Summer Training Report On Management of working capital At (NTPC) Submitted in partial fulfillment fulfillment of the degree of Master of Business Administration Administration Affiliated To Maharishi Dayanand University
Submitted to:
Submitted by:
The Controller of Examination
Preeti Sorout
M.D.U. (Rohtak)
2k-13-MRCE-MBA-
32
FARIDABAD (HARYANA) Aug,2014
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Declaration I Preeti, Roll No. 2k13-MRCE-MBA-032, a student of Masters of Business Administrati on of 3rd semester, at Manav Rachna College of Engineering, Faridabad here by solemnly declare that researched project titled “MANAGEMENT “MANAGEMENT OF WORKING CAPITAL” CAPITAL ” at NTPC, is the outcome of my own researched prepare by me and the same has not been submitted to any university or institute of the award of any degree and diploma. DATE : PLACE :
Faculty’s Signature
Candidate‘s Signature
………………………..
…………………………..
(Signature of the Director/ Principal of the Institute)
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Declaration I Preeti, Roll No. 2k13-MRCE-MBA-032, a student of Masters of Business Administrati on of 3rd semester, at Manav Rachna College of Engineering, Faridabad here by solemnly declare that researched project titled “MANAGEMENT “MANAGEMENT OF WORKING CAPITAL” CAPITAL ” at NTPC, is the outcome of my own researched prepare by me and the same has not been submitted to any university or institute of the award of any degree and diploma. DATE : PLACE :
Faculty’s Signature
Candidate‘s Signature
………………………..
…………………………..
(Signature of the Director/ Principal of the Institute)
2
PREFACE With Immense pleasure and deep sense of sincerity, I have completed my Industrial training. It is an essential requirement for each and every student to have some practical exposure towards real world situations. A systematized practical experience to inculcate self confidence in a student so that they can mentally prepare themselves for this competitive environment. The Purpose of Training are: 1. Developing intellectual ability of student 2. Bring confidence 3. Developing skills 4. Modify Attitude
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Acknowledgement I would like to express my profound gratitude to Mr. Dinesh Rustogi, Sr.General Manager (finance Department) and Mr. Kamal chopra, under whose guidance I was able to complete my summer training project and was able to learn the various aspects of hr apart CAPITAL”. from my project “MANAGEMENT OF WORKING CAPITAL”.
Their guidance and inspiration helps me lot during prepare my project. Their cordial cooperation also impresses me to furnish my project in good manner. I express my gratitude to all authorities at NTPC FARIDABAD, whose directions and valuable information greatly helped me in preparing my project.
Thanks are all due to our MRS. REKHA SACHDEVA AT MRCE member for their motivation and teaching, which have enabled me to cross this milestone.
I acknowledge the great assistance and support of entire team of professionals who allowed me to pursue this project, despite an already crowded and over loaded work schedule.
I would like to specially thank my family members without their support it was impossible to go for the project. Last but not least I must thank god.
(PREETI SOROUT)
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T abl abl e of Conten Conten ts Sr. No. 1. 2. 3. 4. 5. 6.
7.
Title Name
Page No.
Title of the Project Declaration Preface Acknowledgement Table of Content Introduction i. Objective of study ii. Vision And Mission iii. CMD Message to the Organization iv. Top Honors v. NTPC at a Glance vi. NTPC Power Stations In India India vii. Value System of NTPC viii. NTPC Faridabad Vision ix. Faridabad Gas Power Station – Station – Organization Organization Profile x. Plant Technologies xi. Layout of FGPS xii. Working at Gas Power Plant 1. Gas Turbine 2. Steam Turbine Overview of Finance Function In Organization Financial Management Overview of Finance Function of NTPC 1. Areas of Corporate Finance 2. Areas of Project Finance 3. Areas of Regional Finance Review of Literature a. Working Capital Concept b. Need and Importance of Working Capital Capital Management c. Factors influencing the Working Capital requirement d. Operating Cycle e. Cash Required for Working Capital f. Cash Forecasting and Budgeting Research Methodology Data analysis and Interpretation a) Working capital Assessment b) Ratio Analysis Recommendations Limitations of the Study Conclusion Bibliography
8.
9.
10. 11.
12. 13. 14. 15.
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1 2 3 4 5 6 7 8 9 9 10 11 12 13 13 14 15-16 17 18 19 19 20-23 24 25 26 27-30 31-37 38-44 38 39 40-44 45 46 47 48
An I ntr oduction
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Resear ch obj ecti ve :-
1.
To study the liquidity and solvency position of the company .
2.
To study how working capital is determined.
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Vision & M ission
Vision “To be one of the world‟s largest and best power producer, powering India‟s growth.”
Mission “Develop and provide reliable power, related products and services a t competitive prices, integrating multiple energy sources with innovative and eco – friendly technologies and contribute to society.”
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CM D M essage To the Or ganization
NTPC CMD- Shr i Ar up Roy Choudhary Believes that- “If your Intentions are pure, you are bound to succeed.”
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Top honor s f or NTPC at Best Companies to Wor k f or in I ndia Under his supervision NTPC ranked 3rd overall , First amongst the PSUs , First in Manufacturing and Production Industry Segment. Standing tall among the galaxy of 514 Indian Public and Private se ctor companies, the Maharatna PSU, NTPC Ltd. bagged 3rd rank in India’s Best Companies to Work for the year 2012 by The Great Place to Work and The Economic Times , in a glittering award ceremony in Mumbai on 13th July, 2012.
