Finance is a study of money management

ABOUT FINANCE IS A STUDY OF MONEY MANAGEMENT

INTRODUCTION

Finance is a study of money management. It is the master key, which provides access to all the sources for being employed. Hence, efficient management of every business enterprise is closely linked with efficient management of its finance.

Finance is the management of the monetary affairs of a company. It includes determining what has to be paid for raising the money on the best terms available and devoting available funds to best uses.

The term business is an elastic but composite terms which covers the entire series of process. Finance deals primarily with raising, administrating and disbursing funds by privately owned business units operating in the non- financial field of industry. Business finance is only one phase of broader economic process of generating, saving and challenging them into investments and should be considered in their broad setting.

Financial management is the managerial activity, which is concerned with the planning and controlling of the firms resources.

FINANCIAL STATEMENT

A financial statement is an organized collection to logical and consistent accounting procedures financial statements are indicators of two significant factors.

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a. Profitability

b. Financial soundness

The financial statement term is used to describe trading, profit & loss a/c and Balance sheet of an organization.

“Financial statement analysis is largely a study of the relationship among the various financial factors in a business as disclosed by a single set of statement”.

FINANCIAL ANALYSIS

 Analysis of the capital investment projects.

 Capital structure analysis.

 Dividend policy.

 Working capital Management.

 Liabilities Management.

 Financial planning.

 Selection of sources of long-term funding.

ANALYZING AND INTERPRETING

Analyzing accounting data involves methodical classification of the data in the financial statements. The figures given in the financial statements will not help one unless they are put in simplified from.

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For example, all items relating to current assets are shown at one place while all items relating to current liabilities are shown at another place.

Interpretation means explaining the meaning and significance of the data. However both analysis and interpretation are complementary to each other interpretation requires analysis, while analysis is meaningless without interpretation.

The purpose of analyzing and interpreting the result of business transaction is to provide basis to make a meaningful judgment about the financial position and profitability of the business operations. The financial statements become a tool for future planning, forecasting and decision-marking. The market risk can also be assessed with the help of financial statement analysis.

Types of Financial Analysis

On the basis of modus Operating

On the basis of material used

Horizontal Analysis

Vertical Analysis

External Analysis

Internal Analysis

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1. On the basis of material used

According to material used, financial analysis can be of two types

 External Analysis, and

 Internal Analysis.

External analysis

This analysis is done by outsiders who do not have access to the detailed internal accounting records of the business firm. These outsiders include investors, potential investors, creditors, government agencies, credit agencies, and the general public. For financial analysis, these external parties to the firm depend almost entirely on the firm depend almost entirely on the published financial statement. External analysis, thus serves only a limited purpose. However, the recent change in the government regulations requiring business firms to make available more detailed information to the public through audited published accounts have considerably improved the external analysis.

Internal Analysis

The analysis conducted by persons who have access to the internal accounting records of a business firm is known as internal analysis. Such an analysis can, therefore, be performed by executives and employees of the organization as well as government agencies which have statutory powers vested in them. Financial analysis for managerial purpose is the internal types of analysis that can be affected depending upon the purpose to be achieved.

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2. On the basis of modus operating

According to the method of operation followed in the analysis, financial analysis can also be of two types:

 Horizontal analysis and

 Vertical analysis.

Horizontal analysis:

Horizontal analysis refers to the comparison of financial data of a company for a company for several years. The figures for this type of analysis are presented horizontally over a number of columns. The figures of the various years are compared with standard or base year. A base year is a year is a year chosen as beginning point. This type of analysis is also called ‘Dynamic Analysis’ as it is based on the data from year to year rather than on data of any one year. The horizontal analysis makes it possible to focus attention on items that have changed signification during the period under review. Comparison of an item over several periods with a base year may show a trend developing. Comparative statements and trend percentage are two tools employed in horizontal analysis.

Vertical analysis:

Vertical analysis refers to the study of relationship of the various items in the financial statements of one accounting period. In these types of analysis the figures from financial statement of a year are compared with a base selected from the same year’s statement. It is also known as ‘Static Analysis’. Common size financial statements and financial ratios are the two tools employed in vertical analysis.

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Since vertical analysis considers data for one time period only, it is not very conducive to proper analysis of financial statements. However, it may be used along with horizontal analysis to make it more effective and meaningful.

