1 Funds Flow Statement: Meaning, Objective and Importance

Meaning of Funds Flow Statement:

Funds flow statement is a statement which discloses the analytical information about the
different sources of a fund and the application of the same in an accounting cycle. It deals with
the transactions which change either the amount of current assets and current liabilities (in the
form of decrease or increase in working capital) or fixed assets, long-term loans including
ownership fund.
It gives a clear picture about the movement of funds between the opening and closing dates of
the Balance Sheet. It is also called the Statement of Sources and Applications of Funds,
Movement of Funds Statement; Where GotWhere Gone Statement: Inflow and Outflow of
Fund Statement, etc. No doubt, Funds Flow Statement is an important indicator of financial
analysis and control. It is valuable and also helps to determine how the funds are financed. The
financial analyst can evaluate the future flows of a firm on the basis of past data.
This statement supplies an efficient method for the financial manager in order to assess the:

(a) Growth of the firm,

(b) Its resulting financial needs, and
(c) To determine the best way to finance those needs.
In particular, funds flow statements are very useful in planning intermediate and long-term
financing.
Objective of Preparing a Fund Flow Statement:
The main purpose of preparing a Funds Flow Statement is that it reveals clearly the important
items relating to sources and applications of funds of fixed assets, long-term loans including
capital. It also informs how far the assets derived from normal activities of business are being
utilized properly with adequate consideration.
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Secondly, it also reveals how much out of the total funds is being collected by disposing of fixed
assets, how much from issuing shares or debentures, how much from long-term or short-term
loans, and how much from normal operational activities of the business.

Thirdly, it also provides the information about the specific utilization of such funds, i.e. how
much has been applied for acquiring fixed assets, how much for repayment of long-term or shortterm loans as well as for payment of tax and dividend etc.

Lastly, it helps the management to prepare budgets and formulate the policies that will be
adopted for future operational activities.

Significance and Importance of Funds Flow Statement:

Since traditional reports (i.e. Income Statement/Profit and Loss Account, and Balance Sheet) are
not very informative, a financial analyst has to depend on some other reportFunds Flow
Statement. In other words, along with the traditional sources of information, some other sources
of information are absolutely required in order to take the challenge offered by modern business.
Funds Flow Statement, no doubt, caters to the needs of management. This is because a Funds
Flow Statement not only presents the Balance Sheet values for consecutive two years, it also
ascertains the changes of working capitalwhich is a very important indicator.

It not only reveals the source from which additional working capital has been financed but also,
at the same time, the use of such funds. Moreover, from a projected funds flow statement the
management can easily ascertain the adequacy or inadequacy of working capital, i.e., it helps in
decision-making in a number of ways.

The significance and importance of Funds Flow Statements may be summarized as:
(a) Analysis of Financial Statement:

The traditional financial statements, viz. Profit and Loss Account and Balance Sheet, exhibit the
result of the operation and financial position of a firm. Balance Sheet presents a static view about
the resources and how the said resources have been utilized at a particular date with recording
the changes in financial activities. But Funds Flow Statement can do so, i.e., it explains the
causes of changes so made and effect of such change in the firm accordingly.

(b) Highlighting Answers to Various Perplexing Questions:

Funds Flow Statement highlights answers of the following questions:

(i) Causes of changes in Working Capital;

(ii) Whether the firm sells any Non-Current Asset; if sold, how were the proceeds utilized?

(iii) Why smaller amount of dividend is paid in spite of sufficient profit?

(iv) Where did the net profit go?

(v) Was it possible to pay more dividend than the present one?

(vi) Did the firm pay-off its scheduled debts? If so, how, and from what sources?

(vii) Sources of increased Working Capital, etc.

(c) Realistic Dividend Policy:

Sometimes it may so happen that a firm, instead of having sufficient profit, cannot pay dividend
due to lack of liquid sources, viz. cash. In such a circumstance, Funds Flow Statement helps the
firm to take decision about a sound dividend policy which is very helpful to the management.
(d) Proper Allocation of Resources:
Resources are always limited. So, it is the duty of the management to make its proper use. A
projected Funds Flow Statement helps the management to take proper decision about the proper
allocation of business resources in a best possible manner since it highlights the future.
(e) As a Future Guide:

A projected Funds Flow Statement acts as a business guide. It helps the management to make
provision for the future for the necessary funds to be required on the basis of the problem faced.
In other words, the future needs of the fund for various purposes can be known well in advance
which is a very helpful guide to the management. In short, a firm may arrange funds on the basis
of this statement in order to avoid the financial problem that may arise in future.
(f) Appraising of the Working Capital:
A projected Funds Flow Statement, no doubt, helps the management to know about how the
working capital has been efficiently used and, at the same time, also suggests how to improve the
working capital position for the future on the basis of the present problem faced by it, if any.

Working Capital Mean

A measure of a company's efficiency and short-term financial health; a company's working
capital is calculated as shown here:
Positive working capital means that the company is able to pay off its short-term liabilities,
whereas negative working capital means that a company is unable to meet its short-term
liabilities out of its current assets (cash, accounts receivable, and inventory). Working capital also
is referred to as net working capital.

Measurement Type
Free Cash Flow

Component
Prior period net
investment
spending

Advantage

Disadvantage

Spending is in

Capital investments are at the discretion of

current dollars

management, so spending may be sporadic.

Allowing for typical 2% inflation per year,

Charges are
Net Income

Depreciation

smoothed, related to

charge

cumulative prior
purchases

equipment purchased 10 years ago for $100

would now cost about $122. With 10 year
straight line depreciation the old machine
would have an annual depreciation of $10,
but the new, identical machine would have

depreciation of $12.2, or 22% more.

Net Free Cash Flow definition should also allow for cash available to pay off the company's
short term debt. It should also take into account any dividends that the company means to
pay.
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Net Free Cash Flow = Operation Cash flow Capital Expenses to keep current level of
operation dividends Current Portion of long term debt Depreciation

Concept of Working Capital Management

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There are two concepts of working capital viz. quantitative and qualitative. Some people
also define the two concepts as gross concept and net concept. According to quantitative
concept, the amount of working capital refers to total of current assets. What we call
current assets? Smith called, circulating capital. Current assets are considered to be gross
working capital in this concept.
The qualitative concept gives an idea regarding source of financing capital. According to
qualitative concept the amount of working capital refers to excess of current assets over
current liabilities. L.J. Guthmann defined working capital as the portion of a firms current
assets which are financed from longterm funds.
The excess of current assets over current liabilities is termed as Net working capital. In this
concept Net working capital represents the amount of current assets which would remain if
all current liabilities were paid. Both the concepts of working capital have their own points
of importance. If the objectives is to measure the size and extent to which current assets are
being used, Gross concept is useful; whereas in evaluating the liquidity position of an
undertaking Net concept becomes pertinent and preferable.
It is necessary to understand the meaning of current assets and current liabilities for learning
the meaning of working capital, which is explained below.

Current assets It is rightly observed that Current assets have a short life span.
These type of assets are engaged in current operation of a business and normally used for
short term operations of the firm during an accounting period i.e. within twelve months.
The two important characteristics of such assets are,
(i)

short life span, and

(ii)

swift transformation into other form of assets. Cash balance may be held idle
for a week or two, account receivable may have a life span of 30 to 60 days,
and inventories may be held for 30 to 100 days.

Fitzgerald defined current assets as, cash and other assets which are expected to be
converted in to cash in the ordinary course of business within one year or within such longer
period as constitutes the normal operating cycle of a business.

Current liabilities The firm creates a Current Liability towards creditors (sellers)
from whom it has purchased raw materials on credit. This liability is also known as accounts
payable and shown in the balance sheet till the payment has been made to the creditors.
The claims or obligations which are normally expected to mature for payment within an
accounting cycle are known as current liabilities. These can be defined as those liabilities
where liquidation is reasonably expected to require the use of existing resources properly
classifiable as current assets, or the creation of other current assets, or the creation of other
current liabilities.

Circulating capital working capital is also known as circulating capital or

current capital. The use of the term circulating capital instead of working capital indicates
that its flow is circular in nature.

Structure of Working Capital

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The different elements or components of current assets and current liabilities constitute the
structure of working capital which can be illustrated in the shape of a chart as follows:
Structure of Current Assets and Current Liabilities Current Current Assets
Liabilities
Bank Overdraft
Creditors

Cash and Bank Balance

Inventories: Raw-Materials
Work-in-progress

Outstanding Expenses
Bills Payable
Short-term Loans
Proposed Dividends
Provision for Taxation, etc.