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NTPC at a Glance NTPC, the largest power company in India, was set up in 1975 to accelerate power development in the country. It is among the world‟s largest and most e fficient power generation companies. NTPC‟s core business is engineering, construction and operations of power generating plants. It also provides consultancy in the area of power plant construction and power generation to companies in India and abroad. At present, Government of India holds 84.5% of the total equity shares of the company and the balance 15.5% is held by FIIs, Domestic Banks, Public and others. Recognizing its excellent performance and vast potential, Government of India has identified NTPC as one of the jewels of the Public sector Navratnas- a potential global giant. It is listed in Forbes Global 2000 for 2011 ranked it 348th in the world.
Installed Capacity:
NTPC has installed capacity of 36,014 MW. It has 15 coal based power stations (27,535 MW), 7 gas based power stations (3,955 MW) and 5 power stations in Joint Ventures (3,728 MW). The company has power generating facilities in all major regions of the country. The different place where NTPC has power stations is shown in the map given below. NTPC plans to be a 75,000 MW company by 2017.
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NT PC Power Stations in I ND I A
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Value System of NTPC - “BE -
COMMITTED”
Core Values
Operating Values
B
Business Ethics
Integrity, trust, morality fairness
E
Environmentally & Economically Sustainable
C
Customer Focus
Promptness, Reliability, Empathy, Humility
O
Organizational & Professional Pride
Sense & Ownership, Inspiration, Loyalty
M
Mutual Respect & Trust
Openness, Truthfulness, Reciprocity, Tolerance
M
Motivating Self & Others
I
Innovation & Speed
Decision Making, Entrepreneurship, Timely
T
Total Quality for Excellence
Benchmarking, Excellence, System & Process, Continuous learning
T
Transparent & Respected Organization
E
Enterprising
D
Devoted
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VISION To be one of the most Reliable, Economical, Environment friendly and Socially responsible Gas Based Power Station in the country enhancing stakeholder delight
F aridabad Gas Power Stati on – Organi zation Profile NTPC-Faridabad (FGPS) is one of the operating units (Power Stations) of NTPC, which has 15 Coal-based and 7 Gas-based power stations & 5 JVs owned in India with a total installed capacity of 34,854 MW. Cabinet Committee on Economic Affairs (CCEA) accorded Government‟s investment Clearance for FGPS during July 1997. The capacity addition of 432 MW at FGPS was accomplished within 31 months after the Main equipment order and just within 36 months after Government of India‟s approval for setting up of FGPS – which is a benchmark, not only in India, but in the whole world. FGPS started commercial operation from 1st January 2001. FGPS is a Combined Cycle Power Station, having capacity of 432 MW (2 x 138 MW GT + 156MW ST). It is designed to run on Natural Gas as well as Naphtha or mixed fuel. FGPS is in the business of generating electricity / power & entire power is supplied to the state of Haryana. FGPS Power is evacuated through PGCIL‟s 220 kV AC lines to Samaypur & Palla Substations owned by HVPN (Haryana Vidyut Prasaran Nigam). The metering is done on weekly basis, but the energy billing is done month wise. In the last two FY, the station used very high quantity of liquid fuel (1,50,000 KL) to meet the customer demand as gas was in short supply. Due to the tie-up of RLNG on a long term (10 years) basis and the allocation of RIL‟s KG-D6 gas by GOI, the consumption of liquid fuel for the current FY is almost nil, which is a significant achievement.
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F aridabad Gas Power Stati on – Plant Technologies FGPS is a Combined Cycle Power Station , operating since last 12 years, with Gas Turbine is of M/s Siemens make model V94.2, Silo- design combustion system, version 3 & Steam Turbine is of M/s BHEL make. R&M proposals for replacement of obsolete systems of C&I & Electrical sections have been initiated. Proposal for Gas Turbine spares for improvement in efficiency and to increase the life of critical components under R&M has also been initiated.
Type of technology & operator interface:
Gas Turbines at Faridabad are having hybrid burners with NOx emissions of 25 ppm against statutory norms of 50 ppm. The efficiency of these Gas Turbines is best among all the types of Gas Turbines in NTPC. Facility is available for both open cycle and combined cycle operation.
Knowledge Sharing
Knowledge management portal is available in SAP for all employees of Faridabad thru intranet, wherein case histories and experiences from different NTPC sites are uploaded. 1 no. LAN and broadband enabled kiosk has been installed in C&M departmentt, where vendors can upload and download their documents. FGPS shared best practices of O&M with M/S GAIL & HVPN by visits. Also experiences during overhauls shared with M/s Siemens & BHEL.
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L ayout of NTPC F ar idabad
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Wor ki ng at Gas power plant
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Gas tur bine The gas turbine at NTPC is manufactured by Ansaldo and runs on the license provided by Siemens. It weighs about 300 tons and generates power of about 143 MW. The gas is allowed to expand through the turbine thus the pressure energy of gas acts as a source of mechanical rotation of the turbine. This rotation powers not only generator but the compressor as well. The compressor consumes nearly 60 % of the total output. These turbines account for 2/3 of the total output of the plant.
