CHAPTER-1 INTRODUCTION

WORKING CAPITAL FINANCING & MANAGEMENT

Working Capital Financing & Managing is the process of planning and controlling the level and mix of the current assets of the company as well as financing these assets. WCM requires decisions like what quantities of cash, other liquid assets, accounts receivables, and inventories the company will hold at any point of time.

Working capital management involves the relationship between a company's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a company is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. For increasing shareholder's wealth a firm has to analyze the effect of fixed assets and current assets on its return and risk. Working Capital Management is related with the Management of current assets. The Management of current assets is different from fixed assets on the basis of the following points: 1. Current assets are for short period while fixed assets are for more than one Year.

2. The large holdings of current assets, especially cash, strengthens Liquidity position but also reduces overall profitability, and to maintain an optimum level of liquidity and profitability, risk return trade off is involved holding Current assets. 3. Only Current Assets can be adjusted with sales fluctuating in the short run. Thus, the firm has greater degree of flexibility in managing current Assets. The management of Current Assets helps affirm in building a good market reputation regarding its business and economic condition. "Cash is the lifeblood of business" is an often repeated maxim amongst financial managers. Working capital management refers to the management of current or shortterm assets and short-term liabilities. Components of short-term assets include inventories, loans and advances, debtors, investments and cash and bank balances. Shortterm liabilities include creditors, trade advances, borrowings and provisions. The major emphasis is, however, on short-term assets, since short-term liabilities arise in the context of short-term assets. It is important that companies minimize risk by prudent working capital management. 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.

Working capital is the money which a company needs to keep its business going until company cover its operating costs out of revenue. Its a challenge for even the biggest

companies: sustaining working capital while managing the flow of cash through the business along with the proper inventory management and receivables management. But there are ways to ensure that operation makes the best use of its current assets. 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). Current Assets are resources which are in cash or will soon be converted into cash in "the ordinary course of business". Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business". 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 Cash in hand / at bank Bills Receivable Sundry Debtors Short term loans Investors/ stock

Current Liabilities Bills Payable Sundry Creditors Outstanding expenses Accrued expenses Bank Over draft

Temporary investment Prepaid expenses Accrued incomes A satisfactory level of working capital is to be maintained from not becoming insolvent and bankrupt. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety.

The task of the financial manager is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business company is measured by its ability to satisfy shortterm obligations as they become due. The three basic measures of a companys overall liquidity are

The current ratio The acid test ratio The net working capital

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets.

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that

warrants further analysis. For example, it could be that the company's sales volumes are decreasing, and as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up, as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

WORKING CAPITAL CYCLE

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

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital -TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales. More businesses fail for lack of cash than for want of profit.

Need for Working Capital:A successful sales program is necessary for earning profits by any business enterprise. However sales do not convert into cash instantly; there is invariably a time lag between the sale of goods and receipts of cash.

A sufficient amount of working capital is necessary to sustain sales activity. Technically this is referred to as the operating or cash cycle. The operating cycle can be said to at the heart of the need for working capital.

Phase 3 Receivables

Cash Phase 1

Phase 2

Inventory Operating Cycle

The operating cycle consist of three phases:-

Phase 1: Cash Gets Converted in to Inventory.

This includes purchase of raw materials, conversion of raw material into work in progress, finished goods and finally the transfer of goods to stock at the end of the manufacturing activity and cash is directly converted into inventory.

Phase 2: Inventory converted into Receivables.

The inventory is converted into receivables as credit sales are made to customers.

Phase 3: Receivables converted into cash

This phase represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the company has moved from cash to inventory. 8

These phases affect cash flows because sometimes sale is done on credit and it takes sometimes to realize.

The most appropriate method of calculating the Working Capital needs of firm is the concept of operating cycle. There are some limitations with all the three approaches therefore some factors govern the choice of method of Working Capital. Factors considered are seasonal variations in operations, accuracy sales forecasts, investment cost and variability in sales price would generally be considered. The production cycle and credit and collection policy of the firm would have an impact on Working Capital requirements

METHODOLOGY
In the project we will be analyzing the factors that affect the quantum of working capital in a company and to know better about the efficient management of liquidity and 9

understanding the components that make up working capital of a company through a case study.

I have taken a company named NHPC- National Hydro Electric Power Limited Pvt Ltd. for the accomplishment of the objectives of my project. I have used various financial ratios for this purpose.

OBJECTIVES
To understand the concept of working capital and its management in a company. To study the important factors that determines the quantum of working capital. To know about the need of working capital in a company. To examine the salient points regarding each element of working capital.

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To know how company should maintain its working capital to keep its excellent performance and run its business effectively and efficiently without facing much problems.

