SUMMER INTERNSHIP PROGRAMME

2009-2010

HINDUSTAN AERONAUTICS LIMITED (HAL)ENGINE DIVISION

KORAPUT DIVISION, SUNABEDA-2

FACULTY GUIDE INDUSTRY GUIDE MR

PREPARED AND SUBMITED BY VIVEK SINGH RANA ROLL NO. 0912270119

A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF

BUSINESS ADMINISTRATION IN THE MADURAI KAMRAJ UNIVERSITY

CERTIFICATE

THIS TO CERTIFY THAT MR. SWADHIN KUMAR PATTNAIK A STUDENT

OF MBA WITH A SPECIALIZATION IN FINANCE FROM MAGTECH

MANAGEMENT INSTITUTE (MMI), GHAZIABAD AFFILIATED MADURAI

KAMRAJ UNIVERSITY, BEARING REGISTRATION NO. GZ751ACO115

HAS SUCCESSFULLY COMPLETED HIS SUMMER INTERNSHIP PROJECT

WORK ON “WORKING CAPITAL MANAGEMENT” IN HINDUSTAN

AERONAUTIC LIMITED (HAL), ENGINE DIVISION KORAPUT,

SUNABEDA DURING THE PERIOD STARTING FROM 26TH MAY TO 24TH

JUNE 2009.

HE IS SINCERE AND HARDWORKING. I WISH HIM ALL SUCCESS IN HIS

LIFE.

S.C.CHANDMANAGER (TRAINING)

HAL, ENGINE DIVISION KORAPUT

CERTIFICATE

THIS TO CERTIFY THAT MR. SWADHIN KUMAR PATTNAIK A STUDENT

OF MBA WITH A SPECIALIZATION IN FINANCE FROM MAGTECH

MANAGEMENT INSTITUTE (MMI), GHAZIABAD AFFILIATED MADURAI

KAMRAJ UNIVERSITY, BEARING REGISTRATION NO. GZ751ACO115

HAS SUCCESSFULLY COMPLETED HIS SUMMER INTERNSHIP PROJECT

WORK ON “WORKING CAPITAL MANAGEMENT” IN HINDUSTAN

AERONAUTIC LIMITED (HAL), ENGINE DIVISION KORAPUT,

SUNABEDA DURING THE PERIOD STARTING FROM 26TH MAY TO 24TH

JUNE 2009.

HE IS SINCERE AND HARDWORKING. I WISH HIM ALL SUCCESS IN HIS

LIFE.

B. SENAPATISENIOR MANAGER (FINANCE)

HAL, ENGINE DIVISION KORAPUT

I hereby declare that this project report “WORKING CAPITAL MANAGEMENT” submitted to the MAGTECH MANAGEMENT INSTITUTE, GHAZIABAD in partial fulfillment for the award of degree of Master in Business Administration, is a bonafide work done by me and it was not submitted to any other University or Institution previously.

Place: Ghaziabad SWADHIN KUMAR PATTNAIKDate: 24/06/09 REG.NO. GZ751AC0115

The report entitled “WORKING CAPITAL MANAGEMENT” a study in Hindustan Aeronautic Limited represents the guidance and co-operation of a few individuals, to whom I would like to express my deep sense of gratitude.

I express my sincere and heartiest gratitude to my internal guide, Mr. NITUJ GUPTA, (Director) MAGTECH MANAGEMENT INSTITUTE (MMI), GHAZIABAD for their valuable suggestion and guidance, which have given a finite shape to this report.

I am also grateful to Mr. B. SENAPATI, (SENIOR MANAGER FINANCE) HINDUSTAN AERONAUTIC LIMITED (HAL), for giving me this opportunity to conduct the project study in HAL engine division, Koraput.

I am also obliged to the staff members especially Mr. MANASH KUMAR MOHANTY and Mr. B. SANTOSH (FINANCE AND ACCOUNT ASSISTANT), of the book keeping department for their help and assistance.

Finally, I am also thankful to my friend SAGAR PATTNAIK and my cousin CHINTU who helps me every time in the project.

THIS IS TO REFER THAT MR SWADHIN KUMAR PATTNAIK STUDENT OF MAGTECH MANAGEMENT INSTITUTE (MMI), GHAZIABAD HAS DONE A SURVEY IN OUR ORGANISATION AND PRESENTED BEFORE OUR MANAGEMENT WITH RELEVANT SUGGESTION AND CONCLUSION. I APPRECIATE THE HARDWORK IMPLEMENTED BY HIM IN ORDER TO GET EFFECTIVE FEEDBACK FOR US.

THANKS & REGARDS

B.SENAPATI

MANAGER FINANCE

Finance as a subject of study, has received wide-spread support from both academic and business segment people.

The topic “WORKING CAPITAL MANAGEMENT” in HAL was selected as to understand the financial need and importance with special reference to HAL, Engine Division, Koraput.

As the working capital refers to the administration of all the analysis of working capital, ratios and sources and application of funds and the company by studying, interpreting various financial statements using various techniques such as comparative statements analysis, funds flow statement analysis etc.

Even efforts have been made to collect the relevant information about the topic. The present study about WORKING CAPITAL MANAGEMENT in HAL Engine Division, Koraput it based on my four week project study in FINANCE AND ACCOUNT DEPARTMENT in HAL.

This training gives me an opportunity to make a study and analysis the system adopted by the organization. It enables me to build the practical knowledge acquired during the class study with practical training received during my project.

CHAPTER 1INTRODUCTION

ABSTRACTOBJECTIVE OF THE SURVEYSCOPE OF THE SERVEYRESEARCH METHODOLOGYTECHNIQUES OF DATA COLLECTION

CHAPTER 2COMPANY PROFILE

2.1 GENERAL PROFILE2.2 HISTORY OF HAL2.3 PRODUCTS OF HAL2.4 OBJECTIVE OF HAL2.5 STRATEGY OF HAL2.6 VISION, MISION & VALUES2.7 INTERNATIONAL AND DOMESTIC DEALS2.8 CUSTOMERS2.9 OTHER PROGRAMS OF HAL2.10 EVOLUTION AND GROWTH OF THE COMPANY2.11 SERVICES 2.12 DIVISIONS OF HAL2.13 EXPORTS OF HAL2.14 FINANCIAL HIGHLIGHTS OF HINDUSTAN

AERONAUTICS LTD 2.15 HAL KORAPUT DIVISION2.16 FINANCIAL AND ACCOUNTING FUNCTION

2.17 ACCOUNTING POLICY FOLLOWED BY HAL

CHAPTER 3CONCEPTUAL PROFILE

3.1 INTRODUCTION3.2 NATURE AND TYPES OF WORKING CAPITAL3.3 MANAGEMENT OF WORKING CAPITAL3.4 REASONS FOR ADEQUATE WORKING CAPITAL3.5 OBJECTS OF WORKING CAPITAL MANAGEMENT3.6 SOURCES OF WORKING CAPITAL 3.7 FINDING ANALYSIS AND INTERPRETATIONS

CHAPTER 4 FINDINGS RECOMMENDATION LIMITATIONCONCLUSION

BIBILOGRAPHYANNEXURE

ABSTRACT

I am a student of MAGTECH MANAGEMENT INSTITUTE, GHAZIABAD.

Summer season is the project period of all management institutes. I decided to

do my summer project in my state, Orissa. So I went to Koraput, where the

engine division of Hindustan Aeronautics Limited is situated. This company is

well known as one of the DPSUs (Defence Public Sector Undertakings). I am

very lucky to get a chance to do a project in such an organization of high

esteem. I got my letter from my institute which is to be signed by the head of

the Finance Department and then submitted to the Training and Development

Centre. Then they issued a letter to the concerned department to cooperate with

me in my project work. I started in my project in the Finance Department from

26th may 2009. The staffs are very much cooperative there. I got all the data

required for my project with ease. I met with the booking keeping employees as

a part of my project. I completed my project on 24 th June 2009. Then I got the

certificate from the Training and Development Centre. This was indeed a great

project done by me in such an excellent organization. Where I met with the

officers of high ranks and stature, without whose support I would have never

completed my project.

OBJECTIVE OF THE SURVEY

To serve as an instrument of the national policy to achieve self reliance in design, development and production of aircraft and aeronautical equipments to meet country’s changing and growing needs with special emphasis on military requirements.

To conduct its business economically and efficiently so that it can contribute its due share to the national effort for achieving reliant and self generating economy.

To study the components, determinants of working capital. To study how to keep the capital that is tied up in the working capital cycle

at a minimum and maximizing profit. To study how HAL finances working capital requirements of the firms. Interpreting, analyzing based on the various ratios, the liquidity position of

HAL. To ascertain the amount of working capital.