Steam Tu r bine The gases released from HRSG are fed into the ST. The STs at NTPC are manufactured by Ansaldo under license by BBC. The ST has a production capacity of 144 MW. The steam expands through the turbine. The turbine thus rotates and generates power through generator. The ST is a multi shaft turbine so that ma ximum power can be harnessed. ST contributes the 1/3 of total power production.
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Over vi ew of the F inance F un ction in Organizations The Role of the Finance Function in Organizations
Human Body
Organization
• Nervous System
• Management Information System • Operation & Maintenance System • The Finance Function • Waste & Environment Management System
• Digestive System
• Circulatory System • Excretory System
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F inancial M anagement The goal of financial management is to maximize the wealth of its current shareholders. It involves taking decisions on the following:
Capital Budgeting
Working Capital Management
Capital Structure
Capital Budgeting
It involves taking decision on allocating funds to project – land, buildings, machineries, equipment, research & development, godowns, showrooms, distribution network, Information infrastructure, brands and other long-term assets so as to maximize the return on investment. Three techniques are used to evaluate competing projects: a) Payback Period b) Net Present Value c) Internal Rate of Return Capital Structure
It involves taking decisions on the following issues: 1. 2. 3. 4. 5.
What is the optimal debt-equity ratio for the firm? Which specific instruments of equity and debt financing should the firm employ? Which capital markets should the firm access? When should the firm raise finances? At what price should the firm offer its securities?
Capital structure decisions should be guided by considerations of cost and flexibility. The objective should be to minimize the cost of financing. 20
Working Capital Management
It is short-term financial management of Current Assets (Inventories, Debtors, And Marketable Securities & Cash/Bank Balances) & Current Liabilities (Short-term Debt, Creditors) The key questions in working capital management are: 1) 2) 3) 4) 5)
What is the optimal level of inventory? Should the firm grant credit to its customers? How much cash should the firm carry? Where should the firm invest its cash surplus? Wherefrom should the firm raise short-term loans?
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Over view of F inance F unction of NTPC Organi zation Str uctur e of F inance The Finance function is organized in three tiers: 1. Corporate Finance (SCOPE/Delhi & EOC/NOIDA) 2. Regional Finance(NRHQ/Lucknow, ERHQ/ Patna, SRHQ/Hyderabad WRHQ/Mumbai and NCRHQ/NOIDA) 3. Site Finance(all projects and power stations)
Corporate Finance
Organization Structure of Finance
Regional Finance
Site Finance
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Areas of Corporate Finance
- responsible for review of audited accounts of projects, regional Accoun ts and Au dit offices, preparation & audit of unit accounts of Corporate offices, consolidation of NTPC accounts leading to NTPC B/S and P&L a/c and C&AG audit of the same
- responsible for preparing cash/funds flow statement (daily/weekly etc.), Treasury investing surplus and borrowing from a consortium of banks, remittances to projects & regional offices
Establishment - responsible for payroll accounting and payment, payment of all
employee entitlement claims like travelling allowance, LTC, medical bills, contingent expenditure, HBA, car/two-wheeler advance, computer advance etc.
- responsible for employee PF deductions, employers‟ contrn., Provident F und (PF ) filing returns with PF commissioner and maintenance of PF trust.
- responsible for conduct of internal audit of all projects, regional I nternal Audit offices and corporate offices. CA firms are short-listed for internal audit of projects & regional offices while NTPC Finance executives do the internal audit of corporate offices
- responsible for preparation and submission of all MIS reports – internal(to M I S NTPC management) as well as external(Ministry of Power & Finance, CEA etc.)
- responsible for financial vetting of cost estimates of work F inancial Concur rence and purchase order proposals, financial vetting of comparative statements after tendering and financial concurrence of work/purchase order proposals
- responsible for review of project & region Budget (Constru ction and O& M ) construction and operation and maintenance budget, preparation of capital and revenue budget of corporate offices, consolidation and submission of NTPC budget to Ministry of Power & Finance, Planning Commission etc.
- responsible for arranging foreign syndicated loans, issue of I ntern ational Fin ance bonds in foreign capital markets and forex risk management
- responsible for liaison with CERC for tariff fixation, liaison with SEBs Commercial for payments against our oustanding bills, debtors reconciliation, interface with coal cos. for fuel supply, fixation of financial terms etc .