Finished Goods
Spare Parts
Accounts Receivables
Bills Receivables
Accrued Income
Prepaid Expenses
Short-term Investments

overhead expenses are paid which in result produce finished goods for sale.

The sale of goods may be for cash or credit. In the former case, cash is directly received while
in later case cash is collected from debtors. Funds are also generated from operation and sale
of fixed assets. A portion of profit is used for payment of interest, tax and dividends while
remaining is retained in the business. This cycle continues throughout the life of the business
firm.

Classification of Working Capital

The quantitative concept of Working Capital is known as gross working capital while that
under qualitative concept is known as net working capital.
Working capital can be classified in various ways. The important classifications are as given
below:

Conceptual classification There are two concept of working capital viz.,

quantitative and qualitative. The quantitative concept takes into account as the current assets
while the qualitative concept takes into account the excess of current assets over current
liabilities. Deficit of working capital exists where the amount of current liabilities exceeds the
amount of current assets. The above can be summarised as follows:
(i) Gross Working Capital = Total Current Assets
(ii) Net Working Capital = Excess of Current Assets over Current Liabilities
(iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets.

Principles of Working Capital Management

The following are the principles of working capital management:

Principles of the risk variation

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Risk here refers to the inability of firm to maintain sufficient current assets to pay its
obligations. If working capital is varied relative to sales, the amount of risk that a firm
assumes is also varied and the opportunity for gain or loss is increased. In other words,
there is a definite relationship between the degree of risk and the rate of return. As a firm
assumes more risk, the opportunity for gain or loss increases. As the level of working
capital relative to sales decreases, the degree of risk increases. When the degree of risk
increases, the opportunity for gain and loss also increases. Thus, if the level of working
capital goes up, amount of risk goes down, and vice-versa, the opportunity for gain is likewise adversely affected.
Principle of equity position According to this principle, the amount of working
capital invested in each component should be adequately justified by a firms equity position.
Every rupee invested in the working capital should contribute to the net worth of the firm.
Principle of cost of capital This principle emphasizes that different sources of
finance have different cost of capital. It should be remembered that the cost of capital moves
inversely with risk. Thus, additional risk capital results in decline in the cost of capital.
Principle of maturity of payment A company should make every effort to relate
maturity of payments to its flow of internally generated funds. There should be the least
disparity between the maturities of a firms short-term debt instruments and its flow of
internally generated funds, because a greater risk is generated with greater disparity. A margin
of safety should, however, be provided for any short-term debt payment.

Operating Cycle
The duration of time required to complete the following sequence of events, in case of
manufacturing firm, is called the operating cycle:
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1. Conversion of cash into raw materials.

2. Conversion of raw materials into work-in-progress.
3. Conversion of work in process into finished goods.
4. Conversion of finished goods into debtors and bills receivables through sales.
5. Conversion of debtors and bills receivables into cash.
The length of cycle will depend on the nature of business. Non manufacturing concerns,
service concerns and financial concerns will not have raw material and work-in-process so their
cycle will be shorter. Financial Concerns have a shortest operating cycle.

Operating Cycle of Manufacturing Concerns

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Duration of the Operating Cycle

The duration of the operating cycle is equal to the sum of the duration of each of these stages less
the credit period allowed by the suppliers of the firm. In symbols,
O=R+W+F+DC

Where,
O = duration of operating cycle.
R = raw material storage period.
W= work-in-process period.
F= finished goods storage period.
D=debtors collection period, and
C = creditors payment period.
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The components of the operating cycle may be calculated as follows:

R= Average stock of raw material and stores
Average raw material and stores consumption per day
Average wrok-in-process inventory
W= Average cost of production per day
Average finished goods inventory
F=

Average cost of goods sold per day

Average book debt

D= Average credit sales per day

Average trade creditors
C= Average credit purchase per day

ACCOUNTING POLICIES
BASIS OF PREPARATION
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The financial statements are prepared on accrual basis of accounting under historical cost
convention in accordance with generally accepted accounting principles in India and the relevant
provisions of the Companies Act, 1956 including accounting standards notified there under.

USE OF ESTIMATES
The preparation of financial statements requires estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses during the reporting period. Although
such estimates and assumptions are made on a reasonable and prudent basis taking into account
all available information, actual results could differ from these estimates & assumptions and such
differences are recognized in the period in which the results are crystallized.

FIXED ASSETS
1. Fixed Assets are carried at historical cost less accumulated depreciation.
2. Expenditure on renovation and modernisation of fixed assets resulting in increased life
and/or efficiency of an existing asset is added to the cost of related assets.
3. Intangible assets are stated at their cost of acquisition less amortisation.
4. Capital expenditure on assets not owned by the Company is reflected as a distinct item in
Capital Work-in-Progress till the period of completion and thereafter in the Fixed Assets.
5. Deposits, payments/liabilities made provisionally towards compensation, rehabilitation
and other expenses relatable to land in possession are treated as cost of land.
6. In the case of assets put to use, where final settlement of bills with contractors is yet to be
effected, capitalisation is done on provisional basis subject to necessary adjustment in the
year of final settlement.
7. Assets and systems common to more than one generating unit are capitalised on the basis
of engineering estimates/assessments.
CAPITAL WORK-IN-PROGRESS

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1. In respect of supply-cum-erection contracts, the value of supplies received at site and

accepted is treated as Capital Workin-Progress.
2. Administration and general overhead expenses attributable to construction of fixed assets
incurred till they are ready for their intended use are identified and allocated on a
systematic basis to the cost of related assets.
3. Deposit works/cost plus contracts are accounted for on the basis of statements of account
received from the contractors.
4. Claims on the Company for price variation/exchange rate variation in case of contracts
are accounted for on acceptance.
OIL AND GAS EXPLORATION COSTS
1. The Company follows 'Successful Efforts Method' for accounting of oil & gas
exploration activities.
2. Cost of surveys and prospecting activities conducted in search of oil and gas are expensed
off in the year in which these are incurred.
3. All acquisition costs are initially capitalized as 'Exploratory Wells-in-Progress' under
Capital Work-in-Progress.
DEVELOPMENT OF COAL MINES
Expenditure on exploration of new coal deposits is capitalized as 'Development of coal mines'
under Capital Work-in-Progress till the mines project is brought to revenue account.

FOREIGN CURRENCY TRANSACTIONS

1. Foreign currency transactions are initially recorded at the rates of exchange ruling at the
date of transaction.
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2. At the balance sheet date, foreign currency monetary items are reported using the closing
rate. Non-monetary items denominated in foreign currency are reported at the exchange
rate ruling at the date of transaction.
3. Exchange differences (loss), arising from translation of foreign currency loans relating to
fixed assets/capital work-in-progress to the extent regarded as an adjustment to interest
cost are treated as borrowing cost.
4. Exchange differences arising from settlement / translation of foreign currency loans
(other than regarded as borrowing cost), deposits / liabilities relating to fixed assets /
capital work-in-progress in respect of transactions entered prior to 01.04.2004, are
adjusted in the carrying cost of related assets. Such exchange differences arising from
settlement / translation of long term foreign currency monetary items in respect of
transactions entered after 01.04.2004 are adjusted in the carrying cost of related assets.
5. Other exchange differences are recognized as income or expense in the period in which
they arise.

BORROWING COSTS
Borrowing costs attributable to the fixed assets during construction/renovation and
modernisation are capitalised. Such borrowing costs are apportioned on the average balance of
capital work-in-progress for the year. Other borrowing costs are recognised as an expense in the
period in which they are incurred.

INVESTMENTS

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1. Current Investments are valued at lower of cost and fair value determined on an
individual investment basis.
2. Long term investments are carried at cost. Provision is made for diminution, other than
temporary, in the value of such investments.
3. Premium paid on long term investments is amortised over the period remaining to
maturity.
INVENTORIES
1. Inventories are valued at the lower of cost, determined on weighted average basis, and net
realizable value.
2. The diminution in the value of obsolete, unserviceable and surplus stores and spares is
ascertained on review and provided for.