SCOPE OF THE SURVEY

Keeping the magnitude of the work in mind the scope of the study has been

determined. It covers the outset, a description of the role played by the corporation

in improving financial strength of organization. The study has emphasized

working capital and its application in different enterprises.

RESEARCH METHODOLOGY

The present study is based upon primary and secondary data. The sources of

primary data are the official records and discussion with the officers in the finance

dept. of the organization. The secondary sources of the data include various

publications of the organization and annual reports and audited financial

statements. The data, which are presented in this report, have been taken from

secondary sources. The data of Hindustan Aeronautics Limited, Engine Division,

Koraput, for the year 2007-08 and 2008-09 used in these report have been taken

from financial statements i.e., the Profit & Loss Account, Balance Sheet for the

relevant years.

TECHNIQUES OF DATA COLLECTION

Working capital management policy has a great effect on firm’s profitability, liquidity and its structural health.

For analyzing the performance of working capital management, simple

mathematical tools like Percentages, Averages, and Ratios have been used in this

project work. To know the financial performances of this division, calculation of

Operation Cycle, Earning before Interest & Taxes have been calculated.

Primary data: Was collected through the discussion with the concerned

executives.

Secondary data: Was collected through the official records, various

publications of the organization, annual report and audited financial

statements.

2.1 GENERAL PROFILE

Hindustan Aeronautics Limited (HAL) based in Bangalore, India, is one of Asia's largest aerospace companies. Under the management of the Indian Ministry of Defence, this public sector company is mainly involved in aerospace industry, which includes manufacturing and assembling aircraft, navigation and related communication equipment, as well as operating airports. HAL built the first military aircraft in South Asia and is currently involved in the design, fabrication and assembly of aircraft, jet engines, helicopters and their components and spares. It has several facilities throughout India including Nasik, Korwa, Kanpur, Koraput, Lucknow, and Hyderabad. The German engineer Kurt Tank designed the HF-24 Marut fighter-bomber, the first fighter aircraft made in India.

2.2 HISTORY OF THE COMPANY

Hindustan Aeronautics has a long history of collaboration with several other international and domestic aerospace agencies such as the Airbus Industries, Boeing, Sukhoi Aviation Corporation, Israel Aircraft Industries, RSK MiG, BAE Systems, Rolls-Royce plc, Dassault Aviation, Dornier Flugzeugwerke, Aeronautical Development Agency and Indian Space Research Organisation.

HAL was established as Hindustan Aircraft in Bangalore in 1940 by Walchand Hirachand to produce military aircraft for the Royal Indian Air Force. The initiative was actively encouraged by the Kingdom of Mysore, especially by the Diwan, Sir Mirza Ismail. The British Government bought a one-third stake in the company by April 1941 as it believed this to be a strategic imperative. Later in April 1942, it bought out the stakes of Walchand Hirachand himself and other promoters so that it can act freely. The decision by United Kingdom was primairly motivated to boost British military hardware supplies in Asia to counter the increasing threat posed by Imperial Japan during Second World War. However, the Mysore Kingdom refused to sell its stake in the company but yielded the management control over to the British Government. Thus, within 2 years of establishment, it was nationalized.

Hindustan Aeronautics Limited (HAL) came into existence on 1st October 1964. HAL was set up as a amalgamation of Hindustan Aircraft Limited along with Aeronautics India Limited and Aircraft Manufacturing Depot located in Kanpur,

India. Hindustan Aeronautics Limited has it headquarter located at Bangalore, India. HAL is one of the largest aerospace company which is run by the Ministry of Defense. The principal activities of HAL involve manufacturing aircraft, aerospace, navigation, and instruments for communication purposes. Apart from these, few other activities performed by HAL are

designing, manufacturing, and collecting aircraft, jet engines, helicopters, along with their elements and spares. Hindustan Aircraft Limited which located at Bangalore, was incorporated by the industrialist the late Seth Walchand Hirachand in December 1940. The Government of India became a stakeholder of the company in 1941 and seized the management department in 1942. HAL has 19 Production Units and 9 Research and Design Centers in 7 locations in India. The Company has an impressive product track record - 12 types of aircraft manufactured with in-house R & D and 14 types produced under license. HAL has manufactured over 3550 aircraft, 3600 engines and overhauled over 8150 aircraft and 27300 engines. HAL has been successful in numerous R & D programs developed for both Defence and Civil Aviation sectors. HAL has made substantial progress in its current projects:

Dhruv, which is Advanced Light Helicopter (ALH) Tejas - Light Combat Aircraft (LCA) Intermediate Jet Trainer (IJT) Various military and civil upgrades.

Dhruv was delivered to the Indian Army, Navy, Air Force and the Coast Guard in March 2002, in the very first year of its production, a unique achievement.

HAL has played a significant role for India's space programs by participating in the manufacture of structures for Satellite Launch Vehicles like

PSLV (Polar Satellite Launch Vehicle) GSLV (Geo-synchronous Satellite Launch Vehicle) IRS (Indian Remote Satellite)I NSAT (Indian National Satellite)

HAL has formed the following Joint Ventures (JVs) :

BAeHAL Software Limited Indo-Russian Aviation Limited (IRAL) Snecma HAL Aerospace Pvt. Ltd. SAMTEL HAL Display System Limited HALBIT Avionics Pvt. Ltd. HAL-Edgewood Technologies Pvt. Ltd. NFOTECH HAL Ltd

 Apart from these seven, other major diversification projects are Industrial Marine Gas Turbine and Airport Services. Several Co-production and Joint Ventures with international participation are under consideration.

HAL's supplies / services are mainly to Indian Defence Services, Coast Guards and Border Security Forces. Transport Aircraft and Helicopters have also been supplied to Airlines as well as State Governments of India. The Company has also achieved a foothold in export in more than 30 countries, having demonstrated its quality and price competitiveness.

HAL has won several International & National Awards for achievements in R&D, Technology, Managerial Performance, Exports, Energy Conservation, Quality and Fulfillment of Social Responsibilities.

HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for Corporate Achievement in Quality and Efficiency at the International Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating, UK in conjunction with the International Information and Marketing Centre (IIMC). 

HAL was presented the International - “ARCH OF EUROPE” Award in Gold Category in recognition for its commitment to Quality, Leadership, Technology and Innovation. 

At the National level, HAL won the "GOLD TROPHY" for excellence in Public Sector Management, instituted by the Standing Conference of Public Enterprises (SCOPE).

The Company scaled new heights in the financial year 2006-07 with a turnover of Rs.7, 783.61 Cores.

2.3 PRODUCTS OF HAL

PRODUCTS IN CURRENT MANUFACTURING RANGE

Su 30 MKI

Twin-seater, Multi-role, Long range Fighter / Bomber / Air Superiority Aircraft.

MiG-27 MSingle-seater Tactical Fighter / Bomber with variable sweep wings.

MiG-21 VARIANTSSingle-seater Front line Tactical Interceptor/ Fighter Aircraft.

METALLIC DROP TANKS

The Division manufactures different types of metallic drop (Jettisonable) tanks with capacity of

490 and 800 litres 

UNDERCARRIAGE The Division has facilities and expertise in the manufacture and overhaul of Undercarriages of both MiG-27M and MiG-21 variants. The landing gears are of a conventional tricycle type and consist of one steerable Nose wheel leg and two Main

wheel legs to roll the aircraft in motion, on the ground, during take-off run and landing run. The Landing Gear legs have Pneumatic shock absorbers.

EJECTION-SEATThe Ejection Seat is installed to provide safe escape to the Pilot from the Aircraft while catapuling is effected with the help of a combined Ejection Gun. The Division has the facilities and expertise in the manufacture and overhaul of

ejection seats for both MiG-27M and MiG-21 variants.

FLEXIBLE RUBBER FUEL TANKSThe Division manufactures and supplies all types of Rubber Fuel Tanks required for MiG-21 Variants. The Rubber Fuel Tanks are provided with special protection coating against Ozone/heat and adverse climatic conditions. The Division has exported a large number of Rubber Fuel Tanks.

CANOPY

The Division manufactures and overhauls canopies of MiG-21 variants and MiG-27M Aircraft.

AEROSPACE FASTENERS

The Division has a separate complex for manufacturing of Aerospace Fasteners, approximately 7000 types under 400 different standards. Some of the typical items

are nuts, bolts, screws, washers, and rivets of various configurations, studs, dowels, pins, plugs, JO Bolts, pipe connections and springs.

