FINANCIAL MANAGEMENT &

BUDGET PERFORMANCE MONITORING

The term “Financial Management” encompasses all aspects of planning and control of
acquisition, allocation and utilisation of funds. Any organisation makes strategic decisions as
per objectives to invest fund, generated internally from Equity or from outside sources as Debt,
either for Capital expenditure or for revenue expenditure. Capital outlay is meant for new plant
or for replacement or renovation of existing plant/ part thereof. The revenue expenditure is for
running the business so as to earn revenue receipts & profit from the investment already made.

The function of Financial Management is broadly divided into following heads.

1) Financial Planning
i) Investment Decisions
ii) Financing Decisions
iii) Long Range Planning
iv) Operating Decisions

2) Financial Control
i) Monitoring Performance
ii) Managing Corporate Liquidity
iii) Maintaining Financial Information System

Yearly Gross revenue receipts are utilized first for provision of depreciation & interest on
Debt. The after tax surplus is used to redeem the debt as well as plough back to generate the
equity so that the organisation eventually becomes the debt-free company and all working
capital needs are met from the equity base.
Proposal for Capital Outlays are always/ usually subjected to an elaborate Cost-Benefit
Analysis. Similarly all Revenue Outlays are subjected to Budget & Long Range Planning exercise.
Every Utilisation of fund is associated with rate of return on investment (ROI). Many a times
investment is made for meeting the Welfare obligations or the reasons which are political or
strategic in nature. Such outlay may not fetch commensurate benefits and whatever benefit
they fetch may not be amenable to measurement in financial terms. Such outlay restricts (& to
be restricted) to only a small part of total investment.
Every proposal is associated with feasibility analysis, profitability analysis, assurance of
minimum Rate of Return, Social Cost-benefit analysis and yearly accounting of projected capital
outlays, life of project, operating costs & revenue, pay back period. The project is accepted
only after taking in to a consideration all cash inflows & cash outflows in the profitability
analysis. Several techniques are used in estimating the profitability of a investment in project
which includes (1) Pay Back Period, (2) Average return on total investment, (3) Average return
on average investment, (4) Yield Method and (5) Present Value method (Discounted Cash Flow
analysis). The organisation is investing funds into several of such projects, the combined effect
of all such investment is studied & monitored through Portfolio Analysis of overall investment
with the help of various models available as tools for such analysis. For any company it is very
important to monitor total synergy effect of all investment through total cash inflows & outflows

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during each financial year.
Any financial decision for capital outlay shall be associated with the responsibility of
project leader & participating team members for guaranteed returns on the capital invested.
There should be mechanism to assess the projected cash flow & actual cash flow from the
sanctioned capital outlays. The mechanism to assess & to quantify the benefit from the
investment must be evolved during the sanctioning process itself.

BASICS OF BOOK KEEPING

The object of Book Keeping and Accountancy is to present a clear picture of the
financial state of affairs of the firm and of the results of operations carried out during a period.
The picture consists of two statements mainly. These statements are
1. Profit and Loss Account or Income and Expenditure statement
2. Balance sheet

Financial Statements, Balance Sheet, Trading Account/ Profit & Loss Account
General format of the Balance Sheet
Liabilities Assets
Share Capital Fixed Assets
- Equity Shares - Buildings
- Preference Shares - Plant & Machinery
Reserves & Surplus Current Assets
- General Reserve - Cash in Hand
Liabilities (Current) - Cash at Bank
- Sundry Creditors - Sundry Debtors
- Bank Overdrafts - Inventories
- Bills Payable - Prepaid Expenses

General format of the Trading Account

To Opening Stock By Sales
To Purchases/ Generation
To expenses By Closing Stock
- Fuel Power
- General Administration
- Aux Consumption/ Lighting
To Net Profit (transferred to P&L A/C) To Net Loss ( transferred to P&L A/C)

