ORISSA POWER TRANSMISSION CORPORATION LIMITED

Regd. Office : Janpath, Bhubaneswar – 751022

Submitted by:
Joseph Bita
REGSTRATION No.-0906107057
2008-2010

Submitted to:
CENTRE FOR IT EDUCATION, BHUBANESWAR
 Regd. Office : Janpath, Bhubaneswar – 751022

Submitted TO:
CENTRE FOR IT EDUCATION, BHUBANESWAR
Submitted by:
Joseph Bita
REGISTRATION No.-0906107057
2008-2010
Under the guidance of
Mr. Bibhuti Bhusana Nayak Prof. DEBASIS MOHANTY
Manager(Finance),OPTCL, Bhubaneswar, Orissa
Faculty, CITE,Bhubaneswar

ii
 ORISSA POWER TRANSMISSION CORPORATION
LIMITED
Regd. Office : Janpath, bhubaneswar – 751022
(A Govt. of Orissa Undertaking)

Mr. Bibhuti Bhusana Nayak

Manager(Finance)
OPTCL, Bhubaneswar, Orissa

CERTIFICATE

This is to certify that, Mr.JOSEPH BITA,

pursuing MBA at CENTRE FOR IT EDUCATION,
BHUBANESWAR, has worked under my supervision for
his Summer Internship Project on ‘WORKING CAPITAL
MANAGEMENT’ at ‘ORISSA POWER TRANSMISSION
CORPORATION LIMITED’during to the
project report is a bona fide record of his work.

Place: Bhubaneswar
Date: Mr. Bibhuti Bhusana Nayak

iii
Prof. DEBASIS MOHANTY
Faculty, CITE, Bhubaneswar

CERTIFICATE

This is to certify that I have rendered neccary advice

to, Mr JOSEPH BITA, pursuing MBA,CENTRE FOR

IT EDUCATION, BHUBANESWAR, has worked under my
supervision for his Summer Internship Project on
‘WORKING CAPITAL MANAGEMENT’ at ‘ORISSA POWER
TRANSMISSION CORPORATION LIMITEDin partial
fulfillment for the award of Master in Business
Administration under Biju Pattnaik University Of
Technology.
I wish his all success in his future endeavours .

iv
Place: Bhubaneswar
Date: Prof.DEBASIS MOHANTY

DECLARATION

I Mr. Joseph Bita regn No. 0906107057 2nd year MBA student of centre for IT
education ,Bhubaneswar ,do hereby declare that I have under gone the requisite
summer training program at ‘ORISSA POWER TRANSMISSION
CORPORATION LIMITED’ during to on
WORKING CAPITAL MANAGEMENT The report submitted here with to the
institution is product of my own ,not plagiarized and submitted any where else
before.

Place : Bhubaneswar joseph Bita

Date : REG. No. 0806107044

v
 CONTENTS
Page No.
• Acknowledgement vii
• Short recital of the project viii

 CHAPTER -1 ……………………………………....1-4
Introduction:
• About working capital management in OPTCL
• And how it is essential for the financial Management of an
Organization.
 CHAPTER -2 ……………………………………..5-14
An over view of power scenario:
• (World, India & special reference to orissa)
 CHAPTER -3 …………………………………....15-18
Mission, vision & profile of OPTCL:
• OPTCL profile
• Mission
• Vision
• Core objectives
 CHAPTER -4 ……………………………………19-53
Review of literature:
• Operating &cash conversion cycle
• Receivable management
• Inventory management
• Cash management
 CHAPTER -5 ……………………………………54-56
Objectives & scope of study:
 CHAPTER -6 ……………………………………57-73
Information gatherings & Representation:
• Balance sheets of different financial years of OPTCL
• Profit & loss accounts of different financial years of OPTCL
• Cash flow statement
• Other data tables
 CHAPTER -7 ……………………………………74-86

vi
 Analysis of data & Interpretation
• Ratio analysis
• Analysis of statement showing changes in working capital
• Cash flow statement analysis
• Comparative balance-sheet analysis
 CHAPTER -8 ……………………………………87-89
Findings of the study & conclusion,
suggestions & recommendations
• Disclaimer ……………………………………………………………... 90
• Bibliography …………………………………………………………... 91

ACKNOWLEDGEMENT
Sometimes words fall short to show gratitude, the
same happened with me during this project. The immense help
and support received from OPTCL overwhelmed me during the
project. I am thankful to Mr. A. P. Panda, AGM, (HRD) for
providing me training opertunity in OPTCL. I am highly indebted
to Mr. Bibhuti Bhusana Nayak, Manager(Finance), OPTCL,
Bhubaneswar, my corporate guide, who guided me during the
internship period and suggested many issues which has been
taken care in my project work. During my internship, Mr.
Ghanashyam Parida, Sr.Asst. OPTCL helped me a lot and I
am also very much obliged to him. I offer special thanks to my
faculty guide, Prof. Debasis Mohanty, for his continuous
support and guidance through out the project work. I also
specially thanks to Mr. R.N. Sahoo,CITE Bhubaneswar,
whose continuous inspirations, suggestions helped me to
successfully complete the project. I offer thanks to Prof. (Dr.)

vii
S. K. MOHAPATRA, PRINCIPAL CITE Bhubaneswar for
giving me a chance to do my project assignment in OPTCL,
Bhubaneswar. Last but not the least; my heartfelt love and
regards to my parents, whose constant supports and
blessings helped me for completion of this project.

Master BISWAJIT MOHANTY

SHORT RECITAL OF THE PROJECT

In simple term, working capital is an excess of current assets over

the current liabilities. Good working capital management reveals higher
returns of current assets than the current liabilities to maintain a steady
liquidity position of a company. Otherwise, working capital is a
requirement of funds to meet the day to day working expenses. So a
proper way of management of working capital is highly essential to
ensure a dynamic stability of the financial position of an organization.

OPTCL is one of the largest power transmission organizations in the

country, which plays the role of transmission of electricity in the entire
state of Orissa. Seeing the good opportunity to study financial systems
and practices of OPTCL, I intended to take up my internship assignment
on ‘WORKING CAPITAL MANAGEMENT IN OPTCL’. During my project
work, I analyzed the working capital position of this organization. The
existing study is divided into eight chapters depending upon my
requirement and necessity. Accordingly chapter-1 represents some

viii
basic concepts about working capital and how it is essential for financial
management of an organization. Chapter-2 focuses on power scenario
of world, India and special reference to Orissa. Chapter-3 represents
Mission and Vision and Core Objectives of the organization. In chapter-
4, major thrust is given for discussion of receivables management,
inventory management and cash management. Chapter-5 represents
the scope and objectives of our study during the project work. The main
objective is to measure the ability of the organization to pay it’s short
term obligations in time through analyzing the different working capital
ratios. Chapter-6 deals with mainly for collection of informations about
financial transactions, balance sheets, profit & loss accounts for the last
three financial years (2005-06, 2006-07, 2007-08) and other relevant
documents related to study. Chapter-7 is the vital parts of my project
work, wherein I carefully analyzed the data and interpreted the same
with my observations. Chapter-8 represents the findings of the study and
suggestions, recommendations for improvement of working capital
management practices in OPTCL.

ix
x
 About working capital management
in OPTCL and

 How, it is essential for financial

management of the organization

INTRODUCTION
1
 Working capital is so much in use in common parlance and is so much
misunderstood. Even among the professional managers the controversy and
confusion persist. While an accountant will regard working capital as current
asset minus current liability and call it as net working capital, A finance
manager will consider gross current assets as working capital. Both may be
true, but their concerns differ. The former concern is arithmetical accuracy
trained as he is to tally the two sides of the balance sheet. But the finance
manager’s concern is to find fund for each item of current asset at such cost and
risk that the evolving financial structure remains balanced between the two.
When one asks a production controller: What is working capital? His answer is
very simple and straight forward. To him working capital is the fund needed to
meet the day to day working expenses, i.e. to pay for materials, wages and other
operating expenses. Is there any differences between the statement of an
accountant, finance manager and production controller? In the ultimate analysis,
the later may be true, but according to the accountant or finance manager it is
the very working expenses that get blocked in current assets along the
productive-distributive line of an enterprise and net working capital is that
liquidity which takes care of the working expenses if the line gets extended due
to any reason. There are two concepts of working capital: gross and net. Gross
working capital refers to the firm’s investment in current assets. Current assets
are the assets which can be converted in to cash within an accounting year. Net
working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsider which are expected to
mature for payment within an accounting year. A positive net working capital
will arise when current assets exceeds current liabilities. A negative net
working capital occurs when current liabilities are in excess of current assets.

2
However, the management of working capital is highly essential for every
organization. The basic objective of working capital is to provide adequate
support for the smooth functioning of the normal business operation of a
company. Management of current assets leads to a trade off between
profitability and liquidity. An aggressive approach to working capital
management results in greater profitability but lower liquidity while a
conservative approach results in lower profitability but higher liquidity. Under
moderate approach some liquidity and profitability have to be sacrificed so that
the resultant figures of liquidity and profitability are reasonably satisfactory to
the company. A good financial management practice includes a good
management of its working capital position by maintaining its level of current
assets and liabilities in such a way that there will be a smooth functioning of the
daily business operations of the organization. Now-a-days, it is a great
challenge for the business organizations to manage their working capital in a
profitable way. Not only for the manufacturing industries, but also for the
service industries like banking sectors, telecom industries, supply-chain
industry, power transmission industries and many other industries management
of working capital is highly essential in the current business scenario.
Therefore, the existing study on working capital management of OPTCL is
mainly focused on current asset positions and current liabilities for the
consecutive past three years. On the basis of available financial data of balance
sheets, profit and loss accounts and cash flow statements, analysis has been
made to derive the financial viability of the organization for sustaining future.
Although, the company has made substantial profits during last three years
(2005-06, 2006-07, 2007-08) but the ideal working capital ratio is yet to be
streamlined due to repayment of past loan burdens, implementation of revised
scale of pay and super annuity benefits and delay in recovery of huge pending

3
electricity bills. However, the present assets positions and disbursement of
funds and securing of employees benefits are in safe hands of the company and
the future of organization looks to be bright as far as working capital
management is concerned. The details of analysis, observations and suggestions
etc. are included in various chapters of this project report. The organization can
be a EVA +ve company if the OPTCL management minimizes current
liabilities by curtailment of unnecessary administrative overheads as well as
proper planning and execution of work in time schedule to save money by
increasing the profitability.

4
(World, India and Special Reference To
Orissa)

5
 Power Sector: History/Background

When India became independent in 1947, the country had a power

generating capacity of 1,362 MW. Generation and distribution of electrical
power was carried out primarily by private utility companies. Notable amongst
them and still in existence is Calcutta Electric. Power was available only in a
few urban centers; rural areas and villages did not have electricity.

After 1947, all new power generation, transmission and distribution in the
rural sector and the urban centers (which was not served by private utilities)
came under the purview of State and Central government agencies. State
Electricity Boards (SEBs) were formed in all the states.

National Thermal Power Corporation (NTPC), National Hydro-electric

Power Corporation (NHPC) and Power Grid Corporation Limited (PGCL) were
formed by the government to assist in meeting the increasing demand for
electricity throughout the country. The electricity sector is in the 'concurrent
list', meaning that both, State and Central Governments, participate in the
sector's development. The Ministry of Power in the Central government
formulates the policies for the power sector. The Central Electricity Authority
(CEA) was established as a statutory authority to develop a 2nd National Power
Policy and also to function as a regulatory authority. As per government
guidelines, all power projects above a certain capacity have to obtain techno-
economic clearance from CEA before they can be implemented. A new
Ministry of Non-Conventional Energy Sources has also been formed to focus
on renewable energy sources to augment the generation capacity of electrical
power.

The Public sector units (PSUs) provided a vital service to the nation in the
post-independence era. From the few transmission and distribution networks
existing at the time of independence, in few urban centers, the PSUs have
established networks covering the entire length and breadth of the country.
Besides, massive rural electrification programs have boosted agricultural
production in a big way. Today, India is self-sufficient in food grains primarily
because of this.

6
WORLD POWER SCENARIO

Electricity is an essential parameter for measuring economic progress and

well being, and is the unique energy form that enables technical innovation and
productivity growth. However, the important achievements of electrification
remain elusive in many parts of the world because population is growing faster
than the current rate of electrification can accommodate. The following tables
show the prevailing electricity scenario of various countries of the World:-

a) Top 10 Countries (Total Installed Capacity wise)

Installed Capacity (Thousand MW)

Sl. As on January 1, 2003
Country
No Conventiona Hydro- Nuclear Others Total MW % Of
l Thermal Electric World
Total
1 United States 689.5 79.4 98.7 17.4 884.9 25.22
2 China 253.0 83.0 2.2 0 338.2 9.64
3 Japan 168.7 21.7 45.9 0.7 237.0 6.75
4 Russia 139.6 44.7 21.2 0.02 205.6 5.86
5 India 91.4 26.3 2.9 1.5 122.1 3.48
6 Germany 77.4 4.8 22.4 10.9 115.6 3.29
7 Canada 33.5 67.1 10.6 1.4 112.5 3.21
8 France 26.7 21.0 63.2 0.8 111.7 3.18
9 United 61.7 1.5 12.5 1.3 76.9
Kingdom 2.19
10 Brazil 8.2 62.5 2.0 3.5 76.2 2.17
Total Top Ten 1549.7 412 281.6 37.52 2280.7 64.99
Total World 2386.8 705.2 361.6 55.5 3509.1 100
%

Source: Energy Information Administration, U.S. Dept. of Energy; as updated

on June 2005
b) Top 10 Energy Generating Countries

7
 Generation Net (Thousand MU)
2002
Sl.
Country Conventiona Hydro- Nuclear Others Total % Of
No.
l Thermal Electric World
Total
1 United 2730.17 264.33 780.06 92.64 3867.20
States 25.17
2 China 1271.07 271.82 25.17 2.32 1570.38 10.22
3 Japan 646.46 81.55 280.34 27.86 1036.21 6.74
4 Russia 547.55 180.18 134.14 2.82 864.69 5.63
5 Canada 155.17 346.77 71.75 8.47 582.15 3.79
6 Germany 341.60 22.89 156.60 27.54 548.63 3.57
7 India 478.21 63.46 17.76 4.09 563.53 3.67
8 France 49.05 59.96 414.92 5.16 529.09 3.44
9 United 265.47 4.74 83.64 6.30 360.14 2.34
Kingdom
10 Brazil 28.45 283.23 13.84 14.56 340.07 2.21
Total Top 6513.2 1578.93 1978.22 191.76 10262.09 66.80
Ten
Total World 9905.81 2619.10 2546.01 292.15 15363.07 100
%