AIRCRAFT WESTERN ORIGIN

JAGUAR INTERNATIONAL

HAL commenced production of Jaguar International - deep penetration strike and battlefield tactical Support Aircraft in 1979 under license from British Aerospace, including the engine, accessories and avionics. Jaguar aircraft is designed with 7 hard points ( 4 under wing, 2 over wing and 1 under fuselage) capable of carrying a huge load of various of weapons in different combinations to meet the Customers needs.

DHRUV (ADVANCED LIGHT HELICOPTER)

With a proven track record and established technology for manufacture of helicopters and its components, the Helicopter Division commenced series production of Dhruv (Advanced Light Helicopter) in 2000 - 2001. The ALH is a multi-role, multi-mission helicopter in 5.5 ton class, fully designed and developed by HAL. Built to FAR 29 specifications, Dhruv is designed to meet the requirement of both military and civil operators.

CHETAK

The Helicopter Division manufactures the versatile and multi-purpose Chetek Helicopters for Civil and Military applications both for Domestic and International customers.

CHEETAH

The Helicopter Division manufactures the versatile and multi-purpose Cheetah Helicopters for Civil and Military applications both for Domestic and International customers.

LANCER

 The Lancer Helicopter is a light attack helicopter developed by Hindustan Aeronautics Limited as a cost-effective airmobile area weapon system. The basic structure of the Lancer is derived from the reliable and proven Cheetah Helicopter.

2.4 OBJECTIVES OF HAL

To ensure availability of Total Quality People to meet the Organizational Goals and Objectives 

To have a continuous improvement in Knowledge, Skill and Competence (Managerial, Behavioral and Technical) 

To promote a Culture of Achievement and Excellence  with emphasis on Integrity, Credibility and Quality 

To maintain a motivated workforce through empowerment of Individual and Team- building 

To enhance Organizational Learning

  To play a pivotal role directly and significantly to enhance Productivity,

Profitability and improve the  Quality of Work Life

2.5 STRATEGY OF HAL

To be in total alignment with Corporate Strategy. Maintain Human Resource at optimum level to meet the objectives and

goals of the Company.

Be competent in Mapping, Analysis and  Upgradation of Knowledge and Skills including Training, Re-training, Multi-skilling etc.

Cultivate Leadership with Shared Vision at various levels in the Organization.

Focus on Development of Core Competence in High-Tech areas.

Build Cross-functional Teams.

Create awareness of Mission, Values and Organizational Goals through out the Company.

Introduce / Implement personnel policies based on performance that would ensure growth, Rewards, Recognition and Motivation.

2.6 VISION

"To make HAL a dynamic, vibrant, value-based learning organisation with human resources exceptionally skilled, highly motivated and committed to meet the current and future challenges. This will be driven by core values of the Company fully embedded in the culture of the Organisation".

2.6.1 MISSION

Enable all those working for HAL to give their best to ensure their all-round growth as well as that of the organization. To become a globally competitive

aerospace industry while working as an instrument for achieving self-reliance in design, manufacture and maintenance of aerospace defence equipment and diversifying to related areas, managing the business on commercial lines in a climate of growing professional competence.

"To become a globally competitive aerospace industry while working as an instrument for achieving self-reliance in design, manufacture and maintenance of aerospace defence equipment and diversifying to related areas, managing the business on commercial lines in a climate of growing professional competence ".

2.6.2 VALUES

CUSTOMER SATISFACTION

We are dedicated to building a relationship with our customers where we become partners in fulfilling their mission. We strive to understand our customers ' needs and to deliver products and services that fulfill and exceed all their requirements.

COMMITMENT TO TOTAL QUALITY

We are committed to continuous improvement of all our activities. We will supply products and services that conform to highest standards of design, manufacture, reliability, maintainability and fitness for use as desired by our customers.

COST AND TIME CONSCIOUSNESS

We believe that our success depends on our ability to continually reduce the cost and shorten the delivery period of our products and services. We will achieve this by eliminating waste in all activities and continuously improving all processes in every area of our work.

INNOVATION AND CREATIVITY

We believe in striving for improvement in every activity involved in our business by pursuing and encouraging risk-taking, experimentation and learning at all levels within the company with a view to achieving excellence and competitiveness.

TRUST AND TEAM SPIRIT

We believe in achieving harmony in work life through mutual trust, transparency, co-operation, and a sense of belonging. We will strive for building empowered teams to work towards achieving organisational goals.

RESPECT FOR THE INDIVIDUAL

We value our people. We will treat each other with dignity and respect and strive for individual growth and realization of everyone's full potential.

INTEGRITY

We believe in a commitment to be honest, trustworthy, and fair in all our dealings. We commit to be loyal and devoted to our organization. We will practice self discipline and own responsibility for our actions. We will comply with all requirements so as to ensure that our organization is always worthy of trust.

2.7 INTERNATIONAL AND DOMESTIC DEALS

(I ) INTERNATIONAL DEALS

The US$10 billion fifth-generation fighter jet program with the Sukhoi Corporation of Russia.

US$1 billion contract to manufacture aircraft parts for Boeing. Multi-role transport aircraft project with Ilyushin of Russia worth

US$600 million. 120 RD-33MK turbofan engines to be manufactured for MiG-29K by HAL for US$250 million.

Contract to manufacture 1,000 TPE331 aircraft engines for Honeywell worth US$200,000 each (estimates put total value of deal at US$200 million).

US$120 million deal to manufacture Dornier 228 for RUAG of Switzerland.

Manufacture of aircraft parts for Airbus Industries worth US$150 million.

US$100 million contract to export composite materials to Israel Aircraft Industries.

US$65 million joint-research facility with Honeywell and planned production of Garrett TPE331 engines.

US$50.7 million contract to supply Advanced Light Helicopter to Ecuadorian Air Force.[11] HAL will also open a maintenance base in the country.

US$30 million contract to supply avionics for Malaysian Su-30MKM. US$20 million contract to supply ambulance version of HAL Dhruv to

Peru. Contract of 3 HAL Dhruv helicopters to Turkey in a deal worth US$20

million. Supply of HAL Dhruv helicopters to Mauritius' National Police in a deal

worth US$7 million. Unmanned helicopter development project with Israel Aircraft Industries.

(II) DOMESTIC DEALS

180 Sukhoi Su-30MKI being manufactured at HAL's facilities in Nasik and Bangalore. The total contract, which also involves Russia's Sukhoi Aerospace, is worth US$3.2 billion.

200 HAL Light Combat Helicopters for Indian Air Force and 500 HAL Dhruv helicopters worth US$5.83 billion.

US$900 million aerospace hub in Andhra Pradesh. US$57 million upgrade of SEPECAT Jaguar fleet of the Indian Air

Force. US$55 million fighter training school in Bangalore in collaboration with

Canada's CAE. 64 MiG-29s to be upgraded by HAL and Russia's MiG Corporation in a

program worth US$960 million. Licensed production of 82 BAe Hawk

132.

2.8 CUSTOMERS

Air India Airbus Industrie, France Air Sahara Airports Authority of India Bharat Electronics Border Security Force Coal India Defence Research & Development Organisation Govt. of Andhra Pradesh Govt. of Jammu & Kashmir Govt. of Karnataka Govt. of Maharashtra Govt. of Rajasthan Govt. of Uttar Pradesh Govt. of West Bengal Indian Airforce Indian Airlines Indian Army Indian Coast Guard Indian Navy Indian Space Research Organisation Jet Airways Kudremukh Iron ore Company ltd. NALCO Oil & Natural Gas Corporation Ltd. Ordnance Factories Reliance Industries United Breweries APPH Bolton, UK BAE Systems, UK Chelton, UK Coast Guard, Mauritius Corporate Air, Philippines Cosmic Air, Nepal Dassault Aviation, France Dowty Aerospace Hydraulics, UK EADS, France ELTA, Israel Gorkha Airlines, Nepal Hampson, UK Honeywell International, USA Island Aviation Services, Maldives Israel Aircraft Industries, Israel Messier Dowty Ltd., UK Mistubishi Heavy Industries, Japan MOOG, USA Namibian Air Force, Namibia Peruvian Air Force , Peru Rolls Royce Plc, UK Royal Air Force, Oman Royal Malaysian Air Force, Malaysia Royal Nepal Army, Nepal

Royal Thai Air Force, Thailand Smiths Industries, UK Snecma, France Strongfield Technologies, UK The Boeing Aircraft Company, USA Transworld Aviation, UAE Vietnam Air Force, Vietnam

2.9 OTHER HINDUSTAN AERONAUTICS LIMITED PROGRAMS

Apart from the aforementioned upgrades, DRDO has also assisted Hindustan Aeronautics with its programs. These include the HAL Dhruv helicopter and the HAL HJT-36. Over a hundred LRU (Line Replaceable Unit)'s in the HJT-36 have come directly from the LCA program. Other duties have included assisting the Indian Air Force with indigenization of spares and equipment. These include both mandatory as well as other items.

