working capital mgt. of dabur india ltd
TRANSCRIPT
A
PROJECT REPORT
ON
“WORKING CAPITAL MANAGEMENT OF DABUR INDIA
LIMITED”
IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT FORTHE AWARD OF THE DIPLOMA OF
POST GRADUATE DIPLOMA IN BUSINESS ADMINISTRATION(PGDBA)
(SESSION 2007-2011)
SUBMITTED BY:RACHNA MEHTA
REG. NO. 2007200PGDBA – (HR)
SYMBIOSIS CENTER FOR DISTANCE LEARNING PUNE
DECLARATION
I Sudhanshu Kumar Ojha, Reg. No 200756257 student of PGDBA (Finance) of
Symbiosis Center for distance learning, Pune hereby declare that the project report on
“WORKING CAPITAL MANAGEMENT OF DABUR INDIA LIMITED”, is an
original and authenticated work done by me. I further declare that it has not been
submitted elsewhere by any other person in any of the university for the award of any
degree or diploma.
SUDHANSHU KUMAR OJHA
ACKNOWLEDGEMENT
Searching the various opportunities for sales is the project which requires lot of hard
work, patience and true commitment. Every work requires lot of hard work, patience and
true commitment. Every work requires a commitment but this commitment is washed
away in rain when there is guidance.
I express my sincere gratitude to my industry guide MR. DINESH GUPTA, unit
commercial manager, DABUR INDIA LTD., for his dedicated guidance, continuous
support and cooperation throughout my project, without which the present work would
not have been possible.
I would also like to thank the entire team of DABUR INDIA LTD., their constant
support and help in the successful completion of my project.
SUDHANSHU KUMAR OJHA
TABLE OF CONTENT
INTRODUCTION TO DIL Objective Limitations Introduction Company’s History Dabur At A Glance Daburs Major Sbu’s Board Of Directors Bankers Dabur Cores Value Milestone To Success Dabur World Wide It Initiatives Strategic Intents Products
WORKING CAPITAL MANAGEMENT
Conceptual view Components Principles Needs Factor determining wc requirements Financing of wc requirement Negative wc Sources and uses of wc Comparison of dil’ wc with other companies Cash management Receivables management
Inventory management
FINANCIAL STATEMENT ANALYSIS
MEANINGRATIO ANALYSIS OF WC
PERFORMANCE HIGHLIGHT OF DIL
DABUR ON GROWTH PATH
CONCLUSION
BIBLIOGRAPHY
To understand the working capital conceptuality.
To understand the trend exhibit by working capital.
To calculate the working capital of Dabur and compare it with other FMCG’s in India.
To get various financial data of Dabur and other FMCG companies in India and compare them.
Thereafter a brief comparison of working capital of all the FMCG companies and Dabur was done in order to find that which company has managed its cash flows more effectively and efficiently.
The following limitations have been faced in this project inspite of all
possible efforts made to make the report accurate.
The financial data of different companies is available for financial
years that vary, such as, some firms have their accounting year from
January to December while some others have it from April to March.
Hence the comparison may not be fully accurate.
The latest financial data of few firms could not be reported, as their
internet websites have not been updated. Hence for some companies
the data was available for previous year but for some it was available
for preceeding previous year.
This project deals with working capital management of Dabur India Ltd. Dabur India
Ltd., is the fourth largest FMCG company, the basic meaning of working capital in the
simple language in CURRENT ASSETS less CURRENT LIABILITIES.
The working capital management refers to the working capital, or not to be more precise,
the management of current assets. Working capital also called net current assets is the
excess of current assets over current liabilities. All organization has to carry working
capital in one form or the other. The efficient management of working capital is
important from the point of view of both the liquidity and profitability.
Poor management of working capital means that the funds are unnecessarily tied up in
idle assets hence reducing liquidity and also reducing the ability to invest in productive
assets such as plant and machinery, so affecting the profitability.