Source: Energy Information Administration, U.S. Dept. of Energy; as updated

on June 2005

c) Top 10 Energy Consuming Countries

Country For the Year 2003

8
 Per capita
Sl. Consumption Net % Of Total World
consumption
No. (Thousand MU) Consumption
(Kwh)
1 United States 3656.49 24.76 12593.69
2 China 1671.23 11.32 1294.03
3 Japan 946.27 6.41 7438.41
4 Russia 811.51 5.50 5612.64
5 Germany 510.37 3.46 6193.96
6 India 519.04 3.51 494.46
7 Canada 520.90 3.53 16173.50
8 France 433.33 2.93 7200.44
9 Brazil 371.44 2.52 2040.50
United
10 346.08 2.34 5758.88
Kingdom
64800.53
66.27
Total Top Ten 9786.66 (55.38 % of World
Total)
Total World 14767.75 100 % 117007.38

Source: Energy Information Administration, U.S. Dept. of Energy; as updated

on June 2005;
Population Source:- U.S. Census Bureau, International Database
d) Top 10 Countries (Hydro Installed Capacity)

Installed Capacity (MW)

Sl. 2003
Country
No. T
%
otal
1 United States 79366 11.02
2 China 86075 11.96
3 Canada 69206 9.61
4 Brazil 65311 9.07
5 Russia 44828 6.23
6 India 26910 3.74
7 Norway 26319 3.66
8 Japan 21697 3.01
9 France 21074 2.93

9
 10 Sweden 16523 2.30
11 Italy 13557 1.88
Total Top Ten 470866 65.41
World Total 719928 100.00

Source: Energy Information Administration, U.S. Dept. of Energy, as updated

on June 2005

THE POWER SCENARIO IN INDIA

a) Supply Projection:

The total installed capacity under utilities in India increased to 1,01,630 MW in

2000-01 from 97,845 MW in 1999-00 (72,359 MW thermal, 25,142 MW hydel,
2,860 MW nuclear and 1,269 MW wind power). There was a corresponding
increase in electricity generation to 4,99,450 million units (MU) from 4,80,000
MU recorded in 1999-00 (4,08,208 MU thermal, 74,346 MU hydel, and 16,896
nuclear energy). The overall annual plant load factor (PLF) of thermal stations
was 69 per cent as compared to 67.3 per cent in 1999- 00. The per capita
consumption for 2000-01 was estimated to be 374 kWh. As on 2000-01, over
5,08,077 villages had been electrified out of 5,87,258 villages.
(source: Central Electricity Authority (CEA).

b) Demand Projection:

The peak demand met was 67,880 MW and the energy availability was
4,67,000 MU against the requirement of 78,037 MW and 5,07,000 MU,
respectively. Thus, there was a shortage of 13 per cent in meeting the peak
demand and 7.8 per cent in energy for 2000-01. A realistic assessment of
energy and peak power requirements is vital for planning and operation of the
electricity system in India. According to the 16th Electric Power Survey (EPS),
the all-India peak demand would be about 85,132, 1,15,705, 1,57,107, and
2,12,725 MW by the end of the Ninth (20001-02), Tenth (2006-07), Eleventh
(2011-12) and Twelfth (2016-17) Five-Year Plan, respectively. The
corresponding energy requirements would be 5,29,013, 7,19,097, 975222, and
1318 644 MU, respectively. Compared to the 15th EPS projections, these are
less by about one per cent in peak demand and seven per cent to eight per cent
in energy requirement.

10
c) Energy Consumption Pattern in India

The sector-wise energy consumption at national level has been presented

below:
Industry-31%
Agriculture-31%
Domestic-21%
Commercial-5%
Others-12%
The industrial sector consumes nearly 31 per cent of the total commercial
energy available in India. This is basically due to the fact that Indian industries
are often energy inefficient and have least concern for energy conservation.
Hence, experts believe substantial saving potential (nearly 30 per cent) through
retrofitting is possible in this sector.

AT A GLANCE:

 Installed capacity as on March 31, 2001 was 1,01,630 MW, of which 71

per cent was thermal, 25 per cent hydel, three per cent nuclear and one
per cent wind.
 Till January 31, 2001, 25 private sector projects had been commissioned
with total installed capacity of 5,370 MW.
 In 2000-01, 499.45 billion units of power were generated. Energy deficits
were estimated at 7.8 per cent and peak deficit at 13 per cent.
 Per capita consumption of electricity is estimated at 374 kWh.
 Capacity additions envisaged during the Ninth Five Year Plan is 40,245
MW, of which 73 per cent is thermal, 25 per cent hydro, and two per cent
nuclear, but the rate of additions has been below target so far.
 Transmission and distribution losses are reported at 23 per cent on an
average. These losses are being reassessed, and it is evident that actual
losses are much higher than reported losses.
 Power tariffs vary widely between states and between consumer
categories. In 2000-01, the overall average tariff for the state electricity
boards was Rs. 2.12/kWh, which covered just 69.8 per cent of the
average of cost of supply.

Power Scenario in Orissa - An Overview

11
Orissa has been a pioneer among States in India in embarking on a
comprehensive reform of the electricity industry of the State. The aim of the
reform is to address the fundamental issues underlying poor performance of the
Orissa State Electricity Board and restructure the power sector. The objective to
make power supply more efficient, meet the needs of a growing economy and
develop an economically viable power industry which will enable Orissa to
attract private capital while safeguarding the interests of the consumers. A new
legislation, namely, the Orissa Electricity Reform Act, 1995 (Orissa Act 2 of
1996) was enacted for the purpose of restructuring the electricity industry, for
taking measures conducive to rationalization of generation, transmission and
supply system, for opening avenues for participation of private sector
entrepreneurs and for establishment of a Regulatory Commission independent
of the state government and power utilities. Advance clearance of the
legislation by the central government was issued by the Ministry of Home
Affairs in early November 1995. The legislation was approved by the State
Assembly on November 28, 1995. The President gave his assent in January
1996 and the Act became effective in April 1996. There structuring of the
industry became effective from the same date and the Regulatory Commission
became functional on 01.08.1996 after all the three members including the
Chairman had taken oath of office. The reform legislation contains several
fundamental building blocks.
Restructuring - The former OSEB has been corporatised and is designed to be
managed on commercial principles in its new form GRIDCO. While the newly
formed GRIDCO has been put in charge of transmission and distribution, the
hydro power- generating stations owned by the government has been taken over
by the Orissa Hydro Power Corporation (OHPC).
Unbundling - The reform structure has incorporated principles of functional
unbundling with regard to generation, transmission and distribution to be
managed by separate corporations/companies.
Privatisation - The OER Act, 1995 aims at fostering private sector participation
in generation and gradual privatisation of transmission and distribution.
Regulatory Commission - An important component is establishment of the
Orissa Electricity Regulatory Commission for ensuring achievement of
objectives given in the Orissa Electricity Reform Act, 1995.
Licensing - Government ownership and direct control has given way to a
licensing system in respect of transmission and distribution activities.
Tariff - Determining tariff which would ensure commercial rate of return for
investment in the electricity industry while protecting rights of all categories of
consumers with respect to cost, efficiency and quality of service. The new

12
regulatory supervision is designed to be qualitatively and structurally different
from the command and control exercised by the government so far as the
electricity industry is concerned. The Commission is designed to be an
autonomous authority responsible for regulation of the power sector while
policy-making power continues to be retained by the State Government. The
new regulatory regime is designed to insulate the electricity industry from short
term political decisions and rigid bureaucratic control. It aims at ensuring that
industry operates on commercial lines so that the scarce resources of the state
are available for development. It has been the experience that state owned
industry is utilised for achieving social and political ends such as creating
avenues for employment, and giving subsidy to certain categories of consumers.
This becomes detrimental to the industry resulting in non-availability of
resources for maintenance and expansion, lack of accountability in
performance, poor quality of service, financial sickness of the industry and
unwillingness of private sector to invest in any significant manner. The new
regulatory regime, on the pattern prevalent in USA and UK, is designed to
create clear and transparent rules and procedures for open hearing by which the
Regulatory Commission can monitor and control the essential utility industries
while the interests of all those who participate in it and those who are served by
it can be balanced and protected. As an independent Regulatory OERC, issues
and enforces licenses, determines tariff and charges, monitors financial viability
of operators, sets service standards and monitors compliance, arbitrates in
disputes between licensees, arbitrates in disputes between licensees and
consumers, provides information and advice to the Government, handles
consumer grievances and promotes competition in all sectors of electricity
industry. An independent Regulatory Commission operating in a transparent
manner creates comfort and confidence of investors from private sector by
allaying the apprehension that political and personal considerations may create
an uncertain climate and that the interests of Govt. or selected persons shall not
be unduly favoured.
Functions of the OERC are :
(i) to aid and advise, in matters concerning generation, transmission,
distribution and supply of electricity in the State;
(ii) to regulate the working of licensees and to promote their working in an
efficient, economical and equitable manner;
(iii) to issue licenses in accordance with the provisions of the Reform Act and
determine the conditions to be included in the licenses;
(iv) to promote efficiency, economy and safety in the transmission, distribution
and use of electricity in the State including and in particular in regard to quality,

13
continuity and reliability of service so as to enable all reasonable demands for
electricity to be met;
(v) to regulate the purchase, distribution, supply and utilization of electricity,
the quality of service, the tariff and charges payable keeping in view both the
interest of the consumer as well as the consideration that the supply and
distribution cannot be maintained unless the charges for the electricity supplied
are reasonably levied and duly collected;
(vi) to promote competitiveness and progressively involve the participation of
the private sector, while ensuring a fair deal for the customers;
(vii) to collect data and forecast on the demand for and use of electricity and to
require the licensees to collect such data and make such forecasts;
(viii) to require licensees to formulate perspective plans and schemes in
coordination with others for the promotion of generation, transmission,
distribution and supply of electricity; and
(ix) to undertake all incidental or ancilliary things. The Orissa Electricity
Regulatory Commission has taken up its role earnestly in the aforesaid
historical and legal perspective. The Commission's task is all the more difficult
because there has been no precedent of an independent regulatory Commission
in electricity industry in any of the developing countries in Asia. The
Commission has formulated its rules, regulation and procedure in a tailor-made
manner to suit the economic and industrial development in general, and need of
electricity sector in particular, in the state of Orissa while safeguarding the
interests of all categories of consumers.

14
15
 OPTCL PROFILE
ORISSA POWER TRANSMISSION CORPORATION LIMITED (OPTCL),
one of the largest Transmission Utility in the country was incorporated in
March 2004 under the Companies Act, 1956 as a company wholly owned by
the Government of Orissa to undertake the business of transmission and
wheeling of electricity in the State.

 Started commercial operation from 01.04.2005 only as a Transmission

Licensee. (a deemed Transmission Licensee under Section 14 of Electricity
Act, 2003)
 Notified as the State Transmission Utility (STU) by the State Govt. and
discharges the State Load Dispatch functions.
 Number of employees as on (01.10.2008) : 3799
Executives-722, Non-Executives - 3077
 Number of posts vacant as on 1/2007 – 1186
Executives-744, Non-Executives- 442
 Number of pensioners as on 31.01.2007 – 6200
 Number of Grid S/S including switching stations – 81
 Length of EHT lines – 9550 Ckt-Kms.
 Number of Bays – 1506

The registered office of the Company is situated at Bhubaneswar, the capital of

the State of Orissa. Its projects and field units are spread all over the State.
OPTCL became fully operational with effect from 9th June 2005 consequent
upon issue of Orissa Electricity Reform (Transfer of Transmission and Related
Activities) Scheme, 2005 under the provisions of Electricity Act, 2003 and the
Orissa Reforms Act, 1995 by the State Government for transfer and vesting of
transmission related activities of GRIDCO with OPTCL. The Company has
been designated as the State Transmission Utility in terms of Section 39 of the
Electricity Act, 2003. Presently the Company is carrying on intra state
transmission and wheeling of electricity under a license issued by the Orissa
Electricity Regulatory Commission. The Company is also discharging the
functions of State Load Despatch Centre. The Company owns Extra High
Voltage Transmission system and operates about 9550.93 ckt kms of
transmission lines at 400 kV, 220 kV, 132 kV levels and 81 nos. of substations
with transformation capacity of MVA.

The day-to-day affairs of the Company are managed by the Managing

Director assisted by whole-time Functional Directors as per the advice of the

16
Board of Directors constituted. They are in turn assisted by a team of
dedicated and experienced professionals in the various fields.

MISSION AND VISION

MISSION

Plan & operate the Transmission system so as to ensure that transmission

system built, operated and maintained to provide efficient, economical and
coordinated system of Transmission and meet the overall performance
Standards.
(i) To upgrade the transmission system network so as to handle power to the
tune of 3000 MW by the year 2009 for 100% availability of power to each
family.
(ii) To maintain the system losses at par with that of National level.
(iii) To impart advanced techno managerial training to the practicing
engineers and work force so as to professionalism them with progressive
technology and capable commercial organization of the country so as to
build up the most techno-commercially viable model of the country.

VISION

To build up OPTCL as one of the best Transmission utility in the Country

in terms of uninterrupted power supply, minimizing the loss, contributing to
state's Industrial growth. Development of a well coordinated transmission
system in the backdrop of formation of strong National Power Grid as a
flagship, endeavor to steer the development of Power System on Planned
path leading to cost effective fulfillment of the objective of 'Electricity to
All' at affordable price.

CORE OBJECTIVE

To effectively operate Transmission lines and Sub-Stations in the State

for evacuation of power from the state generating stations feed power to
state distribution companies, wheeling of Power to other states,
maintenance of the existing lines and sub-stations for power transmission
and to undertake power system improvement by renovation, up-gradation
and modernization of the transmission network. OPTCL being a State
Transmission Utility Public Authority has set the following objectives.