Account Heads
Under the provisions of The Electricity (Supply)(Annual Accounts) Rules 1985, Ministry
of Energy through CEA, has released Commercial Accounting System. Section 2 contains elaborate
list of account heads & related codes to be used for computerization. These are grouped into
main Account group code from 10 to 99. For example 10 to 16 Capital Expenditure & Fixed

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Assets, 17 to 19 Deferred Costs and intangible assets, 21 to 29 Current Assets, Loans &
advances; 30 to 39 Inter Unit Accounts, 40 to 49 Current & Accrued Liabilities, 50 to 54 Capital
Liabilities & Other Borrowings, 55 to 59 Reserve and Surplus, 60 to 69 Income, 70 to 89
Expenses and Losses, 90 to 99 Memorandum Accounts. All these group codes are further
divided into account head codes having format [Link] e,g, 75.110 for Salaries – Permanent
Employees. All these accounts can be classified into main group of Assets Accounts, Liability
Accounts, Expenses Account & Income Accounts.

JOURNAL
This is the basic document from which accounting starts. It is the record of transactions
and all the records are first recorded in the Journal first. Every business transaction having
financial bearing is recorded in journal. Every transaction affects two account heads in Double
entry Mercantile Accounting system. One account is credited whereas another account is
debited.

The manner of recording transaction in an account is shown below

Asset Account Liability Account
Dr. Cr. Dr. Cr.
Increases Decreases Decreases Increases

Expense Account Income Account

Dr. Cr. Dr. Cr.
Increases Decreases Decreases Increases

Fundamentally, an account is either debited or credited, and the crux of Accounting lies
in finding out which accounts are to be debited and which accounts are to be credited.

Real, Personal & Nominal Accounts

The Personal accounts are related to persons i.e. customers, creditors etc. The Real
accounts are related to assets whereas the Nominal accounts are related to expenses, losses
and incomes.
There are three Golden Rules for recording the transactions
1. For Personal Accounts : Debit the receiver and Credit the giver
2. For Real Accounts : Debit what comes in and Credit what goes out
3. For Nominal Accounts: Debit all losses/ Expenses and Credit all Gains
In Journal, all the records are chronologically written as under

Dr. Cr.
Date Particular L.F. Amount Amount
(1) (2) (3) (4) (5)
Rs. Ps. Rs. Ps.

Now we give entries for a number of transactions which often take place in a firm ...

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1. I start business with Rs. 15,000 as my capital. The entry is
Cash Account Dr. 15,000
To Capital Account 15,000

2. Out of Rs.15,000, Rs.12,000 is deposited in the bank.

Bank Account Dr. 12,000
To Cash Account 12,000

3. Goods are purchased on credit from M/S RAM & Sons for Rs.6,000
Goods Account Dr. 6,000
To M/S Ram & Sons 6,000

4. A typewriter is Purchased for cash for Rs.3,450

Office Equipment Account Dr. 3,450
To Cash Account 3,450

THE LEDGER
From Journal one cannot form any idea of net effect of the transactions since it records
only which account is to be debited and which account to be credited. The record is made date
wise. Transactions of similar nature are recorded at different places if they occur on different
dates. Therefore to get the picture as a whole, the entries recorded in the journal have to be
recorded further. All similar transactions must be brought together. For instant, transactions
relating to cash must be put together.
The statement, which contains all transactions relating to a particular subject for a
particular period and in which the transactions are neatly arranged into debits and credits, is
known as a LEDGER ACCOUNT. The usual form of LEDGER account is as under

Dr. Cr.
Date Particular Folio Amount Date Particular Folio Amount
Rs. Ps. Rs. Ps.

POSTING
The task of preparing Ledger accounts on the basis of the journal is known as “Posting”.
In the ledger account, it is customary to write “To” on the debit side and “By” on the credit
side.

Balancing An Account
After all transactions have been posted and thus various accounts prepared, the balance
of real and personal accounts are ascertained. This is done by totalling the two sides of an
account and by noticing the difference. The difference is put on shorter side, thus making two
sides equal. Against the difference the words “To (or By) Balance c/d” are written.