Methods or Devices of Financial Analysis:

The analysis and interpretation of financial statement is used to determine the financial position and results of operations as well. A number of methods or devices are used to study the relationship between different statements. An effort is made to use those devices which clearly analyze the position of the enterprise.

1.Ratio Analysis;

2.Comparative Statements;

3.Commom Size Statements;

4. Trend Analysis;

1. RATO ANALYSIS:

Ratio is an expression of one number in relation to another. Ratio analysis is the process of determining and interpreting the numerical relationship between figures of financial statements. A ratio is a mathematical relationship between two items expressed in a quantitative form. An absolute figure does not convey much meaning. Generally, with the help of other related information the significance of the absolute figure could be understood., better.

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2. COMPARATIVE BALANCE SHEET STATEMENTS:

Comparative balance sheet as on two or more different dates can be used for comparing assets and liabilities and finding out any increase or decrease in those items. Thus, while in a single balance sheet the emphasis is on present position, It is on change in the comparative balance sheet. Such as balance sheet is very useful in studying the trends is an enterprise.

A Comparative balance sheet has two columns to record the figures of the current year and previous year. A third column is used to show the increase or decrease in figures. A fourth column may be added for giving percentage of increase or decrease. Thus, While in the balance sheet the emphasis is on status, in the comparative balance sheet it is on change comparative balance sheet indicates whether the business is moving in a favorable or unfavorable direction. It is very for studying the trends in an enterprise.

3. COMMON SIZE STATEMENTS:

Financial statement present absolute figures. A comparison of absolute figures might have gone up but as a percentage of sales it might have come down hence, for a better understanding and comparison, the figures are converted into percentage of some common base are called common size statements.

4. TREND ANALYSIS:

Trend percentage are immediately helpful in making a comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Any intervening year may also be taken as base year.

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Each item of base year is taken as 100 and on those bases the percentages for each of the items of each of the years are calculated. These percentages can also be taken as index numbers showing relative changes in the financial data resulting with passage of time.

LIMITATION OF FINANCIAL ANALYSIS: Financial analysis is a powerful mechanism of determining financial strength

and weakness of a firm.

 But the analysis is based on the information available in the financial statement.

 Thus, the financial analysis suffers from serious inherent limitations of financial

statements as studied.

 The Financial analyst has also to be careful about the impact of price level

changes, window dressing of financial statements, changes in accounting policies of a firm, accounting concepts and conventions, and personal judgment, etc.

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OBJECTIVES :

 To suggest methods of improving profitability of the BHEL management of past 5 years balance sheet report.

 To identify the financial strength of the company.

 To study about the operational efficiency of the firm.

 To give recommendation with a view to increase efficiency of the company.

SCOPE OF THE STUDY:

The study reviews the performance of the company for the period of 5 years from 2009 to 2013 as revealed from the annual reports of BHEL.

The project is resolving over the historical accounting data conducted in the firm of balance sheet and profit and loss accounts. The study aims at identifying the financial soundness pertaining to financial health and performance of the company over the past five years.

Financial planning and analysis are financial information, financial need to predict to compare and evaluate the forms earning ability. It is also required to aid in economic decision making., Investment and financial statements or accounting reports.

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LIMITATION OF THE STUDY:

 The study is a limited for a period of 5 years from 2008-2009 to 2012-2013.

 The tools and techniques used for the study have its own inherent limitations.

 The study doesn't take place in the area of capital budgeting, fund and cash flow analysis

STATEMENT OF THE PROBLEM:

The analysis of the financial statements i.e, Income statement and the balance sheet it is very difficult to analyze the complete picture of financial performance. Therefore there is a need of applying the modern tools of management accounting to access the exact financial performance and position the business enterprise.

. Firm have some latitudes in accounting treatment like depreciation, appreciations, valuation of stocks research and development expenses, foreign exchange transactions, installment sales, preliminary and pre-operative expenses, provision of reserve and revaluation asset. Due to diversity of Accounting policies found in practice, comparative financial statement may be vitiated.

But the exact worth of the financial position of the company would be better understandable only if it is subjected to analysis such as " ANALYSIS FINANCIAL STATEMENT IN BHARAT HEAVY ELECTRICALS LIMITED."

