capital management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets & current liabilities but also in maintaining a satisfactory level of working capital.

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

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

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

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

COMPANY PROFILE

1956 - Company was set up at Bhopal in the name of M/s Heavy electrical (India) Ltd. in collaboration with AEI, UK. Subsequently, three more plants were set up at Hyderabad, Hardwar and Tiruchy. The Bhopal Unit was controlled by the company, the other three were under the control of Bharat Heavy Electricals Ltd. - The Company`s object is to manufacture of heavy electrical equipments. 1972 - In July the Operations of all the four plants were integrated. 1974 - In January Heavy electrical (India) Ltd was merged with BHEL. - For the manufacture of a wide variety of products, the company has developed technological infrastructure, skills and quality to meet the stringent requirements of the power plants, transportation, petro chemicals, oil etc. - BHEL has entered into collaboration which are technical in nature. Under these agreements, the collaborators have transferred, furnished the information, documentation, including know-how relating to design, engineering, manufacturing assembly etc. 1982 - BHEL also entered into power equipments, to reduce its dependence on the power sector. BHEL Heavy Equipment Repair Plant (HERP), Varanasi set up in 1984.  

Accordingly, two repair plants at Bombay & Varanasi came into existence, the foundation equipment repair plant sprawling in 29.8 acre area at Varanasi was laid on 20th September 1984 by Chief Minister of U.P. Shri Narayan Dutt Tiwari within a short span of 21 month much before the schedule.

Starting a manufacturer of O&M spares for the boiler and boiler auxiliaries, repair activities got a real break in 1990 when rebabitting of TG set bearing was taken up in the plant. Since than rebabitting of different type of bearing including an unconventional synchronous condenser has been carried out to the entire satisfaction of the customers. Now HERP manufactures turbine spares, tools & tackles complete spares of bowl mill XRP 623,803,883 & 1003. The unit has a plan to add Constant load hanger, Variable load hanger & condensate polishing unit in near future.

Through small in size, HERP has been in adequate attention to all the facts of plant operation like computerization, inventory control, quality assurance. In order to channellies the creative energy of employees suggestion scheme and quality circle and productivity improvement project are in operation. 

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

BHEL caters to core sectors of the Indian economy viz., power generation and  transmission , industry  transportation , renewable  energy defiance  etc. the wide network of BHEL 14 manufacturing divisions 4 power sector regional  centers, 8 service centers, 15 regional office, one subsidiary  co. joint venture and a large number of projects sites spread all over India  and abroad enables the company to promptly serve its customers and provide them with suitable products, systems and servicers- efficiently and at competitive  prices

Power sector :-

Power generation sector comprises thermal, gas, hydro and nuclear power plant business. As of 31-3-2004, BHEL supplied sets account for nearly 71,255 MW or 64% of the total installed capacity of 1,11,151 MW in the country, as against nil till 1969-70.

BHEL has proven turn key  capabilities for executing power projects from concepts to commissioning. It possesses the technology and capability to produce thermal sets  with super critical parameters up to 1000 mw unit rating and gas turbine-generator sets of up to 250 mw unit rating. Cogeneration and combined-cycle plants have been introduced to achieve higher plant efficiencies. To make efficient use of the high ash-content coal available in India, BHEL supplies circulating fluidized bed combustion boilers to both thermal and combined-cycle power plants.

The company manufactures 235 MW nuclear turbine generator sets and has commenced production of 500 MW nuclear turbine generator sets.

Custom-made hydro sets of Francis, Pelton And Kaplan types for different head discharge combinations are also engineered and manufactured by BHEL. In all, orders for more than  700 utility sets of thermal, hydro, gas and nuclear have been placed on the company as on date. The power plant equipment  manufactured by BHEL is based on contemporary technology comparable to the best in the world, and is also  internationally competitive.

 The company has proven expertise plant performance improvement through renovation, modernization and upgrading of a variety of power plant equipment, besides specialized know how of residual life assessment, health diagnostics and life extension of plants.

Transmission :-

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

Industry sector :-

BHEL is a major contributor of equipment  and systems to  industries: cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc. the range of systems and equipment  supplied includes: captive power plants, dg power plants,  high speed industrial drive turbines, industrial boilers and axillaries, waste heat recovery boilers, gas turbines, heat exchangers and pressure vessels, centrifugal compressors, electrical machines, pumps, valves,  seamless steel tubes and process controls, control systems for process industries, and control and instrumentation systems for power plants, defense and other applications. The company has commenced manufacture of large scale desalination plants to help augment the supply of drinking water to people.

Transportation :-

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

Telecommunication :-

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

Renewable energy :-              

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

International operations :-

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

Technology Up gradation and research and development :-

To remain competitive and meet customers’ expectations, BHEL  lays great emphasis on the continuous Up gradation  of products and related technologies, and development of new products. The company has upgraded its products to contemporary levels through continuous inhouse efforts as well as through acquisitions  of new technologies from leading engineering organizations of the world.

The corporate R&D Division at Hyderabad leads BHEL’s research efforts in a number of areas of importance to BHEL’s product range. Research and product development centers at each of the manufacturing divisions  play a complementary role.

Reinforcing its position as a total solution provider BHEL has developed and successfully commissioned a maintenance controller at the western mountain power project , Libya. Based on powerpac-g , software jointly development  by BHEL and TCS , this is the system for complete power plant application and takes care of all the maintenance needs of a power station.