Cash Book And Banking Transactions

So far we have thought of only one way of recording the transactions, viz., journalising

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and then posting. There is another way of doing this work. It consists of keeping various
registers to record various types of transactions and then preparing ledger accounts. The
transactions of a firm generally falls in following three main categories
1. Receipt & payment of cash (or through Bank)
2. Purchase of Goods
3. Sales of Goods

In this case, there will be one book for cash & Bank transactions, another to record
purchases and third to record sale of goods. If any other class of transactions is numerous, a
book can be maintained for that class also. Such books can be maintained for Pay Bills, [Link],
NMRs, Imprests etc.

CASH BOOK
In any business house, there will be numerous transactions relating to cash (receipts &
payments). On receipt of cash, cash amount is debited and on payment, cash account is
credited. On this basis, the cash account can be prepared straightaway without the transactions
being first journalised. Since cash transactions are numerous, it is better to keep separate book
to contain only the Cash Account. This book is known as Cash Book. The cash book can have
separate column to identify Bank transactions.

BANK RECONCILIATION STATEMENT :

The Bank Pass Book & Cash Book(bank column) record the same transactions. Hence
both balances must tally. However in actual practice this is rarely so because of the time lag of
few days between entries made in cash book & pass book. The Bank reconciliation statement is
therefore necessary to highlights the reasons for such deviations in balances. Followings are
the reasons for the difference between balances..
1. Cheques received entered in Cash Book but not yet credited in Bank a/c by Bank.
2. Cheques issued entered in cashbook but not yet presented by party to bank for realisation.
3. Entries regarding Bank Charges.
4. Amounts collected by Banks but not entered in cashbook.
5. Mistakes in cash book or bank pass book.

TRIAL BALANCE AND ERRORS :

We have seen, how ledger accounts are prepared on the basis of journal or other
subsidiary books. We have also seen how the two aspect of every transaction are given effect
while making entries. This means that if an amount is debited in any account, it has to be
credited in some other account or accounts. Thus for every debit entry, there is a credit entry
& vice versa.
This helps us to check the accuracy of our work. If total of debit entries made in various
accounts are listed, it must be equal to the total of credit entries in various accounts. If it is
not equal, it means there is some error. These two lists if combined in one statement, it will be
a trial balance.
Another method of preparing trial balance is to find out differences of two sides of every
account. If debit side is bigger, it is called debit balance and if credit side is bigger it is called
credit balance. One statement can be prepared with names of accounts. There will be two
columns, one for debit balances & another for credit balances. Total of these two columns must
be same.
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FINAL ACCOUNTS
The term final accounts means statements, which result finally from the preparation of
accounts showing the profit, earned or loss suffered by the firm and the financial state of
affairs of the firm at the end of the period concerned. The statement showing profit or loss is
known as “Profit and Loss Account” and the statement showing financial state of affairs is
called “Balance Sheet”.

CAPITAL ITEM & REVENUE ITEM

Before we take up the task of preparing the P&L account and Balance Sheet, we must
have clear idea as to which items go into each of these statements. Balance sheet consists of
only Assets and Liabilities. Profit & Loss can be determined by comparing expenses & incomes.
Therefore, we must know whether an expenditure is to be treated as an Asset or as an
Expense. Similarly whether a receipt of funds is to be treated as Income or as a Liability. In
other words, we must know which item is of capital nature and which item is of revenue nature.
Expenditure will be treated as Capital in following circumstances...
1. If it results in acquisition of asset.
2. If it results in a benefit which will last for a long time.
3. If it is incurred in putting a new asset in working condition.
4. If it results in extra capacity.
5. If it results in reduction of cost of production.
Expenditure will be treated as Revenue in following circumstances ...
1. To acquire raw materials
2. Expenditure whose benefit will be expired within the year.
3. Expenditure to maintain the asset in working condition.
4. Expenditure incurred to defend one’s right to an asset.
5. Loss of all types.