17
Undertake transmission and wheeling of electricity through intra-State
Transmission system
1. Discharge all functions of planning and coordination relating to
intra State, inter State transmission system with Central Transmission
Utility, State Govt. Generating Companies, Regional Power Board,
Authority, Licensees or other person notified by State Govt. in this
behalf.
2. Ensure development of an efficient and economical system of
intra state and inter State transmission lines for smooth flow of
electricity from generating station s to the load centers.
3. Provide non-discriminatory open access to its transmission
system for use by any licensee or generating company or any consumer
as and when such open access is provided by the State Commission on
payment of transmission charges/surcharge as may be specified by the
State Commission.
4. Exercise supervision and control over the intra-state
transmission system, efficient operation and maintenance of
transmission lines and substations and operate State Load Despatch
Centers to ensure optimum scheduling and despatch of electricity and
to ensure integrated operation of power systems in the State.
5. Restore power at the earliest possible time through deployment of
emergency Restoration system in the event of any Natural Disasters like
super cyclone, flood etc.

18
 Operating & cash conversion cycle

 Receivables management

 Inventory management

 Cash management

19
 REVIEW OF LITERATURE
Never cross the border
Wisdom says
There is fire beyond the border.

Working capital is so much in use in common parlance and is so much

misunderstood. Even among the professional managers the controversy and
confusion persists. In an economists point of view capital is often used to refer
to capital goods consisting of a great variety of things, namely, machines of
various kinds, plants, houses, tools, raw materials and goods in process. A
finance manger of a firm looks for these things on the asset side of the balance
sheet. For capital, he turns his attention to the other side of the balance sheet.
An accountant will regard working capital as current assets minus current
liabilities and call it as net working capital. While a finance manager will
consider gross current assets as the working capital. In case of accountant and
finance manager both may be true, but there concerns differ. The former’s
concern is arithmetical accuracy trained as he is to tally the two sides of the
balance sheet. But the finance manager’s concern is to find fund for each item
of current assets at such costs and risks that the evolving financial structure
remains balanced between the two. When one asks a production controller:
what is working capital? His answer is very simple and straightforward. To him
working capital is the fund needed to meet the day-to-day working expenses,
i.e. to pay for materials, wages and other operating expenses. Is there any
differences between the statements of the accountant, the finance manager and
the production controller? In the ultimate analysis; the later may be true, but
according to the accountant or the finance manager it is the very working
expenses that get blocked in current asset along the productive-distributive line
of an enterprise, and net working capital is that liquidity which takes care of the
working expenses if the line gets extended due to any reason.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital-gross and net.

Gross working capital refers to the firm’s investment in current assets. Current
assets are the assets which can be converted in to cash within an accounting
year and include cash, short term securities, debtors, (accounts receivables or
book debts) bills receivable and stock (inventory).

20
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors (accounts
payable), bills payable, and outstanding expenses. Net working capital can be
positive or negative. A positive net working capital will arise when current
assets exceeds current liabilities. A negative working capital occurs when
current liabilities are in excess of current assets.
The two concepts of working capital-gross and net – are not exclusive: rather,
they have equal significance from the management view point.

FOCUSING ON MANAGEMENT OF CURRENT ASSETS

The gross working capital concept focuses attention on two aspects of

current assets management: (1) how to optimize investment in current assets?
(2)How should current assets be financed?
The consideration of the level of investment in current assets should
avoid two danger points- excessive or inadequate investment in current assets.
In vestment in current asset should be just adequate to the needs of the business
firm. Excessive investment in current asset should be avoided because it
impairs the firm’s profitability, as idle investment earns nothing. On the other
hand inadequate amount of working capital can threaten solvency of the firm
because of its inability to meet its current obligations. It should be realised that
the working capital needs of the firm may be fluctuating with changing business
activity. This may cause excess or shortage of working capital frequently. The
management should be prompt to initiate an action and correct imbalances.
Another aspect of the gross working capital points to the need of arranging
funds to finance current assets. When ever a need for working capital funds
rises due to the increasing level of business activity or for any other reason,
financing arrangement should be made quickly. Similarly, if suddenly, some
surplus funds arise they should not be allowed to remain idle, but should be
invested in short term securities. Thus, the financial manager should have
knowledge of the sources of working capital funds as well as investment
avenues where idle funds may be temporarily invested.

FOCUSING ON LIQUIDITY MANAGEMENT

Net working capital is a qualitative concept. It indicates the liquidity

position of the firm and suggests the extent to which working capital needs may
be financed by permanent sources of funds. Current assets should be
sufficiently in excess of current liabilities to constitute a margin or buffer for

21
maturing obligations within the ordinary operating cycle of a business. In order
to protect their interests, short term creditors always like a company to maintain
current assets at a higher level than current liabilities. It is a conventional rule to
maintain the level of current assets twice the level of current liabilities. How
ever, the quality of current assets should be considered in determining the level
of current assets vis-à-vis current liabilities. A weak liquidity position posses a
threat to the solvency of the company and makes it unsafe and unsound. A
negative working capital means a negative liquidity, and may prove to be
harmful for the company’s reputation. Excessive liquidity is also bad. It may be
due to mismanagement of current assets. Therefore, prompt and timely action
should be taken by management to improve and correct the imbalances in the
liquidity position of the firm.

OPERATING AND CASH CONVERSION CYCLE

Operating cycle is the time duration required to convert sales, after the
conversion of resources in to inventories, in to cash. The operating cycle of a
manufacturing company involves three phases:
 Acquisition of resources such as raw material, labour power and fuel etc
 Manufacture of the product which includes conversion of raw material in
to work-in-progress in to finished goods.
 Sale of the product either for cash or on credit. Credit sales create
account receivable for collection.

Purchases paym

RMCP +WICP +FGCP

22
The length of operating cycle of a manufacturing firm is the sum of
inventory conversion period (ICP), and debtors (receivable) conversion
period (DCP). The inventory conversion period is the total time needed for
producing and selling the product. It includes raw material conversion period
(RMCP), work-in-progress conversion period(WIPCP) and finished goods
conversion period(FGCP). The debtor conversion period is the time required
to collect the out standing amount from the customers. The total inventory
conversion period and debtors conversion period is referred to as gross
operating cycle(GOC). The creditors deferral period(CDP) the length of time
the firm is able to defer payments on various resource purchases. The
difference between gross operating cycle and payables deferral period is net
operating cycle (NOC).
If depreciation is excluded from expenses in the computation of operating
cycle, the net operating cycle also represents the cash conversion
cycle(CCL). It is the net time interval between cash collection from sale of
the product and cash payments for resources acquired by the firm. It also
represents the time interval over which additional funds, called working
capital, should be obtained in order to carry out the firms operations.

GROSS OPERATING CYCLE (GOC)

The firms gross operating cycle can be determined as inventory conversion

period (ICP) plus debtor conversion period (DCP). Thus GOC is given as
follows:
Gross operating cycle = Inventory conversion period + debtor conversion
period
GOC = ICP + DCP
Inventory conversion period(ICP) is the sum of raw material conversion
period(RMCP), work-in-progress conversion period(WICP),and finished
good conversion period(FGCP).
ICP = RMCP + WICP + FGCP
Raw material conversion period(RMCP)- It is the average time period taken
to convert raw material in to work-in-progress. RMCP depends on raw
material consumption per day and raw material inventory. Raw material
consumption per day is given by the total raw material consumption divided
by the number of days in the year (say 360). The raw material conversion
period is obtained when raw material inventory is divided by raw material
consumption per day.

23
Raw material conversion period = Raw material inventory
(Raw material consumption)/360
RMCP = RMI×360
RMC
Work in progress conversion period (WIPCP) - It is the average time taken
to complete the semi finished or work-in-progress.
Work-in-progress conversion period = Work-in-progress inventory
(cost of production)/360
WIPCP = WIPI×360
COP
Finished good conversion period (FGCP) - It is the average time taken sell
the finished goods.
Finished goods conversion period = Finished goods inventory
(Cost of goods sold)/360
FGCP = FGI×360
CGS
Debtor conversion period (DCP) - It is the average time taken to convert
debtors in to cash. DCP represents the average collection period.
DCP = debtors × 360
Credit sales
Creditors deferral period (CDP) - it is the average time taken by the firm in
paying its suppliers (creditors).
CDP=Creditors×360
Credit purchases

CASH CONVERSION OR NET OPERATING CYCLE (NOC)

Net operating cycle (NOC) is the difference between gross operating cycle
and payables deferral period.
Net operating cycle = Gross operating cycle ─ Creditors deferral
period
NOC = GOC ─ CDP
The following table-1 shows the detailed calculation of the components of a
firms operating cycle. Table -2 shows the summary of calculations.

24
 Table-1

Operating cycle calculation (RS in lakh)

Items Actual Projected

1. Raw materials conversion period

a. Raw material consumption 4349 5932
b. Raw material consumption per day 12.1 16.5
c. Raw material inventory 827 986
d. Raw material inventory holding days 68d 60d
2. Work in progress conversion period
a. Cost of production 7051 5212 ‫٭‬
b. Cost of production per day 14.5 19.6
c. Work in progress inventory 325 498
d. Work in progress inventory holding days 22d 25d
3. Finished good conversion period
a. Cost of goods sold6582 5003 ‫٭‬
b. Cost of goods sold per day 13.9 18.3
c. Finished goods inventory 526 995
d. Finished goods inventory holding days 38d 54d
4. Collection period
a. Credit sales (at cost)8006 6087 ‫٭٭‬
b. Sales per day 16.9 22.2
c. Debtors 735 1040
d. Debtors out standing days 43d 47d
5. Creditors deferral period
a. Credit purchases 4653 6091
b. purchase per day 12.9 16.9
c. Creditors 454 642
d. Creditors out standing days 35d 38d
‫ ٭‬Depreciation is included.
‫ ٭٭‬All sales are assumed on credit.

25
 Table -2

Summary of operating cycle calculations

(Number of days)
Actual Projected
GROSS OPERATING CYCLE
1. Inventory conversion period
 Raw material 68 60
 Work in progress 22 25
 Finished goods 38 128 54 139
2. Debtor conversion period 43 47
3. Gross operating cycle (1+2) 171 186
4. Payment deferral period 35 38
NET OPERATING CYCLE (3−4) 136 148

DETERMINANTS OF WORKING CAPITAL

There is no set rules and formulae to determine the working capital

requirements of a firm. A large no of factors each having a different importance
influences working capital needs of a firm. The following is the common
factors that generally influences the working capital requirements of a firm.
• Nature of business
• Market and demand conditions
• Technology and manufacturing policy
• Credit policy
• Availability of credit from suppliers
• Operating efficiency
• Price level changes

THE DANGERS OF EXCESSIVE WORKING CAPITAL

 It results in unnecessary accumulation of inventories. Thus chances

of inventory mishandling, waste, theft and losses increase.

26
  It is an indication of defective credit policy and slack collection
period. Consequently, higher incidence of bad debts results, which
adversely affect profit.
 Excessive working capital makes management complacent which
degenerates in to managerial efficiency.
 Tendencies of accumulating inventories tend to make speculative
profits grow. This may tend to make dividend policy liberal and
difficult to cope with in future when the firm is un able to make
speculative profits.

THE DANGERS OF INADEQUATE WORKING CAPITAL

 It stagnates growth. It becomes difficult for the firm to

undertake profitable projects for non availability of working
capital funds.
 It becomes difficult to implement operating plans and achieve
the firm’s profit target.
 Operating in inefficiencies creep in when it becomes difficult
even to meet day to day commitments.
 Fixed assets are not efficiently utilized for the lack of working
capital funds. Thus the firms profitability would deteriorate.
 Paucity of working capital funds render the firm unable to avail
attractive credit opportunities etc.
 The firm losses its reputation when it is not in a position to
honour its short term obligations. As a result, the firm faces
tight credit terms.

An enlightened management should, therefore, maintain the

right amount of working capital on a continuous basis. On then a
proper functioning of business operations will be ensured. Sound
financial and statistical techniques, supported by judgement,
should be used to predict the quantum of working capital needed at
different time periods.

27
 RECEIVABLES MANAGEMENT AND
FACTORING
INTRODUCTION

Trade credit arises when a firm sells its products or services on credit and
does not receive cash immediately. It is an essential marketing tool acting as
abridge for movement of goods through production and distribution stages to
customers. A firm grants trade credit to protect its sales from the competitors
and to attract the potential customers to bye its at favourable terms. Trade credit
creates accounts receivable or trade debtors also referred to book (debts in
India) that the firm is expected to collect in the near future. The customers from
whom receivable or book debts have to be collected in the future are called
trade debtors or simply as debtors and represents the firm’s claim or asset.
A credit sale has three characteristics. First, it involves an element of
risk that should be carefully analysed. Case sales are totally risk less but not the
credit sales as the cash payments are yet to be received. Second, it is based on
economic value. To the buyer, the economic value in goods or services passes
immediately at the time of sale, while the seller expects an equivalent value to
be received later on. Third it implies futurity. The buyer will make the cash
payment for goods or services received by him in a future period.

CREDIT POLICY: NATURE AND GOALS

A firm’s investment in accounts receivable depends on: the volume of credit
sales and the collection period. For example if a firm’s credit sales are Rs 30
lakh per day and customers, on an average, take 45 days to make payment, then
the firm’s average investment in accounts receivable is:
Daily credit sales × average collection period
Rs 30 lakh×45=Rs 1,350 lakh
The investment in receivables may be expressed in terms of costs of sales
instead of sales value.
The volume of credit sales is a function of the firm’s total sales and the
percentage of credit sales to total sales. Total sales depend on market size, firms
market share, product quality, intensity of competition, economic condition etc.

28
the financial manager hardly has any control over these variables. The
percentage of credit sales to total sales is mostly influenced by the nature of
business and industry norms.
There is one way in which the financial manager can affect the volume of credit
sales and collection period and consequently, investment in accounts receivable.
That is through the changes in credit policy. The term credit policy is used to
refer to the combination of three decision variables:
Credit standard, credit terms and collection efforts, on which the financial
manager has influence.
• Credit standards are the criteria to decide the type of customers to whom
goods should be sold on credit. If a firm has more slow paying
customers, its investment in accounts receivable will increase. The firm
will also be exposed to higher risk of default.
• Credit terms specify duration of credit and terms of payment by
customers. Investment in accounts receivable will be high if customers
are allowed extended time period for making payments.
• Collection efforts determine the actual collection period. The lower the
collection period, the lower the investment in accounts receivable and
vice versa.

Goals of credit policy

A firm may follow a lenient or a stringent credit policy. The firm

following a lenient credit policy tends to sell on credit to customers on very
liberal terms and standards, credits are granted for longer period even to those
customers whose creditworthiness is not fully known or whose financial
position is doubtful. In contrast, a firms following a stringent credit policy sells
on a credit on a highly selective basis only to those customers who have proven
creditworthiness and who are financially strong. In practice, firms follow credit
policies ranging between stringent to lenient.