2.10 EVOLUTION AND GROWTH OF THE COMPANY

The Company's steady organisational growth over the years with consolidation and enlargement of its operational base by creating sophisticated facilities for manufacture of aircraft / helicopters, aeroengines, accessories and avionics is illustrated below.

2.11 SERVICES

2.12 DIVISIONS OF HAL

2.13 EXPORTS OF HAL

2.14 FINANCIAL HIGHLIGHTS OF HINDUSTAN AERONAUTICS LTD.

Hindustan Aeronautics Limited (HAL) has cruised past the Rs.10, 000 crore mark for the first time with a sales turnover of Rs.10,260 crores during the Financial Year 2008-09. The profit of the Company (Profit before Tax) soared to Rs.2260 crores.

The highlights are given below:

Engine Division - Korapu t, a unit of HAL's vast network, was set up in April 1964 to manufacture R11-f2 turbo jet engine of MiG-21 FL aircraft under licence from the erstwhile USSR. Subsequently, the division took up, under various licence agreements, manufacture of R-11 series engines of MIG-21 FL and MiG-21M aircraft, R-25 series engines of MiG-21 BIS aircraft and R-29B engines for Mig-27M aircraft. Simultaneously, facilities were set up for overhaul of R-11 and R-25 series engines, which started in 1971 and 1983 respectively. Starting from 1997 - 98 we have also undertaken overhaul of RD - 33 Engines of MiG-29 aircraft. The

Rupees in Crores

Particulars 2007-08 2008-09Growth-over

Year

Sales 8625 10260 18.96%

VOP 8791 11162 26.97%

Profit before tax 2164 2260 4.44%

Profit after tax 1632 1559 -4.47%

Gross Block 2255 2661 18.00%

Division has stepped into diversification by signing on MOU with GTRE for supply of components belonging to three modules (gear box, fan and turbine modules) of KAVERI engine meant for LCA.

The Division has also entered the export market by overhauling R25 engines for Vietnam, supply of helicopter gears for MH1, Japan and supply of spares for Egypt. The Division has bagged an order from M/s allied Signals, USA for machining of castings. The Division has a long term plan to undertake manufacture of AL-31FP engines for SU-30MKl aircraft under licence.

Today we have behind us a rich and enviable experience of manufacturing more than 1000 aero-engines and overhaul of nearly 4500 powerplants. The Division has the unique distinction of manufacturing almost all types of components required for manufacture and overhaul of engines and spares for service exploitation. The Division is equipped with modern Forge and Foundry shops which cater to the requirements of prevision forgings and castings.

PRODUCTS IN CURRENT MANUFACTURING RANGE

The Engine Division at Koraput, a unit of HAL's vast network, has the unique distinction of being one amongst the few Aero Engine manufacturers in the world. The spectrum of manufacturing facilities extends literally from the production of nuts and bolts to discs, shafts, blades, forgings and castings - all that are required to make an Aero Engine right from the Raw materials. This spectrum is further enlarged to include overhaul of Aero Engines for the MiG family and supply of spares required during service.

AL-31FP-ENGINE

AL-31FP is a high temperature turbojet by-pass engine of modular design. A specific feature of AL-31FP is an axi-symmetric vectoring nozzle with a thrust vector angle of ±15° in the vertical plane providing super maneuverability of the aircraft. The vectoring nozzle control is integrated

with the engine control system. AL-31FP engines ensure stable operation in all available evolutions of the aircraft in super

maneuverability modes. AL-31FP engines power advanced multi-purpose Su-30 MKI fighters of the 4+ generation.

R25-ENGINE

This is a Twin Spool, Axial Flow, Turbojet Engine fitted with After burner and a variable area Jet nozzle. It powers the MiG-21 BiS multi-role Fighter Aircraft. The Engine has provision for an emergency After-burner thrust boost, which can be selected below 4.5 KM altitude.

R-29B-ENGINE

This Engine is a Twin spool, Axial flow Turbojet Engine incorporating After-burner system and variable area Jet nozzle of convergent-divergent type. The Engine is equipped with automatic Fuel egulation system, Turbo-starter, Anti-surge system, Temperature controller, Constant speed drive for AC Generator and Two speed drive for Hydraulic Pump. R-29B Engine powers MiG-27 M, a Multi-role Ground attack / Air combat Aircraft.

PRECISION-COMPONENTS

The Division also produces precision components like: total gamut of Blades ranging from Compressor Rotors and Stators to Turbine Blades and Nozzle Guide Vanes, intricate Cored Magnesium Alloy Gear Casings, Compressor and Turbine Discs and Shafts, JIS class-l/DlN 5 Spur, Helical Gears and DIN 6 straight and Hypoid / Spiral Bevel Gears ranging from module 1 to 6.

2.16 FINANCIAL AND ACCOUNTING FUNCTION

Finance and accounting both play very vital role in any business organizational setup. The main function of any finance and accounting of an organization are founds management, cost monitoring, cost reduction and finance appraisal.Money and finance are not one and the same things.

Money stored in vaults or kept in the shape of gold bars or ornaments is not finance.

Money is very resource and is the most sought after commodity because all the transaction of human society is settled in terms of money.

Depending upon the requirement and close monitoring of expenditure, HAL Koraput Division has formed the following section for smooth running of the finance and accounts department and to maintain the liquidity position of the company.

Bills payable section Bills receivable section Book keeping section Cash office section Costing section Finance section Material section Payroll section Provident fund section

These sections are described as follows:

BILLS PAYABLE

This section mainly divided into three sub sections such as:

Bills payable (inland): This section deals with payment and accounting of supplies and services rendered by inland/domestic vendor to the company.Bills payable (civil work): This section deals with service rendered by the contractor of the company.Bills payable (foreign): This section deals with payment and accounting of supplies and services rendered by the foreign collaborators to the company.

BILLS RECEIVABLE SECTION

This section is responsible for preparation and submission of invoice to customer for the suppliers made and services rendered and follow up for recovery of the amounts and accounting of the same.

BOOK KEEPING SECTION

This is the section in which the financial position of the organization can be reflected through the presentation of profit and loss account and balance sheets. It is the apex section of the finance and accounts department, which cover the following important functions.

Co-ordination of all sections for relevant information

Maintenance of journal and ledger.Preparation of trial balance, profit and loss account and balance sheets.Maintenance of capital assets ledger.Preparation of fixed assets and depreciation schedules.Furnishing of data for determination of income tax liability.Preparation of performance budget.Dealings with sales tax matters.Disposal of surplus/condemned plant and machinery and other assets.Reconciliation of control account of other division/corporate office.Liaison with audit authority.Submission of various types of reports/returns as when required by corporate office/MD (MIG) and other agencies.Updating the accounting policy/procedure based upon the guidelines issue by the corporate office.

CASH OFFICE SECTION

The section is responsible for all receipt and payment of cash/cheque and accounting of the same in the book. The main functions are as follows:

Receipt of cash, cheque, bank draft & issue of official receipt for the same.Banking of all receipt.Drawl of cash from bank to cater for daily needs.Payment of vouchers by cash/cheque.Writing cash/bank books.Preparation of Bank Reconciliation Statement.

Safe Custody of cash, cheque books, bank guarantees, fixed deposits receipts & other investments etc.

COSTING SECTION

The main functions of this section are:

Fixation of fixed cost quotation.Fixation of standard man-hour rate.Preparation of operating statement.Accounting & adjustment of differed revenue expenditure.Accounting of non-production of overhead.Preparation of man-hour rate. Accounting of work in progress.Setting of sales.Submission of monthly reports to various agencies.

FINANCE SECTION

The main functions are: Security & financial concurrent as per the delegation of power of proposal for:

Capital expenditureRevenue expenditurePurchase of Material, stores tools & other servicesManpower requirementsIncentivesWrite off-of lossesCases involving relaxation of rulesSales of company assetsContracts enter into with suppliers/ collaboration/ subcontractors.Estimates & errors of contracts in respect of Civil/ Electrical/ Plant Order.

MATERIALS SECTIONThis section covers the following:

Maintenance of material ledger cards for all materials held in stores.Accounting of receipts of all materials by various classes & issue of all materials draws on work order & expenses accounts.Reconciliation of balances with general ledger.

Quality reconciliation of Bin Card balances with with Materials ledge balances.Accountings of inter divisional transfer of materials & its reconciliation.Scrutiny of slow, non-moving inventories.