RESEARCH METHODOLOGY:

The research methodology is a way to solve the research problem. It may be understood as a science of study how research is done scientifically, we study various steps that are generally adopted by a researchers in studying his research problems along with the logic behind him. It is necessary for a researcher to know not only research but also methodology. The aim of the research is to find out the fact which is hidden and which had been discovered as yet.

RESEARCH DESIGN:

The research is based on descriptive research. The success of any research depends on its systematic design, collection, analysis and reporting as data. The result oriented latter parts i.e., design and collection of data and relevant systematic and not absolute. A research design is the arrangement of condition for collection and analysis of data in manner that aims to combine relevance to the research purpose with economy in procedure.

SAMPLE DESIGN:

Sample size:-

Hence in this research study the following samplings design was adopted to generate a true representative sample. The sample size for this study is 2008-2013 annual reports of the profit and loss account and balance sheet.

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SOURCES OF DATA:

Methods if data collection:

Mainly sources were used for collecting data. They are

Secondary sources:

Data collected through the BHEL company Annual report, Books and other official records. However the data collected from the secondary sources.

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CHAPTER -I

REVIEW OF LITERATURE

The theory applied in this paper, to achieve the aforementioned objectives are financial management theory. Specifically, financial statement analysis theory since it aids to financial analysis. Analysis of financial statements are the tool that widely used among interested parties such as a investors, creditors and managers to evaluate and assess the historical and current financial condition as well as to predict the performance in coming years.

Khan and Jain (2007) defines Financial statement as a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm's position and performance. Ratio analysis is a more practical tool for financial statements, it could llink between risk and return regardless company's size in any industry

Bhatawadkar (2010) defines ratio analysis as the systematic use of ratio to interpret the financial statements so that the strength and weakness of a firm as well as historical performance and current financial condition can be determined. Futhermore, Ratio analysis makes related information comparable it helps to identify the deficiencies and then take the action to improve it.

AICPA (American Institute of Certified public Accountant) (2011), says “financial statement are prepared for the purpose of presenting the periodical review or report on the progress by the management and deal with the status of investment in the business and the result achieved during the period of under review”.

In the words of Hampton j.j. (2009),the statement disclosing status of investment is known as balance sheet showing the result is known as profit and loss account”. Thus, the term financial statement has been widely used to represent two statement prepared by accountants at the end of specific period. They are (i) profit and loss account or Income statement; and (ii) balance sheet or statements of financial position. Of late, another statement is also being prepared called, ‘surplus statement’ or ‘retained earning statements’.

The analysis may be described as an examination of financial transactions effected during a definition period of time. Kennedy and Muller said “analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement are an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the prospects for future earning, ability to pay interest and debt maturities (both current and long term) and probability of a sound dividend policy”.

F.Wood (2007) in his work “Business accounting” has defined the term interpretation as follows: “to interpret means to put the meaning of a statement in simple terms for the benefits of a person”.

Mr. Sanjay J Bhayani (The Indian Journal of Accounting, June 2006) made an attempt to study the impact of assets utilization on profitability of Indian industry for the purpose of study 24 India industries has been selected while comprises 641 Indian firms.

S.K. Bagchi (The Management Account, July 2004) conducted the study on accounting ratio’s for risk evaluation the author had analyzed the creadit risk evaluation by using accounting rations.

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Dr.D.Mukhopadhyay (The Management Accountant, April 2004) conducted a case study on working capital management in heavy engineering firms. In this study he tries to examine the effectiveness of working capital management and to find out how adequacy of working capital affects the commercial operations of the company for that made component wise analysis and ration analysis.

Y.V.Reedy and S.B patkar (The Management Accountant, May 2004) has working conducted the study working capital and liquidity management is factoring a comparative study of SBI and CAN bank factors for his study he makes ratio analysis, percentage methods, spearman ship between profitability working capital through using ratio analysis.

Mr.Narwar (The Management Accountant, June 2004 ) conducted the study in working capital and profitability analysis the study made to examine the inter relationship between profitability and working capital through using ratio analysis.