Marketing tool

Firms use credit policy as a marketing tool for expanding sales. In a declining
market it may be used to maintain the market share. Credit policy helps to retain
old customers and create new customers by weaning them away from
competitors. In a growing market, it is used to increase the firm’s market share.
Under a highly competitive situation or recessionary economic conditions, a

29
firm may loosen its credit policy to maintain sales or to minimize erosion of
sales.

WHY DO COMPANIES IN INDIA GRANT CREDIT?

Companies in India feel the necessity of granting credit for the following
reasons:-

 Competition- generally the higher the degree of competition the more

the credit granted by the firm. How ever there are exceptions in case of
the electronics industries in India.
 Companies bargaining power- if a company has higher bargaining
power vis-à-vis its buyers, it may grant no or less credit. The company
will have a strong bargaining power if it has a strong product, monopoly
power, brand image, large size or strong financial position.
 Buyers requirements- in a number of business sectors buyers/dealers
are not able to operate without extended credit. This is particularly so in
cash of industrial products.
 Buyer’s status- large buyers demand easy credit terms because of bulk
purchases and higher bargaining power. Some company follows a
policies of not giving much credit to small retailers since it is quite
difficult to collect dues from them.
 Relationship with dealers - companies sometimes extend credit
relationship with dealers to keep long term relationship with them and to
reward them for their loyalty.
 Marketing tools- credit is used as marketing tool, particularly when a
new product is launched or when a company wants to push its weak
products.
 Industry practice- small companies have been found guided by industry
practice or norm more than the large companies. Sometimes companies
continues giving credit because of past practice rather than industry
practice.
 Transit delay- this is a forced reason for extended credit in case of a
number of companies in India. Most companies have evolved systems to
minimize the impact of such delays. Some of them takes the help of
banks to control cash flows in such situations.
Maximization of sales vs. incremental profit

30
Is sales maximization the goal of firms credit policy? If it is so the firm
would follow a very lenient credit policy, and would sell on credit to every
one. Firms in practice don’t follow very loose credit policy just to maximize
sales. Sales don’t expand without costs. The firm will have to evaluate its
credit policy in terms of both return and cost of additional costs. Additional
sales should add to the firm’s operating profit. There are three types of costs
involved.
Production and selling costs- These costs increase with expansion of
sales. If sales expand within the existing production capacity, then only the
variable production and selling costs will increase. If capacity is added for
sales expansion resulting from loosening of credit policy, then the
incremental production and selling costs will include both variable and fixed
costs.
The difference between incremental sales revenue and the incremental
production and selling cost is the incremental contribution of the change in
the credit policy. We should note that a tight credit policy means rejection of
certain type of accounts whose credit worthiness is doubtful. This results in
to loss of sales and consequently, loss of contribution. This is an
opportunity loss to the firm. As the firm starts loosening its credit policy, it
accepts all or some of the accounts which the firm had earlier rejected. Thus
the firm will recapture lost sales and thus, lost contribution. The opportunity
cost of lost contribution declines with the loosening of credit policy.
Administrative cost- Two types of administrative cost are involved
when a firm loosens its credit policy. (a) credit investigation and supervision
costs and (b) collection costs. The firm is required to analyze and supervise
large number of accounts when it loosens its credit policy. Similarly, the
firm ill have to intensify its collection efforts to collect outstanding bill from
financially less sound customers. The incremental cost of credit
administration will be nil if the existing credit department without any
additional costs can implement the new credit policy. This will be the case
when the credit department has idle capacity.
Bad debt losses- These arise when the firm is unable to collect its
accounts receivable. The size of the bad debt depends on the quality of
accounts accepted by the firm. This firm tends to sell to customers with
relatively less credit standing when it loosens its credit policy. Some of these
customers delay payments, and some o f them don’t pay at all. As a result
bad debt losses increases. The firm can certainly avoid or minimize these
losses by adopting a very tight credit policy. Is minimization of bad debt
losses a credit policy? If it is so no firm will ever sell on credit to any one. If

31
this happens, then the firm is not availing the opportunity of using credit
policy as a marketing tool for expanding sales, and will incur opportunity
cost in terms of lost contribution. Thus the evaluation of a change in firms
credit policy involves analysis of:

Opportunity cost of lost contribution

Credit administration cost and bad debt losses

These two costs behave contrary to each other. We can see that as the
firm moves from tight to loose credit policy, the opportunity cost declines
( i.e. the fir recaptures lost sales and thus, lost contribution), but the credit
administration costs and bad debt loses increase( i.e. more accounts have to
be handled which also include bad accounts which ultimately fail to pay).
How should the firm determine its credit policy? The firm’s credit policy
will be determined by the trade-off between opportunity cost and credit
administration costs and bad-debt losses. In the figure, this trade-off occurs
at point ‘A’ where the total opportunity costs of lost contribution and credit
administration costs and bad-debt losses is minimum.

Costs and benefits cost of administration

and bad-debt loss
Opportunity cost

Tight credit policy loose

( Cost of credit policy )

32
Optimum credit policy:
A marginal cost- benefit analysis

The firms operating profit is maximized when total cost is minimized for a
given level of revenue. Credit policy at point ‘A’ in the above figure represents
the maximum operating profit( since total cost is minimum). But it is not
necessarily the optimum credit policy. Optimum credit policy is one which
maximizes the firm’s value. The value of the firm is maximized when the
incremental or marginal rate of return of a investment is equal to the
incremental or marginal cost of the funds used to finance the investment. The
incremental rate of return can be calculated as incremental operating profit
divided by the incremental investment in receivable. The incremental cost of
fund is the rate of return required by the suppliers of funds, given the risk of
investment in accounts receivable. We should note that the required rate of
return is not equal to the borrowing rate. Higher the risk of investment, higher
the required rate of return. As the firm loosens its credit policy, its investment
in accounts receivable becomes more risky because of increase in slow paying
and defaulting accounts. Thus the required rate of return is upward slopping
curve.

In sum we may state that the goal of the firm’s credit policy is to
maximize the value of the fir. To achieve this goal the evaluation of investment
in accounts receivable should involve the following four steps.

• Estimation of incremental operating profit

• Estimation of incremental investment in accounts receivable.
• Estimation of the incremental rate of return of investment
• Comparison of the incremental rate of return with the required rate of
return.

33
Cost and return (%) marginal cost of capital (k)
marginal rate

Optimum investment in receivable of return (r)

Stringent credit policy liberal
( optimum level of receivables)

MONITORING RECEIVABLES
A firm need to continuously monitor and control its receivable to ensure the
success of collection efforts. Two traditional method of evaluating the
management of receivable are average collection period (APC) and aging
schedule. These methods have certain limitations to be useful in monitoring
receivable. A better approach is collection experience matrix.

COLLECTION EXPERIENCE MATRIX

34
The major limitation of the traditional method is that they are based on
aggregated data and fail to relate outstanding receivables of a period with the
credit sales of the same period. Thus using the traditional method two
analysts can came up with entirely different signals about the status of
receivables if they aggregate sales and receivables data differently. Using
disaggregated data for analyzing collection experience can eliminate this
problem. The key is to relate receivables to sales of the same period. When
sales over a period of time are shown horizontally and associated receivables
vertically in a tabular form, a matrix is constructed. Therefore, this method
of evaluating receivables is called collection experienced matrix. Let us
take an example.
Suppose that the financial manager of affirm is analyzing its
receivables from the credit sales of past six months starting from July to
December. The credit sales of the company are as follows.

Rs in lakh Rs in lakh
July 400 October 220
August 410 November 205
September 370 December 350

From the sales ledger the financial manager gathered out standings
receivables data for each month’s sales. For example he found that for July,
there was a sale of 400 lakh, the out standing receivables during July, august
and September were Rs 330 lakh, Rs 242 lakh, and Rs 80 lakh. Similarly he
ascertained receivables for sales of other months. This information is shown
in table-3.
How do we interpret the information contained in table-3? We can convert
the table to a collection experience matrix by dividing the out standing
receivables in each column by sales amount in that column. This is shown in
table-4, which contains information on the percentage of receivable on the
credit sales from which those receivables have originated. For example for
the sale of July, 82.5 per cent receivables (i.e. 330/400) were outstanding at
the end of July, 60.5 per cent (i.e. 242/400) at the end of august and 20 per
cent (i.e. 80/400) at the end of September. In other words, 17.5 per cent
receivables were paid by the end of July, 39.5 per cent by the end of august
(viz., 39.5-17.5=22 per cent additional receivables were paid in august), 80
per cent by the end of September(viz., 80-39.5=41.5 per cent additional
receivables were paid during September) and remaining receivables were
collected during October so that the balance of book debts became nil at the
end of October. Receivables of other months can also be analyzed in the

35
 same way. Thus when we read a column top down, we get an idea of the
manner in which the firm collects a given month’s sales. How well does a
firm collects current months sales? This can be ascertained by reading the
diagonals drawn in table-4. For example the top diagonal shows the manner
in which current month’s sales are collected. The next diagonals shows
receivables one month older and so on. For the firm in our example, we find
the table-4 that about 80 per cent of sales in a given month remain
uncollected by the end of that month. In other words, about 20 per cent of
sales in a given month are collected in the same month. If the percentages
increase as we move down by diagonal, it implies that the firm is unable to
collect its receivables faster. This requires an investigation for appropriate
remedial action.

Table-3
Sales and receivables fro July to December
Rs in lakhs
Month July Aug Sept oct Nov Dec
Sales 400 410 370 220 205 350
Receivables July 330
Aug 242 320
Sept 80 245 320
Oct 0 76 210 162
Nov 0 0 72 120 160
Dec 0 0 0 40 130 285

Table-4
Collection experience matrix
Rs in lakhs
Month July Aug Sept oct Nov Dec
Sales 400 410 370 220 205 350
Receivables (%) July 82.5
Aug 60.5 78.0
Sept 20.0 59.8 86.5
Oct 0 18.5 56.8 73.6
Nov 0 0 19.5 54.5 78.0
Dec 0 0 0 18.2 63.0 81.4

Factoring

36
It is a method of converting a non productive inactive asset (i.e. receivable) in
to a productive asset(cash) by selling receivables to a company that specializes
in their collection and administration. A factor makes the conversion of
receivable in to cash possible.

Factoring services
While purchase of receivable is the fundamental to the functioning of factoring,
the factor provides the following three basic services to the clients:
• Sales ledger administration and credit management.
• Credit collection and protection against default and bad debt losses.
• Financial accommodation against the assigned book debts (receivables).
In developed countries like USA, factors provide many other services. They
include :
• Providing information on prospective buyers.
• Providing financial counselling.
• Assisting the client in managing its liquidity and preventing sickness.
• Financing acquisition of inventories.
• Providing facilities for opening letters of credit by the client etc.

DIFFERENT WORKING CAPITAL RATIOS

Although working capital management particularly its receivable
component, apparently takes on a short term approach, commitment to a
particular receivables policy and the customer relation ship that emanates from
it are long term in nature. Hence, the credit manager must take a long term as
well as short term view of the business to which he is going to commit him self.
It is not important to have a strong accounting background to make intelligent
use of financial statements. A credit manager is required to calculate and
interpret certain key ratios which will tell him where his account receivables are
in danger or not.

Classification of ratio:
• Liquidity ratio
• Solvency ratio
• Profitability ratio

37
Among these three ratios the liquidity ratio is generally important for the
working capital management. So let us discuss about the liquidity ratio first.
Liquidity ratio- This ratio measures the ability of a business organization to
pay short term obligations in time. The liquidity ratio can be sub classified into
two groups.

 Liquidity study
 Efficiency study
The liquidity study can be further classified in to three categories.
• Current ratio
• Quick ratio(acid test ratio)
• Absolute liquid ratio
The efficiency study can be further classified in to three categories.
• Inventory turn over ratio(ITR)
• Debtor turn over ratio(DTR)
• Creditors turn over ratio(CTR)
 Current ratio
It establishes the relationship between the current assets and current
liabilities.
Mathematically,
Current ratio=current assets/ current liabilities
Rule of thumb: The standard fixed for current ratio is 2:1
The current ratio is a crude measure of liquidity.
 Quick ratio(acid test ratio)
It establishes the relationship between liquid asset and current liability.
Mathematically,
Quick ratio=liquid assets /current liabilities
It is the absolute measure of liquidity.
Rule of thumb: The normal standard fixed for the quick ratio is 1:1
It is a rigorous measure of examining the liquidity of a business concern. It’s
other name is also acid test ratio.
 Absolute liquid ratio
It establishes the relationship between absolute liquid assets and current
liabilities.
Mathematically,
Absolute liquid ratio=absolute liquid assets/current liability
Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2
A rare measure of liquidity used under certain special circumstances.

38
  Inventory turn over ratio(stock velocity)/(ITR)
Measures the relationship between cost of goods sold and the average
inventory during the period.
Mathematically,
ITR=cost of goods sold/average inventory
Or sales / average inventory
Its main objective is to measure the movement of stock. It is an absolute
measure of movement of stock or inventory.
Inventory holding period=365/ITR(days)

 Debtor turn over ratio(DTR)

It measures or establishes a relationship between the net sales and the
average debtor.
Mathematically,
DTR=net sales/average debtors
It measures the conversion of debtors in to the cash. It is an absolute
measure of measuring the turn over or conversion of debtors. There is a
relative measure also namely average collection period.
Average collection period=365/DTR(days)
 Creditors turn over ratio(CTR)
While receivables turn over ratio of the customer organization measures the
vulnerability of the sources from which payables of the vendor-organizations
are satisfied, the creditors turn over ratio indicates the actual payment
behaviour of the customer organization.
CTR=purchases/trade creditors(payables)
Conversion of this ratio in number of days = 365/CTR

39
INVENTORY MANAGEMENT

INTRODUCTION
Inventories constitute the most significant part of current assets of a large
majority of companies in India. On an average, inventories are approximately
60 per cent of current assets in public limited companies in India. Because of
the large size of inventories maintained by firms, a considerable amount of
funds is required to be committed to them. It is, therefore, absolutely imperative
to manage inventories efficiently and effectively in order to avoid un necessary
investment.

OBJECTIVE- To balance between smooth production, sales, operation and

minimum inventory to maximize profitability.