ABOUT DABUR
Dabur India Limited is India’s fourth largest FMCG company with interests in Health
care, Personal care and F. Building on a 120-year legacy of quality and experience, today
Dabur has a turnover of $340 million food products.
The company has been instrumental in reviving traditional remedies and health care
solutions, making them popular brands of nature-based products backed by modern
scientific research and state-of-art manufacturing. Dabur’s products are available for
people in more than 50 countries across the world, helping them move towards a healthy,
natural and holistic lifestyle.
Dabur’s basket of products include powerful super brands that have become a household
name in India and very popular in our international markets. Some of them are:
Dabur Amla Hair Oil :-
The first branded herbal hair oil that become our flagship brand in the hair oils category
and has been associated with popular stars of the silver screen.
Dabur chyawanprash :-
India’s largest selling brand of traditional Ayurvedic revitaliser.
Vatika :-
The premium range of natural hair
Hajmola :-
The market leader in digestive product
With 75% share of Indian market.
FOUNDING THOUGHTS
“What is the life worth which cannot bring comfort to others”
The story of Dabur began with a small, but visionary endeavor by Dr.S.K.Burman, a
physician tucked away in Bengal. His mission was to provide effective and affordable
cure for ordinary people in far-flung villages. With missionary zeal and fervor, Dr.
Burman undertook the task of preparing natural cures for the killer diseases of those days,
like cholera, malaria, plague.
Soon the news of his medicines traveled, and he came to be known as the trusted ‘Daktar’
or doctor who came up with effective cures. And that is how his venture Dabur got its
name-derived from the Devanagri rendition of Daktar Burman. Dr.S.K.Burman set up
Dabur in 1884 to produce and dispense Ayurvedic medicines. Reaching out to a wide
mass of people who had no access to proper treatment. Dr.Burman’s commitment and
ceaseless effprts resulted in the company growing from a fledging medicine manufacturer
in a small Calcutta house, to a household name that once evokes trust and reliability.
COMPANY’S HISTORY
1984 Birth of Dabur
1896 Setting up a manufacturing plan
1900 Ayurvedic medicines
1919 establishment of research laboratories
1920 Expands further
1936 Dabur India (Dr.S.K.Burman) Pvt. Ltd.
1972 Shift to Delhi
1979 Sahibabad factory / Dabur research foundation
1986 Public limited company
1992 Joint Venture with Agrolimen of Spain
1993 Cancer treatment
1994 Public issues
1995 Joint Ventures
1996 3 separate divisions
1997 Food division / Project STARS
1998 Professionals to manage the company
2000 turnover of Rs. 1000 crore
2003 Dabur emerges Pharma Business
2005 Dabur acquires Balsara
2006 Dabur announces bonus after 12years &
crosses $2 Bin Market Cap, adopts US GAAP
DABUR AT GLANCE
Dabur India Limited has marked its presence with some very significant
achievements and today commands a market leadership status. Our story of success is
based on dedication to nature, corporate and process hygiene, dynamic leadership and
commitment to our partners and stakeholders. The results of our policies and
initiatives speak for themselves.
Leading consumer goods company in India amongst turnover of Rs.1899.57
Crore ( FY02 )
2 major strategic business units (SBU) – Consumer Care Division (CCD)
and Consumer Health Division (CHD)
3 subsidiary Group Companies – Dabur food, Dabur Nepal and Dabur
International and 3 step down subsidiaries of Dabur International – Asian
Consumer Care in Bangladesh, African Consumer Care in Nigeria and
Dabur Egypt
13 Ultra modern manufacturing units spread around the globe
Products marketed in over 50 Countries
Wide and deep market penetration with 47 C&F agents, more than 5000
distributors and over 1.5 million retail outlets all over India
CCD, dealing with FMCG Products relating to Personal Care and Health Care
Leading brands –
Dabur – The Health Care Brand
Vatika – Personal Care Brand
Anmol – Value for Money Brand
Hajmola – Tasty Digestive Brand
Dabur Amla, Chyawanprash and Lal Dant Manjan with Rs.100 Crore
turnover each
Vatika Hair Oil & Shampoo the high growth brand
Strategic Positioning of honey as a food product, leading to market leadership
( over 40% ) in branded honey market.