Taxation - responsible for income tax, service tax and sales tax assessment; issuance
of circulars for important changes in taxation laws; attending court hearings
Bonds - responsible for issue and redemption of domestic bonds
- deals with payment of dividend, all issues pwertaining to I nvestor s Ser vices shareholders of equity shares of NTPC
- This section deals with holding of Board meetings of NTPC, Company Secretar i at holding of AGM of shareholders, Delegation of Powers and maintaining compliance to all clauses of the Companies Act relevant to NTPC
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Areas of Project Finance a) Accoun ts, Audit and Cash & Bank b) Establishment c) Budget d) Concurrence
e) Commercial - responsible for preparation and submission of data for energy billing and commercial reports on sales/debtors f) MIS
g) Stores Bills - responsible for payment and accounting of suppliers bills against purchase orders and pricing of received materials for taking on stock h) Pr iced Stor es L edger - responsible for inventory accounting – opening & closing balances and receipt and issue of materials both in quantity and price i) Works Bil ls - responsible for payment and accounting of contractors‟ bills against work orders based on measurement books certified by Engr.-in-charge and rates, terms & conditions of Letter of award
Areas of Regional Finance a) Accoun ts, Audit and Cash & Bank b) Establishment c) Budget, Commer cial and M I S d) Concurrence e) Wor ks and Sup pliers’ bills
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Review of L iter atur e:
Working Capital Concept: Working Capital Management is a process of planning & controlling the level and mix of current assets of the firm as well as financing these assets. Specifically, Working Capital Management requires financial manager to decide what quantity of cash, other liquid assets, account receivables and inventories the firm will hold at any point of time. Working Capital is capital that you require for working i.e. functioning of your business in short run. There are two concepts of working capital: 1. Gross working capital 2. Net working capital
Gross working capital Net working capital
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Gross Worki ng Capital:
The gross working capital is the capital invested in the total current assets of the enterprises. It focuses on,
a) Optimu m I nvestment i n Cu r r ent assets:
Excessive investment impairs firm‟s profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets.
b) F in ancing of Cur rent assets:
Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term securities.
Constituents of Current Assets:
1. 2. 3. 4. 5.
6. 7. 8. 9.
Cash in hand and cash at bank Bills receivables Sundry debtors Short term loan and advances Inventories of stock as: a. Raw material b. Work-in-process c. Stores and spares d. Finished goods Temporary investment of surplus Prepaid expenses Accrued income Marketable securities
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Net Worki ng Capital:
Net working capital refers to the difference between current assets and current liabilities of the firm. It can also be explained as that portion of current assets which is financed with long term funds. When current assets exceed current liabilities it is called positive working capital and when current liabilities exceed current assets it is called negative working capital. Net working capital is excess of current assets over current liabilities, or, say:
Net Working Capital= Current Assets- current Liabilities
Constituents of Current Liabilities:
1. 2. 3. 4. 5. 6. 7.
Accrued or outstanding expenses Short term loans, advances and deposits Dividend payables Bank overdraft Provision for taxation, if it does not amount to app. of profit Bills payable Sundry creditors
Implications of Net Working Capital:
Net working capital is necessary because the cash outflows and inflows do not coincide. In general cash outflows resulting from payments of current liabilities are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are less net working capital is required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities.
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The dangers of excessive Working Capital are as follows:
a) It results in unnecessary accumulation of inventories. Thus the chances of inventory mishandling, waste, theft and losses increases. b) It is an indication of defective credit policy and slack collection period. Consequently higher incidences of bad debts occurs which adversely affect the profits. c) It makes the management complacent which degenerates into managerial efficiency.
The dangers of inadequate Working Capital are as follows:
a) It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. b) It becomes difficult to implement operating plans and achieve the firms profit target. c) Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. d) Fixed assets are not efficiently utilized. Thus the rate of return on investments slumps. e) It renders the firm unable to avail attractive credit opportunities etc. f) The firm loses its reputation when it is not in position to owner its short term obligations. As a result the firm faces a tight credit terms.
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Need and Importance of Working Capital Management:
The IMPORTANCE of working capital management stems from the following reas ons:
a) Investment in the current assets represents a substantial portion of total investment. b) Investments in the current asset and the level of current liabilities have to be geared quickly to change in sales, which helps to expand volume of business. c) Gives a company the ability to meet its current liabilities. d) Take advantage of financial opportunities as they arise.
The NEED of working capital management stems from the following reasons:
a) The firm needs working capital because the production, sales and cash flows are not instantaneous. b) The firms need cash to purchase raw material and pay expense as there may not be perfect matching between cash inflows and cash outflows. c) Cash may also be held up to meet future contingencies.
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Factors influencing the Working Capital requirement:
All firms do not have the same working capital needs. Following are the factors that affect the working capital needs:
The working capital requirement of the firm is closely 1. Natur e and size of busin ess:
2.
3.
4.
5.
6. 7.
8.
9.
related to the nature of the business. We can say that the trading and financial firms have very less investment in the fixed assets but require a large sum of money to be invested in working capital. On the other hand retail stores, for example, have to carry large stock of variety of goods little investments in fixed assets. M anufacturi ng Cycle: It starts with the purchase and use of raw materials and completes with the production of finished goods. Longer the manufacturing cycle larger will be the working capital requirement; this is seen mostly in the industrial products. Business F lu ctuations: When there is an upward swing in the economy sales will increase also the firm‟s investment in the inventories and book debts will also increase, thus it will increase the working capital requirement of the firm and viceversa. Production Poli cy: To maintain an efficient level of production the firm may resort to normal production even during the slack season. This will lead to excess production and hence the funds will be blocked in form of inventory for long time, hence provisions should be made accordingly. Since cost and risk of maintaining a constant production is high during the slack season some firm‟s may resort to producing various products to solve their capital problems. If they do not, then they require high working capital. Firm’s Credit Policy: If the firm has a liberal credit policy its funds will remain blocked for long time in form of debtors and vice-versa. Normally industrial goods manufacturing will have a liberal credit policy, whereas dealers of consumer goods will have a tight credit policy. Avail abil ity of Credit: If firms get credit on liberal terms it will require less working capital since it will always pay its creditors later and vice-versa. Growth and Expansion activities: It is difficult precisely to determine the relationship between volumes of sales and need for working capital. The need for working capital does not follow the growth but precedes it. Hence, if the firm is planning to increase its business activities, its need to plan its working capital requirements during the growth period. Conditions of Supply of Raw M ateri al: If the supply of raw material is scarce the firm may need to stock it in advance and hence need more working capital and vice versa. Profit Margin and Profit Appropriation: A high net profit margin contributes towards the working capital pool. Also, tax liability is unavoidable and provisions for its payment must be made in the working capital plan, otherwise it may impose a strain on working capital. 30
Oper ating Cycle: All business firms aim at maximizing the wealth of shareholders for which they need to earn sufficient return on their operations. To earn sufficient profits they need to do enough sales, which further necessitates investment in current assets like raw material etc. There is always an operating cycle involved in the conversion of sales into cash. The duration of time require to complete the following sequence of events in case of manufacturing firm is called the operating cycle:
1. 2. 3. 4. 5.