Motives of inventories management

• Transaction motive-emphasizes the need to maintain inventories to
facilitate smooth production and sales operations.
• Precautionary motive-necessitates holding of inventories to guard
against the risk of un predictable changes in demand and supply forces
and order factors.
• Speculative motive-influences the decision to increase or reduce
inventory levels to take advantage of price fluctuations.

INVENTORY MANAGEMENT TECHNIQUES

To manage inventories answer should shout to the following two questions-
How much should be ordered?

40
 When should it be ordered?
The answer to the first question is economic ordering quantity(EOQ)
Then what is economic ordering quantity?
It is that quantity of raw materials to be purchased at a time where both
carrying cost and ordering cost are at minimum.
Or The optimum quantity where both ordering cost and carrying cost are
minimum.

Ordering cost- the cost involved to place an order for the purchase of raw
material and to receive the raw materials there to.
Ordering costs include-
• Cost of staff
• Traveling cost
• Inspection cost
• Office costs like- stationary, typing, postage, telephone.

Carrying cost- the cost of keeping the raw materials in the store is termed as
carrying cost.
It includes-
• Cost of capital(interest)
• Cost of storage
• Insurance cost
• Cost of spoilage in handling

Methods of calculation of EOQ

 Trial and error approach
 Formula approach
 Graphical approach

Trial and error approach

Example-
A firms inventory planning period is one year. Annual requirement is 1600
units. The ordering cost per order is assessed as Rs 50.00. the carrying cost is
calculated at Rs 1.00 per unit. The firm can procure the materials in various lots

41
like-1600, 800, 400, 200 and 100 units. Which order quantity is EOQ? Show
the analysis in trial error approach.
Ans .
Carrying cost (c)=Rs 1.00/ units
Ordering cost(o)=Rs 50 / order
Total annual consumption (A)=1600 units

Units in lot purchase 1600 800 400 200 100

No. of orders 1 2 4 8 16
Ordering cost per order 50 50 50 50 50
Total ordering cost 50 100 200 400 800
Carrying cost per unit 1 1 1 1 1
Average inventory 800 400 200 100 50
Total carrying cost 800 400 200 100 50
Total cost(ordering cost +
carrying cost) 850 500 400 500 850
As the ordering cost and carrying cost is minimum at 400 units of lots purchase
(i.e. Rs400.00), the EOQ is 400 units.

Formula approach
There is a formula for calculation of EOQ

‘Ordering cost’ is taken as per order ordering cost..

Here in our example the EOQ is 400 units according to the formula
approach also.
Graphical approach

42
Our answer to the second question (When should it be ordered?) is
Reordering point.

Reordering point

The reordering point is that inventory level at which an order should

be placed to replenish the inventory. Before knowing the reordering point
we should first know the lead time, average usage and EOQ. Lead time is
the time normally taken in replenishing inventory after the order has been
placed.

According to the formula

Re-order point =lead time ×average usage + safety stock

Safety stock- It is difficult to predict usage and lead time accurately. The
demand for material may fluctuate from day to day or even week to
week. Similarly the actual delivery time may be different from the
normal lead time. If the actual usage in creases and the delivery of
inventory is delayed, the firm can face a problem of stock out which can
prove to be costly for the firm. Therefore, in order to guard against the
stock out the firm may maintain a safety stock- some minimum or buffer
inventory as cushion against expected increased usage and/ or delay in
delivery time.

43
Optimum production run
The use of the EOQ approach can be extended to production runs to determine
the optimum size of manufacture. Two costs involved are set up cost and
carrying costs. Set up cost includes cost of the following activities: preparing
and processing the stock orders, preparing drawings and specifications, tooling
machines set up, handling machines, tools, equipments and materials, over time
etc. production costs or set up costs will reduce with bulk production runs, but
carrying costs will increase as large stocks of manufactured inventories will be
held. The economic production size will be the one where the total of set up
and carrying costs minimum.

Costs Minimum total cost Carrying cost

Order size ‘Q’

Q Ordering cost
The following equation can be used to determine economic lot size (ELS) or
economic production size.

44
 ELS= 2AS
INVENTORY CONTROL SYSTEMS
C
A firm needs an inventory control system to effectively manage its inventory.
There are several inventory control systems in vague in practice. They range
from simple systems to very complicated systems. The nature of business and
Where ‘A’ isthetotal estim
size dictate the choice of an inventory control system. ate
cost , and ‘c’ thecarryin
There are five important practices of inventory control systems:
• Two bin system
• ABC inventory control system
• Just-In-Time (JIT) systems
• Out-sourcing
• Computerized inventory control systems
 Two-bin-system
Under this system, the company maintains two bins. Once inventory
in one bin is used, an order is placed, and mean while the firm uses
inventory in the second bin. For a large departmental store that sells
hundreds of items, this system is quite unsatisfactory. The
departmental store will have to maintain a self operating, automatic
computer system for tracking the inventory position of various items
and placing order.
 ABC inventory control system.
Large number of firms have to maintain several types of inventories.
It is not desirable to keep the same degree of control on all the items.
The firm should pay maximum attention to those items whose value is
highest. The firm should, therefore, classify the inventories to identify

45
 which item should receive the most effort in controlling. The firm
should be selective in it’s approach to control investment in various
types of inventories. This analytical approach is called ABC analysis
and tends to measure the significance of each item of inventories in
terms of its value. The high value items are classified as ‘A’ terms and
would be under the tightest control. ‘C’ items represents relatively
least value and would be under simple control. ‘B’ items fall in
between those two categories and require reasonable attention of
management. The ABC analysis concentrates on important items and
is also known as (control by importance and exception CIE). As the
items are classified in the importance of there relative value, this
approach is also known as proportional value analysis(PVA).
The following steps are involved in implementing the ABC analysis.
 Classify the items of inventories , determining the expected se
in unites and the price per unit for each item.
 Determine the total value of each item by multiplying the
expected units by its units price.
 Rank the item in accordance wit the total value, giving first
rank to the item with highest total value and so on.
 Compute the ratios(percentage) of numbers of units of each
item to total units of all items and the ratio of total value of
each item to total value of all items.
 Combine items on the basis of their relative value to form three
categories-A,B and C.
 Just-In-Time(JIT) systems
Japanese firm popularized just in time(JIT) system in the world. In a JIT system
material or manufactured components and parts arrive to the manufacturing
sites or stores just few hours before they are put to use. The delivery of material
is synchronized with the manufacturing cycle and speed. JIT system eliminates
the necessity of carrying the large inventories, and thus, saves carrying and
other related costs to the manufacturer. The system requires perfect
understanding and co-ordination between the manufacturer and the suppliers in
terms of the timing of delivery and quality of material. Poor quality material or
components could halt the production. The JIT inventory system complements
the total quality management (TQM). The success of the system depends on
how well a company manages its suppliers. The system puts tremendous
pressure on its suppliers. They will have to develop adequate systems and
procedures to satisfactory meet the needs of manufacturers.
 Out sourcing

46
A few years ago there was a tendency on the parts of many companies to
manufacture all components in-house. Now more and more companies are
adopting the practice out-sourcing. Out-sourcing is a system of buying parts and
components from out sides rather than manufacturing tem internally. Many
companies develop a single source of supply, and many others help developing
small and middle size suppliers and components that they require.
 Computerized inventory control systems
More and more companies, small or large size, are adopting the computerized
system of controlling the inventories A computerized inventory control system
enables a company to easily track large number of inventories. It is a automatic
system of counting inventories, recording withdrawals and revising the balance.
There is an inbuilt system of placing order as the computer notices that the
order point has been reached. The computerized inventories system is inevitable
for large retail stores, which carry thousands of items. The computer
information systems of the buyer and suppliers are linked to each other. As
soon as the supplier’s computer receives an order from the buyer’s system, the
supply process is activated.

CASH MANAGEMENT
Cash and near cash; what is blood to human body, cash is to company. It is like
oil to lubricate the over turning wheels of business; without it the process grinds
to a stop. Cash is an asset which earns only when it is in use. It is the basic input
needed to keep the business running on a continuous basis.

MOTIVES OF HOLDING CASH

The firms need to hold cash may be attributed to the following three motives.
Transaction motive-The transaction motive requires cash to conduct its
business in the ordinary course. The firm needs cash primarily to make
payments for purchases, wages and salary, other operating expenses, taxes
dividend etc.
Precautionary motive- It is need to hold cash to meet contingencies in the
future. It provides a cushion or buffer to withstand some un expected
emergency. The precautionary amount of cash depends upon the predictability
of cash flows. If cash flows can be predicted with accuracy, less cash will be
maintained for an emergency.

47
Speculative motive- The speculating motive for holding of cash for investing
in profit making opportunities as and when they arise. The opportunities to
make profit may arise when the security prices changes. The firm will hold
cash, when it is expected that interest rate will rise and security price will fall.
Securities can be purchased when the interest rate is expected to fall; the firm
will benefit by subsequent fall in interest rates and increase in security prices.
The firm may also speculate on material prices. If it is expected that the
material’s price will fall, the firm can postpone purchase of materials and make
purchases in future when price actually falls. Some firm may hold cash for
speculative purposes. By and large, business firms do not engage in
speculations. Thus the primary motive to hold cash and marketable securities
are: the transaction and precautionary motives.

The firm should evolve strategies regarding the following four

facets of cash management.
 Cash planning- Cash in flows and out flows should be planned to
project cash surplus or deficit for each period of the planning period.
Cash budget should be prepared for this purpose.
 Managing the cash flows- The flow of cash should be properly
managed. The cash in flows should be accelerated while, as far as
possible, the cash out flows should be decelerated.
 Optimum cash level- the firm should decide about the appropriate
level of cash balances. The cost of excess cash and danger of cash
deficiency should be matched to determine the optimum level of cash
balances.
 Investing surplus cash- The surplus cash balance should be properly
invested to earn profits. The firm should decide about the division of
such cash balance between alternative short term investment
opportunities such as bank deposits, marketable securities, or inter
corporate lending.

DETERMING OPTIMUM CASH BALANCE:

OPTIMUM CASH BALANCE UNDER CERTAINTITY
BAUMOL’S MODEL
Most firms try to minimize the sum of the cost of holding cash and the
cost of converting marketable securities to cash.
Baumol’s cash management model helps in determining a firm’s optimum cash
balance under certainty. As per the model, cash and inventory management

48
problems are one and the same. There are certain assumptions that are made in
the model. They are as follows:

1. The firm is able to forecast its cash requirements with certainty and receive a
specific amount at regular intervals.
2. The firm’s cash payments occur uniformly over a period of time i.e. a steady
rate of cash outflows.
3. The opportunity cost of holding cash is known and does not change over
time. Cash holdings incur an opportunity cost in the form of opportunity
foregone.
4. The firm will incur the same transaction cost whenever it converts securities
to cash. Each transaction incurs a fixed and variable cost.

For example, let us assume that the firm sells securities and starts with a cash
balance of C rupees. When the firm spends cash, its cash balance starts
decreasing and reaches zero. The firm again gets back its money by selling
marketable securities. As the cash balance decreases gradually, the average cash
balance will be: C/2. This can be shown in following figure:

Cash balance

The firm incurs a cost known as holding cost for maintaining the cash balance.
It is known as opportunity cost, the return inevitable on the marketable

49
securities. If the opportunity cost is k, then the firm’s holding cost for
maintaining an average cash balance is as follows:

Holding cost = k (C/2)

Whenever the firm converts its marketable securities to cash, it incurs a cost
known as transaction cost. Total number of transactions in a particular year will
be total funds required (T), divided by the cash balance (C) i.e. T/C. The
assumption here is that the cost per transaction is constant. If the cost per
transaction is c, then the total transaction cost will be:

Transaction cost = c (T/C)

The total annual cost of the demand for cash will be:

Total cost = k (C/2) + c (T/C)

Optimum level of cash balance

As the demand for cash, ‘C’ increases, the holding cost will also increase and
the transaction cost will reduce because of a decline in the number of
transactions. Hence, it can be said that there is a relationship between the
holding cost and the transaction cost.

The optimum cash balance, C* is obtained when the total cost is minimum.

Optimum cash balance (C*) = √2cT/k

Where, C* is the optimum cash balance.

‘c’ is the cost per transaction.

T is the total cash needed during the year.
k is the opportunity cost of holding cash balances.

With the increase in the cost per transaction and total funds required, the
optimum cash balance will increase. However, with an increase in the
opportunity cost, it will decrease.

50
Limitations of the Baumol model:
1. It does not allow cash flows to fluctuate.
2. Overdraft is not considered.
3. There are uncertainties in the pattern of future cash flows.

OPTIMUM CASH BALANCE UNDER UNCERTAINTITY

THE MILLER-ORR MODEL
Most firms don’t use their cash flows uniformly and also cannot predict their
daily cash inflows and outflows. Mille-Orr Model helps them by allowing daily
cash flow variation.

Under the model, the firm allows the cash balance to fluctuate between the
upper control limit and the lower control limit, making a purchase and sale of
marketable securities only when one of these limits is reached. The assumption

51
made here is that the net cash flows are normally distributed with a zero value
of mean and a standard deviation. This model provides two control limits - the
upper control limit and the lower control limit as well as a return point. When
the firm’s cash limit fluctuates at random and touches the upper limit, the firm
buys sufficient marketable securities to come back to a normal level of cash
balance i.e. the return point. Similarly, when the firm’s cash flows wander and
touch the lower limit, it sells sufficient marketable securities to bring the cash
balance back to the normal level i.e. the return point.

Cash balance

The lower limit is set by the firm based on its desired minimum safety stock of
cash in hand. The firm should also determine the following factors:
1. An interest rate for marketable securities, (i)
2. A fixed transaction cost for buying and selling marketable securities, (c)
3. The standard deviation if its daily cash flows, (s)

The upper control limits and return path are than calculated by the Miller-Orr
Model as follows:
Distance between the upper limits and lower limits is 3Z.

(Upper limit-Lower limit) = (3/4 × Transaction Cost × Cash Flow

Variance/Interest Rate) 1/3

52
Z = (3/4 × cs2/i) 1/3

If the transaction cost is higher or cash flows shows greater fluctuations, than
the upper limit and lower limit will be far off from each other. As the interest
rate increases, the limits will come closer. There is an inverse relation between
the Z and the interest rate. The upper control limit is three times above the
lower control limits and the return point lies between the upper and lower
limits.

