1

Summer Training Report

On
Management of working capital At (NTPC)
Submitted in partial fulfillment of the degree of
Master of Business 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





2


Declaration

I Preeti, Roll No. 2k13-MRCE-MBA-032, a student of Masters of Business Administration of
3
rd
semester, at Manav Rachna College of Engineering, Faridabad here by solemnly declare
that researched project titled MANAGEMENT OF WORKING 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 :

Facultys Signature Candidates Signature
.. ..




(Signature of the Director/ Principal of the Institute)








3


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











4


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
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)



5


Table of Contents
Sr.
No.
Title Name Page No.
1. Title of the Project
2. Declaration
3. Preface
4. Acknowledgement
5. Table of Content
6. 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
vii. Value System of NTPC
viii. NTPC Faridabad Vision
ix. Faridabad Gas Power Station Organization Profile
x. Plant Technologies
xi. Layout of FGPS
xii. Working at Gas Power Plant
1. Gas Turbine
2. Steam Turbine
1
2
3
4
5
6
7
8
9
9
10
11
12
13
13
7. Overview of Finance Function In Organization
Financial Management
14
15-16
8. Overview of Finance Function of NTPC
1. Areas of Corporate Finance
2. Areas of Project Finance
3. Areas of Regional Finance
17
18
19
19
9. Review of Literature
a. Working Capital Concept
b. Need and Importance of Working Capital Management
c. Factors influencing the Working Capital requirement
d. Operating Cycle
e. Cash Required for Working Capital
f. Cash Forecasting and Budgeting

20-23
24
25
26
27-30
31-37
10. Research Methodology 38-44
11. Data analysis and Interpretation
a) Working capital Assessment
b) Ratio Analysis
38
39
40-44
12. Recommendations 45
13. Limitations of the Study 46
14. Conclusion 47
15. Bibliography 48
6







An I ntroduction
7



Research objective :-

1. To study the liquidity and solvency position of the company .


2. To study how working capital is determined.








8

Vision & Mission

Vision

To be one of the worlds largest and best power producer, powering Indias growth.


Mission

Develop and provide reliable power, related products and services at competitive
prices, integrating multiple energy sources with innovative and eco friendly technologies
and contribute to society.

9

CMD Message To the Organization


NTPC CMD- Shri Arup Roy Choudhary
Believes that- If your Intentions are pure, you are bound to succeed.




10

Top honors for NTPC at Best Companies
to Work for 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 sector companies, the
Maharatna PSU, NTPC Ltd. bagged 3rd rank in Indias 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.


11

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 worlds largest and most efficient power
generation companies.
NTPCs 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.

12

NTPC Power Stations in I NDI A


13

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

14


VI SI ON
To be one of the most Reliable, Economical, Environment friendly and Socially
responsible Gas Based Power Station in the country enhancing stakeholder delight

Faridabad Gas Power Station
Organization 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
Governments 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 Indias 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 PGCILs 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 RILs KG-D6 gas by GOI, the consumption of liquid fuel for the current FY is
almost nil, which is a significant achievement.
15

Faridabad Gas Power Station
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.

16

Layout of NTPC Faridabad




17

Working at Gas power plant





18

Gas turbine
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 Turbine
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 maximum power can be harnessed.
ST contributes the 1/3 of total power production.



19

Overview of the Finance Function in
Organizations

The Role of the Finance Function in Organizations



Human Body
Nervous System

Digestive System


Circulatory System

Excretory System
Organization
Management
Information System
Operation &
Maintenance
System
The Finance
Function
Waste &
Environment
Management
System
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Financial Management
The goal of financial management is to maximize the wealth of its current
shareholders. It involves taking decisions on the following:


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. What is the optimal debt-equity ratio for the firm?
2. Which specific instruments of equity and debt financing should the firm employ?
3. Which capital markets should the firm access?
4. When should the firm raise finances?
5. 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.
Capital Budgeting


Working Capital
Management


Capital Structure



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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) What is the optimal level of inventory?
2) Should the firm grant credit to its customers?
3) How much cash should the firm carry?
4) Where should the firm invest its cash surplus?
5) Wherefrom should the firm raise short-term loans?