To understand the need of efficient management of liquidity and financial risks in a business (treasury management).

CHAPTER-2 COMPANY PROFILE- NHPC

Our Company was incorporated on November 7, 1975 under the Companies Act as a private limited company under the name National Hydro Electric Power Corporation Private Limited. The word private was subsequently deleted on September 18, 1976.Our Company was converted to a public limited company w.e.f. April 2,1986. Pursuant to a shareholders resolution dated March 13, 2008, the name of our Company was changed to its present name NHPC Limited and a fresh certificate of Incorporation consequent upon change of name was issued by the RoC, National 11

Capital Territory of Delhi and Haryana, on March 28, 2008.

Major events Financial Year 1975 - 76 1976 - 77 Event Incorporation of our Company Transfer of the Loktak hydroelectric project

(105 MW) from GoI to our Company

1977 - 78

Transfer of the Baira Siul hydroelectric

project (180 MW) from GoI to our Company

1982 - 83

Baira Siul power station (180 MW) in Himachal

Pradesh commissioned 1983 - 84 All units of Devighat power station in Nepal commissioned ahead of

schedule Loktak power station (105 MW) in Manipur commissioned 1985 - 86 Hydro Power Training Institute set up at the Baira Siul hydroelectric

project to train operators and supervisory staff 1986 - 87 First issue of 14% 7 years, redeemable secured non convertible bonds

amounting to Rs. 143.64 crore

Nuwakot Rural Electrification project in Nepal completed ahead of schedule 1987 - 88 Establishment of a satellite telecommunication network taken up to link 12

various projects of our Company 1989 - 90 GoI upgraded our Company from a Schedule B to a Schedule A corporation 1992 - 93 A consultancy wing set up to provide a range of specialised services in

the investigation, design, construction and operation of hydel projects

Tanakpur power station (120 MW) in Uttarakhand commissioned Our Company declared its maiden dividend of Rs. 5 crore for the year ending March 31, 1994

Our Companys registered office started operating from its present building in Faridabad Chamera I power station (540 MW) in Himachal Pradesh commissioned

1995 - 96

Agreement signed for execution of Kurichhu

hydroelectric project (45 MW) in Bhutan

1997 - 98 commissioned

Uri power station (480 MW) in Jammu & Kashmir

1999 - 2000

Rangit power station (60 MW) in Sikkim commissioned

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2000 - 01

Three units of 45 MW Kurichhu power station in Bhutan

commissioned by our Company ahead of schedule Our Company and the government of Madhya Pradesh entered into an MoU to exploit the hydro electric potential of the Narmada basin by completing the Indira Sagar and Omkareshwar projects

Our Company and the government of Jammu & Kashmir entered into an MoU to exploit the power potential of the state 2002 - 03 A line of credit for a tenor of 19 years taken from LIC for an amount of Rs. 2,500 crore Our Company was accorded AAA credit rating for domestic borrowing and BB credit rating at par with sovereign rating of international borrowings by Fitch Ratings 2003 - 04 Chamera- II power station (300 MW) in Himachal Pradesh commissioned 2004 - 05 Indira Sagar hydroelectric project (1,000 MW) of NHDC, a joint venture of our Company and the government of Madhya Pradesh in Madhya Pradesh commissioned 2005 - 06 ERP initiated under the name Project Kiran 2006 - 07 Our Company entered into an agreement with Government of Bhutan for preparation of DPR of Mangdechhu project (672 MW) in Bhutan 2007 - 08 The name of our Company changed to its present name NHPC Limited Dulhasti power station (390 MW) commissioned 14

Teesta-V power station (510 MW) commissioned Omkareshwar hydroelectric project (520 MW) of NHDC, a joint venture of our Company and the government of Madhya Pradesh, commissioned

Our Company entered into an MoA with the government of Arunachal Pradesh to execute the Dibang multipurpose hydroelectric project Our Company entered into an MoU with the government of Manipur to exploit the hydro electric potential of the tailrace discharge of Loktak Downstream Hydroelectric Project 2008 - 09 Our Company conferred Mini Ratna Category I status by the GoI Our Company entered into an MoU with the government of Jammu & Kashmir, JKSPDC and PTC to incorporate a joint venture develop the Pakal Dul and other hydro projects in the Chenab River Basin

Incorporation of joint venture company, National Power Exchange Limited, along with NTPC, PFC and Tata Consultancy Services Limited NHPC Ltd has appointed Shri. Sudhir Kumar, Joint Secretary (Hydel), Ministry of Power as Part-time Director on the Board of the Company with effect from October 21, 2009. NHPC Ltd has informed that Ministry of Power has informed the approval of appointment of Shri A. Gopalakrishnan as part-time non-official Director by the President of India on the Board of NHPC Ltd. 15