Hence,
Upper Limit = Lower Limit + 3Z
Return Point = Lower Limit + Z

So, the firm holds the average cash balance equal to:
Average Cash Balance = Lower Limit + 4/3 Z

The Miller-Orr Model is more realistic as it allows variation in cash balance

within the lower and upper limits. The lower limit can be set according to the
firm’s liquidity requirement. To determine the standard deviation of net cash
flows the pasty data of the net cash flow behaviour can be used. Managerial
attention is needed only if the cash balance deviates from the limits.

53
54
OBJECTIVES OF STUDY

 Whether, OPTCL has the ability to pay it’s short

term obligations in time?
 Whether, the management of OPTCL is serious
about the result of working capital management?
 Whether, the changes in working capital is directly
attributable to profitability of the organization?
 Whether, the cash flow analysis indicates
operating, investing and financing activities of the
organization?
 Whether, the company’s financial basis is stable on
the basis of two years balance-sheet analysis?

55
SCOPE OF STUDY
To analyze the objectives and getting fact finding
observations, the present study covered the financial
data analysis, reference of three years balance sheets,
as well as cash flow analysis including taking
personal reference of the guide (organization) to
minutely observe the working capital management
practices in OPTCL. Since, the matter is finance
subject, the scope of study is included to data
reference of company’s records, as well as interaction
of key officials of finance department, dealing with
the matter.
While doing the project assignment, due care
was taken to include factual informations on the basis
of data analysis and interpretations.
To avoid bias and prejudices, the matters were
thoroughly deliberated with organization’s guide and

56
obtained clarifications in many issues while included
the same in the project report.

 Balance sheets of different financial

years of OPTCL

 Profit & loss accounts of different

financial years of OPTCL

 Cash flow statement

57
  Other data tables

DATA COLLECTION AND REPRESENTATION

BALANCE-SHEETS OF DIFFERENT FINANCIAL YEARS

The balance sheet shows the financial position of an organization.

Therefore, we take three years balance sheets of OPTCL for our study.
Balance Sheet as at March 31, 2006
(Rupees) (Rupees)
As at 31.03.2006 As at 31.03.2005

I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000
Reserves and Surplus 4769470319
5370170319 0
2. Loan Funds 0
Secured Loans 6887167330
Unsecured Loans 8759859022
15647026352 0
3. Other Funds
Consumers' Security Deposit 83334
21017280005 0
II. APPLICATION OF FUNDS
1.Fixed Assets
Gross Block 19222030684
Less Accumulated Depreciation 8254276443
Net Block 10967754241 0
Capital Work in Progress 8599224175 0
2. Investments 270550000
3. Current Assets, Loans and
Advances
Stores and Spares 701161072 0

58
 Sundry Debtors 1635494618
Cash and Bank Balances 186925346
Other Current Assets 755959781
Loans and Advances 140157178
3419697995 0
Less
Current Liabilities and Provisions
Current Liabilities 1663849985 15132115
Provisions 837699177
2501549162 15132115
Net Current Assets 918148833 -15132115
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 12105692 15132115
(b) Profit and Loss Account 249497064
21017280005 0

Balance Sheet as at March 31, 2007

(Rupees) (Rupees)
As at 31.03.2007 As at 31.03.2006

I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000 600700000
Reserves and Surplus 5143178990 4769470319
5743878990 5370170319
2. Loan Funds
Secured Loans 6121296584 6887167330
Unsecured Loans 9128121439 8759859022
15249418023 15647026352
3. Other Funds
Consumers' Security Deposit 83334 83334
20993380347 21017280005
II. APPLICATION OF FUNDS
1.Fixed Assets
Gross Block 20664373798 19222030684
Less Accumulated Depreciation 9241049678 8254276443
Net Block 11423324120 10967754241
Capital Work in Progress 8243327667 8599224175
2. Investments 270550000 270550000
3. Current Assets, Loans and
Advances
Stores and Spares 751064690 701161072
Sundry Debtors 798196201 1635494618
Cash and Bank Balances 648276812 186925346
Other Current Assets 628081987 755959781
Loans and Advances 389406739 140157178
3215026429 3419697995
Less
Current Liabilities and Provisions
Current Liabilities 1677146697 1663849985

59
 Provisions 830865819 837699177
2508012516 2501549162
Net Current Assets 707013913 918148833
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 9079269 12105692
(b) Profit and Loss Account 340085378 249497064
20993380347 21017280005

Balance Sheet as at March 31, 2008

(Rupees) (Rupees)
Sch. As at 31.03.2008 As at 31.03.2007
No.
I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000
1 600700000
Reserves and Surplus 5143178990
2 5368362657
5969062657 5743878990
2. Loan Funds
3
Secured Loans 5094601256 6121296584
Unsecured Loans 9058314752 9128121439
14152916008 15249418023
3. Other Funds
Consumers' Security Deposit 83334 83334
20122061999 20993380347
II. APPLICATION OF FUNDS
1.Fixed Assets 4
Gross Block 22725369686 20664373798
Less Accumulated Depreciation 10340108668 9241049678
Net Block 12385261018 11423324120
Capital Work in Progress 8243327667
5 7221440474
2. Investments 270550000
6 270550000
3. Current Assets, Loans and
Advances
Stores and Spares
7 766865262 751064690
Sundry Debtors
8 1052479982 798196201
Cash and Bank Balances
9 490881183 648276812

60
 Other Current Assets
10 652553304 628081987
Loans and Advances
11 143339572 389406739
3106119303 3215026429
Less
Current Liabilities and Provisions
12
Current Liabilities 2055168764 1677146697
Provisions 1304517744 830865819
3359686508 2508012516
Net Current Assets (253567205) 707013913
4. (a) Miscellaneous Expenditure to the
extent not written off or adjusted 13 6052846 9079269
(b) Profit and Loss Account 492324866 340085378
20122061999 20993380347

Profit & Loss account for the Year Ended March 31, 2006
Rupees

For the year For the year

ended ended
31.03.2006 31.03.2005
INCOME
Revenue from wheeling of Power 3620758281
Other Income 202875869
Total 3823634150 0
EXPENDITURE
Administrative, General & Other Expenses 1996788733
Depreciation 952711771
2949500504 0
Profit/ (Loss) before interest & finance charges 874133645.9 0
Interest & Finance Charges (1025249710)
Profit/(Loss) before Taxation & Contigency (151116064.1) 0
Reserve Appropriation
Provision for taxation:- 0
Current year 0
Fringe Benefit Tax (2270846)
Profit After Tax (153386910.1)
Appropriation to Contigencies Reserve (96110153.6)
Profit/(Loss) After Taxation & Contigency Reserve (249497063.7) 0
Balance of P&L Account Brought Forward from Last Year 0
Balance Carried over to Balance Sheet (249497063.7) 0

61
Profit & Loss account for the Year Ended March 31, 2007
Rupees

For the year For the year

ended ended
31.03.2007 31.03.2006
INCOME
Revenue from wheeling of Power 3553494401 3620758281
Other Income 168611550 202875869
Total 3722105951 3823634150
EXPENDITURE
Administrative, General & Other Expenses 1423194067 1996788733
Depreciation 986381451 952711771
2409575518 2949500504
Profit/ (Loss) before interest & finance charges 1312530433 874133645.9
Interest & Finance Charges (1162312531) (1025249710)
Net prior period income/(expenditure) (155979199)
Profit/(Loss) before Taxation & Contigency (5761297) (151116064.1)
Provision for taxation:-
Current year 0 0
Fringe Benefit Tax (2341534) (2270846)
Profit After Tax (8102831) (153386910.1)
Reserve Appropriation
Appropriation to Contigencies Reserve (82485483) (96110153.6)
Profit/(Loss) After Taxation & Contigency Reserve (90588314) (249497063.7)
Balance of P&L Account Brought Forward from Last Year (249497064) 0
Balance Carried over to Balance Sheet (340085378) (249497063.7)

62
Profit & Loss account for the Year Ended March 31, 2008
Rupees

For the year For the year

Sch. ended ended
No. 31.03.2008 31.03.2007
INCOME
Revenue from wheeling of Power 14 3997558798 3553494401
Other Income 15 282103171 168611550
Total 4279661969 3722105951
EXPENDITURE
Administrative, General & Other Expenses 16 2399988627 1423194067
Depreciation 1085485700 986381451
3485474327 2409575518
Profit/ (Loss) before interest & finance charges 794187642 1312530433
Interest & Finance Charges
17 (1106554318) (1162312531)
Net prior period income/(expenditure)
18 275867293 (155979199)
Profit/(Loss) before Taxation & Contigency (36499383) (5761297)
Provision for taxation:-
Current year 0 0
Fringe Benefit Tax (2113256) (2341534)
Profit After Tax (38612639) (8102831)
Reserve Appropriation
Appropriation to Contigencies Reserve (113626849) (82485483)
Profit/(Loss) After Taxation & Contigency Reserve (152239488) (90588314)
Balance of P&L Account Brought Forward from Last Year (340085378) (249497064)
Balance Carried over to Balance Sheet (492324866) (340085378)

63
Schedule 1- Share Capital Rupees
As at 31.03.2008 As at 31.03.2007
Authorised :
30,00,000 equity shares of Rs.1,000/- each 3,000,000,000 3,000,000,
000
Issued, Subscribed and Paid-up :
6,00,700 Equity shares of Rs. 1,000/- each 600,700,
600,700,000 000
Share Capital Pending Allotment -
Total 600,700,
600,700,000 000
Schedule 2 - Reserves and Surplus
As at 31.03.2008 As at 31.03.2007
Capital Reserve:
1,641,941,
Capital Reserve -Opening Balance 1,641,941,251 251

Adjustments during the year - -

1,641,941,
1,641,941,251 251
Service line Contributions Received under the
735,452,
Electricity (Supply) Act 1948-Opening Balance 1,006,905,451 814
271,452,
Add : Contributions Adjusted During the Year 90,805,812 637
1,006,905,
1,097,711,263 451
Subsidies Towards Cost of Capital Assets:
289,100,
Opening Balance 289,100,564 564

Adjustments during the year - -

289,100,
289,100,564 564
Grants Towards Cost of Capital Assets:
1,501,694,
Opening Balance 1,500,389,627 587
(1,304,
Adjustments during the year - 960)
1,500,389,
1,500,389,627 627
4,438,336,
Capital Reserve 4,529,142,705 893
Contigency Reserve
598,959,
Opening Balance 702,281,636 867

Adjustment during the year - -

20,836,
Add: Interest accrued during the year on 20,836,287 286

Contigency Reserve Fund Investment. -

64
 Add:Transferred from P&L A/C during the year 113,626,849 82,485,483
702,281,
836,744,772 636
Staff Welfare Fund
2,097,5
Opening Balance 2,336,768 43
239,2
Adjustments during the year (85,281) 25
2,336,7
2,251,487 68
Other Reserves
223,6
Opening Balance 223,693 93

Adjustments during the year - -

223,6
223,693 93
5,143,178,
Total 5,368,362,657 990

Schedule 3 - Loan Funds

Rupees
As at As at
31.03.2008 31.03.2007
Secured Loans
Commercial Banks & Financial
Institutions (Secured by
Floating Charge on Tangible Movable 5,094,601,2 6,121,296,
Fixed Assets) 56 584
Unsecured Loans
112,55 112,552,
Loans from Central Government 2,528 528
204,57 317,130,1 194,502,
Interest accrued and due 7,628 56 436
170,00 170,000,
Loans from State Government 0,000 000
30,972 200,972,0 28,372,
Interest accrued and due ,055 55 055
Loans from State Government - IBRD
Loans - -
347,33 347,334,4 347,334,
Interest accrued and due 4,414 14 414
256,12 405,613,
PFC * 8,149 661
179,77 435,905,5 193,633,
Interest accrued and due 7,362 11 880
358,89 203,345,
REC * 8,705 145
358,898,7
Interest accrued and due - 05 -
240,34 240,347,
Public bonds* 7,700 700

65
 240,347,7
00 -
4,000,00 4,000,000,
Bonds - Government of Orissa 0,000 000
1,820,00 5,820,000,0 1,560,000,
Interest accrued and due 0,000 00 000
780,00 1,245,000,
Bonds - Pension Trust 0,000 000
170,02 950,026,0 112,050,
Interest Accrued and due 6,032 32 000
387,70 315,369,
Loans from others 0,179 620
387,700,1
Interest accrued and due - 79 -
9,058,314,7 9,128,121,
52 439
14,152,916,0 15,249,418
Total 08 ,023

Schedule 5 - Capital Work in Progress Rupees

As at 31.03.2008 As at 31.03.2007
Project / Scheme
Transmission
2,761,249,20 3,780,500,19
(1) EHT Projects 8 8
234,533,67
(2) Other T&D Projects 4 25,251,326
4,485,03
(3) Special Projects of R.E.C. 4 4,790,412
3,817,566,94 3,841,134,41
(4) Power Evacuation Project 6 8
30,676,34
(5) Civil Works Scheme 0 9,567,813
259,520,59 369,150,95
(6) R.E.C. Transmission Support Scheme 1 7
7,108,031,79 8,030,395,12
Total of All Projects 3 4
113,408,68 212,932,54
Advance to Suppliers/Contractors (Capital) 1 3
7,221,440,47 8,243,327,66
Total 4 7

Schedule 6 - Investments
(At Cost) Rupees
As at 31.03.2008 As at 31.03.2007

Unquoted
270,550, 270,550,000
Contigency Reserve Investment 000
(Orissa Govt. Securities)

66
 270,550,
Total 000 270,550,000
Schedule 7: Stores and Spares Rupees
As at 31.03.2008 As at
31.03.2007
25,3
Capital Stores and Spares 54,102 26,801,870
285,1
O&M Stores and Spares 40,369 271,201,929
Capital Stores and Spares at 249,8
Site 40,486 237,923,888
207,6
O&M Stores and Spares at Site 54,626 198,352,454
12,3
Other Materials 24,462 19,036,532
Materials Stock Shortage / 59,8
Excess Pending Investigation 08,113 56,957,821
840,122,
158 810,274,494

Less: Provision for Loss / (59,8 (56,957,821

Theft of Materials 08,113) )
Provision for Obsolete (13,4
Stock-Stores etc. 48,783) (2,251,982)
(73,256, (59,209,803
896) )
766,865,
Total 262 751,064,691
Schedule 8 - Sundry Debtors Rupees
As at 31.03.2008 As at
31.03.2007
1,341,8
For Wheeling Charges 54,077 1,078,281,018
Debts outstanding for a period 985,0
exceeding 6 months- 06,524 444,565,116
Unsecured- 704,9
Considered Good 21,707 172,810,303
Consider 280,0
ed Doubtful 84,817 271,754,813
Debts outstanding for a period 356,8
less than 6 months- 47,553 633,715,902
Unsecured 347,5
-Considered Good 58,275 625,385,898
Consider 9,2
ed Doubtful. 89,278 8,330,004
Less- Provision for Bad & (289,3 (280,084,817
Doubtful Debts 74,095) )
1,052,479,
982 798,196,201
1,052,479,
Total 982 798,196,201