Conversion of cash into raw material Conversion of raw material into WIP Conversion of WIP into FG Conversion of FG into debtors and bills receivables through sales Conversion of debtors and bills receivables into cash I nj ection of Cash
Cash withdr awals
Cash
Payments
Debtors generated & then cash received
To supplier s F or r aw mater i al To wor ker s wages
Goods Produced
Goods Sold
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Cash Requir ed f or Wor ki ng Capital: For estimating the actual cash requirement we may follow the following two-step procedure: 1. Estimate the cash cost of various current assets requirements: The cash cost of a current asset is: Value of current asset: (-) profit element if any included in value (-) non-cash charges like depreciation, if any, included in value
2. Deduct the spontaneous current liabilities from the cash cost of current assets: A portion of cost cash of current assets is supported by trade credit and accruals of wages on expense, which may be referred to as spontaneous current liabilities. The balance left after such deduction has to be arranged from other sources.
In 1997, the RBI permitted banks to evolve their own norms for assessment of the Working Capital requirements of their clients.
Cash flow based calculation of Working Capital:
a) Drawing up cash flow statements (monthly or quarterly) for the past few years clearly indicate the seasonal and secular trends in utilization of working capital. b) The projections drawn up by the entrepreneur may then be jointly discussed with the banker as modified in the light of past performance and banker‟s opinion. c) The peak cash deficit is ascertained from the cash budgets. d) The promoter‟s share for such requirement may be mutually arrived at by the banker and the borrower with the balance requirement forming the bank financed part of working capital. Cash flow based computation of working capital requirement has been recommended by RBI for assessment of working capital requirement permitting the banks to evolve their own norms for such assessment. However the reluctance to provide cash budgets thereby revealing additional information to the banks, has led to even larger companies shying away from cash budget methods assessing working capital. Consequently cash budget method is currently prevalent mainly in case of seasonal industry, construction sector as well as other entities whose operations are linked to project.
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Meaning and Importance:
Cash is the money, which the firm can disburse immediately without any restrictions. Near cash items like marketable securities or bank time deposits are included in cash.
Cash Management is concerned with the managing of:
a. Cash flows into and out of the firm b. Cash flows within the firm and c. Cash balance held by a firm at a point of time
Cash Management is important because:
i.
Cash is used for paying the firms obligation
ii.
Cash is an unproductive asset you need to invest it somewhere
iii.
It is difficult to predict cash flows accurately as there cannot be perfect coincidence between inflows and outflows of cash
iv.
Though cash constitutes the smallest portion of total current assets, management‟s considerable time is devoted in managing it.
The obvious aim of firm these days is to keep its cash balance minimum and to invest the released cash funds in profitable opportunities. In order to overcome the uncertainty about the predictability of cash flow, the firm should evolve strategies regarding the following four facts of cash management: i.
Cash Planning: Cash surplus and deficit for each period should be planned; this can
be done by preparing the cash budget. ii.
Managing the Cash Flows: The firm should try to accelerate the inflows of cash
flow while trying to minimize the outflows. iii.
Optimum Cash Level: The cost excess cash and danger of cash deficit should be
matched to determine the optimum level. iv.
Investing Idle Cash: The firm should make decision about the division of such cash
balances between bank deposits and marketable securities.
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In order to manage cash we need to manage the sources of additional working capital, which includes the following: I. II. III. IV. V. VI. VII.
Existing cash reserves Profits (when we secure it as cash) Payables (credit from suppliers) New equity or loan from shareholders Bank overdrafts or lines of credit Long term loans If you have insufficient working capital and try to increase sales, you can easily overstretch the financial resources of business. This is called overtrading.
Why Does a Firm Need Cash: 1) Transaction Motive: Transaction motive refer to the holding of cash to meet routine cash requirement to finance the transactions which a firm carries on in variety of transactions to accomplish its objective, which have to be paid for in the form of cash. Example: payment for purchases, wages, operating expenses, financial charges like interest, taxes and dividends etc. Thus requirement of cash balances to meet routine need is known as transaction motive and such motive refers to holding of cash to meet anticipated obligations whose timing is not perfectly synchronised with cash receipts. 2) Precautionary Motive: A firm has to pay cash for the purpose which cannot be predicted or anticipated. The unexpected cash needs at short notice due to: a) Floods, strikes & failure of customers b) Slow down in collection of current receivables c) Increase in cost of raw material
The cash balance held in reserves for such random and unforeseen fluctuations in cash flows are called as precautionary balance. Thus precautionary cash provides a cushion to meet unexpected contingencies. The more unpredictable are the cash flows, the larger is the need for such balance.