LITERATURE REVIEW

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Generally, Working Capital refers to a companys investment in current assets-cash, short term
securities, account receivable and inventories. However, for the purpose of working capital
management, the more descriptive term in net working capital. Which refers to the current assets
minus current liabilities, which are typically account payable and other obligation due with in
one year. It is also explained as follows:- Current assets, commonly called working capital,
represent the portion of investment that circulates from one from to another in the ordinary
conduct of business. (Gitman ,2003). This idea embraces the recurring transaction from cash to
inventories to receivable and back to cash. As cash substitutes, marketable securities are
considered part of working capital.
Filbeck and Krueger (2005), define working capital management as follows: it is the
difference between resource in cash or readily convertible in to cash and organizational
commitment for which cash soon will be required.
The importance of working capital is defined by Wild , Subramanyam, and Halsey (2004), as
follows :- It is important as a measure of liquid assets that provide a safety cushion to creditors.
It is also important in measuring the liquid reserve available to meet contingencies and the
uncertainties surrounding a companys balance of cash and out flow.
Working capital, capital budget and capital structure are components of corporate finance.
Capital budget and capital structure concern rising and management long term capital. On the
other hand, working capital, including current assets and current liabilities, is the source of short
term capital. (Chiou et al 2006).
Weston and Brigham (1972) further extended the second proposition suggested by
Walker by dividing debt into long-term debt and short-term debt. They suggested that short-term
debt should be used in place of long-term debt whenever their use would lower the average cost
of capital to the firm. They suggested that a business would hold short-term marketable securities
only if there were excess funds after meeting short-term debt obligations. They further suggested
that current assets holding should be expanded to the point where marginal returns on increase in
these assets would just equal the cost of capital required to finance such increases.

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Vanhorne in his study (1969), recognizing working capital management as an area

largely lacking in theoretical perspective, attempted to develop a framework in terms of
probabilistic cash budget for evaluating decisions concerning the level of liquid assets and the
maturity composition of debt involving risk-return trade-off. He proposed calculation of different
forecasted liquid asset requirements along with their subjective probabilities under different
possible assumptions of sales, receivables, payables and other related receipts and disbursements.
He suggested preparing a schedule showing, under each alternative of debt maturity, probability
distributions of liquid asset balances for future periods, opportunity cost, maximum probability
of running out of cash and number of future periods in which there was a chance of cash stockout. Once the risk and opportunity cost for different alternatives were estimated, the form could
determine the best alternative by balancing the risk of running out of cash against the cost of
providing a solution to avoid such a possibility depending on managements risk tolerance limits.
Thus, Vanhorne study presented a risk-return trade-off of working capital management in entirely
new perspective by considering some of the variables probabilistically. However, the usefulness
of the framework suggested by Vanhorne is limited because of the difficulties in obtaining
information about the probability distributions of liquid-asset balances, the opportunity cost and
the probability of running out of cash for different alternative of debt maturities.

Welter, in his study (1970), stated that working capital originated because of the global delay
between the moment expenditure for purchase of raw material was made and the moment when
payment was received for the sale of finished product. Delay centers are located throughout the
production and marketing functions. The study requires specifying the delay centers and working
capital tied up in each delay centre with the help of information regarding average delay and
added value. He recognized that by more rapid and precise information through computers and
improved professional ability of management, saving through reduction of working capital could
be possible by reducing the length of global delay by rescuing and/or favourable redistribution of
this global delay among the different delay centres. However, better information and improved
staff involve cost. Therefore, savings through reduction of working capital should be tried till
these saving are greater or equal to the cost of these savings. Thus, this study is concerned only
with return aspect of working capital management ignoring risk. Enterprises, following this
approach, can adversely affect its short-term liquidity position in an attempt to achieve saving
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through reduction of working capital. Thus, firms should be conscious of the effect of law
current assets on its ability to pay-off current liabilities. Moreover, this approach concentrated
only on total amount of current assets ignoring the interactions between current assets and
current liabilities.

Lambrix and Singhvi (1979) adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital could be
optimized and cash flows could be improved by reducing the time frame of the physical flow
from receipt of raw material to shipment of finished goods, i.e. inventory management, and by
improving the terms on which firm sells goods as well as receipt of cash. However, the further
suggested that working capital investment could be optimized also
(1) By improving the terms on which firms bought goods i.e. creditors and payment of
cash, and
(2) By eliminating the administrative delays i.e. the deficiencies of paper-work flow
which tended to extend the time-frame of the movement of goods and cash.

Warren and Shelton (1971) applied financial simulation to simulate future financial statements
of a firm, based on a set of simultaneous equations. Financial simulation approach makes it
possible to incorporate both the uncertainty of the future and the many interrelationships between
current assets, current liabilities and other balance sheet accounts. The strength of simulation as a
tool of analysis is that it permits the financial manager to incorporate in his planning both the
most likely value of an activity and the margin of error associated with this estimate. Warren and
Shelton presented a model in which twenty simultaneous equations were used to forecast future
balance sheet of the firm including forecasted current assets and forecasted current liabilities.
Current assets and current liabilities were forecasted in aggregate by directly relating to firm
sales. However, individual working capital accounts can also be forecasted in a larger simulation
system. Moreover, future financial statements can be simulated over a range of different
assumptions to portray inherent uncertainty of the future.
Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset Pricing Model
(CAPM) for working capital management decisions. They tried to interrelate long-term
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investment and financing decisions and working capital management decisions through CAPM.
They emphasized that an active working capital management policy based on CAPM could be
employed to keep the firms shares in a given risk class. By risk, he meant unsystematic risk, the
only risk deemed relevant by CAPM. Owing to the lumpy nature for long-term financial
decisions, the firm is continually subject to shifts in the risk of its equity. The fluid nature of
working capital, on the other hand, can be exploited so as to offset or moderate such swings. For
example they suggested that a policy using CAPM could be adopted for the management of
marketable securities portfolio such that the appropriate risk level at any point in time was that
which maintains the risk of the companys common stock at a constant level. Similarly,
Copeland and Khoury (1980) applied CAPM to develop a theory of credit expansion. They
argued that credit should be extended only if the expected rate of return on credit is greater than
or equal to market determined required rate of return. They used CAPM to determine the
required rate of return for the firm with its new risk, arising from uncertainty regarding collection
due to the extension of credit. Thus, these studies show how CAPM can be used for decisions
involved in working capital management.

COMPANY PROFILE

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UPPCL will be professionally managed utility supplying reliable and cost efficient
electricity to every citizen of the state through highly motivated employees and
state of art technologies, providing an economic return to our owners and
maintaining leadership in the country.
We shall achieve this being a dynamic, forward looking, reliable, safe and
trustworthy organization, sensitive to our customers interests, profitable and
sustainable in the long run, providing uninterrupted supply of quality power, with
transparency and integrity in operation, providing

TO OUR CONSUMERS:
High productivity reflected in a fair, equitable and cost based tariff across consumer
categories, accurate and timely billing on a rational, comprehensible billing basis
reflecting actual consumption, and convenient system for payment of dues. Simple
and well-advertised procedures, Guaranteed connection of requested load within
reasonable time, prompt breakdown attendance, and Efficient Complaint handling.
Timely actions based on anticipation of the future & perspective planning, and Clear
Communication on customer issues.

TO OUR SHAREHOLDERS :
A secure and well managed assets, Corporate Governance in line with
Kumaramagalam Birla Committee recommendations, a business growing organically
and through diversification, and satisfied stakeholders.

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TO OUR EMPLOYEES :
Opportunities for career growth and development, Pride in the Organization, and a
sense of belongingness, with the ability to contribute to the organization. Well
defined service conditions and full compliance with Labor Laws. Accountability and
Responsibility for actions including performance incentives based on fair and
transparent assessment and compensation in line with the best in the industry, and
an increased sense of security based on the increased success of the organization.

TO THE REGULATOR :
The equitable satisfaction of all stakeholders, ensuring the long-term stability of the
section and an Adherence to Regulations and Guidelines issued by the Regulator,
including inter alias Compliance with License Conditions, Furnishing Accurate and
Timely Information, Ensuring techno-economic feasibility of investments, and an
effective consumer grievance redressed systems.

TO OUR FINANCIAL
INSTITUTIONS :
Sustained growth and profitability, Sound Economic Appraisal of Projects to be
Undertaken, Security of loan and Timely servicing of Debts, and Timely Publication
of Audited Financial Statements, including Sound Accounting & Financial practice in
accordance with Law.

TO THE STATE GOVERNMENT :

Implementation of Reform Legislation and of all Government Policies and directives
as far as is practical, applying Public Funding and Subsidies to the intended
24

category of Consumers. Compliance with the rule of law and Electrical safety rules.
The Satisfaction of stakeholders.
In return Government will assist us by Ensuring Law and order and enforcement and
assistance with revenue realization.

TO OUR SUPPLIERS :
Transparent and efficient procedures for tendering and timely ordering and
settlement in adherence with Commercial Agreements.

TO OTHER UTILITIES :
Reliable and secure system operations in accordance with Grid Code, 0.2 class
metering, and timely readings, an Integrated Information system to provide fast and
accurate interface data, Timely settlement observing Proper Commercial
Agreements between entities, and Adherence to System operating procedures in
terms of merit order dispatch, security, etc.