67
Schedule 9 - Cash and Bank Balances
Rupees
As at 31.03.2008 As at 31.03.2007

Cash
4,106,26
Cash in Hand 4 3,634,008
28,82
Stamps in Hand 4 43,173
Balances with Scheduled Banks
(Including Cheques in hand)
72,114,29
Current Accounts 3 135,541,644
255,000,00
Fixed Deposit Accounts 0 443,577,177
120,865,43
Flexi Deposit 4 -
39,036,55
Remittances in Transit 5 65,751,206
491,151,37
0 648,547,208

(270,18
Less: Provision 7) (270,396)
490,881,18
Total 3 648,276,812

Schedule 10 - Other Current

Assets Rupees
As at 31.03.2008 As at31.03.2007
3,359,94
Prepaid Expenses 4 716,361
Capital Subsidy / Grant 573,025,56
Receivable 5 573,025,566
104,868,27
Sundry Receivable 1 83,040,536
681,253,78
0 656,782,463
Less: Provision for Other (28,700,47
Receivables 6) (28,700,476)
652,553,30
Total 4 628,081,987

Schedule 11 - Loans and Advances

(Secured) Rupees
As at 31.03.2008 As at 31.03.2007
20,666,46
Advance to Suppliers 2 21,098,849
26,807,55
Loans and Advances to Staff 3 28,375,774
50,483,36
Advance to Others 7 25,509,100
Advances to GRIDCO - 260,000,000

68
 Sundry Receivables
Amount Recoverable from 2,102,47
Employees / Ex-Employees 6 2,103,347
47,102,27
Other Receivables 5 56,640,009
51,968,54
Deposits 6 51,470,767
101,173,29
Sub Total 7 110,214,123
Outstanding for a Period 101,173,29
Exceeding 6 Months 7 100,760,079
Outstanding for a Period Less
than 6 Months 9,454,044
101,173,29
7 110,214,123
(55,791,10
Less- Other Provision 7) (55,791,107)
143,339,57
Total 2 389,406,739
Schedule 12 - Current Liabilities
& Provisions Rupees
Current Liabilities As at 31.03.2008 As at 31.03.2007
665,167,98
Sundry Creditors 0 610,322,496
Deposits and Retention from 137,154,49
Suppliers / Contractors 7 125,063,350
Interest Accrued but not Due on 20,582,14
Loans 9 62,733,789
47,24
Liabilities for Wealth Tax 0 37,299
49,09
Electricity Duty Payable 2 212,903
4,454,79
Liabilities for Fringe Benefit Tax 0 2,341,534
1,227,713,01
Other Liabilities 6 876,435,326
- 1,677,146,697
Provisions
1,293,949,52
Pension & Gratuity 1 820,297,596
10,568,22
Others 3 10,568,223
1,304,517,74
4 830,865,819
1,304,517,74
Total 4 2,508,012,516

Schedule 13 - Miscellaneous Expenditure to

the Extent not Written off or Adjusted Rupees
As at As at 31.03.2007
31.03.2008

69
 12,105,69
Preliminary Expenses 9,079,269 2
6,052, 3,026,42
Less : Written off During the Year 3,026,423 846 3
6,052, 9,079,26
Total 846 9

Schedule 14 :
Revenue from
Wheeling of
Power
For the year ended 31.03.2008 For the year ended 31.03.2007

Units
Units Wheeled
Wheeled (MU) Revenue (Rs) (MU) Revenue (Rs)
Revenue from
Wheeling Charges 19407.66 3,997,558,798 15662.145 3,553,494,401

Gross Revenue
from Wheeling of
Power 3,997,558,798 3,553,494,401
Net Revenue 3,997,558,798 3,553,494,401

Schedule 15:Other Income Rupees

For the year For the year

ended ended
31.03.2008 31.03.2007

934,60 924,57
Interest on Loans to Staff 8 8
49,425,77 29,614,79
Interest from Banks 5 8

70
 208,20
Excess Provision Written Back 209 9
185,026,54 116,776,87
Supervision Charges 3 5
46,716,03 21,087,09
Miscellaneous Receipts 6 0
282,103,17 168,611,55
Total 1 0

Schedule 16-Administration and General

Expenses Rupees

For the year

ended For the year
31.03.2008 ended 31.03.2007
Employee Costs
1,072,340,10
Salaries, Wages, Allowances & Benefits 3 714,185,512
Staff Welfare Expenses 6,208,159 5,462,797
Terminal Benefits :
798,315,90
Pension 0 290,656,816
192,133,28
Gratuity 0 91,003,881
PF - 777,457
Leave Encashment & Other Terminal Benefits 37,617,527 35,011,647
2,106,614,96
9 1,137,098,110
Repairs & Maintenance
Buildings 11,462,260 13,579,943
145,201,35
Lines, Cables and Network Assets 5 92,235,307
Vehicles 2,396,977 2,974,094
Furniture, Fixtures & Office Equipment 6,106,533 4,293,250
165,167,12
5 113,082,594

Administration,General & Other Expenses

Rent (including lease rentals) 1,773,410 1,719,305
Insurance Premium 385,532 1,958,166
Communication 4,790,519 5,332,649

71
 Professional Charges 11,087,121 4,664,048
Preliminary Expenses Written Off 3,026,423 3,026,423
134,691,16
Other Expenses 6 126,061,744
Provision for Wealth Tax 46,305 36,364
Provisions and Write Off Against Theft of
Materials 2,865,292 4,684,760
Provision for Bad & Doubtful Debt 9,289,278 45,735,910
Provision for Unidentified Assets - 66,359,330
Provision for Obsolete Stock - Stores etc. 11,196,801 2,251,982
- 261,830,681
2,271,782,09
4 1,512,011,385
(50,945,314
Less: Expenses Capitalised ) (88,817,318)
2,220,836,78
Total 0 1,423,194,067
Schedule 17:Interest & Finance Charges
Rupees
For the year
For the year ended
ended 31.03.2008 31.03.2007
Term Loans

Loans from Central Government 10,075,192 10,075,192

Loans from State Government 2,600,000 2,600,000
Loans from State Government-IBRD Loans - -
580,345,88
Commercial Banks 564,530,795 2
PFC 33,699,207 49,365,958
REC 14,319,578 28,993,022
399,563,75
Bonds 386,903,337 0
1,070,943,80
- 4
120,000,87
Others 100,260,950 5
1,190,944,67
100,260,950 9
(28,632,148
Less: Interest Capitalised (5,834,741) )
1,162,312,53
Total 94,426,209 1

Schedule- 18
Net Prior Periods Credit/Charges

For the Year ended 31.03.2008 For the Year ended 31.03.2007

Net Income/ Net Income/

Particulars Expenditure Receipt (Expenditure) Expenditure Receipt (Expenditure)

1.Employee Cost 6,735,408 - (6,735,408) 2,562,497 - (2,562,497)

72
2.Interest & 70,723
Finance Charges 9,603,313 27,360,334 17,757,021 273,501,942 ,882 (202,778,060)
3.Depreciation 41,663,274 28,089,984 (13,573,290) 391,784 (391,784)
50,440
4.Others 1,853,470 280,272,440 278,418,970 687,058 ,200 49,753,142
121,164
Total 59,855,465 335,722,758 275,867,293 277,143,281 ,082 (155,979,199)

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2007
PARTICULARS CURRENT YEAR PREVIOUS YEAR
(2006-2007) (2005-2006)
Amount in (Rs.) Amount in (Rs.)
Cash flow from operating activities:
Profit/loss after tax and exceptional items (90588314) (151116064)
Adjustment for :
Appropriation to reserve & surplus 156253434 32472982
Interest & finance charges 1162312531 1025249710
Depreciation 986773234 952711774
Preliminary expenses W/O 3026423 3026423
Excess provision written back (208209) (14480338)
Interest income (30539376) (26308704)
Provision for wealth tax 36364 37571
Provision /write off against theft materials - 5326605
Operating profit before working capital 2187066087 1826919956
change (A)
Working capital change
Stores and spares (49903618) (100988326)
Sundry debtors 837298417 (1186318464)
Other current assets 127877794 (55102286)
Loan and advances (249249561) 67815838

Current liabilities 8861720 (103238021)

Provisions (6833358) 783371530
Net working capital change (B) 668051394 (594459729)
Cash generated from operations (A+B) 2855117482 1232460227
Cash flow from investing activities:
Acquisition of fixed assets (1442343113) (1621063088)
Sale/ transfer of fixed assets - 54119
Acquisition of capital works 573351745 1014441389
Interest received : Revenue 30539376 26308704

73
Cash generated from investing (838451992) (580258876)
activities (C)
Cash flow from financing activities:
Proceeds from share capital - 700000
Proceeds from secured loan (765870746) 1372868027
Proceeds from unsecured loan (45171657) (1554771938)
Interest paid (744271621) (1461458855)
Cash flow from financing activities (D) (1555314023) (1642662766)
NET CASH GENERATED FROM 461351466 (990461415)
ALL ACTIVITIES (A+B+C+D)
Cash & cash equivalent at the beginning 186925346 1177386761
of the year
Cash and cash equivalent at the end of the 648276812 186925346
year

 Ratio analysis

 Analysis of statement showing

changes in working capital

 Cash flow statement analysis

 Comparative balance sheet analysis

74
DATA ANALYSIS AND INTERPRETATION
WORKING CAPITAL RATIOS
Different working capital ratios can be calculated for different financial
years of OPTCL by using the data available in the balance sheets and profit and
loss accounts of the organization. These ratios will help us to say whether the
organization is currently able to meet its short term obligations in time or not.

Current Ratio- (Current Assets/Current Liability)

YEAR Current Asset Current Liability Ratio

2005-2006 3419697995 1663849985 2.05:1

2006-2007 3215026429 1677146697 1.92:1
2007-2008 3106119303 2055168764 1.52:1

Quick Ratio- (Liquid Asset/ Current Liability)

YEAR Liquid Asset Current Liability Ratio

2005-2006 1822419964 1663849985 1.09:1

2006-2007 1446473013 1677146697 0.9:1
2007-2008 1543361165 2055168764 0.8:1

75
Absolute liquid ratio- (Absolute Liquid Asset/Current Liability)
YEAR Absolute Liquid Asset Current Liability Ratio

2005-2006 186925346 1663849985 0.2:1

2006-2007 648276812 1677146697 0.4:1
2007-2008 490881183 2055168764 0.3:1

Debtor Turn Over Ratio- (Net sales/Average Debtors)

YEAR Net Sales Average Debtors Ratio Average Collection
Period (365/DTR)days
2005-2006 3620758281 1635494618 2.3 159
2006-2007 3553494401 1216845409.5 2.92 125
2007-2008 3997558798 925338091.5 4.32 85

Net Working Capital Ratio- (Net Working Capital/Net Assets)

YEAR Net Working Capital Net Assets Ratio

2005-2006 918148833 11885903074 0.08

2006-2007 707013913 12130338033 0.06
2007-2008 (253567205) 12131693813 -0.03

Working Capital Turn Over Ratio- (Sales/Net Current Assets)

YEAR Cost of Sales Net Current Assets Ratio

2005-2006 3620758281 918148833 3.95

2006-2007 3553494401 707013913 5.03

76
2007-2008 3997558798 (253567205) -15.7

ANALYSIS OF WORKING CAPITAL RATIOS

From our calculation of different working capital ratios of OPTCL
various results can be made. The liquidity ratio will measure the ability of the
organization to pay its short term obligations in time.

Current Ratio-
From our calculation of Current Ratios of different financial years of
OPTCL, various results can be made.

Rule of thumb- The standard fixed for the current ratio is 2:1

 The Current Ratio of OPTCL in the year 2005-2006 is found to be

2.05:1. It is a good indication according to the rule of thumb. Because the
firm has more current assets than current liabilities. The firm may be able
to meet its short term obligations in time.
 But in 2006-2007 it is found that the current ratio is 1.92:1 which is just
bellow the standard of 2:1. It is due to a little bit decrease of total current
assets from the previous year to current year. Still it is manageable and
also the condition is under the control.
 In 2007-2008, it is found that the current ratio of OPTCL is 1.52:1. It is
below the standard of 2:1 and it is due to a little bit decrease in total
current assets from previous year and an increase in current liability this
year. The cash and bank balance is found to be decreased this year in
comparison to that of previous year where as the current liabilities and
provisions both have increased this year.

77
  Because of increase in administrative overhead expenses, super annuity
benefits and payment of past loan etc. are the major factor for increasing
of current liabilities.
 Still it is also nearly in a manageable position and the situation can be
controlled. So more emphasis can be given on these areas to reduce
current liabilities and to increase current assets so that the actual standard
of 2:1 can be achieved.
 In addition to, company should make clear cut strategic planning to sell
electricity to major industries at industrial rate to achieve higher revenue.

Quick Ratio-
From the table of Quick Ratios of different years of OPTCL some results
can be drawn.

Rule of thumb- The normal standard fixed for the Quick Ratio is 1:1

 The Quick Ratio or the Acid Test Ratio of OPTCL for the financial year
2005-2006 is found to be 1.09:1 and the normal standard for is 1:1. So it
is a good indication. The firm has sufficient liquid assets to meet the
current liabilities.
 In the year 2006-2007 it is found that the Quick Ratio is 0.9:1. It is just
below but very near to the normal standard of 1:1. So it is in a
manageable position.
 In the year 2007-2008 it is found that the Quick Ratio of OPTCL is 0.8:1
which is just below the normal standard. It is due to a little bit increase in
current liabilities in comparison to that of previous year. Still it is also in
a manageable position and by giving a small effort the normal standard of
1:1 can be achieved.

Absolute Liquid Ratio-

By going through the table of Absolute Liquid Ratio, balance sheet of
OPTCL the following results can be drawn.