PAYROLL SECTION

The main function of payroll covers the following:

Placement of time punching cards in the time card racks for recording attendance.Receipt of approved leave application, over time authorization, attendance sheet and employees gate pass etc.Maintenance of level records and feeding of attendance data to computer.Disbursement of salary and wages.Payment and recovery of advances.Maintenance of employees punching card.Recovery of dues from employees.Accounting of all payroll transaction.

PROVIDENT FUND SECTION

This section deals with the transaction preparing to PF as:

Account of Provident Fund transaction.

Remittance of amounts recovered from employee to a fund called provident

fund trust fund.

Providing refundable & nonrefundable loan & adjustment thereof.

2.17 ACCOUNTING POLICY FOLLOWED BY HAL

ACCOUNTING METHODS

The financial accounts are prepared under the accrual basis & at historical cost unless otherwise stated.

FIXED ASSETS

Land received from the state Government till 31st March 1969 has not been valued. Such land which have been taken over by the company after 1st April 1969, have been valued at estimated fair price ruling on the date of taking possession. Land other than above has been capitalized at cost to the company and no account has been taken of the cost borne by the state Govt. Expenditure on development is shown under land.

Fixed assets acquired with financial assistance/subsidy from outside agencies either wholly or partly is capitalized at net cost of the company.Minor Civil work including addition, alterations etc. costing individually Rs.50000/- and below not resulting in additional floor space are charged to revenue.Where the actual costs of the fixed/current assets are not readily ascertainable, they are accounted initially on provisional basis but adjusted subsequently to cost when ascertained.Assets declared surplus/discarded are retained in the books at cost and depreciation provided till the end of the month, proceeding the month in which they are disposed off. Proceeds from sales of assets in excess of net book value are credited to profit and loss account.Expenditure on reconditioning, resetting and relay out of machinery and equipments which does not increase the future benefits from the existing assets beyond the previously assessed.Standard of performance based on the technical assessment is not capitalized.Cost of the initial pack of spares procures with plant, machinery and equipment is capitalized and depreciated in the same manner as plant machinery and equipment.

TOOLS AND EQUIPMENTS

Expenditure on special purpose tools, jigs and fixture including those specific to project/product is initially capitalizes for amortization over production on technical assessment and to the extent not amortized is carried forward as on assets. Expenditure on maintenance, rework, reconditioning, periodical inspection,

referencing of tooling, replenishing of cutting tools and work of similar nature is charged to revenue act at the time of issue.

RESEARCH AND DEVELOPMENT

Research and development is built up by the appropriation from profit. Research and development expenditure is debited to the Profit and Loss account. To the extent the expenditure are meet out of the research and development reserve amounts to that extent are transferred from the research and development reserve to the profit and loss account.

DEFERRED REVENUE EXPENDITURE

Expenditure on training personnel/foreign technical fees and expenses, pre-production expenses, etc. specific to projects/products is amortized over production on technical estimates and to the extent not amortized is carried forward

DEFERRED DEBTS

Unpaid installment payments under deferred payment terms for the cost of imported material and tooling content of the equipment/products sold are accounted as deferred debt from the customers and are recovered as and when the installment are paid.

SUNDRY DEBTORS

Disputed/time barred debts from the Government Departments are generally not treated as doubtful debts.

INVENTORY

Raw material, components, stores and spare parts are value at cost.Work-in-progress/stock in trade is valued at lower of cost on realizable value.Adjustment is not made for under/over observation of cost on jobs, if the extent of under/over observation in a year does not exceed 0.5% of the net operating expenses.

Customs duty where applicable is loaded to cost of goods when cleared and passed through customs.Stationary, uniform, medical and canteen, stores are charged to revenue at the time of receipt.Semi-perishable, welfare and Miscellaneous equipments (other then fixed assets) Costing individually Rs.20000/- and below are charged to revenue at the time of issue and those costing above.Rs.20000/- is written off to revenue in two years including the year of issue.Provision for redundancy is maintained at a suitable percentage/level of the value of closing inventory of Raw Materials and Components, Stores and Spares parts and construction material less the value of inventory to be borne by the customer and the value of the inventory for the initial phase of the new projects. Besides, where necessary, adequate provision is made for redundancy of such materials in respect of completed/specific project and other surplus/redundant material pending transfer to salvage stores. Stores declared surplus/unserviceable/redundant are charged to revenue.Material issued from main stores and lying unused at the end of the year is not reckoned as inventory.

INDIRECT EXPENSES ON EXPANSIONS

Expenses on administration and supervision in respect of expansion facilities/new projects at the existing operating division are charged to revenue.

SALES

Sales are set up on completion of contracted work on the basis of signaling out/acceptance by the customer’s inspection of the product. Where sale price are not established, sales are set up on provisional basis at price likely to be realized. Research and development expenditure financed by the customer is billed and accounted as sales.

RETIREMENT BENEFITS

Liabilities towards gratuity provided on yearly actuarial valuation in respect of all employees is remitted to a trust progressively.Provision for vocation leave is made on accrual basis and un-utilized leave at the year-end is restated as if such benefits is payable at the close of the year.Employer’s contribution of provident fund for the year is provided for at the Govt. stipulated rate and are remitted to the trust.

INTEREST

Interest on loan/borrowing for different projects is charged to revenue.

DEPRECIATION

Depreciation on fixed assets is charged on ‘straight line method’. The rate of depreciation on assets acquired on prior to 01.04.1989 is on the basis of estimated life. The rate of depreciation is as prescribed in scheduled XIV to the companies Act 1956 for assets capitalized after 01.04.1989 (except for assets separately listed in notes to Balance Sheet). However, prorate depreciation charge to the assets from the first day of the month of addition. Fixed assets costing Rs.10000/- and below are depreciated fully in the year of purchase. Where cost of internal partitions exceeds Rs.50000/- they are depreciated with in a period of 5years or the lease period of premises which ever is less.

FOREIGN CURRENCY TRANSACTION

Foreign Currency transaction are recorded and reported as per requirement of Accounting Standard-II of ICAI except in respect of liability for deferred payments on supplies/services from the Russian federation arising in terms of inter Govt. agreement entered into between Govt. of India and USSR Govt. of Russian federation. The liability is set up on the transaction date at the rate of exchange notified by the Reserve Bank of India (R.B.I) for deferred payments under the protocol arrangements between the Government The different arising out of the re-calculation of Rubles into Rupee in terms of protocol arrangement is charged to the revenue at the time of payment and is realized from the customs. No adjustment is made at the close of the year. However, the impact on this account is disclosed as note to the accounts.

CLAIM ON SUPPLIERS/UNDERWRITERS/CARRIERS, ETC

Claim on suppliers/underwriters/carriers towards loss/damage and claims on customs department for refund are accounted when claims are preferred.

DISPOSABLE SCRAP

Saleable/Disposable scrap is valued at estimated realizable.

3.1 INTRODUCTION

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds 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.

3.2NATURE AND TYPES OF WORKING CAPITAL

The term working capital refers to current assets which may be defined as (i) those which are convertible into cash or equivalents within a period of one year and (ii) those which are required to meet day to day operations. The fixed asset as well as the current assets, both requires investment of funds. The very basics of fixed assets decision process (i.e. the capital budgeting)& the working capital decision processes are different. The fixed assets involve long period perspective & therefore, the concept of time value of money is applied in order to discount the future cash flows: whereas in working capital considered. The fixed assets affect

the long-term profitability of the firm while the current assets affect the short-term liquidity position. So in the working capital management there are some decisions to be taken, as

1. What should be the total investments in working capital of the firm?

2. What should be the level of individual current assets?

3. What should be the relative proportion of different sources to finance the working capital requirements?

Thus, the working capital management may be defined as the management of firm’s sources and uses of working capital in order to maximize the wealth of the shareholders. The proper working capital requires both the medium term planning and also the immediate adaptations to changes arising due to fluctuations in operating levels of the firm. The term working capital may be used in two different ways,

Gross working capital (or Total working capital):

The gross working capital refers to the firm’s investment in all the current assets taken together. The total of investments in all the individual current assets is the gross working capital.

Net working capital:

The term net working capital may be defined as the excess of current assets over total current liabilities. It may be noted that to those liabilities which are payable within a period of one year. The extent, to which the payments to these current liabilities are delayed, the firm gets the availability of funds for that period. So a part of the funds required to maintain current assets is provided by the current liabilities & the firm will be required to invest the funds in only those current assets which are not financed by the current liabilities. In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. In narrow sense the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities i.e.;

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.

Net working capital may be positive or negative , when the current assets exceed the current liabilities the working capital is positive or the negative working capital results when the current liabilities are more than current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business.