TO THE PUBLIC :
Effective communication of policies and procedures, a Reliable supply to essential
public services, enforcing adequate safety norms and environmental and social
norms, minimizing inconvenience dare to disruptions etc.
We shall be a diversified business with a core function of providing quality,
uninterrupted power, Commercial focus considering all techno-economic issues of
investments, and a high level of Consumer Service with new connections on
demand and low complaint resolution times. Diversifications shall include optic fiber
based activities, consultancy, manufacture, and repairs, and we shall have a
Diversified investment portfolio around the globe.

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We shall satisfy all stakeholders including the regulator.

We shall be a global industry Leader working in close cooperation with other utilities
supporting self sustained growth through financially viable business units and
technological leadership, providing a world class cost of supply, and world class
profits, doubling turnover every 5 years. We shall function independently;
implementing prudent safety and environment norms, with a cost of supply based
tariff, without external interference, in a transparent corruption free operating
environment, in compliance with statutory requirements. We shall add value to our
shareholders, safeguard the environment, and maintain our asset base. We shall
maintain a strong image with the general public.
We shall measure success on global standards, e.g.
Parameter
Reliability of supply
Technical losses
Commercial losses
Collection efficiency

Measurement
99.50%
10%
2%
97%

Billing efficiency

100%

Employee cost

25 p/u

We shall have a Long-term dynamic vision based on strong perspective planning.

We shall have sophisticated procedures including on line billing, on line queries and
eBusiness functions.
We shall have the most motivated. Satisfied and best-trained employees with full
competence in all key areas, optimally deployed and the most satisfied customers
in the sector.
Our Supply quality shall be : 2% variation in voltage and 0.5 Hz variation in
frequency, with Fault repairs in 1 to 2 hours and redressal of 100% and new
connections will be made on demand.
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POLICIES :

INDIAN ELECTRICITY RULES, 1956

General Safety Precautions

1. Construction, installation, protection, operation and main electric supply lines and
apparatus . - All electric supply lines and apparatus shall be sufficient in power and size and of
sufficient -mechanical strength for the work they may be required to do, and, so far as is shall be
constructed, installed, protected, worked and maintained in accordance with the standards of the
Indian Standards Institution so as to prevent danger.

2. Service lines and apparatus on consumer's premises. i.

The supplier shall ensure that all electric supply lines, wires, fittings, and apparatus
belonging to him or under his control, which are on a consumer's premises, are in a safe
condition and in all respects fit for supplying energy he supplier shall take due
precautions to avoid danger arising on premises from such supply lines, wires, fittings
and apparatus.

ii.

Service lines placed by the supplier on the premises of a consumer which are
underground or which are accessible shall be so insulated and protected by the supplier
as to be secured under all ordinary conditions mechanical, chemical or other injury to the
insulate.

iii.

The consumer shall, as far as circum

29

2. PESTEL ANALYSISOF UTTAR PRADESH POWER CORPORATION LTD..

A PESTEL analysis is a framework or tool used by marketers to analyse and monitor
the macro-environmental (external marketing environment) factors that have an
impact on an organisation. The result of which is used to identify threats and
weaknesses which is used in a SWOT analysis.
PESTEL stands for:

P Political
E Economic
S Social
T Technological
E Environmental
L Legal
All the external environmental factors (PESTEL factors)

Political Factors:
These are all about how and to what degree a government intervenes in the economy.
This can include government policy, political stability or instability in overseas
markets, foreign trade policy, tax policy, labour law, environmental law, trade restrictions
and so on. It is clear from the list above that political factors often have an impact on
organisations and how they do business. Organisations need to be able to respond to the
current and anticipated future legislation, and adjust their marketing policy accordingly.

Economic Factors:
Economic factors have a significant impact on how an organisation does business and
also how profitable they are. Factors include economic growth, interest rates, exchange
rates, inflation, disposable income of consumers and businesses and so on. These factors
can be further broken down into macro-economic and micro-economic factors. Macro30

economic factors deal with the management of demand in any given economy.
Governments use interest rate control, taxation policy and government expenditure as
their main mechanisms they use for this.Micro-economic factors are all about the way
people spend their incomes. This has a large impact on B2C organisations in particular.

Social Factors:
Also known as socio-cultural factors, are the areas that involve the shared belief and
attitudes of the population. These factors include population growth, age distribution,
health consciousness, and career attitudes and so on. These factors are of particular
interest as they have a direct effect on how marketers understand customers and what
drives them.

Technological Factors:
We all know how fast the technological landscape changes and how this impacts the way
we market our products. Technological factors affect marketing and the management
thereof in three distinct ways:

o New ways of producing goods and services

o New ways of distributing goods and services
o New ways of communicating with target markets
o Environmental Factors
These factors have only really come to the forefront in the last fifteen years or so. They have
become important due to the increasing scarcity of raw materials, pollution targets, doing
business as an ethical and sustainable company, carbon footprint targets set by governments (this
is a good example were one factor could be classes as political and environmental at the same
time). These are just some of the issues marketers are facing within this factor. More and more
31

consumers are demanding that the products they buy are sourced ethically, and if possible from a
sustainable source.

Legal Factors:
Legal factors include - health and safety, equal opportunities, advertising standards,
consumer rights and laws, product labelling and product safety. It is clear that companies
need to know what is and what is not legal in order to trade successfully. If an
organisation trades globally this becomes a very tricky area to get right as each country
has its own set of rules and regulations. After you have completed a PESTEL analysis
you should be able to use this to help you identify the strengths and weaknesses for a
SWOT analysis.

RESEARCH METHODOLOGY ALONG WITH OBJECTIVE

RESEARCH MEANS
The definition of research is given by Creswell who states - "Research is a process of steps
used to collect and analyze information to increase our understanding of a topic or issue". It
consists of three steps: Pose a question, collect data to answer the question, and present an
answer to the question.

Steps in conducting research

Research is often conducted using the hourglass model structure of research. The hourglass
model starts with a broad spectrum for research, focusing in on the required information through
the method of the project (like the neck of the hourglass), then expands the research in the form
of discussion and results. The major steps in conducting research are:

Identification of research problem

32

Literature review

Specifying the purpose of research

Determine specific research questions or hypotheses

Data collection

Analyzing and interpreting the data

Reporting and evaluating research

The steps generally represent the overall process, however they should be viewed as an everchanging process rather than a fixed set of steps. Most researches begin with a general statement
of the problem, or rather, the purpose for engaging in the study. The literature review identifies
flaws or holes in previous research which provides justification for the study. Often, a literature
review is conducted in a given subject area before a research question is identified. A gap in the
current literature, as identified by a researcher, then engenders a research question. The research
question may be parallel to the hypothesis. The hypothesis is the supposition to be tested. The
researcher(s) collects data to test the hypothesis. The researcher(s) then analyzes and interprets
the data via a variety of statistical methods, engaging in what is known as Empirical research.
The results of the data analysis in confirming or failing to reject the Null hypothesis are then
reported and evaluated. At the end the researcher may discuss avenues for further research.
Rudolph Rummel says, "... no researcher should accept any one or two tests as definitive. It is
only when a range of tests are consistent over many kinds of data, researchers, and methods can
one have confidence in the results.

Research Design
Design used for this research is Explorative Research. As hidden insights are to be find out
from this research, in depth analysis is done to explore the facts.

33

Exploratory research

Exploratory research is a form of research conducted for a problem that has not been clearly
defined. Exploratory research helps determine the best research design, data collection method
and selection of subjects. It should draw definitive conclusions only with extreme caution. Given
its fundamental nature, exploratory research often concludes that a perceived problem does not
actually exist.
Exploratory research often relies on secondary research such as reviewing available literature
and/or data, or qualitative approaches such as informal discussions with consumers, employees,
management or competitors, and more formal approaches through in-depth interviews, focus
groups, projective methods, case studies or pilot studies. The Internet allows for research
methods that are more interactive in nature. For example, RSS feeds efficiently supply
researchers with up-to-date information; major search engine search results may be sent
by email to researchers by services such as comprehensive search results are tracked over
lengthy periods of time by services such as and websites may be created to attract worldwide
feedback on any subject.
When the purpose of research is to gain familiarity with a phenomenon or acquire new insight
into it in order to formulate a more precise problem or develop hypothesis, the exploratory
studies ( also known as formulative research ) come in handy. If the theory happens to be too
general or too specific, a hypothesis cannot to be formulated. Therefore a need for an exploratory
research is felt to gain experience that will be helpful in formulative relevant hypothesis for more
definite investigation.
The results of exploratory research are not usually useful for decision-making by themselves, but
they can provide significant insight into a given situation. Although the results of qualitative
research can give some indication as to the "why", "how" and "when" something occurs, it
cannot tell us "how often" or "how many".
Exploratory research is not typically generalizable to the population at large.
Social exploratory research "seeks to find out how people get along in the setting under question,
what meanings they give to their actions, and what issues concern them. The goal is to learn
34

'what is going on here?' and to investigate social phenomena without explicit expectations."
(Russell K. Schutt, "Investigating the Social World," 5th ed.). This methodology is also at times
referred to as a grounded theory approach to qualitative research or interpretive research, and is
an attempt to unearth a theory from the data itself rather than from a predisposed hypothesis.
Earl Babbie identifies three purposes of social science research. The purposes are exploratory,
descriptive and explanatory. Exploratory research is used when problems are in a preliminary
stage. Exploratory research is used when the topic or issue is new and when data is difficult to
collect. Exploratory research is flexible and can address research questions of all types (what,
why, how). Exploratory research is often used to generate formal hypotheses. Shields and Tajalli
link exploratory research with the conceptual framework working hypothesis
Skeptics, however, have questioned the usefulness and necessity of exploratory research in
situations where prior analysis could be conducted instead.