Range Of Products/Services Provided By HERP , VARANASI

• Bowl Mill XRP/XRS 623, 703HP, 783, 803, 803HP, 883, 1003 spares
• Turbine fasteners
• Repair/Rebabbiting of TG bearings
• Rotor machining
• Spares for Boiler Auxiliaries like Coal Burners, Fuel Piping, ESP, Air Preheater     & R.C. Feeder etc.
• Hydro Turbine component machining like Guide Vanes, Guide Bearings.
• Tools & Tackles of Steam Turbines
• Limiter Assembly, Oil Filter Assembly & Speed Changer Assembly of Governing System.

  Services Offered By HERP,VARANASI

        Repair Machining Of --    

• HP/LP rotor of steam turbine  (removal of thermal cracks)
• Casing Liners and Diaphragm of steam turbine.
• Minor machining of Power plant components at the site.
• NDT like Ultrasonic testing of bearings at site
• Consultancy for performance improvement of Bowl mills through modification of mill components.

MISSION:

To be an Indian Multinational Engineering Enterprise providing Total Business Solution through Quality Products, Systems and Services in the fields of Energy, Industry, Transportation, Infrastructure and other potential areas

WORKING CAPITAL MANAGEMENT

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

Defining Working Capital

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

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

Thus:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

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

Current Assets

• Liquid Assets (cash and bank deposits)
• Inventory
• Debtors and Receivables

Current Liabilities

• Bank Overdraft
• Creditors and Payables
• Other Short Term Liabilities

ISSUES IN WORKING CAPITAL

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

• Management of cash:- Identify the cash balance which allows for the business to meet day to day expenses .It reduces cash holding costs

• Management of sundry debtors:- Money which is owed to a company by a customer for products and services provided on credit  It Identify the appropriate credit policy

• Management of inventory:- Money which is owed to a company by a customer for products and services provided on credit  It Identify the appropriate credit policy

Cash Management in B.H.E.L.

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

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

The only source of cash inflow for unit is corporate office. The sale proceeds cannot be directly utilized. Based on the above requisitions, the corporate office allocates the funds.

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

Arrangements have been already been made by the State Bank of India, HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank for centralizing total cash credit limits at New Delhi.

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

 Based on these cash flow statements, the corporate office will allocate the sub limits will be transferred to the consortium of the bank by 25th of the month. The unit can utilize this fund. The actual cash flow statement will be send to corporate office monthly i.e. 1st of succeeding month.

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

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.

Receivable Management in BHEL.

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

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 Operational Divisions (RODs) 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.

Inventory Management in BHEL,

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 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.

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

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

5 . Accounting -The record of every transaction regarding the use of material in every department is kept. These records give the overall view of how and where inventories have been used.

                                          BALANCE SHEET OF HERP UNIT

CURRENT RATIO:                                                                                           ( Rs in lakhs)

QUICK RATIO:

                                                                                                                         ( Rs in lakhs)

Order book position of BHEL has substantially improved. The company has received order of Rs. 36,400 crore upto December,2009 and is likely to receive orders of Rs 59,900 crore in 2009-10 as against Rs. 59,687 crore of orders in 2008-09. Against opening balance Rs. 1,17,000 crore of orders outstanding, company is likely to have Rs. 1,44,000 crore as on 1.4.2010 for execution in 2010-11 and beyond.

BHEL has embarked upon a plan of enhancing its manufacturing capacity and capability for preparing itself to meet the country’s power demand, for providing “Power to all by 2012” and to contribute fully for meeting the power forecast of the 11th Plan and beyond. Towards this end, BHEL has been augmenting its capacity and capability and has already enhanced its power generating equipment manufacturing from 6000 MW in 1999-2000 to 10,000 MW per annum w.e.f. 1st January,2008. This manufacturing capacity is planned to be enhanced to 15,000 MW per annum by end of March, 2010. This will further go up to 20,000 MW per annum by March, 2012.

                                    Objective  of Study

.

• To study in general the working capital management procedure in BHEL (HERP), Varanasi.
• To analyze and apply operating cycle concept of working capital in BHEL (HERP), Varanasi.
• To know how the working capital is being financed.
•  To know the various methods to be followed by BHEL for inventories and accounts receivables.
• To give suggestions, if any, for better working capital management in BHEL.

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

                                 Research Methodology                                                            

 Research methodology used for study secondary sources of data.  most of study is conducted based on secondary sources.

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

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

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

Collecting the Information

With respect to primary and secondary data, the information is collected. Primary data tells us to asking the question to the person personally like interaction with employers and account head in BHEL . Secondary data means that to get the data from the internet, company magazines, annual reports of the company , internal financial document which is provided by the account department.

Findings & Observation

During my project period, I have studied the working capital management in BHEL (HERP), Varanasi. On the basis of my study my findings and observation are as follows:-

•  Estimation of working capital requirement is done of the basis of the length of operating cycle of different products.
• Net working capital increased year on year.
• The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that the firm is highly liquid and would be able to meet its short term liabilities effectively
• The WC is also showing an increasing trend which is attributed to the increasing profits.
• Centralized cash management system has proved better cash security .
• Inventory control system have somewhere time consuming.

Limitations of the study

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

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

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

RECOMMENDATIONS AND SUGGESTIONS            

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

         During my project period, I have studied the working capital management in BHEL (HERP), Varanasi. On the basis of my study I am putting forward some suggestions. Implementation of which may certainly improve the efficiency of working capital management in the unit.

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

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

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

• Government department customers are lagging in debt payment which should be consider.

                                          Conclusion 

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

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

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

1. Increase in Sundry Debtors due to  relaxing of the credit policy
2. Increase in Inventory.
3. Increase in Other Current Assets and Loans and Advances. However, increase in Current Liabilities and Provisions has offset the increase in Current Assets.
4.  The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that the firm is highly liquid and would be able to meet itsshort term liabilities effectively

BIBLOGRAPHY