Thus both concepts of working capital i.e. the gross working capital & the net working capital have their own relevance & a Financial Manager should give due attention to both of these. The cash inflows & outflows for any firm are seldom synchronized and so, some working capital is necessary. The cash outflows occurring from the existence of the current liabilities are more easily & correctly predictable but the cash flows from current assets are difficult to be accurately predicted. The more predictable, these cash flows are, the less the net working capital required by the firm. The firm with more & more uncertain cash inflows must maintain higher &higher level of current assets adequate to cover the current liabilities.

Before analyzing working capital management, one needs to know what working capital is.  

CURRENT ASSETS1) Cash in hand and bank balance2) Bills receivable3) Sundry debtors4) Short term loans and advances5) Inventories of stocks as:

Raw material Work-in-progress Stores and spares Finished good

6) Temporary investment of surplus funds.7) Prepaid Expenses8) Accrued incomes

CURRENT LIABILITIES1) Bills payable2) Sundry creditors or Account payable3) Accrued or Outstanding Expenses4) Short term loans, advances and deposits 5) Dividends payable6) Bank Overdraft7) Provision for taxation if it does not amount to appropriation of profits.

Working capital is simply the difference between current assets and current liabilities. 

For example, if current assets = $1,000 and if current liabilities = $400, then working capital is equal to $600. 

Working capital is an indicator of a firm's ability to take advantage of opportunities. 

TYPES OF WORKING CAPITAL Working capital Can be divided into two categories on the basis of time: -

PERMANENT WORKING CAPITAL:-

This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. It represents the current assets required on a continuing basis over the entire year. Permanent working capital is permanently needed for the business and therefore it should be financed out of long-term funds.This is the reason why the current ratio has to be substantially more than ‘1’

TEMPORARY OR VARIABLE WORKING CAPITAL:-

The amount of such working capital keeps on fluctuating from time to time on the basis of business activities.

In other words, it represents additional current assets required at different times during the operating year.

Amount of working

Temporary

Capital (Rs.)

permanent

Time

(D#2 Source: Dr. S N Maheshwari, Financial Management.)

Temporary

Amount of working permanent

Capital (Rs.)

Time

(D#3 Source: Dr. S N Maheshwari, Financial Management.)

3.3 MANAGEMENT OF WORKING CAPITALGuided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply

chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity

Debtors’ management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

3.3.1 ESTIMATING WORKING CAPITAL REQUIREMENTS

In order to determine the amount of working capital needed by a firm, a number of factors viz. production policies, nature of business, length of manufacturing process, rapidity of turnover, seasonal fluctuations, etc. are to be considered by the finance manager.

3.3.2 TECHNIQUES FOR ASSESSMENT OF WORKING CAPITAL REQUIREMENTS

ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHODSince working capital is the excess of current assets over current liabilities,

an assessment of the working capital requirements can be made by estimating the amounts of different constituents of working capital e.g., inventories, accounts receivable, cash, accounts payable, etc.

PERCENT OF SALES APPROACH

This is a traditional and simple method of estimating working capital requirements.

According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future.

WORKING CAPITAL CYCLECash 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

cashflow 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 firm'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. Symbolically the duration of the working capital cycle can be put as follows:

O = R + W + F + D – C

Where,

O=Duration of operating cycle;

R=Raw materials and stores storage period;

W=Work-in-progress period;

F=Finished stock storage period;

D=Debtors collection period;

C=Creditors payment period.

Each of the components of the operating cycle can be calculated as follows:-

R= Average stock of raw materials and stores

Average raw materials and stores consumptions per day

W = Average work-in-progress inventory

Average cost of production per day

D = Average book debts

Average credit sales per day

C= Average trade creditors

Average credit purchases per day

After computing the period of one operating cycle, the total number of operating cycles that can be computed during a year can be computed by dividing 365 days with number of operating days in a cycle. The total expenditure in the year when year when divided by the number of operating cycles in a year will give the average amount of the working capital requirement.

3.4 REASONS FOR ADEQUATE WORKING CAPITAL

A firm must have adequate working capital, i.e., as much as needed by the firm. It should neither have excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds, which earn no profit for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations, which ultimately results in production interruptions, and lowering down the profitability.It will be interesting to understand the relation between working capital, risk and return. In a manufacturing concern, it is generally accepted that higher levels of working capital decrease the risk and decrease the profitability too.

While lower levels of working capital increase the risk but have the potentiality of increasing the profitability also.

This principle is based on the following assumptions: -

There is direct relationship between risk and profitability --- higher is the risk, higher is the profitability, while lower is the risk, lower is the profitability. Current assets are less profitable than fixed assets. Short-term funds are less expensive than long-term funds.

3.5 OBJECTS OF WORKING CAPITAL MANAGEMENT

The need for working capital cannot be over emphasized. Every business needs some amount of working capital. So management of working capital is necessary. working capital is needed for the following purpose:

For the purchase of raw materials, components and spares To pay wages and salaries To inure day-to-day expenses and overhead costs such as fuel power and

office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers To maintain the inventories of raw materials, work-in-progress, spares and

finished stock.A finance manager should therefore, chalk out appropriate working capital management policies in respect of each of the components of working capital so

as to ensure higher profitability, proper liquidity and sound structural health of the organization.In order to achieve this objective the finance manager has to perform basically following two functions: -

Estimating the amount of working capital. Sources from which these funds have to be raised.

3.6 SOURCES OF WORKING CAPITAL

The working capital requirements should be met both from short-term as well long-term sources of funds. Its will be appropriate to meet at least 2/3 rd (if not the whole) of the permanent working capital requirements from long-term sources and only for the period needed.

The financing of working capital through short-term sources of funds has the benefits of lower cost and establishing close relationship with the banks.

Financing of working capital from long-term resources provides the following benefits:

It reduces risk, since the need to repay loans at frequent intervals is eliminated.

It increases liquidity since the firm has not to worry about the payment of these funds in the near future.

3.7 FINDING ANALYSIS AND INTERPRETETION

TABLE- 1

CALCULATION OF PERCENTAGE OF CASH AND BANK BALANCE TO THE CURRENT ASSETS ( IN LAKHS)

CASH AND BANK BALANCE TO THE CURRENT ASSETS

INTERPRETATION

By analyzing the statements, it is observed that 0.013, 0.004 of current assets were held as cash in hand and cash at bank during the years 2007-2008, 2008-2009 respectively. The cash management in HAL is centralized and managed by the corporate office.

PARTICULAR

2007-2008

2008-2009

A. Cash and bank balance (Rs)

19.98

11.95

B. Current Assets (Rs)

152518.97

260862.93

C. % of Cash and Bank

Balance to Current Assets (A/B*100)

0.013

0.004

On the basis of yearly budgets and performance of the division, the corporate office has fixed certain measures for smooth running of the business. They are:

Fixing the drawl limits: After analysis of budget and forecast given by the division, the corporate office has fixed drawl limit not exceeding 12 crores per month. This ceiling does not include drawing the salaries and wage of the staff

Fixing the letter of credit: the limit for opening the fore cast irrevocable letter of credit is up to Rs 12 crores. If any urgency arises prior approval of the corporate office it may go beyond the limit.

By fixing these types of limits, the corporate office is in position to monitor its divisions, fund requirements and collections. By this process divisions are not in a position to withhold/block cash at their disposal because the net balance has to be transferred to the central account at the corporate office at daily basis. Even though we extract the information that will not signify the real norms.

ACCOUNTS RECEIVABLE:

Account Receivable of HAL, Koraput Division consists of sales to India air force (IAF) and very minor amount of foreign parties in real sense there is no such credit sales to Indian air force. The debts are pending for collecting due ton want of clarification/documentation or some other reason. The arrangement between India Air Force and HAL regarding payment based on the Fixed Price Quotation (FPQ). Initially the IAF & HAL have entered into an agreement for payment like Advance Payment depending on progress of the work & balance amount is to be paid after completion of work.

TABLE – 2

CALCULATION OF PERCENTAGE OF ACCOUNTS RECEIVABLE TO THE CURRENT ASSETS (IN LAKHS)

ACCOUNTS RECEIVABLE TO THE CURRENT ASSETS

PARTICULARS2007-082008-09

A. Account receivable5883.4714655.86

B. Current assets152518.97260862.93

C.% of accounts receivable to current assets (A/B*100)3.855.61

INTERPRETATION The above comparison shares that: The investment in Accounts receivables is

more during 2008-2009. By increasing more credit the sales have increased proportion. If more & more block of working capital. The increase in ratio indicates that the management wants to push off the accumulated stocks & go for fresh production. However the resultant credit period extended to the customer is to be received.