35

OBJECTIVES OF THE STUDY

The main objective of the present study is to examine the effectiveness of management of
finances of UPPCL Ltd. Towards this end, and to set a direction for the study, the following
objectives are set forth:

To profile the power scene in India in its various facets so as to provide a meaningful
backdrop for the study involving UPPCL which is a premier power utility in the Indian
power sector;

To study the performance highlights and critical issues of UPPCL so as to identify the
areas of UPPCL's strengths and those which could adversely affect its performance;

To study the management of long-term finances of UPPCL for the purpose of identifying
the problems involved in its project financing;

To study the management of short-term finances of UPPCL so that the specific problems
faced in the management of different components of working capital are identified;

To study the management of finances in UPPCL through its long-run tariff policy

To study the efficacy of the internal management system as is being evolved and operated
by UPPCL for the management of its finances; and finally

To suggest suitable measures that may contribute to the effective overall management of
UPPCL's finances.

To Future capacity additions programmed in UPPCL is very much dependent upon the
availability of project financing. The situation would call for increase in the internal

resources generation of the power sector entities by way of

To improved commercialization of working, adequately remunerative tariffs and prompt

payment by the consumers of power

To efforts to minimize project cost and improved project implementation

36

USE & IMPORTANCE OF THE STUDY

USES OF THE STUDY

UPPCL LTD is the largest producer of electricity in the country. From this study we see that
how company plans their budget according to their requirement is important.

Increasing capital cost over the years

Higher interest during construction
Changing financing pattern
Inadequate generation of internal resources
Problems in the borrowings for power projects
Devaluation of rupee/partial convertibility
Uncertainty in the flow of external aid
Problems of financing through power bonds

IMPORTANCE OF THE STUDY

Working capital (WC) is an important metric for all businesses, regardless of their

size.

WC is a signal of a company's operating liquidity Figure 0. Having enough WC means

that the company should be able to pay for all of its short-term expenses and liabilities.

Large companies pay attention to WC for the same reason as small ones do: WC is a
measure of liquidity, and thus is a measure of their future credit-worthiness. Companies
who want to borrow by issuing bonds or purchasing commercial paper(a market of large,
short-term loans for big companies) will find it more expensive if they do not have
enough WC. If they are a public company, their stock price may fall if the market doesn't
believe they have adequate WC.
37

For small businesses and start-ups, unable to access financial markets for borrowing, WC
has more dire implications. WC can also be described as the amount of money that a
small business or start-up needs to stay in operation. Start-ups need to pay attention to
their WC because it is the amount of money they need to keep the business running until
they break-even (start earning a net profit).

On one hand, WC is important to because it is a measure of a company's ability to pay off

short-term expenses or debts. On the other hand, too much working capital means that
some assets are not being invested for the long-term, so they are not being put to good
use in helping the company grow as much as possible.

WC is only one measure of a company's operating liquidity. It is not the only measure,
and it is certainly not a guarantee of a company's ability to pay. A company may have
positive WC, but not enough cash to pay an expense tomorrow. Similarly, a company
may have negative WC, but may be able to adjust some of their debt into longterm debt in order to reduce their current liabilities.

WC is an important metric, but is not the whole story of a company's financial health.

DATA COLLECTION METHOD & ITS ANALYSIS

38

Methods of Data Collection

The data collection for this research used is Secondary Data.

Website of the company

Different research papers

This study mostly makes use of secondary data relevant for the purpose of analysis and draws
inferences which will throw light on the subject. They include UPPCL's published annual reports
for the relevant period, Annual plan documents, Company manuals and records from UPPCL's
Corporate Budget, International Finance, Power Bond Cell, also site cash books and other
relevant records. In addition to these, Bulk Power Supply Agreements (BPSAs) entered into by
UPPCL with the beneficiary State Electricity Boards (SEBs), Bureau of Industrial Costs and
Prices (BICP) and K.P. Rao Committee Reports on UPPCL's tariffs, relevant electricity
legislation like Indian Electricity Act, 1910, Electricity (Supply) Act, 1948 and other company
records at UPPCL's Corporate Centre are used for the study of tariffs.

Type of Data Collection

While deciding about the method of data collection to be used for the
s t u d y t h e researcher should keep in mind two types of data viz, Primary data and secondary.

Primary Data
The data are those, which are collected afresh and for first time and thus happens to
be original in character. The secondary are those which have been collected by someone
else and which have already been passed through statistical process. The researcher would
have to decide which sort of data he would be using for his study

The method

collecting primary and secondary data differ since primary data are tube

39

originally collected while in case of secondary data the nature of data collection
work is merely that of compilation. There are several ways of collecting
Primary data.
They are:
1. Observation method
2. Interview method
3. through questionnaires
4. through schedules
OTHER PRIMARY METHODS
Warranty cards Distributors audits Pantry audits Consumer panels using mechanical devices
through projective techniques Depth interviews Content analysis
SECONDARY DATA
Secondary data means that are already available that is they refer to the data, which have already
been collected and analyzed by someone else. When the researcher utilizes secondary data, then
he has to look into various sources from where he can obtain them. In this case he is
certainly not confronted with the problems that are usually associated with the
collection of original data. Secondary data may be either published or unpublished data usually
published data are available in: Various publications of the central, state and local government
various publications of foreign government or of international bodies
a n d t h e i r subsidiary organization. Technical and trade journals Books magazines and newspapers
Reports publication of various associations connected with business and industry,
banks, stocks exchanges etc Reports prepared by various scholars universities economists etc in
different field P u b l i c r e c o r d s a n d s t a t i s t i c s , h i s t o r i c a l d o c u m e n t s a n d
other sources of publish information. The sources of unpublished data
are

many;

they

may

be

found

in

diaries,

letters

unpublished

b i o g r a p h i e s a n d a u t o b i o g r a p h i e s a n d a l s o m a y b e available with scholars

research workers. Trade organization, labor bureaus and other public/private
organizations

40

 We are using the secondary data in this research methodology

ANALYSIS
The analysis of working capital can be conducted through a number of devices, such as:
41

1. Ratio analysis
.2. Fund flow analysis.
3. Budgeting.

1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio
analysis can be employed for measuring short-term liquidity or working capital position of a
firm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover
5 Receivables turnover
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which
additional funds were derived and the use to which these sources were put. The fund flow
42

analysis

consists

of Preparing schedule of changes of working capitalb. Statement of sources and application of fu

nds.It is an effective management tool to study the changes in financial position (working
capital) business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be
pursued in the future period time. Working capital budget as a part of the total budge ting process
of a business is prepared estimating future long term and short term working capital needs and
sources to finance them, and then comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may be taken in future. He objective
working capital budget is tonsure availability of funds as and needed, and to ensure effective
utilization of the sere sources. The successful implementation of working capital budget involves
the preparing of separate budget for each element of working capital, such as, cash, inventories
and receivables etc.
ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit and commercial
banks short-term loans are primarily interested to know the ability of affirm to meet its
obligations in time. The short term obligations of a firm can be met intimae only when it is
having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth
functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be
strong. But, a very high degree of liquidity of the firm being tied up in current assets.
Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of ratios
can be calculated for measuring short-term financial position or short-term solvency position
of the firm.