22

Overview of Finance Function of NTPC
Organization Structure of Finance
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)


Organization
Structure of
Finance
Corporate
Finance
Regional
Finance
Site Finance
23

Areas of Corporate Finance
Accounts and Audit - responsible for review of audited accounts of projects, regional
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
Treasury - responsible for preparing cash/funds flow statement (daily/weekly etc.),
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.
Provident Fund (PF) - responsible for employee PF deductions, employers contrn.,
filing returns with PF commissioner and maintenance of PF trust.
I nternal Audit - responsible for conduct of internal audit of all projects, regional
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
MI S - responsible for preparation and submission of all MIS reports internal(to
NTPC management) as well as external(Ministry of Power & Finance, CEA etc.)
Financial Concurrence- responsible for financial vetting of cost estimates of work
and purchase order proposals, financial vetting of comparative statements after
tendering and financial concurrence of work/purchase order proposals
Budget (Construction and O&M) - responsible for review of project & region
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.
I nternational Finance - responsible for arranging foreign syndicated loans, issue of
bonds in foreign capital markets and forex risk management
Commercial - responsible for liaison with CERC for tariff fixation, liaison with SEBs
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
I nvestors Services - deals with payment of dividend, all issues pwertaining to
shareholders of equity shares of NTPC
Company Secretariat - This section deals with holding of Board meetings of NTPC,
holding of AGM of shareholders, Delegation of Powers and maintaining compliance
to all clauses of the Companies Act relevant to NTPC

24

Areas of Project Finance
a) Accounts, 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) MI S
g) Stores Bills - responsible for payment and accounting of suppliers bills against
purchase orders and pricing of received materials for taking on stock
h) Priced Stores Ledger - responsible for inventory accounting opening & closing
balances and receipt and issue of materials both in quantity and price
i) Works Bills - 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) Accounts, Audit and Cash & Bank
b) Establishment
c) Budget, Commercial and MI S
d) Concurrence
e) Works and Suppliers bills


25

Review of Literature:

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 Working Capital:

The gross working capital is the capital invested in the total current assets of the
enterprises. It focuses on,

a) Optimum I nvestment in Current assets:
Excessive investment impairs firms 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) Financing of Current 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. Cash in hand and cash at bank
2. Bills receivables
3. Sundry debtors
4. Short term loan and advances
5. Inventories of stock as:
a. Raw material
b. Work-in-process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus
7. Prepaid expenses
8. Accrued income
9. Marketable securities


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Net Working Capital= Current Assets- current Liabilities
Net Working 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:




Constituents of Current Liabilities:
1. Accrued or outstanding expenses
2. Short term loans, advances and deposits
3. Dividend payables
4. Bank overdraft
5. Provision for taxation, if it does not amount to app. of profit
6. Bills payable
7. 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.


28

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 reasons:

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.



30

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:

1. Nature and size of business: The working capital requirement of the firm is closely
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.
2. Manufacturing 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.
3. Business Fluctuations: When there is an upward swing in the economy sales will
increase also the firms investment in the inventories and book debts will also
increase, thus it will increase the working capital requirement of the firm and vice-
versa.
4. Production Policy: 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 firms may resort to producing
various products to solve their capital problems. If they do not, then they require high
working capital.
5. Firms 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.
6. Availability 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.
7. 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.
8. Conditions of Supply of Raw Material: 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.
9. 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.
31

Operating 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. Conversion of cash into raw material
2. Conversion of raw material into WIP
3. Conversion of WIP into FG
4. Conversion of FG into debtors and bills receivables through sales
5. Conversion of debtors and bills receivables into cash
I njection of Cash Cash withdrawals

Cash
Payments
To suppliers
For raw material
To workers wages
Goods
Produced
Goods Sold
Debtors
generated & then
cash received
32

Cash Required for Working 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 bankers opinion.
c) The peak cash deficit is ascertained from the cash budgets.
d) The promoters 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.


33

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, managements
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.


34

In order to manage cash we need to manage the sources of additional working capital,
which includes the following:
I. Existing cash reserves
II. Profits (when we secure it as cash)
III. Payables (credit from suppliers)
IV. New equity or loan from shareholders
V. Bank overdrafts or lines of credit
VI. Long term loans
VII. 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.
35

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 quantum of transactions and precautionary balances 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 firms liability.
4. The firms 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; its on a monthly basis.
As the firm grows and its operation becomes complex, cash planning becomes
inevitable for them.

36

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. Developing credit policy
vi. 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 companys working capital and future finance needs.

37

i. Receipt and Payment Method: It simply shows the timing and magnitude of
expected cash receipts and payments over the forecast receipts.