It had a sudden decrease in 2007-08 due to a sudden increase in current assets. The percentages of accounts receivable to current assets has been 3.85% and

5.61% respectively.

TABLE – 3

CALCULATION OF AVERAGE COLLECTION PERIOD (IN LAKHS)

PARTICULAR2007-082008-09

A. Debtors5883.4714655.86

B. Sales140816.78140991.83

C. Average collection period (A/B*360 days)16 days38 days

AVERAGE COLLECTION PERIOD

INTERPRETATION

From the above table we can analyzes that:

The Average Collection Period (ACP) for the year 2007-08 & 2008-09 are 16 days and 38 days.

Normally 50-60 days is the lead-time for realizing the debtors for the enterprise like HAL.

The Average Collection Period for these years is much than required. The Average Collection Period shows the extent of time period & the

efficiency in the Collection of debtors. Thus to improve the efficiency of HAL unit at Koraput has to shorten the

Average Collection Period. Thus reduce the liberal term to the debtors. Average Collection Period below would be better for HAL. As more than

95% of Collections are from Government there is no risk of bad debts.

INVENTORY MANAGEMENT IN HAL

There is a centralized stores department functioning in this division in co-ordination with stores department, purchase department & material control department. The responsibilities of each department have been laid down clearly by the management.

TABLE – 4

CALCULATION OF PERCENTAGE OF INVENTORY TO CURRENT ASSETS (IN LAKHS)

PERCENTAGE OF INVENTORY TO CURRENT ASSETS

INTERPRETATION

The holding of inventory is 13-62% of current assets. This percentage has been substantially increased from 2007-08 onwards but decreased in 2008-09. The main cause for the accumulation of inventory is to maintain sufficient space/raw materials to meet the emergency like war. Maximum material of HAL, Koraput Division is imported from Russia, there for it is possible to decrease cost of transportation & also large-scale order will enable HAL to

PARTICULARS

2007-08

2008-09

A. Inventories

94998.36

153860.31

B. Current Assets

152518.97

260862.93

C. Percentage of Inventory to Current Assets

(A/B*100)

62.28

58.98

bargain for cost. The main cause for the accumulation of inventory is to maintain sufficient space/raw materials to meet the emergency like war to safeguard the system & depositing/utilizing the non-moving/slow moving items.

The percentages of inventory to the current assets are 62.28 and 58.98 in the year 2007-08 and 2008-09 respectively.

In 2007-08 the percentages of 62.28% of current assets were occupied by inventory where as the percentage has gone down.

The present system of procurement by HAL in just-in –time & no enterprise is willing to block its funds in terms of inventory as it is a sleeping investment.

At present the inventory held is huge as compared to the standard norms.

INVENTORY ANALYSIS & SELECTIVE CONTROLS:

If inventory analysis HAL, Koraput Division follows ABC,VED,ADF & HMI Analysis then the inventory management of the organization functioning smoothly. Among all the analysis, ABC analysis is widely used in this Division. The procedures & categorization of this analysis followed by this Division are as follows:

The annual usage in units is to be calculated for each item based on forecast estimates.

The annual usage in units is to be multiplied with the unit cost to get the annual usage in rupees of each item.

The items are to be ranked from the highest annual rupee usage in the descending order to the lowest annual rupee usage an assign category.

CATAGORISATION OF ITEMS IN THE HAL, KORAPUT DIVISION

ITEM OF VALUE% OF ITEMS% OF AGE OF USAGE

A

05-10

70-80

B

15-20

15-20

C

70-80

05-10

TABLE – 5

CALCULATION OF RAW MATERIAL CONVERSION PERIOD (IN LAKHS)

RAW MATERIAL CONVERSION PERIOD

INTERPRETATION:

There is significance increases in raw material conversion period. The reason is most of the raw materials are produced from Russia. They are ordered in bulk and hence at the closing of the period stock of raw material more. As bulk orders will reduce the most of procuring division orders large amounts at a time. Increase in raw materials does not affect the raw material conversion period seriously.

Raw material conversion period is263 days in 2007-08, 226 days in 2008-09. The raw material conversion period is very high during 2007-08 as compared

to 2008-09.

PARTICULARS

2007-08

2008-09

A. Closing Raw Material

46818.8577615.98

B. Raw material consumed

64227123733.45

C. Raw material conversion period (A/B*360 Days)

263 days226 days

Therefore, from the above discussion it is cleared that the raw material level does not affect the raw material conversion period.

The raw material conversion period for the year 2007-08 is 263 days. This was so high because of manufacturing of a new product the Engine SU – 30.

TABLE – 6

CALCULATION OF WORK IN PROGRESS CONVERSION PERIOD (IN LAKHS)

WORK IN PROGRESS CONVERSION PERIOD

NOTE: Cost of production = Sales +Closing balance of WIP–Opening balance of WIP +Closing balance of SIT–Opening balance of SIT.Where,WIP - Work in ProgressSIT - Stock in Trade

INTERPRETATION

WIP conversion period are 89 days and 147 days in 2007-08 and 2008-09 respectively.

PARTICULARS2007-082008-09

A. Closing WIP (Rs.)35794.1472537.85

B. Cost of production (Rs.)145324.85177735.54

C. WIP Conversion period (A/B*360)

89 days147 days

The company has shown an efficient management labour force & efficient utilization of materials by maintaining a less work in progress conversion period in year 2007-08 as compared to2008-09.

Further to improve , it has to reduce the work in progress conversion period though aviation industry requires much time in work in progress, still constant vigil over reducing work in progress is appreciable.

Due to manufacturing of the new product SU – 30 the work in progress conversion has consumed more time in the 2008-09 i.e.147 days as compared to 2007-08.

TABLE – 7

CALCULATION OF FINISHED GOODS CONVERSION PERIOD (IN LAKHS)

FINISHED GOODS CONVERSION PERIOD

NOTE: Cost of Goods Sold = Sales – Profit

INTERPRETATION:

Finished goods conversion period is 307 days and 325 days in 2007-08 and 2008-09 respectively.

PARTICULARS2007-082008-09

A. Closing Finished Goods.

108719116322.85

B. Cost of Goods Sold.

127809128945.87

C. Finished Goods Conversion period (A/B*360 Days)

307 days325days

The time period consumed by the company to the convert the finished in goods in to sales is very long.

TABLE – 8

CALCULATION PAYABLE DEFERRAL PERIOD (IN LAKHS)

PAYABLE DEFERRAL PERIOD

INTERPRETATION

From the above table it is seen that:

The payable deferral period i.e. the credit period allowed by the creditors during the years 2007-08 and 2008-09 is 64 days and 45 days respectively.

PARTICULARS2007-082008-09

A. Creditors

23474.48

25846.90

B. Credit Purchase

132207.91

207532.20

C. Payable Deferral period (A/B*360 Days)

64 days45 days

This means that the amount payable to creditors was paid after a long period of credit purchase.

Where as in 2008-09, the payable deferral period was the shortest i.e. only 45 days, which means that creditors were paid with in a very short span of time as compare to 2007-08.

The payable procedure in HAL is though banks or the letter of Credit. But in some cases, the payment was made after receipt & acceptance of

goods.

TABLE – 9

SUMMARY OF OPERATING CYCLE CALCULATION (IN LAKHS)

PARTICULARS

2007-08

2008-09

A. Inventory conversion period

i. Raw Material Conversion periodii. WIP Conversion Period

iii. Finished goods Conversion period

263 days

89 days

307 days

226 days

147 days

325 days

Total

659 days

698 days

INTERPRETATION

During last two years the Gross operating cycle varies from 675 days to 736 days.

There is no specific rule or formula to know the optimum period of operating cycle.

Usually the period is of one year. It depends upon the time gap between two consecutive procurements. Due to the manufacturing of the new product the Engine SU – 30, the gross

operating cycle in the year 2007-08 onwards it is going higher.

TABLE – 10

CALCULATION OF AMOUNT OF WORKING CAPITAL (IN LAKHS)

PARTICULARS2007-082008-09

A. Current Assets (Gross)

152518.97260862.93

B. Fixed Assets

(Less :Depreciation)

26612.8736578.15

C. Total Assets (A+B)

179131.84297441.08

D. Current Liabilities

405550.85433890.42

E. Sales

140816.78140991.83

F. EBIT

12630.2912045.96

G. Rate of return (F/C*100)

7.054.04

H. Net working capital (A-D)

-253031.88-173027.49

I. Current Ratio (A/D)

0.370.60

WORKING CAPITAL

INTERPRETATION

From the above table it is observed that:

There was gradually increase in current assets from 2007-08 to 2008-09. The net working capital, shows the liquidity position of the company, the

position is negative in all the years. The negative amount of net working capital i.e. if the current liabilities are

more than current assets, it does not means that the bad profitability position of the company it happens sometimes that the net working capital may be negative.