1. Liquidity ratios
.2. Current assets movements ratios
43

.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when these become
due. The short-term obligations are met by realizing amounts from current, floating or circulating
assts. The current assets should either be liquid or near about liquidity. These should be
convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency
of current assets should be assessed by comparing them with short-term liabilities. If current
assets can pay off the current liabilities then the liquidity position is satisfactory. On the other
hand, if the current liabilities cannot be met out of the current assets then the liquidity position is
bad. To measure the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and its most
widely used to make the analysis of short-term financial position or liquidity of a firm. It is
defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITESC
urgent assets include cash, marketable securities, bill receivables, sundry debtors, inventories and
work-in-progresses. Current liabilities include outstanding expenses, bill payable; dividend
payable etchant relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities

44

in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current
liabilities is considered to be satisfactory.
Interpretation:As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company
for last three years it has increased from 2003 to 2005. The current ratio of company is more than
the ideal ratio. This depicts that companys liquidity positions sound. Its current assets are more
than its current liabilities

2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may bead fined as
the relationship between quick/liquid assets and current or liquid liabilities .An asset is said to be
liquid if it can be converted into cash with a short period without loss of value. It measures the
firms capacity to pay off current obligations immediately
.QUICK RATIO = QUICK ASSETS / CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors
.A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms liquidity
position is not good .As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally
thought that if quick assets are equal to the current liabilities then the concern may be able to meet its shortterm obligations. However, a firm having high quick ratio may not have assets factory liquidity
position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if
it has fast moving inventories.

45

Interpretation:
A quick ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio.
This shows company has no liquidity problem

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventories, yet
there may be doubts regarding their realization into cash immediately or in time. So absolute
liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude
even receivables from the current assets and find out the absolute liquid assets. Absolute Liquid
Assets includes:
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
/CURRENTLIABILITESABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

Interpretation:
These ratio shows that company carries a small amount of cash. But there is nothing to be
worried about the lack of cash because company has reserve, borrowing power & long term
investment. In India, firms have credit limits sanctioned from banks and can easily draw cash

.B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency
with which assets are managed directly affects the volume of sales. The better the management
of assets, large is the amount of sales and profits. Current assets movement ratios measure the
efficiency with which a firm manages its resources. These ratios are called turnover ratios
because they indicate the speed with which assets are converted or turned over into sales.
Depending upon the purpose, a number of turnover ratios can be calculated. They are
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio

46

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include high amount of
debtors due to slow credit collections and moreover if the assets include high amount of slow
moving inventories. As both the ratios ignore the movement of current assets, it is important
to calculate the turnover ratio.

1.INVENTORY TURNOVER OR STOCK TURNOVER RATIO:

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the
requirements of the business. But the level of inventory should neither be too high nor too low.
Because it is harmful to hold more inventory as some amount of capital is blocked in it and some
cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible. I
NVENTORY TURNOVER RATIO = COST OF GOOD SOLD / AVERAGEINVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually
a high inventory ratio indicates an efficient management of inventory because more frequently
the stocks are sold; the lesser amount of money is required to finance the inventory. Whereas, the
low inventory turnover ratio indicates that the inefficient management of inventory. A low
inventory turnover implies overinvestment in inventories, dull business, poor quality of goods,
stock accumulations and slow moving goods and low profits as compared to total investment.
AVERAGE STOCK = (OPENING STOCK + CLOSING STOCK) / 2
Interpretation: This ratio shows how rapidly the inventory is turning into receivable through
sales. In 2004 the company has high inventory turnover ratio but in 2005 it has reduced to 1.75
times. This shows that the companys inventory management technique is less efficient as
compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365

(net working days)

/ INVENTORY

TURNOVER RATIO
47

Interpretation:
Inventory conversion period shows that how many days inventories take to convert from raw
material to finished goods. In the company inventory conversion period is decreasing. This
shows the efficiency of management to convert the inventory into cash

3. DEBTORS TURNOVER RATIO:

A concern may sell its goods on cash as well as on credit to increase its sales and liberal credit
policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade
debtors are expected to be converted into cash within a short period and are included in current
assets. So liquidity position of a concern also depends upon the quality of trade debtors. Two
types of ratio can be calculated to evaluate the quality of debtors.
a) Debtors Turnover Ratio) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT) / AVERAGEDEBTORS

Debtors velocity indicates the number of times the debtors are turned over during year.
Generally higher the value of debtors turnover ratio the more efficient is the management of
debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor
management of debtors/sales and less liquid debtors. This ratio should be compared with ratios
of other firms doing the same business and trend may be found to make a better interpretation of
the ratio
.AVERAGE DEBTORS= (OPENING DEBTOR+CLOSING DEBTOR) / 2
Interpretation: This ratio indicates the speed with which debtors are being converted or turnover
into sales. The higher the values or turnover into sales. The higher the values of debtors turnover,
the more efficient is the management of credit. But in the company the debtor turnover ratio is
decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now
their credit policy becomes liberal as compare to previous year.4

AVERAGECOLLECTIONPERIOD:

48

Average Collection Period = No. of Working Days / Debtors Turnover Ratio

The

average

collection period ratio represents the average number of days for which affirm has to wait before
its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the
average collection period the better is the quality of debtors as a short collection period implies
quick payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days)Debtors Turnover Ratio
Interpretation: The average collection period measures the quality of debtors and it helps in
analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by
company. In the firm average collection period increasing year to year. It shows that the firm has
Liberal Credit policy. These changes in policy are due to competitors credit policy.
WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of utilization of net working capital. This
ratio indicates the number of times the working capital is turned over in the course of the year.
This ratio measures the efficiency with which the working capital is used by the firm. A higher
ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But
a very high working capital turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales / Net Working CapitalWorking Capital
Turnover = Sales / Networking Capital
Interpretation :This ratio indicates low much net working capital requires for sales. In 2005,the
reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60
paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on
the basis of sale.

INVENTORIES
Interpretation: Inventories are a major part of current assets. If any company wants to manage its
working capital efficiency, it has to manage its inventories efficiently. The graph shows that
49

inventory in 2009-2010 is 45%, in 2010-2011 is 43% and in 2011-2012 is54% of their current
assets. The company should try to reduce the inventory up to10% or 20% of current assets.
CASH

BANK

BALANCE:(Rs.

in

Cores)Year 2009-2010 2010-2011 2011-

2012Cash Bank Balance 4.69 1.79 5.05

50

Key Financial Ratios of UPPCL

Mar '12
Investment Valuation Ratios
Face Value
10.00
Dividend Per Share
4.00
Operating Profit Per Share (Rs)
16.66
Net Operating Profit Per Share (Rs)
75.26
Free Reserves Per Share (Rs)
-Bonus in Equity Capital
-Profitability Ratios
Operating Profit Margin(%)
22.13
Profit Before Interest And Tax Margin(%) 16.88
Gross Profit Margin(%)
17.63
Cash Profit Margin(%)
17.83
Adjusted Cash Margin(%)
17.83
Net Profit Margin(%)
14.22
Adjusted Net Profit Margin(%)
14.22
Return On Capital Employed(%)
11.37
Return On Net Worth(%)
12.58
Adjusted Return on Net Worth(%)
11.96
Return on Assets Excluding
88.89
Revaluations
Return on Assets Including Revaluations 88.89
Return on Long Term Funds(%)
11.37
Liquidity And Solvency Ratios
Current Ratio
2.11
Quick Ratio
1.92
Debt Equity Ratio
0.65
Long Term Debt Equity Ratio
0.65
Debt Coverage Ratios
Interest Cover
8.02
Total Debt to Owners Fund
0.65
Financial Charges Coverage Ratio
9.65
Financial Charges Coverage Ratio Post Tax
8.02
Management Efficiency Ratios
Inventory Turnover Ratio
16.87
Debtors Turnover Ratio
9.02

Mar '11

Mar '10

Mar '09

Mar '08

10.00
3.80
15.34
66.63
69.08
--

10.00
3.80
15.09
56.25
62.75
--

10.00
3.60
12.79
50.91
56.25
--

10.00
3.50
13.98
44.98
52.34
--

23.01
17.69
18.49
18.22
18.22
15.85
15.85
11.32
13.31
11.66

26.81
19.87
21.10
21.83
21.83
17.72
17.72
12.45
13.69
12.70

25.11
18.06
19.48
21.10
21.10
18.11
18.11
12.27
13.90
12.18

31.07
23.44
25.31
23.74
23.74
18.51
18.51
15.15
13.66
13.57

82.94

77.28

71.55

65.81

82.94
11.32

77.28
12.45

71.55
12.27

65.81
15.15

2.59
2.32
0.63
0.63

2.81
2.50
0.59
0.59

2.89
2.59
0.59
0.59

2.36
2.16
0.50
0.50

10.65
0.63
7.46
6.72

12.18
0.59
8.22
7.11

11.91
0.59
7.97
7.08

10.28
0.50
7.31
5.82

29.18
7.54

27.54
9.06

28.21
12.78

33.59
17.52

51

Investments Turnover Ratio

Fixed Assets Turnover Ratio
Total Assets Turnover Ratio
Asset Turnover Ratio

16.87
0.76
0.52
0.53

Average Raw Material Holding

Average Finished Goods Held
Number of Days In Working Capital
Profit & Loss Account Ratios
Material Cost Composition
Imported Composition of Raw Materials
Consumed
Selling Distribution Cost Composition
Expenses as Composition of Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit
Dividend Payout Ratio Cash Profit
Earning Retention Ratio
Cash Earning Retention Ratio
AdjustedCash Flow Times