2009-10 Incorporation of a joint venture company, National High Power Test Laboratory Private Limited, along with NTPC, Powergrid Corporation of India Limited and Damodar Valley Corporation

Balance Sheet
Mar '08 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories 11,182.49 11,182.49 0.00 0.00 6,093.34 0.00 17,275.83 7,003.49 2,952.84 9,956.33 27,232.16 Mar '09 11,182.49 11,182.49 0.00 0.00 6,798.13 0.00 17,980.62 8,212.38 4,021.65 12,234.03 30,214.65 Mar '10 12,300.74 12,300.74 0.00 0.00 10,972.45 0.00 23,273.19 10,953.18 2,915.04 13,868.22 37,141.41

20,626.52 3,262.66 17,363.86 7,408.97 3,049.22 739.63

21,460.08 3,816.27 17,643.81 10,498.62 2,793.60 56.71

21,279.70 4,907.44 16,372.26 14,047.69 2,894.05 71.15

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Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

348.06 287.37 1,375.06 1,586.11 1,553.90 4,515.07 0.00 3,165.92 1,939.38 5,105.30 -590.23 0.34 27,232.16

294.66 240.79 592.16 2,167.95 1,659.16 4,419.27 0.00 3,479.72 1,663.26 5,142.98 -723.71 2.33 30,214.65

1,140.21 343.00 1,554.36 2,013.05 6,254.38 9,821.79 0.00 3,706.13 2,288.25 5,994.38 3,827.41 0.00 37,141.41

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Profit & Loss account

Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extraord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Mar '08 2,570.36 0.00 2,570.36 537.22 0.00 3,107.58 6.15 0.00 316.78 Mar '09 2,720.82 0.00 2,720.82 379.29 0.00 3,100.11 8.92 0.00 492.51 Mar '10 4,331.98 0.00 4,331.98 567.04 0.00 4,899.02 4.28 0.00 529.84

82.92 259.84 466.74 -239.09 893.34 1,677.02 2,214.24 611.54 1,602.70 443.74 0.00 1,158.96 -26.47 1,132.49 127.46 1,004.09 887.19 0.00

98.56 41.85 300.66 0.00 942.50 1,778.32 2,157.61 506.84 1,650.77 518.24 0.00 1,132.53 72.63 1,205.16 119.99 1,075.22 933.58 0.00

114.78 288.50 286.41 0.00 1,223.81 3,108.17 3,675.21 463.98 3,211.23 1,033.25 1.00 2,176.98 323.72 2,500.70 404.81 2,090.50 1,219.53 0.00

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Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

300.00 50.99

325.00 55.23

676.54 112.36

111,824. 93 0.90 2.68 15.45

111,824. 93 0.96 2.91 16.08

123,007. 43 1.70 5.50 18.92

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Formulae Result Interpretation

Stock Turnover (in days)

Average Stock * 365/= x days Cost of Goods Sold

On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies due to you 65 days...

Receivables Ratio (in days)

Debtors Sales

365/= x days

you. If your official credit terms are 45 days and it takes One or more large or slow debts can drag out the average days. Effective debtor management will minimize the

why?

Payables RatioCreditors (in days) Cost of Purchases)

* Sales

365/= x days (or

days. On average, you pay your suppliers every x days. If you earlier, say, to get a discount this will decline. If you this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers

negotiate better credit terms this will increase. If you pay

simply defer paying your suppliers (without agreement)

Current Ratio Total Current Assets/= x times Total Liabilities Current

may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. be under pressure to generate sufficient cash to meet

pay within the coming 12 months. For example, 1.5

0.75 means that you could have liquidity problems and oncoming demands. Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash. Current +As % Sales A high percentage means that working capital needs are high relative to your sales.

Quick Ratio

(Total Current Assets -= x times Inventory)/ Total Liabilities (Inventory Payables)/ Sales

Working

Capital Ratio Receivables

CHAPTER-3 ANALYSIS & FINDINGS

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WORKING CAPITAL MANAGEMENT RATIOS IN NHPC.:(Values of Rs. in crores)

Working Capital = Current Assets- Current Liabilities

Years 2007-08 2008-09 2009-10 Current Assets 1375.06 592.16 1554.36 Current Liabilities 3165.92 3479.92 3706.13 WC (1790.86) (2087.76) (2151.77)

Current Ratio = Current Assets / Current Liabilities

Years 2007-08 2008-09 2009-10 Current Assets 4515.07 4419.27 9821.79 Current Liabilities 5105.30 5142.98 599.38 Current ratio 0.884 times 0.859 times 1.638 times