Dr.B.Ramachandra Reddy and Dr. Yuvaraja Reddy (The Banking finance, 2005) conduct of financial performance of SBI for the period of 1991 to 2003. The study focus the key responsibility areas of banking such as deposit mobilization, department, nonperforming assets, profitability and productivity the ration analysis has been used as a tool.

The importance of financial ratio underpins the truth that it illustrates the facts of performance on comparative basis and enabled the drawing of inferences regarding the performance. There are three types of comparison that are generally involved; 1) Trend analysis which involve comparison of firm over the period. In other words , it compares current position of the firm with its past performance,

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usually from a year to 5 years. 2) Inter firm analysis that involve comparison of the firm with others in the same line of business or in the entire industry. last but not least comparison with standards or industry average.

Financial Statements ( or financial reports) are formal records of a business financial activities. In British English, including United Kingdom company law, financial statements are often referred to as Accounts, although the term financial statements are also used, particularly by accountants.

CHAPTER – III

COMPANY PROFILE

Bharat Heavy Electricals Limited (BHEL) is an Indian state-owned integrated power plant equipment manufacturer and operates as an engineering and manufacturing company based in New Delhi, India. BHEL was established in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. It is one of the only 7 mega Public Sector Undertakings (PSUs) of India clubbed under the esteemed 'Maharatna' status. On 1 February 2013, the Government of India granted Maharatna status to Bharat Heavy Electricals Limited.

It is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional offices, eight service centres, eight overseas offices and 15 regional centres and currently operates at more than 150 project sites across India and abroad. Most of its manufacturing units and other entities have been accredited to Quality Management Systems (ISO 9001:2008), Environmental Management Systems (ISO 14001:2004) and Occupational Health & Safety Management Systems (OHSAS 18001:2007).

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It is the 7th largest power equipment manufacturer in the world. In the year 2011, it was ranked ninth most innovative company in the world by US business magazine Forbes. BHEL is the only Indian Engineering company on the list, which contains online retail firm Amazon at the second position with Apple and Google at fifth and seventh positions, respectively. It is also placed at 4th place in Forbes Asia's Fabulous 50 List of 2010.

BHEL has a share of 59% in India’s total installed generating capacity contributing 69% (approx.) to the total power generated from utility sets (excluding non-conventional capacity) as of March 31, 2012. The company has been exporting its power and industry segment products and services for over 40 years. BHEL’s global references are spread across 75 countries. The cumulative overseas installed capacity of BHEL manufactured power plants exceeds 9,000 MW across 21 countries including Malaysia, Oman, Iraq, the UAE, Bhutan, Egypt and New Zealand. Its physical exports range from turnkey projects to after sales services.

The company's Corporate R&D division at Hyderabad leads BHEL's research efforts in a number of areas of importance to its product range. Research and Product Development (RPD) centres at all its manufacturing divisions play a complementary role. BHEL has introduced, in the recent past, several state of the art products. Commercialization of products and systems developed by way of in-house Research and Development contributed Rs.95,120 Million corresponding to around 19.3% of the company's total turnover in 2011-12. In 2011-12, BHEL filed 351 patents and copyrights, enhancing the company's intellectual capital to 1,786 patents and copyrights filed, which are in productive use in the company's business. The company established four new Centres of Excellence, taking the total tally to 13. Significantly, BHEL is one of the only four Indian companies and only

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Indian Public Sector Enterprise figuring in 'The Global Innovation 1000' of Booz & Co., a list of 1,000 publicly traded companies which are the biggest spenders on R&D in the world.The company boasts of a dedicated team of highly skilled and committed workforce of 49,390 employees.

BHEL works along a pre-determined CSR Scheme and its Mission Statement on CSR is "Be a Committed Corporate Citizen, alive towards its Corporate Social Responsibility". BHEL's contributions towards Corporate Social Responsibility till date include adoption of villages, free medical camps/charitable dispensaries, schools for the underprivileged and handicapped children, ban on child labour, disaster/natural calamity aid, employment for the differently abled, widow resettlement, employment for ex-serviceman, irrigation using treated sewage, pollution checking camps, plantation of millions of trees, energy saving and conservation of natural resources through environmental management. As part of social commitment, BHEL provides financial assistance to various NGOs/Trusts/Social Welfare Societies that are engaged in social welfare activities throughout the country. 56 villages having nearly 80,000 inhabitants have been adopted.