Capital Receipt and Revenue Receipt

The following rules can be observed in this respect..
1. If stock-in-trade i.e. goods are sold, receipt is revenue receipt.
2. If money is received by converting other assets into cash, it is capital receipt.
3. If amount is borrowed or is received from proprietor, it is capital receipt.
4. If money is received without having to returned again & benefit of that amount
is already given, it is revenue receipt.
5. If some profit is incurred in sale of assets, it can be treated as revenue receipt.

CONCEPTS UNDERLYING FINANCIAL STATEMENTS

Financial Statements are prepared subject to certain underlying assumptions and
assumptions used affect them materially. These assumptions are known as concepts, conventions,
principles or postulates.
1. Money Measurement Concept : Accounting measurements are restricted to items
measurable in terms of money assuming that value of money remains constant.
2. Entity Concepts : All accounting is done in terms of the business entity which is distinct
and separate from the owner of the business.

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3. Going Concern Concept : This assumes that the business has continuity of existence.
4. The Cost Concept : Cost is the basis for accounting of asset and expenses. The cost at
the time of acquisition is considered for accounting purpose.
5. Dual Concept : The amount of asset must equal to the amount of equities or claims
against the business.
6. Conservatism: This requires that whenever there is a choice in accounting methods, the
one that results in lower figure of owners equity is adopted.
7. Accounting Period Concept : The assumes that the life of business is divisible into small
periods of time called accounting periods.
8. Accrual Concept: Accounting profit is the difference between revenues and expenses
and is not synonymous with the net cash flow.
9. Realisation Concept : Revenue is recognized when it is realized not necessarily in cash.
10. Consistency Concept : Where different procedures are possible in given cases, the
procedure adopted must be followed consistently from period to period. When a change in
procedure is considered necessary, adequate disclosure must be made in the financial
statements of the effect of such change.
11. Materiality Concept : Where the amounts involved are not material, departure from
conventional accounting treatment of particular items in financial statement may be
permitted. Thus stationery may be charged as expense of the period of purchase even
though it may be used up over the period of time.

FINANCIAL INFORMATION SYSTEM

The Financial Information System if properly developed, helps in catering the decision-
making needs of managers at various levels. Developing the MIS is a complete project, which
needs innovative leader behind the force & interest of topmost level of the management. The
software developed should be subjected to highest level of audit to ensure that it gives only
correct results to avoid any decisions based on wrong data.
All day to day transactions related to fund management, right from receipt of funds to
its disbursements, all activities related to cash receipt & disbursement including posting of
related sub ledgers, all transactions related to salaries, deductions, disbursement processes,
daily receipts & payments through entry of vouchers etc are to be entered on line so that it is
timely available for decision making & reporting requirements.
In Generation wing, it was already planned to implement PPMS (Power Plant Monitoring
System), which contains Fund Management, Budget & Cash Flow Management as well as
Financial Management features. There is urgent need to properly implement these systems in
daily working.

FINANCIAL STATEMENT ANALYSIS

Analysis implies the use of measuring devices such as ratios, trends and percentages for
interpretation of data, which refers to the process of understanding data and drawing meaningful
conclusions.

RATIO ANALYSIS
For meaningful Ratio analysis, it is necessary to have standards or benchmarks against
which the actual ratios can be compared. These may be external standards i.e. of the industry

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or the country or internal (represented by past performance or future expectations in the form
of goals/ targets).

Ratios related to solvency of a business

1. Current Ratio: (Short term solvency test) = Current Assets/ Current Liabilities
2. Liquid Ratio: (Ability to pay current Liabilities) = Cash, Debtors/ Current Liabilities
3. Average Collection Period: Avg no. of days sales contained in debtors’ accounts.
4. Stock Turnover Ratio: No. of times specific class of stock is turned over in a year.

Ratios related to Profitability

Profit Margin = Gross Profit * 100 / Sales.
Operating Ratio = (Cost of Goods Sold + Other Op. Expenses) / Sales.
Cost of Goods Sold Ratio = Cost of Goods Sold / Sales.
Return on Assets = Net PAT / Total Assets.