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.
ITEMS BASIS OF ESTIMATION
Cash sales

Estimated sales and its division between cash/credit sales
Collection of a/cs
receivables
Estimated sales, its division between cash and credit sales,
and collection pattern
Interest and dividend
receipts
Firms portfolio of securities and return expected from the
portfolio
Increase in loans/deposits
and issue of securities
Financing plan
Sale of assets

Proposed disposal of assets
Cash purchases Estimated purchases, its division between cash/credit
purchases, and terms of credit purchases.
Payment for purchases Estimated purchases and its division between cash/credit
purchases.
Wages and salaries

Manpower employed and wages and salaries structure
Manufacturing expense

Production plan
General, administration
and selling expenses
Administration and sales personnel and proposed sales
promotion and distribution expenditure.
Capital equipment
purchases
Capital expenditure budget and payment pattern
associated with capital equipment purchases
Repayment of loans and
retirement of securities
Financing plan
38


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 companys 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
balance. In preparing the adjusted net income forecasts items like net income, depreciation,
taxes and dividends etc can be easily determined from the companys 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

39

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. Indicate future financial needs
ii. Helps evaluate proposed capital projects
iii. 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 its 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.

40

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 companys 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 firms 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.

41

Research Methodology:
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 information.

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 its 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. Interactions with employees
ii. Various books of financial management
iii. Reference material
42

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. Annual reports of the company of the respective years
ii. The analysis has been completed with the help of various tools and techniques of
working capital management
iii. Company website
43

Data analysis and I nterpretation:

Working capital Assessment



Particulars Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Current
Assets(A)

Inventories 634765973.00 575775096.00 467776440.00 574022257.11 538921967.64
Cash &
Bank
Balance
2776826.00 6397537.00 634239.00 1111890.97 658022.00
Loans &
Advances
116506282.00 108444277.00 226124164.00 16885701.32 16691547.18
Other
Current
Assets
15274.00 139490.00 389321.00 1376261.00 2277788.75

Total 754064805.00 690756400.00 694924164.00 593396110.4 558549325.6

Current
liabilities(B)

Sundry
Creditors
1763459121.00 449472574.00 431295037.00 390100642.97 488554832.30
Short-term
Borrowings
_ _ _ _ _
Other
Current
Liabilities
107208287.00 66344834.00 66640556.00 143172821.42 79409139.13
Short term
Provisions
66723750.00 108867356.00 84763794.00 22480054.00 14780793.00

Total 1937391158.00 624684764.00 582699387.00 555753518.4 582744764.4
44

Working Capital=Current Assets- Current Liabilities
Year Working Capital
2009 (1183326353)
2010 66071636
2011 112224777
2012 37642592
2013 (24195438.8)








-1.4E+09
-1.2E+09
-1E+09
-8E+08
-6E+08
-4E+08
-2E+08
0
200000000
1 2 3 4 5
Year
Working Capital
45

Ratio Analysis:
Current Ratio:
Current ratio is a measure of firms 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






0
1E+09
2E+09
3E+09
4E+09
5E+09
6E+09
1 2 3 4 5
Year
Current Assets
Current Liabilities
Current Ratio
46

Quick 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
firms 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






0
200000000
400000000
600000000
800000000
1E+09
1.2E+09
1.4E+09
1.6E+09
1.8E+09
2E+09
1 2 3 4 5
Year
Quick Assets
Quick Liabilities
Quick Ratio
47

Net Working Capital Ratio:
The difference between current assets and current liabilities is called net working capital. Net
Working Capital measures the firms 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)






-1.4E+09
-1.2E+09
-1E+09
-8E+08
-6E+08
-4E+08
-2E+08
0
200000000
400000000
1 2 3 4 5
Year
Working Capital
Net Current Assets
NWC Ratio
48

Current Assets to Working 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= Current Assets
Working Capital
year Current Assets Working Capital CA to WC Ratio
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)







1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
1 2 3 4 5
ca to wc ratio
year
49

Stock Turnover 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


0
5E+09
1E+10
1.5E+10
2E+10
2.5E+10
Inventory
Year Total Sales Inventory STR Holding
days of
Series1
Series2
Series3
Series4
Series5
50

Recommendations:
a. Working capital requirement are not consistent and shows fluctuating trends 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.

51

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 many 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.

52

Conclusion



The training in Faridabad Gas Power Station, NTPC FARI DABAD 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.

53

Bibliography
Reports
1. NTPC Annual Reports
2. NTPC Financial Results
WEB
a) http://en.wikipedia.org/wiki/NTPC_Limited
b) http://www.ntpcindia.com/
c) http://www.ntpcindia.com/index.php?option=com_content&view=article&id=46
&Itemid=60&lang=en
Books
i. BHATTACHARYA, D K, RESEARCH METHODOLOGY, EXCEL BOOKS
ii. Cooper, Donald R and Pamela S Schiendler, Business Research Methods, Tata Mc
Graw Hill, New Delhi