Quick Ratio = (Current Asset - Inventory)/ Current Liabilities

Years 2007-08 2008-09 2009-10 Current Assets 4515.07 4419.27 9821.79 Current Liabilities 5105.30 5142.98 5994.38 Inventory 739.63 56.71 71.15 Quick ratio 0.739 times 0.848 times 1.626 times

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Working capital turnover ratio (W.C.T.R.) = Net sales/Working capital

Years 2007-08 2008-09 2009-10 Net sales 2570.36 2720.82 4331.98 Working capital (1790.86) (2087.76) (2151.77) W.C.T.R. 1.43 times 1.30 times 2.01 times

Stock turnover= Cost of goods sold/ Average stock

Cost of goods sold = opening stock + Purchases + Direct expenses - closing stock Average stock= Opening stock + Closing stock 2 Years 2007-08 2008-09 2009-10 Cost of goods sold 5242168 5097752 7082376 Average stock 685238 1141866 1655906.5 Stock turnover 7.65 times 4.46 times 4.28 times

Average inventory collection period (AICP) =

365 days/ Stock turnover

Years 2007-08 2008-09 2009-10

Stock turnover 7.65 4.46 4.28

AICP 48 Days 82 Days 85 Days

Receivable Turnover = Credit Sales/ Average Receivables

Average receivables = (Opening debtors + Closing debtors)/ 2

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Years

Credit sales

Average receivables

Receivables turnover

2007-08 2008-09 2009-10

5278457 7130404 10074856

1145038 1945787.5 3065168.5

4.61 times 3.66 times 3.29 times

Average Collection Period (ACP) =

365 days/

Receivables turnover
Years 2007-08 2008-09 2009-10 Receivables Turnover 4.61 3.66 3.29 ACP 79 Days 100 Days 111 Days

FINDINGS

1. Current ratio is the ratio between current assets and current liabilities and shows whether the company has sufficient short term assets to meet short term liabilities. The current ratio should ideally be 2:1 or in other words the ratio should ideally have a value of more than one. A high current ratio may point to inefficiencies in working capital management as well. If the company has high levels of inventory or short term debtors the ratio would be very high. High level of cash holding,

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which should ideally be used more productively, would also push up the ratio. We can see that this ratio has improved over the 3 years, from 0.844 in 2008 to 1.638 in 2010. 2. Quick ratio measures whether the company can meet its short term liabilities with its current assets excluding stocks. It judge the ability to pay the current liabilities without relying on the sale of stock in hand. The standard quick ratio is 1:1. The company has shown an increase over the years. It has risen from 0.739 in 2008 to 1.626 in 2010. 3. Using the Working capital turnover ratio we can measure as to how sales are generated by each rupee invested in working capital. The higher the ratio the better it is. We can observe that from year 2008 the ratio has improved i.e from 1.43 in 2007-08 to 2.01 times in 2009-10.

4. Stock turnover ratio is a ratio that measures the speed with which the inventory is converted into sales. The higher the ratio the better it is and thus indicates high profits. We can see the ratio has declined over the years, from 7.65 in 2008 to 4.28 in 2010. 5. Debtors turnover ratio measures the activity involved in converting the receivables into cash. Higher debtors turnover ratio means quicker collection from debtors and bills receivables. Here also the ratio has fallen from 4.61 to 3.29 in 2010.

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6. Average debt collection period ratio indicates as to how soon the debtors pays the amount. The company has managed to improve this ratio , from 79 days in 2008 to 111 days in 2010.

CHAPTER-4 CONCLUSIONS

After analyzing various ratios regarding the working capital structure of the firm, I would like to say that working capital which has been decreased up to 20% is a bad indicator of the financial soundness to meet the short term obligations. It is showing that current assets are not able to meet the current liability.

Rate of accumulation of working capital is very less. The company is not capable to meet its liability very easily. 26

Firms liquidity position is quite strong. It can be analyzed by looking over the current ratio and quick ratio.

Working capital turnover has been increased in 2010, as a result the turnover was also high.

Receivable turnover is also decreasing year by year. This is the indicator of increment in average collection period. Firms credit limit is increasing yearly; this may be a bad indicator for firm. By this chances of bad debts may occur. To play safe, firm should decrease its collection period.

Generally, sales are increasing, but apart from it, collection period should be in focus. Due to giving emphasize on collection period, automatically it will cover the receivable turnover ratio which is also to be decrease.

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BIBLIOGRAPHY
Websites:www.wikipedia.com www.careerage.com www.investopedia.com www.ezinearticles.com www.universalteacherpublication.com www.domain-b.com www.allbusiness.com

Books referred: Pandey, I.M., Financial management, Vikas Publication House Private Limited, New Delhi, 2001. Khan M.Y. and Jain P.K., Financial Management, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2000. 28

`Financial Management ICFAI.

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