Debt Ratios or Leverage

· Debt Equity Ratio = Long Term Debts / Equity.
· Interest Coverage Ratio = EBIT (Earnings before interest & tax) / Interest.
· Dividend Coverage Ratio = EAT (Earnings after tax)/ Dividend on Pref. Shares.
· Total Fixed Coverage Ratio = EBIT / Total Fixed Charges.

Turn Over Ratios...

· Debtors Turn over Ratio
· Average Collection Period
· Creditors Turn over Ratio
· Creditors Payment Period

LONG RANGE PLANNING & OPERATING DECISIONS

Primary objective of LRP (Long Range Planning) is to prepare organisation for the uncertain
future. It involves early recognition of threats and opportunities and evolving appropriate
strategies to meet the threats and capitalize on the opportunities.
Rapid changes in technology and market structure, likely competition in near future and
working of MERC leaves no choice to the POWERGENCO except to be alert. With the far-
reaching changes in the Electricity Act, there shall be changes in the tariff fixation norms of the
MERC. Continuous process of Project Planning and Profit Planning to reach appropriate strategic
decision through four steps in LRP is together called as Corporate Planning Process. These four
steps includes (1) External Appraisal (2) Internal Appraisal (3) Review of objectives & strategies
and (4) Formulation of Long Range Plan. Each of these four functions is an expert exercise by
the competent team to reach at formal plans, which are expressed in the usual financial
formats as follows:
· Profit and Loss forecast
· Projected Balance Sheet
· Projected Flow of Funds
· Capital Expenditure Forecast

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 LRP needs deployment of the sophisticated Management Techniques in the areas of
forecasting, resource planning & allocation and performance appraisal. Bur what is needed more
is the attitude to accept the type of self-discipline which planning imposes on skilled manpower
needed for developing good plans.

OPERATING DECISIONS : Whereas the investment decisions mainly focus on installing new
plants and expanding, modernising or replacing the plant capacity; the operating decisions are
focused to putting the available capacity to better use. Suppose a plant/ power station is
having some spare capacity, it offers considerable scope for availing the economies of scale by
stepping up output. To put it into the professional terminology “incremental costs in such a
situation fetch more than proportionate incremental revenues”.
It may be relevant to deal with the concept of CONTRIBUTION, which is closely related
to the concept of relevant cost. The excess of income over the variable expenditure chargeable
to such income is known as the contribution. The total contribution less fixed costs for the
period represents profit. It is possible to compute contribution per sale rupee, per unit of
output or for a given level of plant capacity. Contribution per sale of rupee is also known as
profit – volume ration or p/v ratio. The enterprise is said to break even when, in a period the
contribution just equals the fixed costs. The break-even analysis highlights the need not only
for improving the p/v ratio but also for absorbing or reducing the burden of fixed costs.
Corporate plans aims at improving the contribution on one hand and about absorbing the fixed
costs on the other. Either or both of these steps help in increasing the ultimate profit of the
individual power station as a profit center.
The profit in its conventional sense does not provide a rational basis for taking managerial
decisions on the problems concerning with production and marketing strategies. In the changing
power scenario, the capacity utilisation of a power plant unit shall mainly depend on the
position of power station merit rating stack and the unit cost offered by power station. A multi-
unit power station would like to project from time to time the relative profitability of every unit
in the station. Unit-wise allocation of fixed cost by allocation of fixed cost to each process
center & service center is a cumbersome & controversial exercise. Many times allocated fixed
costs prove to be irrelevant to a decision making because those costs may have to be incurred
in any case. The contribution approach offers a way-out to such problems.
Provided the user is aware of pit falls in contribution approach, he can use it with considerable
advantage in taking rational operating decisions, some of which are indicated below:
· To Buy or to Make
· Departmental Work or Contract Work by Outsourcing.
· Preventive or Breakdown Maintenance
· Replace Parts or replace whole machine.
· To decide reasonability of rates quoted.
· Requirement of reliability in Quality/ Brand product concept.
· Extent of resulting loss & risk that can be taken to sustain failure of supplies/ works.
· Cost affordable to organisation/ Budget allocation i.e. capacity to pay.