29.18
0.76
0.49
0.52

27.54
0.70
0.46
0.48

28.21
0.67
0.45
0.48

33.59
0.70
0.46
0.70

----129.59 142.33

--154.07

--173.56

--171.01

0.07

0.05

0.06

0.07

0.07

--

--

--

--

--

---

0.31
--

0.14
--

0.13
--

0.12
--

41.48
31.84
56.38
66.92
4.09

40.07
31.46
54.26
65.14
4.13

41.94
32.16
54.80
65.96
3.51

42.31
32.83
51.75
63.70
3.62

45.53
35.33
54.17
64.49
2.86

Consolidated Key Financial Ratios of

------------------- in Rs. Cr. ------------------UPPCL

Mar '12
Investment Valuation Ratios
Face Value
Dividend Per Share

10.00
--

Mar '11

Mar '10

Mar '09

Mar '08

10.00
--

10.00
--

10.00
--

10.00
--

52

Operating Profit Per Share (Rs)

Net Operating Profit Per Share (Rs)
Free Reserves Per Share (Rs)
Bonus in Equity Capital
Profitability Ratios
Operating Profit Margin(%)
Profit Before Interest And Tax Margin(%)
Gross Profit Margin(%)
Cash Profit Margin(%)
Adjusted Cash Margin(%)
Net Profit Margin(%)
Adjusted Net Profit Margin(%)
Return On Capital Employed(%)
Return On Net Worth(%)
Adjusted Return on Net Worth(%)
Return on Assets Excluding Revaluations
Return on Assets Including Revaluations
Return on Long Term Funds(%)
Liquidity And Solvency Ratios
Current Ratio
Quick Ratio
Debt Equity Ratio
Long Term Debt Equity Ratio
Debt Coverage Ratios
Interest Cover
Total Debt to Owners Fund
Financial Charges Coverage Ratio
Financial Charges Coverage Ratio Post Tax
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Investments Turnover Ratio
Fixed Assets Turnover Ratio
Total Assets Turnover Ratio
Asset Turnover Ratio

18.34
79.91
---

18.89
69.71
69.79
--

17.89
58.59
63.19
--

13.05
53.72
57.33
--

14.26
46.91
52.23
--

22.95
17.45
18.23
18.11
18.11
14.25
14.25
11.43
13.19
12.57
90.23
90.23
11.44

27.09
21.41
22.36
18.18
18.18
15.57
15.57
12.86
13.73
12.04
82.57
82.57
12.86

30.53
23.16
24.54
21.72
21.72
17.26
17.26
13.64
14.18
13.20
75.56
75.56
13.64

24.29
17.38
18.66
19.58
19.58
17.01
17.01
11.77
14.09
11.87
69.62
69.62
11.77

30.40
22.95
24.70
24.92
24.92
17.94
17.94
14.74
14.13
15.45
64.11
64.11
14.74

1.96
1.80
0.76
0.76

2.37
2.14
0.76
0.76

2.52
2.26
0.73
0.73

2.70
2.42
0.70
0.70

3.05
2.73
0.60
0.60

7.01
0.76
8.46
7.05

4.24
0.76
4.05
3.70

4.95
0.73
4.66
4.10

8.56
0.70
6.69
6.05

12.07
0.60
8.08
6.32

15.88
8.74
15.88
0.74
0.50
0.52

28.43
7.43
28.43
0.73
0.48
0.50

27.47
8.86
27.47
0.68
0.45
0.68

28.77
12.67
28.77
0.69
0.45
0.69

36.08
16.99
36.08
0.70
0.46
0.70

Average Raw Material Holding

Average Finished Goods Held

--127.5

---

---

---

---

138.40

149.61

166.03

164.69

Number of Days In Working Capital

9

53

Profit & Loss Account Ratios

Material Cost Composition
Imported Composition of Raw Materials
Consumed
Selling Distribution Cost Composition
Expenses as Composition of Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit
Dividend Payout Ratio Cash Profit
Earning Retention Ratio
Cash Earning Retention Ratio
AdjustedCash Flow Times

0.07

0.06

0.06

0.07

0.07

--

--

--

--

--

---

0.14
--

0.14
--

0.13
--

0.12
--

39.77
30.20
58.30
68.69
4.53

39.09
30.28
55.43
66.53
4.73

41.65
31.38
55.27
66.91
4.11

42.98
32.85
48.99
62.65
4.34

45.33
35.00
58.55
67.36
3.08

Estimation of working capital

UPPCL ltd.

FY

FY

FY

FY

FY

(Rs. Crore)

2007-08

2008-09

2009-10

2010-11

2011-12

CURRENT ASSETS

4083.58

4237.6

13701.89

36962.44

10285.09

Store and Spare

349.06

442.66

505.44

557.67

612.19

Stock in trade

1523.34

1732.09

1827.54

2047.31

2868.28

Sundry Debtors

581.82

539.4

631.63

543.48

635.98

Interest accrued

0.2

0.2

0.2

0.2

246.72

288.39

7681.35

465.04

1590.6

1382.44

1234.86

3055.73

33348.74

4578.05

3699.99

3808.72

5453.66

6768.78

8974.05

2689.83

2835.99

3523.2

3855.26

6039.86

parts

on investment
Cash and bank
balance
Loans and
Advances

CURRENT
LIABILITIES &
PROVISIONS
Sundry Creditors

54

Provisions

1010.16

972.73

1930.46

2913.53

2934.19

WORKING

383.59

428.88

8248.23

30193.66

1311.04

CAPITAL
(C=A-B)

CURRENT ASSETS

55

40000

35000

30000

25000
FY 2007-08
FY 2008-09

20000

FY 2009-10
FY 2010-11
FY 2011-12

15000

10000

5000

0
Store and Spare parts

Sundry Debtors

Cash and bank balance

CURRENT LIABILITIES & PROVISIONS

56

7000
6000
5000
Sundry Creditors

4000

Provisions

3000
2000
1000
0

WORKING CAPITAL (C=A-B)

35000
30000
25000
20000

(C=A-B)

15000
10000
5000
0

Working Cycle and Turnover Ratios

57

UPPCLltd.

FY

FY

FY

FY

FY

(Rs. Crore)

2007-08

2008-09

2009-10

2010-11

2011-12

122.77

123.563

93.44

104.932

87.674

Stock in trade

1.855

2.045

1.41

2.6035

2.58

cycle
Sundry Debtors

15.342

12.71

11.44

10.236

8.423

Gross Working

163

164.521

131.355

140.24

119.589

Creditors

90.71

88.61

95.421

90.74

109.48

Net Working

72.29

75.91

35.934

49.504

10.111

10.42

9.89

10.81

10.84

9.36

Debtors Turnover

23.79

28.72

31.91

35.569

43.33

Creditors

2.735

2.512

2.583

2.385

3.094

Working Cycle (in

days)
Store and Spare
parts cycle

Capital Cycle

Capital Cycle

Turnover ratios
Inventory
Turnover ratios

Turnover

Working Cycle (in days)

58

180
160
140
120

FY 2007-08

100

FY 2008-09
FY 2009-10

80

FY 2010-11

60

FY 2011-12

40
20
0
Store and Spare parts cycle

Sundry Debtors

Creditors

The Gross working capitals are higher in 2007 to 2009.

Net Working Capital Cycle

80
70
60

Net Working Capital Cycle

50
40
30
20
10
0

The Net working capital are reduced in 2011-2012

59

Inventory Turnover ratios

11
10.5
Inventory Turnover ratios

10
9.5
9
8.5

Debtors Turnover
50
45
40
35
30

Debtors Turnover

25
20
15
10
5
0

60

Creditors Turnover
3.5
3
2.5
Creditors Turnover
2
1.5
1
0.5
0

61

Impact of changes in working capital on sales

UPPCL ltd.