3) Speculative Motive: It refers to the desire of firm to take advantage of opportunities which present themselves as unexpected moment & which are typically outside the normal course of business. If the precautionary motive is defensive in nature, in that firm must make provisions to tide over unexpected contingencies, the speculative motive represents a positive and aggressive approach. The speculative motive helps to take advantage of:
i.
An opportunity to purchase raw material at reduced price on payment of immediate cash. 34
ii.
A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline.
iii.
Make purchase at favourable prices
iv.
Delay purchase of raw material on the anticipation of decline in prices.
The firm must decide the quantu m of tr ansactions and pr ecaution ary balan ces to be held, which depends upon the following factors: 1. The expected cash inflows and outflows based on the cash budget & forecasts, encompassing long/short range cash needs of firm. 2. The degree of deviation between the expected and actual cash net flow. 3. The maturity structure of firm‟s liability. 4. The firm‟s ability to borrow at short notice, in case of emergency. 5. The philosophy of management regarding liquidity and risk of insolvency. 6. The efficient planning and control of cash.
Cash Planning:
Cash planning is a technique to plan for and control the use of cash. The forecast may be based on the present operations or anticipated future operations. Normally large, professionally managed firms do it on daily or weekly basis, whereas, medium size firms do it on monthly basis. Small firms do not do formal cash planning is case they do it; it‟s on a monthly basis. As the firm grows and its operation becomes complex, cash planning becomes inevitable for them.
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Cash Forecasting and Budgeting: A cash budget is a summary statement of the firms expected cash outflows and inflows for the projected time period. It helps the financial manager to determine the future cash needs, to arrange for it and to maintain a control over the cash and liquidity of firm. If the cash flows are stable, budgets can be prepared monthly or quarterly, if they are unstable they can be prepared daily or weekly. Cash budgets are helpful in: i.
Estimating cash requirements
ii.
Planning short term financing
iii.
Scheduling payments in connection with capital expenditure
iv.
Planning purchases of raw material
v. vi.
Developing credit policy Checking the accuracy of long-term forecasts
Short term Forecasting methods:
Two most commonly used methods of short term forecasting are: I.
The receipt and payment method
II.
The adjusted net income method
The receipt and payment method is used for forecasting limited periods, like a week or a month, whereas, the adjusted net income method is used for longer durations. The cash flows can be compared with budgeted income and expense item if the receipt and payment approach is followed. On the other hand the adjusted net income method is appropriate in showing the company‟s working capital and future finance needs.
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i.
Receipt and Payment Method: It simply shows the timing and magnitude of expected cash receipts and payments over the forecast receipts.
ITEMS Cash sales
BASIS OF ESTIMATION Estimated sales and its division between cash/credit sales
Collection of a/c’s receivables Interest and dividend receipts Increase in loans/deposits and issue of securities Sale of assets
Estimated sales, its division between cash and credit sales, and collection pattern Firms portfolio of securities and return expected from the portfolio Financing plan
Cash purchases
Wages and salaries
Estimated purchases, its division between cash/credit purchases, and terms of credit purchases. Estimated purchases and its division between cash/credit purchases. Manpower employed and wages and salaries structure
Manufacturing expense
Production plan
General, administration and selling expenses Capital equipment purchases Repayment of loans and retirement of securities
Administration and sales personnel and proposed sales promotion and distribution expenditure. Capital expenditure budget and payment pattern associated with capital equipment purchases Financing plan
Payment for purchases
Proposed disposal of assets
The most difficult part is to anticipate the amount as well as the time when the receipts will be collected, the reason being that the projection of cash receipts relies heavily on sales forecasts and the guesses regarding the time of payment by the customer. Its main advantages are: 1. Provided a complete picture of expected cash flows 2. Helps to keep check over day-to-day transactions Its main drawbacks are: 1. Its reliability is impaired by delays in collection or sudden demand for large payments and other similar factors. 2. It fails to provide a clear picture regarding the changes in the movement of working capital, especially those related to inventories and receivables.
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ii.
Adjusted Net Income method: It involves the tracing of working capital flows. It is also called sources and use approach. Its two objectives are: a) To project company‟s need for cash at some future date. b) To show if the company can generate its money internally, and if not, how much either will have to be borrowed or raised in capital market.
It generally has three sections; sources of cash, uses of cash and adjusted net . In preparing the adjusted net income forecasts items like net income, depreciation, balance taxes and dividends etc can be easily determined from the company‟s annual operating budget. Normally it is difficult to find working capital changes, especially since the inventories and receivables pose a problem. Its main advantages are: 1. Helps to keep a control on working capital 2. Helps anticipate financial requirements
Its main drawbacks are: 1. It fails to trace the flow of cash 2. Not useful in controlling day-to-day transactions
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Long term Cash Forecasting:
They are generally prepared for period of two to five years and hence provide a broad picture of firms financing needs and availability of investible surplus in future. Its major uses are: i. ii. iii.