STATEMENT OF SOURCES & APPLICATION OF FUNDS & WORKING CAPITAL MANAGEMENT

An odd idle machine or installation may cause concern, murmur and some talk on the
plant. It is soon recognized even at the level of workers, as an unproductive use of a productive
resource and it is even realized that this has an adverse effect on profits.

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 Mounting inventory levels tucked away in stores and increasing debtors accounts piling
up in the ledger sheets may not evoke the same attention, as they are not obvious to the level
of casual observer as in case of idle machine. Some study, search and analysis alone will bring
to light avoidable excesses of investment in current assets.
Together with reasonable profits, the company’s growth has to be sustained by unfailing credit
soundness at all times. Funds should ever be available to meet maturing obligations. This calls
for effective management of working capital.
Working Capital Management embraces
a) Selection of appropriate sources for financing the current assets;
b) Preparedness to meet current obligations as and when they mature;
c) Decision on the right level and composition of current assets;
d) Efficient management of different categories of current assets and current liabilities.

WORKING CAPITAL CYCLE:

Revenue Receipt 96-97 97-98 2004-05

Sale of Electricity 8307.83 9406.92 13109.90
Misc Revenue 326.52 333.05 1120.35
Subsidy to achieve prescribed ROR 268.38
A TOTAL 8902.73 9739.97 14230.25
Revenue Expenditure
Fuel Charges 2453.97 2629.75 4427.58
Cost of Power Purchased 2340.23 2480.73 3551.81
Lease Rent 65.00 75.00 85.00
O&M expenses 550.08 601.19 794.48
Estt. & Adm. Charges 1047.67 1144.18 1861.10
Bad Debts Write off 190.00 309.27 5.00
Other Expenses 182.58 200.84 525.92
B TOTAL 6829.53 7440.96 11250.89
C Gross Revenue Surplus(A-B) 2073.20 2299.01 2979.36
Less Depreciation 908.36 979.79 1623.95
Less Interest due for the year 1016.49 1137.42 1260.47
Add back Interest capitalised 198.24 180.00 82.40
D Net Surplus 346.59 361.80 177.34
Capital Base u/s 59 7701.78 7485.62 9720.00
Rate of Return (ROR) 4.5% 4.8% 1.8%
Internal Resources
Net Surplus(C) 2073.20 2299.01 2979.36
less Credit to depreciation reserve 908.36 979.79 1623.95
less Interest on Bonds 106.53 99.50 0.00
less Interest on loan from Govt 432.83 546.25 1178.07
less Interest on loan from LIC, Bank 429.52 509.01 0.00

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 Revenue Receipt 96-97 97-98 2004-05
E Net Revenue Surplus 195.96 164.46 177.34
Depreciation 908.36 979.79 1623.95
Consumer Service Connection Charges 218.95 229.90
Recovery of consumer arrears -265.41 -228.98
Debts, Deposites & Others 60.00 60.00
Drawing Down of Cash 1.00 1.00
Opening Balance 326.93 325.93
Less Closing Balance 325.93 324.93
Drawing Down of Inventory -32.59 -76.94
Opening Balance 519.87 552.46
Less Closing Balance 552.46 629.40
F Gross Internal Resources 1086.27 1129.23 1801.29
Less Repayment of Loans 705.47 552.02 552.02
G Net Internal Resources 380.80 577.21 1249.27
H Borrowings by Board 1234.33 1366.95
I Total Working Capital (G+H) 1615.13 1944.16

CAPITAL BUDGETING TECHNIQUES

In Power Industry, any new project investment capital outlay is allowed at 80-20 debt-
equity mix. With the capacity base of 10000 MW, the MAHAGENCO shall have to compete for
market share in near future with the process of competition for place & position in Merit Rating
stack and stringent monitoring by MERC. In such environment it shall be a task to paint the
future scenario of influx of new power project and resulting slow but steadily intensifying
competition for market share in sale of electricity to DISCOMs.
The projected Business Plan of Transfer Scheme prepared while restructuring the MSEB
in to three corporations anticipates turn around in the internal cash generation by 2009. For
MAHAGENCO, the turn around is projected in the very next year of transfer i.e. in 2006. Self-
financing obligations are projected as having increasing trend from 17% in 2006 to 33% in 2009.