Rule of thumb- The normal standard fixed for Absolute Liquid Ratio is 1:2

78
  The Absolute Liquid Ratio of the firm for the financial year 2005-2006 is
found to be 0.2:1 which is below the normal standard of 1:2 or 0.5:1.
This is due to less cash and bank balances of the organization in
comparison to the Current Liabilities.
 In the year 2006-2007 the Absolute Liquid Ratio is found to be 0.4:1.
Though it is just below the normal standard still it is in a manageable
condition. The total absolute liquid asset (cash and bank balances) of this
year has well increased from the previous year.
 In the year 2007-2008 the Absolute Liquid Ratio of OPTCL is found to
be 0.3:1 which is just below from the previous year. It is due to a little bit
decrease in cash and bank balances and also a slightly increase in Current
Liabilities. Still it is also in a manageable condition. So some emphasis
can be given to this area to achieve the normal standard.

Debtor Turn Over Ratio- By going through our calculation table of

Debtor Turn Over Ratio, profit and loss accounts and balance sheets of OPTCL
the following results can be drawn.

 In the year 2005-2006 the debtor turn over ratio of OPTCL is found to be
2.3 times and the average collection period is 159 days. The debtors turn
over 2.3 times a year and the collection of debtors is 159 days which is a
manageable position still more emphasis can be given to attain a higher
value of debtor turn over and to make the average collection period
shorter.
 In the year 2006-2007 the debtor turn over ratio is 2.92 times and the
average collection period is found to be 125 days. This year, there is a
higher value of debtor turn over and a shorter average collection period in
comparison to that of previous year. This is a good indication.
 In the year 2007-2008 the debtors turn over ratio is 4.32 times and the
average collection period is 85 days. This year, the value of debtors turn
over is higher than the previous year due to decrease in average debtors
and an increase in net sales. And the average collection period is also
shorter than the previous year’s figure.
 Earlier, OPTCL used to collect pending dues directly from consumers for
which, substantial delay in getting payment was attributed to procedural
methods of collection. However, the present average period of collection
is decreased due to involvement of NESCO, SOUTHCO, CESCO,
WESCO etc. for collection of revenue on behalf of OPTCL and the same
has been made through banks.

79
  The shorter the average collection period, the better the quality of
debtors, since a short collection period implies the prompt payments by
debtors. So this is a good indication for the organization.

Net Working Capital Ratio-

 The net working capital ratio for the financial year 2005-2006 is 0.08.
 In the year 2006-2007, there is a little bit decrease in this net working
capital ratio to 0.06 from its previous year’s figure of 0.08.
 However, in the year 2007-2008, it is decreased to -0.03 due to decrease
in net working capital from previous year’s figure of Rs.707013913 to
current year’s figure (a negative figure) of Rs.(253567205).

Working Capital Turn Over Ratio-

 The working capital turn over ratio for the year2005-2006 is 3.95.
 In the year 2006-2007, there is a increase in working capital turn over
ratio to 5.03 from its previous year’s figure of 3.95.
 However, in the year 2007-2008, it is -15.7 which indicates there is a
decrease in net current assets due to increase in current liabilities.

STATEMENT SHOWING CHANGES IN

WORKING CAPITAL
(2007-2008)

Previous Current Increase in Decrease in

year Year working working
(2006-2007) (2007-2008) capital capital
(Rs) (Rs) (Rs) (Rs)
Current assets
Stores and spares 751064690 766865262 15800572 -
Sundry debtors 798196201 1052479982 254283781 -
Cash & bank 648276812 490881183 - 157395629
balances
Other current 628081987 652553304 24471317 -

80
assets
Loans & advances 389406739 143339572 - 246067167
Total 3215026429 3106119303
Current
liabilities
Current liabilities 1677146697 2055168764 - 378022067
Provisions 830865819 1304517744 - 473651925
Total 2508012516 3359686508
Working capital 707013913 (253567205)
(current assets-
current liabilities)
Net decrease in (960581118)
working capital 960581118

(253567205) (253567205) 1255136788 1255136788

ANALYSIS OF STATEMENT SHOWING

CHANGES IN WORKING CAPITAL
By going through the statement showing changes in working capital the
following results can be made.

 That, the total current asset of the year 2007-2008 is decreased to Rs.
3106119303 from a previous year’s figure of Rs. 3215026429.
 The total value of stores and spare is increased from the previous years
figure and the value of sundry debtors is also increased from the previous
years figure.
 The cash and bank balances of the organization have a decrease of Rs.
157395629 from the previous years figure. Similarly the figure for loans
and advances is also decreased to Rs. 143339572 from the previous
year’s figure of Rs. 389406739.
 The other current assets like prepaid expenses and sundry receivables
have also increased from the previous years figure.
 The total current liabilities of the year 2007-2008 is increased to
Rs.3359686508 from a previous year’s figure of Rs.2508012516.
 That, the increase for current liabilities is due to increase in the figure of
sundry creditors, deposits and retention from suppliers/contractors,

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 liabilities for wealth tax, liabilities for fringe benefit tax and other
liabilities from the previous year’s figure.
 Due to increase in the value of stores and spares, sundry debtors, and
other current assets, there is a sign of increase in working capital.
However, due to a decrease in the figure of cash, bank balances, loan and
advances etc, there is a clear sign of decrease in the working capital.
 Due to increase in current liabilities and provisions for pension and
gratuity and retrospective revision of pay, there is a sign of decrease in
working capital.
 As per the analysis, it is observed that, the ratio of increase of working
capital is drastically reduced than the previous year’s and the decrease
sign of working capital is Rs.960581118(2007-2008), which has
impacted the steady increase of current working capital & negatively
affected the profitability of the organization.
 It is found that the current asset’s figure is decreased from the previous
year’s figure & the current liabilities figure is increased from the
previous year. As a result of which, there is a net decrease (negative
figure) in working capital this financial year (2007-2008).
 That, some more emphasis can be given on current assets to increase its
figure and to decrease current liabilities’ figure as a result of which the
figure for working capital can be increased.

ANALYSIS OF CASH FLOW STATEMENT

By going through the cash flow statement of OPTCL the following
assessments are being made.

 That, there is an utilization of Rs.1442343113 in acquiring fixed assets

during the year 2006-2007 where as in 2005-2006 it is Rs.1621063088.
After adjusting for sales/transfer of fixed assets, acquisition of capital
works and interest received the net out flow on account of investing
activities is Rs.838451992 for the year 2006-2007 but it is Rs.580258876
for the year 2005-2006.
 Hence, there is a generation of Rs.2855117482 cash flow from its
operating activities for the year 2006-2007, where as in 2005-2006, it
was Rs.1232460227.

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  There is a net cash flow of Rs.1555314023 from the financing activity of
the firm in the year 2006-2007 where as, it is Rs.1642662766 for the year
2005-2006.
 That, the net cash flow from its operating, investing and financing
activities for the year 2006-2007 is a positive figure of Rs.461351466
against negative figure of Rs.990461415 for the year 2005-2006.

COMPARATIVE BALANCE-SHEET ANALYSIS

Balance Sheet as at March 31, 2008
(Rupees) (Rupees) (Rupees)
As at As at Increase or % of
31.03.2008 31.03.2007 Decrease Inc./Dec.
I. SOURCES OF FUNDS
1. Shareholders' Funds
Share Capital 600700000 600700000 - -
Reserves and Surplus 5368362657 5143178990 225183667 4.38
5969062657 5743878990 225183667 3.93
2. Loan Funds
Secured Loans 5094601256 6121296584 (1026695328) (16.78)
Unsecured Loans 9058314752 9128121439 (69806687) (0.77)
14152916008 15249418023 (1096502015) (7.2)
3. Other Funds
Consumers' Security Deposit 83334 83334 - -
20122061999 20993380347 (871318348) (4.15)
II. APPLICATION OF FUNDS
1.Fixed Assets
Gross Block 22725369686 20664373798 2060995888 9.98
Less Accumulated Depreciation 10340108668 9241049678 1099058990 11.9
Net Block 12385261018 11423324120 961936898 8.43

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 Capital Work in Progress 7221440474 8243327667 (1021887193) (12.39)
2. Investments 270550000 270550000 - -
3. Current Assets, Loans and
Advances
Stores and Spares 766865262 751064690 15800572 2.1
Sundry Debtors 1052479982 798196201 254283781 31.86
Cash and Bank Balances 490881183 648276812 (157395629) (24.28)
Other Current Assets 652553304 628081987 24471317 3.89
Loans and Advances 143339572 389406739 (246067167) (63.19)
3106119303 3215026429 (108907126) (3.38)
Less
Current Liabilities and Provisions
Current Liabilities 2055168764 1677146697 378022067 22.54
Provisions 1304517744 830865819 473651925 57
3359686508 2508012516 851673992 33.96
Net Current Assets (253567205) 707013913 (960581118) (135.8)
4. (a) Miscellaneous Expenditure to
the extent not written off or adjusted (3026423) (33.3)
6052846 9079269
(b) Profit and Loss Account 492324866 340085378 152239488 44.77
20122061999 20993380347 (871318348) (4.15)

By going through the comparative balance sheet table of OPTCL for the two
financial years, the following results can be given.

 That, there is a decrease of 3.38% of total current assets in the year 2007-
2008 from the previous year-2006-2007.
 Though there is an increase of stores and spares, sundry debtors and other
current assets of 2.1%, 31.86% and 3.89% respectively, there is also a
decrease in cash and bank balances and loans and advances of 24.28%
and 63.19% respectively which leads to decrease in the total current
assets of the year 2007-2008.
 There is an increase in current liabilities of 22.54% from the previous
year and also a 57% increase in provisions from the previous year. As a
result of which there is a net increase in current liabilities and provisions
of 33.96% from the previous years figure.
 There is a decrease of 12.39% in the capital work in progress in the year
2007-2008.
 There is an increase in net block of 8.43% from the previous year.
 The total investment for both the years remains the same.
 There is a decrease of 4.15% in the sources of the company.

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  The share capital remains same for both the year where as there is a
4.38% increase in reserves and surplus which leads to an increase in total
share holders’ funds by 3.93%.
 That, there is a decrease in the net current assets of the company. So
more emphasis can be given on it to increase the value of net current
assets to attain a better position.

The following graph shows the Total amount of Current Assets and Total
amount of Current Liabilities & provisions of different financial years of
OPTCL.

3500000000
3000000000
2500000000
2000000000
1500000000
Current Assets
1000000000
500000000 Current Liabilities &
0 Provisions
2005- 2006- 2007-
2006 2007 2008
The following graphs show the percentage of different items of Current
Assets for different financial years of OPTCL.

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 Loans &
Advances, 4.09% Stores & Spares,
20.51% Stores & Spares
Other Current
Assets, 22.10% Sundry Debtors
Cash & Bank balances
Cash & Bank
Other Current Assets
balances, 5.47%
Sundry Debtors, Loans & Advances
47.83%

(% of different items of current assets of OPTCL for the year 2005-2006)

Loans &
Advances,
12.11% Stores & Spares,
23.36% Stores & Spares
Other Current Sundry Debtors
Assets, 19.54%
Cash & Bank balances
Other Current Assets
Sundry Debtors,
Cash & Bank Loans & Advances
24.83%
balances,
20.16%

(% of different items of current assets of OPTCL for the year 2006-2007)

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 Loans &
Advances, 4.62% Stores & Spares,
24.69% Stores & Spares
Other Current
Assets, 21.00% Sundry Debtors
Cash & Bank balances
Cash & Bank Other Current Assets
balances, Sundry Debtors, Loans & Advances
15.81% 33.88%

(% of different items of current assets of OPTCL for the year 2007-2008)

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 CONCLUSION
On the basis of data analysis on working capital management in
OPTCL, the following conclusions arrived.
 Although the company has gross profit for the past three
years(2005-06, 2006-07, 2007-08) but the current liabilities
are increasing, in comparison to current assets position.
Hence, it is an alarming sign for the smooth working capital
management.
 The OPTCL manages properly the liquidity position of the
company. During the year 2005-06, the liquidity position was
in a good condition and in 2006-07, it was also satisfactory.
But, in the year 2007-08, the situation of liquidity position
was alarming due to increase in total current liabilities and
decrease in total current assets which led to the decrease in
the net working capital of the company.
 During the year 2006-07 and 2007-08, the company’s liquid
assets were satisfactory.

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  However, there was a good indication of reduction in average
collection period of the company during the year 2007-2008
in comparison to previous years (2005-06, 2006-07).
 There is also satisfactory net cash flow from the operating,
investing and financing activities of the organization.
 Though the net working capital of the company is decreased,
still the company is in a better manageable position and the
company’s present status of maintaining current assets and
current liabilities are satisfactory.
 They are managing their cash, funds and debts in a
professional manner.
However, the present financial status of the organization is very good.
By adapting better management practices, the company may attain a
sound financial position in future and able to manage its working
capital efficiently.
SUGGESTIONS & RECOMMENDATIONS
OPTCL is the soul of Orissa’s power transmission and is playing
a pivotal role in making surplus power consumption state through
efficiently administering the system of transmission. For
improvement of organization’s profitability, much emphasis is needed
to improve the better working capital management by decreasing the
current liabilities through reducing of unplanned over head expenses.
In such process, current assets position will be improved through
collection of revenue from power transmission as well as recovery of
past dues from consumers, Govt. and other agencies etc.
The company should give more attention on increasing its collection
of revenue from wheeling of power and should give more emphasis to
curtail unplanned expenses to decreases the loss. Further, the
management should focus on shortening its average collection period
by changing its credit terms and conditions.
By taking the above remedial measures, the organization can be an
EVA+ company with due emphasis on proper way of managing the
working capital.

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 DISCLAIMER

The present study of working capital management in OPTCL is

purely academic in nature. The analysis of the data and
interpretation of the matters in the project report are purely
academic purpose and no body should take it as a fact finding
conclusion for lodging any claim or submission of above facts
for their personal benefits for which the undersigned will not be
held responsible. The views suggestions, conclusions etc. are
the bonafide work of mine and nobody should claim or copy it
for their benefit without permission.

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 ……………...

BIBLIOGRAPHY

 Financial Management by I. M. Pandey.

 Working Capital Management by Hrisikesh Bhattacharya.

 Financial Management by M. Y. Khan & P. K. Jain.

 Financial Management by Prasanna Chandra.

 Financial management by Dr. P. k. Sahu.

 Financial Management by Sharma & Gupta.

 Working Capital Management by V. K. Bhalla.

 Financial Management by S. P. Jain.

 Annual Financial Report of OPTCL.

 www.themanagementor.com/.../cfa/miller.htm

 http://ssrn.com/abstract=961614

 http://mpra.ub.uni-muenchen.de/4541/

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 http://www.optcl.co.in

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