Indicate future financial needs Helps evaluate proposed capital projects Improve corporate planning
Long term Forecasting methods:
The adjusted net income method can be used here also. Long term financing not only reflects more accurately the impact of any recent acquisition but also foreshadows financial problems that new additions may pose for the firm. To enhance the efficiency of cash management, collections and payment must be properly monitored. In this respect the following will be helpful:
Prompt billing: It ensures early remittances. Also the firm has high control in this area and hence there is a sizeable opportunity to free up the cash. To tap this opportunity the treasurer should work with the controller and others in: a. Accelerating invoice data b. Mailing bills promptly c. Identifying payment locations
Expeditious collection of cheques: Two important methods for expediting the collection process are: 1. Concentration Banking: The important features of concentration banking are:
a. A major bank account of company is set up with a concentration bank, generally situated at same place where the company has it‟s headquarter. b. Customers are advised to mail their remittances to collection centre closest to them. c. Payments received in different collection centres are deposited in local banks, which in turn transfer them to concentration bank.
39
Thus this help saving mailing and processing time, reducing financial requirements. This system leads to potential savings, which should be compared to the cost of maintaining system. 2. Lock-Box System: It functions as follows: a. A number of post boxes are rented by the company in different locations. b. Customers send their remittances to lock box c. Banks are instructed and authorized to pick up the cheques from the local boxes and deposit them in the company‟s account.
The main advantages of this system are, firstly, the bank handle the remittance prior to deposit at a lower cost. Secondly, the cheques are deposited immediately upon receipt of remittance and their collection process starts sooner than if a firm would have them processed from internal accounting purpose prior to their deposits.
Control of Payables: Payments arise due to trade credit, which is a source of funds, and hence, the firm should try to slow them down as much as possible. By proper control of payables a firm can conserve its cash resources. Following are some of ways of doing it: a. Payments should be made as and when they fall due.
b. Payments must be centralised. This helps in consolidating funds at the head office, and investing surplus fund more effectively. c. Arrangements may be made with the suppliers to set due dates of their bills to match the firm‟s period of peak receipts, Thus helping the firm to get better mileage.
Optimal Cash Balance:
Cash balance is maintained for transaction purposes and an additional amount may be maintained as a buffer or safety stock. It involves the tradeoff between cost and risk. If a firm maintains a small cash balance, it has to sell its marketable securities and probably buy them later more often, than if it holds a large cash balance. More the number of transactions more will be the trading cost and vice-versa; also lesser the cash balance, less will be the number of transaction and vice-versa. However the opportunity cost of maintaining the cash rises, as the cash balance increases.
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Research M ethodology: Research may be defined as a systematic and objective analysis and recording of controlled observations that may lead to the development of generalization of principles or theories resulting in prediction and possibly ultimate control of events. Methodology is often used in a narrow sense to refer to methods, technology or tools employed for collection of data as well as its processing. Research Design:
Exploratory and Descriptive research The research is primarily both exploratory as well as descriptive in nature. The sources of information are both primary and secondary. 1. Exploratory research: Exploratory research focuses on the discovery of new ideas and is generally based on secondary data. Exploratory research is all about to collect the data and gathering of information about the organisation where project is to be done. Sources of information are available and this collected information is very crucial & important. So proper care should be taken while collecting the i nformation. 2. Descriptive research: Descriptive research is done when the researcher wants to know the characteristics of certain group, it will help us describe relevant aspects of phenomena of cash and it‟s each relevant variable. Methodology:
The purpose of this research is to contribute towards a very important aspect of financial management known as working capital management. Here we will see the relationship between working capital management practices and its affects. Data type:
Generally there are two types of data: a. Primary data b. Secondary data Primary Data:
Primary data is the data which is collected for the first time and had not been published earlier. Sources of primary data are following: i. ii. iii.
Interactions with employees Various books of financial management Reference material 41
iv.
Lectures taken by project guide
Secondary Data:
Secondary data is the data which is already published and readily available for the use of users. Sources of secondary data following: i. ii. iii.