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At present, the management capabilities in MAHAGENCO are not exposed to marketing function
in the competitive environment. With the surplus power in the state still a distance dream, the
return on the available resource of generation capacity is guaranteed without involving mush
exploration of marketing strategies. But the new entrants in power scenario of state shall
emerge as a host of competitors for market shares & capacity utilisation with every surplus
energy component available in the GRID. Hence the first task before MAHAGENCO would be to
strengthen the available capacity base and to prepare for likely competition for capacity
utilisation, which shall mainly depend on strategies of Operating Decisions on existing plant and
betterment of management practices. Whether to invest for internal growth & building up of
strength or for expansion or for both is an area of long term strategy to be decided now.
Capital Budgeting is an integral part of financial management in any enterprise. Financial
Management focuses attention not only on the procurement of funds but also on their effective
use with the objective of maximizing the owner’s wealth. The allocation of fund is therefore
important function of financial management.
Identification of Sources of Finance

Schematic of Capital Budgeting Process

The allocation of funds involves the commitment of funds to assets and activities. It is
also, referred to as Investment decision, that is, making choice between the assets in which
funds will be invested. These assets fall into two broad categories (1) Long Term or fixed
assets and (2) Short term or current assets. Accordingly there are two types of investment
decisions. The first is the long term investment decision and second is short term investment
decision. It is also known as management of current assets or working capital management.
The first type of decision is, however, widely known as Capital Budgeting or Capital Expenditure
Decision. Objective of survival and growth is main amongst all other objectives including profit
maximization. The capital Budgeting is one of important vehicles to achieve the objective.

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MANAGING CORPORATE LIQUIDITY
The primary objective of any business enterprise is to generate an adequate returns on
the total capital placed at its disposal. Broadly speaking the capital is employed in two categories
of assets, namely fixed assets and current assets. The return on capital can be improved (a)
by achieving higher margin of profit on sales and / or (b) by bringing down the level of invested
capital. The following example will illustrate the point:
(Figures in Rs. Lakhs) Company A Company B
1 Sales 200 200
2 Profit on sales 20 20
3 Capital 100 80
4 Return on Capital 20% 25%
5 Capital turnover (1/3) 2 times 2.5 times

Investments in fixed assets are not to change, at least in short run. Such investments
are made at one time and are recovered through depreciation over a number of subsequent
years. The best way to improve the return on assets is to put them to optimal use.
Current assets on the other hand land themselves to stricter controls. By judicious
planning it is possible to keep investments in current assets under close surveillance. There are
several techniques for planning and controlling each of the three main components of current
assets namely, Cash, Inventory and Book Debts.

CAPITAL INVESTMENT & OPERATING EXPENSES DECISIONS

Profit plans are prepared normally once a year to coincide with the financial year. Profit
planning is almost a continuous process in many leading organisations facing competitive
environment & market share competition. The plan for coming year is to be initiated right in the
middle of the current year. The annual plan in many enterprises is an extension of the corporate
plan drawn for five years in advance.
If we limit our discussion to position in MAHAGENCO, the first need is to establish machinery for
continuous review of strategies and making corporate plan for next five years available to
executives at all level to enable them to draft the corresponding plans at their level. Once the
corporate office declares the annual plan, all the responsibility centers in every profit center
has to work out the resource analysis and identify the gaps to formulate the strategy at power
station level to bridge the gap.
Every responsibility center shall have to prepare targets in terms of contribution in total capital
assets, standard resources requirements to meet the target, resource gap existed and the
proposed strategies to meet such resource gap. Every profit center shall have to prepare their
contribution in profit, sales & volume. The budget exercise should involve use of the managerial
tools for decision making & forecasting.

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