FY

FY

FY

FY

FY

(Rs. Crore)

2007-08

2008-09

2009-10

2010-11

2011-12

Sales

14498.9

15139.3

17552.0

19691.0

24315.7

Impact of changes in working capital on sales

Sales
25000

20000

15000

Sales

10000

5000

62

 To increase the sales in every years

FINDINGS

Some of the main factors responsible for UPPCL's deteriorating financial condition and
those which represent its chief financing constraints are :
Increasing capital cost over the years
Higher interest during construction
Changing financing pattern
Inadequate generation of internal resources
Problems in the borrowings for power projects
Devaluation of rupee/partial convertibility
Uncertainty in the flow of external aid
Problems of financing through power bonds

The most of the UPPCL's financial problems is that financing from the institutional

agencies has slowed down due to sectoral issues. This trend can be reversed only with
improvements in the financial health of the State Electricity Boards (SEBs), though such
assistance could take care of only a portion of the total requirements. The key issue lies in
improving the internal resource generation of all the sector utilities including SEBs
whose contribution to the resource mobilisation during the entire seventh plan had been
negative. This would point out to the need for suitable adjustment in the tariff and
adoption of sound commercial practices in utility management.

63

 From an analysis of the various sources of UPPCL's financing mix, it is evident that the
emphasis is clearly shifting from Government support and soft loans to internal resources
and commercial/market borrowing. Bond financing, as a source, is shrinking because of
the changing economic scenario and the liberalization measures announced by
Government. There is a dampening impact, presumably, of the mounting outstanding
dues from SEBs on UPPCL's ability to generate internal resources to finance its own
development programmers in the recent past.

64

Recommendation

These are some of the sect oral issues which have resulted in serious fund constraints in
UPPCL. This would point out to the need for suitable all-round adjustments in utility
management. UPPCL's management practices and control systems in the area of finance
will have to be subjected to more rigorous tests in an increasingly adverse environment
characterized by resource constraints and weak financial position of the customers for
UPPCL power viz., SEBs.

Efforts to maintain growth with financial soundness by greater and more innovative
efforts towards resource mobilization is urgently called for by UPPCL.

While the agreements with SEBs provide for prompt payment for sale of electricity by
means of Letter Of Credit (LCs) for this purpose, many of the beneficiaries have not
opened LCs for the required amounts and have defaulted in their payments. The position
of arrears has severely affected the ways and means position of UPPCL because it had to
divert substantial investible funds which could have been ploughed back for capacity
additions.

65

 The Integrated Project Management and Control Systems (IPMCS) evolved and
implemented by UPPCL has enabled it to commission most of its projects on or ahead of
their schedule. Apart from the system of project management, the system of financial
control in a project is of utmost importance. In the UPPCL's philosophy, there is an
integrated approach to the task of overall project management where finance, engineering
and other functions including personnel are integrated all along the line. UPPCL has also
felt that modern management techniques would be equally applicable in operation and
maintenance of power stations. It has, therefore, evolved a comprehensive philosophy for
the operation and maintenance which has enabled it to operate its existing power stations
at a very high plant load factor.

However, the problem of funding in UPPCL, the premier power utility in the country is
so enormous, that it has recently shelved its expansion plans. It will take up no new
project during the eighth plan.

66

Conclusions
The most of the UPPCL's financial problems is that financing from the institutional agencies has
slowed down due to sectoral issues. This trend can be reversed only with improvements in the
financial health of the State Electricity Boards (SEBs), though such assistance could take care of
only a portion of the total requirements. The key issue lies in improving the internal resource
generation of all the sector utilities including SEBs whose contribution to the resource
mobilization during the entire seventh plan had been negative. This would point out to the need
for suitable adjustment in the tariff and adoption of sound commercial practices in utility
management.
In UPPCL, successful implementation of capacity additions programme is sensitive to timely
mobilization of financial resources. It would be very useful to adopt a comprehensive approach
to investment planning, particularly from the point of view of identifying sources of funds. This
would facilitate the taking up of advance action for processing the financing proposals so that the
arrangements can be finalised especially from foreign sources in time for scheduled project
execution. Further, such comprehensive long-term planning alone would reveal projected
resource gaps providing increased response time for drawing up strategies to bridge such gaps
through alternative sources. With every year, the problem related to financing of UPPCL are
becoming increasingly difficult. With net budgetary support from the Government trickling down
to almost non-existent level and increasing dependence on the domestic borrowing which is also
not forthcoming, UPPCL is finding it extremely difficult to mobilise resources to fund its plans.
From an analysis of the various sources of UPPCL's financing mix, it is evident that the
emphasis is clearly shifting from Government support and soft loans to internal resources and
commercial/market borrowing. Bond financing, as a source, is shrinking because of the changing
economic scenario and the liberalization measures announced by Government. There is a
67

dampening impact, presumably, of the mounting outstanding dues from SEBs on UPPCL's
ability to generate internal resources to finance its own development programmers in the recent
past.

Thus its high time that UPPCL should modify its strategies to compete in the era of the
competitive tariff bidding. Competitive tariff bidding is a step in direction of total deregulation of the electricity sector. The mantra is simple that Consumer is King. Further,
to stay competitive in global market, every organization has to transform itself to new
business models; otherwise, competitive forces will make organization redundant.
To achieve sustainable competitive advantage, UPPCL has to think not only in terms of
engineering excellence, operational excellence or excellence in project execution. UPPCL
have to invent new business model catering to the need of present stakeholders.

68

LIMITATIONS OF THE STUDY

In increasingly global environment, real threat will come from MNCs who are having
access to cheap funds and technological superiority. The new global scenario will force
UPPCL to rethink the strategy.
Private Sectors have access to cheaper technology from foreign countries like China with
minimum time lags. Whereas in case of UPPCL they have a running contract with BHEL.
BHEL takes longer time to deliver the required machinery at a higher cost.

With the opening up of the sector, more and more players are keen to put up power plants
because of new enabling regulatory mechanism. They will operate the plant with
minimum overheads and flexible financing options.

Source of fund especially from stock market are cheaper compared to public sector
utilities. This is because of market perception that private sector can run business more
efficiently.

Being a Public Sector Company UPPCL has to bear to certain rules & regulation
formulated from time to time. Where private sectors has no such restrictions

UPPCL has to go through a formal route of tendering where the bids are invited from
interested parties. Whereas in case of Private sector, they have independence of awarding
contract without inviting any bids.

69

BIBLIOGRAPHY
Books
Agarwal N.K., Management of Working Capital, Sterling Publishers Pvt Ltd. New Delhi
1983.
Chakravarty S. K., Reddy K., Inter firm comparison in the Indian Cement Industry, The
Charted Accountant, Vol. 20, No. 3, April 1973
Deloof, M.. Does Working Capital Management Affects Profitability of Belgian
Firms?, Journal of Business Finance & Accounting, 2003

Ghosh, S. K. and Maji, S. G.. Working Capital Management Efficiency: A study on

the Indian Cement Industry, The Institute of Cost and Works Accountants of India
2003

Guthmann H.G., Analysis Of Financial Statement Prentice Hall Inc. New York, 1935
Horrigan, J. O., A Short History Of Financial Ratio Analysis The Accounting Review,
April, 1968
Howard Leslie R., Working Capital : Its Management and Control, London Macdonald
And Evan Ltd., 1971

MAGAZINES:
Business Today
Business World

70

NEWSPAPER
Economic Times
Business Standard
The Financial Express
The Times Of India

Reports, Journals, Bulletins and Periodicals:

Annual reports of the various selected cement units
Tendon committee reports
The Hindu, Chennai
The capital, Kolkata
Management accountants, India
The journal of industries and trade
Chartered accountant, new Delhi
Lok udyog, new Delhi
Productivity, new Delhi
The Indian economic journal, Mumbai
The Indian Accounting Journal
Journal of Accounting & Finance
Accounting Review

71

Internet web sits

http://www.studyfinance.com/lessons/capbudget/index.mv?page=01
www.UPPCL.co.in
Financial Management by Prasanna Chandra
CERC Tariff Policy of 2009-2014.
www.moneycontrol.com
Indian Power Stations 2010 by UPPCL
Delegation of Power by UPPCL
Internal Management Reports
www.moneycontol.com
Tariff based Competitive-bidding Guidelines for Transmission Service

Authors by
Filbeck and Krueger (2005)
Wild , Subramanyam, and Halsey (2004),
Chiou et al (2006)

72

 Vanhorne (1969)
Weston and Brigham (1972)
Filbeck and Krueger (2005)
Lambrix and Singhvi (1979)
Welter, in his study (1970),
Warren and Shelton (1971)

Cohn and Pringle in their study (1973)

Copeland and Khoury (1980)

73