Annual reports of the company of the respective years The analysis has been completed with the help of various tools and techniques of working capital management Company website
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Data analysis and I nter pretation:
Wor ki ng capital Assessment
Particulars
Mar-„09
Mar-„10
Mar-„11
Mar-„12
Mar-„13
634765973.00
575775096.00
467776440.00
574022257.11
538921967.64
6397537.00
634239.00
1111890.97
658022.00
108444277.00
226124164.00
16885701.32
16691547.18
Current Assets(A) Inventories
Cash & 2776826.00 Bank Balance Loans & 116506282.00 Advances Other Current Assets
15274.00
139490.00
389321.00
1376261.00
2277788.75
Total
754064805.00
690756400.00
694924164.00
593396110.4
558549325.6
449472574.00
431295037.00
390100642.97
488554832.30
_
_
_
_
66344834.00
66640556.00
143172821.42
79409139.13
108867356.00
84763794.00
22480054.00
14780793.00
582699387.00
555753518.4
582744764.4
Current liabilities(B) Sundry 1763459121.00 Creditors Short-term _ Borrowings Other 107208287.00 Current Liabilities Short – term 66723750.00 Provisions Total
1937391158.00 624684764.00
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Worki ng Capital= Cu rr ent Assets- Cur rent Li abili ties
Year
Working Capital
2009
(1183326353)
2010
66071636
2011
112224777
2012
37642592
2013
(24195438.8)
200000000
0 1
2
3
4
5
-2E+08
-4E+08 Year -6E+08 Working Capital -8E+08
-1E+09
-1.2E+09
-1.4E+09
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Ratio A nal ysis:
Curr ent Ratio:
Current ratio is a measure of firm‟s short term solvency. It indicates the availability of current asset in rupee for every one rupee of current liability. A ratio of greater than one means that the firm has more current assets than current liabilities to meet their short term requirements. The current ratio of 2:1 is considered satisfactory. Current Ratio=
Current Assets Current Liabilities
Year
Current Assets
Current Liabilities
Current Ratio
2009
754064805
1937391158
0.38
2010
690756400
624684764
1.10
2011
694924164
582699387
1.19
2012
593396110.4
555753518.4
1.06
2013
5585493256.6
582744764.4
.95
6E+09 5E+09 4E+09
Year Current Assets
3E+09
Current Liabilities 2E+09
Current Ratio
1E+09 0 1
2
3
4
5
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Qui ck Ratio:
A high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and, on the other hand, o low quick ratio represents that the firm‟s liquidity position is not good. A rule of thumb of 1:1 is considered satisfactory. Quick Ratio=
Quick or Liquid Assets Quick or Liquid Liabilities
Quick or Liquid Assets= Current Assets- Inventories Year Quick Assets Quick Liabilities
Quick Ratio
2009
119298832
1937391158
.06
2010
114981304
624684764
.18
2011
227147724
582699387
.38
2012
19373853.29
555753518.4
.03
2012
19627357.96
582744764.4
.03
2E+09 1.8E+09 1.6E+09 1.4E+09 Year
1.2E+09
Quick Assets
1E+09
Quick Liabilities
800000000
Quick Ratio 600000000 400000000 200000000 0 1
2
3
4
5
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Net Worki ng Capital Ratio:
The difference between current assets and current liabilities is called net working capital. Net Working Capital measures the firm‟s potential reservoir of funds. Net Working Capital Ratio=
Working Capital Net Current Assets
Year
Working Capital
Net Current Assets
NWC Ratio
2009
(1183326353)
119298832
(9.91)
2010
66071636
114981304
.57
2011
112224777
227147724
.49
2012
37642592
19373853.29
1.94
2013
(24195438.8)
19627357.96
(1.23)
400000000 200000000 0 1
2
3
4
5
-2E+08 Year -4E+08
Working Capital Net Current Assets
-6E+08
NWC Ratio -8E+08 -1E+09 -1.2E+09 -1.4E+09
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Cur r ent Assets to Worki ng Capital Ratio:
This ratio shows the relationship between current assets and working capital. It indicates the percentage of current assets to working capital. Current Assets to Working Capital Ratio= year
Current Assets
Current Assets Working Capital Working Capital
2009
754064805
(1183326353)
(.63)
2010
690756400
66071636
10.45
2011
694924164
112224777
6.19
2012
593396110.4
37642592
15.76
2013
5585493256.6
(24195438.8)
(23.08)
CA to WC Ratio
2040 2035 2030 2025 2020
ca to wc ratio
2015
year
2010 2005 2000 1995 1
2
3
4
5
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Stock T ur nover Ratio:
Stock turnover ratio is also known as inventory turnover ratio. This ratio measures the number of times the stock turns, flows, rotates in an accounting period compared to the sales effected during that period. It indicates the frequency of inventory replacement, i.e. the number of times the inventory has been sold and replaced during a given period of time . Stock Turnover Ratio=
Total sales Inventory
Holding days of Inventory=
365 STR
Year
Total Sales
Inventory
STR
Holding days of Inventory
2009
22477605438.00
634765973.00
35.41
10.30
2010
22914345086.00
575775096.00
39.80
9.17
2011
14545644401.00
467776440.00
31.10
11.73
2012
12698978172.50
574022257.11
22.12
16.50
2013
13106393203.43
538921967.64
24.31
15.01
2.5E+10 2E+10 Series1
1.5E+10
Series2 1E+10
Series3 Series4
5E+09
Series5 0 Inventory Year
Total Sales
Inventory
STR
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Holding days of
Recommendations: a. Working capital requirement are not consistent and shows fluctuating tren ds in last five years so it requires proper attention.
b. In March 2008 and 2012 working capital is negative that shows shortage to cash and that affects the other parts too. Estimates must be done properly so that company can ask same from corporate centre.
c. Organisation should keep the complete detailed record of debtors.
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Limitations of the Study:
1. As plant is small unit of NTPC and plant is instructed not to show debtors in their books and not to collect the debtors, it restricts the scope of the project. 2. Working capital management is a vast subject covering man y domains of current assets and current liabilities management. It is not possible to cover all aspects in such a short tenure of the project. 3. All the information is not available with the plant. 4. Some of the information is not provided due to the organisations policy. 5. Training period is short for such topic.
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Conclusion
The training in F ari dabad Gas Power Station , NTPC – F ARIDABAD has given me an opportunity to understand the concept of working capital management and how working capital is determined in the company. On completion of the project in F&A department, I came to the conclusion that Working Capital Management is one of the most important parts of finance. Though working capital management has restricted scope but it affects NTPC a lot. Training bridges the gap between theoretical knowledge and practical implication, same I have experienced in the company.
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