The EBIT shows the profitability position of the year 2007-08 and 2008-09. The profitability position had a gradual decrease from 12630.29 lakhs to 12045.96 lakhs.

The sales of HAL Engine Division, Koraput are increasing year by year, which is a positive indication of growth of the organization.

Working capital is always shows negative, because the duration of the project of developing any aircraft engine at least for 15 years. In this period company only take advance from customers (i.e 40% of total amount) which are debited to share capital, so company cannot make profit as well as the current assets are always less then the current liabilities during this time.

HAL should indigenously get the raw material and develop spare parts without depending on Russian to avoid unnecessary delays.

Company is very strict to their customers. It is founded that 40% to 50% of the current asset is occupied by industry. Company got advance from the Government of India, which resulted in an

increase in cash/bank balance. Company annual sales turnover for 2008-09 175.05 crore and to see it reach

enviable heights in the future. This is a defence related organization, so production is made on contract

basis.

Organization must take necessary steps to raise the interest on loans and advances in order to increase the revenue sources of HAL.

To maintain a good current ratio, it must try to increase the amount of current assets.

As the analysis reveals, the division is facing a problem of liquidity due to the reason that the payment to be received from the debtors is not realized in the time.

That is the collection period is more than the required. So, the HAL Engine Division, Koraput has to be strict to its debtors by

reducing the credit period allowed, so as to improve its efficiency in managing work.

The study of the solely depends upon reliability of the data and information collected from the secondary sources, it is not possible to collect information on all activities taken over the years, thus the study incorporates on limitation that are inherent in the available publish information.

As usual Most of the information is collected from the secondary sources. There is a gap between the theoretical analysis & its practical and real life

application. The data available is limited to the Koraput Division. The overall data of HAL is not available.

Even if all the factors are taken in consideration, factors like motivation is not considered.

As HAL comes under Defence sector of central govt. there are some limitations upon getting the data.

The analysis is purely mathematical in nature and ignores management factors like motivation.

The overall performance is taken into consideration without taking into account the individual values.

The study is purely based on the data in the form of annual reports and appraisal reports.

Cash is the life-blood of any business, no matter how large or small. If a business has no cash and no way of getting any cash, it will have to close down.

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.

Cash is king, especially at a time when fund raising is harder than ever. Letting it slip away is an oversight that investors should not forgive. Analyzing a company's working capital can provide excellent insight into how well a company handles its cash, and whether it is likely to have any on hand to fund growth and contribute to shareholder value.

Working capital of a business reflects the short-term use of funds these are cash short-term securities, amount receivable and inventories of raw materials, work in progress and finished goods.

It is also referred as to the funds required for operations of the business. It follows a cycle process of conversion of cash into inventory, inventory to receivable and receivable into cash.

The determination of working capital are nature of business manufacturing cycles, credit policies, availability of raw materials, availability of credits, growth and expansion activities and other factors.

The working in an organization mainly depends on the analysis of the management of receivable, cash and inventories and finally the organization profit and loss account, balance sheet highlights the working capital status whether it is healthy or not.

 

 

REFERENCE BOOKS

MANAGEMENT ACCOUNTING – S.P.JAIN & K.L.NARANGFINANCIAL MANAGEMENT- R.P.RUSTAGIFINANCIAL MANAGEMENT - DR. S N MAHESHWARI

REPORTS

BALANCE SHEET OF HALPROFIT AND LOSS ACCOUNT OF HALANNUAL BOOK REPORT OF HAL

WEBSITES

www.google.com

www.hal-india.com

HINDUSTAN AERONAUTICS LIMITED

DIVISION:KORAPUT

PROFIT AND LOSS ACCOUNTFor the year ended 31st March 2009 (Rs. in Lakhs)INCOMEGross Sales 140991.83

Less Excise DutyNet Sales 140991.83Transfer to inter divisional units 754.03Changes in WIP/SIT/Scrap 36766.73Other Income 4748.82Chances received on iter divisional transfers 75.4

Transfer from R&D reserves183336.81

EXPENDITUREConsumption of Raw Material, Components, etc 123733.45Amortization &Other charges 15214.51Salaries and Wages 21104.93Other Expenses 8412.15Charges paid on its divisional Transfer 3.3Interest 1.41Depreciation 3659.52Provisions 9218.99Inter services/common services 1585.9Transfer of IDT 182934.16Deduct :Expenditure relating to 11643.31Capital & Other Accounts Net Expenditure 171290.85

Profit for the Year 12045.96

Less :Provision For Taxation (Net) Provision For Fringe Benefit Tax Provision For Deferred Taxation (Net) Profit After Tax 12045.96Profit Available For Appropriations APPROPRIATIONSInterim Dividend Proposed Final Dividend

Debenture redemption reserveGeneral Reserve Balance carried to balance sheetTotal of Appropriations 12045.96

HINDUSTAN AERONAUTICS LIMITEDDIVISION:KORAPUT

BALANCE SHEET (Rs in Lakhs)As at 31st March 2009 31st March 2009SOURCES OF FUNDSShareholders' FundsHead office control account 4712.43Reserves and Surplus 12045.96

16758.39Loan Funds Secured Loans 259.75Unsecured Loans 0

259.75Deferred Liabilities (Net) 0.44Deferred Tax Liabilities (Net)

17018.58APPLICATION OF FUNDSFixed AssetsGross block 60053.35Less : Depreciation 23475.2Less :impairment loss Net Block 36578.15Capital Work-in-progress 7522.95

44101.1Special Tools and Equipments 113380.82InvestmentsDeffered tax assetsCURRENT ASSETS, LOANS & ADVANCESInventories 153860.31Sundry debtors 14655.86Cash & Bank balance 11.95Loans & advances 92334.81

260862.93Less: current liabilities & provisionsLiabilities 411352.28Provisions 22538.14

433890.42

Net current assets -173027.49INTANGIBLE ASSETSGross carrying amount 44467.53Less: cumulative amortization & impairment loss 11903.38NET CARRYING AMOUNT 32564.15

17018.58

BALANCE SHEET (Rs in Lakhs)DIVISION:KORAPUT

As at 31st March 2008 31st March 2008

SOURCES OF FUNDS

Shareholders' Funds

Head office control account -89880.19

Reserves and Surplus 12630.29

-77249.9

Loan Funds

Secured Loans 468.56

Unsecured Loans

468.56

Deferred Liabilities (Net) 0.74

Deferred Tax Liabilities (Net)

-76780.6

APPLICATION OF FUNDS

Fixed Assets

Gross block 46430.09

Less : Depreciation 19817.22

Less :impairment loss

Net Block 26612.87

Capital Work-in-progress

9145.97

35758.84

Special Tools and Equipments 110774.82

Investments

Deffered tax assets

Current Assets, Loans & Advances

Inventories 94998.36

Sundry debtors 5883.47

Cash & Bank balance 19.98

Loans & advances 51617.16

152518.97

Less: current liabilities & provisions

Liabilities 387792.34

Provisions 17758.51

405550.85

Net current assets -253031.88

Intangible assets

Gross carrying amount 38257.78

Less: cumulative amortization & impairment loss 8540.16

Net carrying amount 29717.62

-76780.6

HINDUSTAN AERONAUTICS LIMITED

DIVISION:KORAPUT

PROFIT AND LOSS ACCOUNT

For the year ended 31st March 2008 (Rs. in Lakhs)INCOMEGross Sales 140816.78Less Excise DutyNet Sales 140816.78Transfer to inter divisional units 312.82Changes in WIP/SIT/Scrap -9121.13Other Income 2406.65Chances received on iter divisional transfers 31.28

Transfer from R&D reserves134446.4

EXPENDITUREConsumption of Raw Material, Components, etc 64227.08Amortization &Other charges 11164.18Salaries and Wages 7697.32Other Expenses 8412.15Charges paid on its divisional Transfer 2.04Interest 4.06Depreciation 2369.55Provisions 1116.81

Inter services/common services16110.35

Transfer of IDT 128246.37Deduct :Expenditure relating to 6430.26Capital & Other Accounts Net Expenditure 121816.11

Profit for the Year 12630.29

Less :Provision For Taxation (Net) Provision For Fringe Benefit Tax Provision For Deferred Taxation (Net) Profit After Tax 12630.29Profit Available For Appropriations APPROPRIATIONSInterim Dividend Proposed Final Dividend Debenture redemption reserveGeneral Reserve

Balance carried to balance sheetTotal of Appropriations 12630.29