Dabur Chyawanprash the largest selling Ayurvedic medicine with over 65%
market share.
Leader in herbal digestives with 90% market share of digestive tablets category.
Dabur Lal Tail tops baby massage with 35% of total share.
CHD ( Consumer Health Division ), dealing with classical Ayurvedic medicines
Has more than 250 products sold through prescriptions as well as over the
counter.
Major categories in traditional formulations include Proprietary Ayurvedic
medicines developed by Dabur include:
Nature care Isabgol
Madhuvaani
Trifgol
Division also works for promotion of Ayurveda through organized community
of traditional practitioners and developing fresh batches of students.
DABURS MAJOR STRATEGIC BUSINESS UNITS
Dabur has three major strategic business units (SBUs) namely:
Family products division with a share of in its total sales.
Dabur Ayurvedic specialties having a share of in its total sales.
Health care products with a share of in its total sales.
DABUR MAJOR STRATIC BUSINESS UNITS
Dabur has five major strategic business units (SBUs) namely:
Consumer Care products division with a share of 68% in its total sales.
Consumer health care products having a share of 7% in its total sales.
International product with a share of 13% of its total sales.
Food products with a share of 11% of its total sales.
Other products with a share of 1% of its total sales.
BOARD OF DIRECTORS
Mr. V.C Burman ChairmanDr. Anand Burman Vice PresidentMr. Pradeep Burman
DirectorMr. Amit Burman
DirectorMr. P.D Narang DirectorMr. Sunil Duggal
DirectorHH Maharaja Gaj Singh
DirectorMr. R.C Bhargava
DirectorMr. P.N Vijay
DirectorMr. Stuart Edward Purdy
DirectorDr. S Narayana Director
GM (finance) and company seceratary
Mr. Ashok Jain
AUDITORSM/s G.Basu & co.Charted Accountant
INTERNAL AUDITORSPrice Waterhouse
BANKERS
Punjab National Bank Standard Charted Bank HSBC Bank State Bank of India ABN Amro Bank Citibank NA United Bank of India HDFC Bank IDBI Bank
DABUR’S CORE VALUES
VISION“Dedicated to the health and well being of every household”
PRINCIPLESOWNERSHIP
This is our company. We accept personal responsibility and accountability to meet business needs.
PASSION FOR WINNING
We all are leaders in our area of responsibility, with a deep commitment to deliver results. We are determined to be the best at doing what matters most.
PEOPLE DEVELOPMENT
People are our most important asset. We add value through result driven training and we
encourage &reward excellence.
CONSUMER FOCUS
We have superior understanding of consumer needs and develop products to fulfill them better.
TEAM WORK
We work together on the principle of mutual trust & transparency in a boundary-less organization. We are intellectually honest in advocating proposals, including recognizing risks.
INNOVATION
Continuous innovation in products &processes is the basis of our success.
INTEGRITY
We are committed to the achievement of business success with integrity. We are honest with consumers, with business partners and with each other.
MILESTONE TO SUCCESS
Dabur India Ltd., made its beginnings with a small pharmacy, but has continued to learn
and grow to a commanding status in the industry. The company has gone a long way in
popularizing and making easily available a whole range of products based on the
traditional science of Ayurveda. And it has set very high standards in developing
products and processes that meet stringent quality norms. Also it grows even further,
Dabur will continue to mark up on major milestones along the way, setting the road for
others to follow.
1884 – Established by Dr.S.K.Burman at kolkata
1896 – First production unit established at Garhia
1919 – First R&D unit established
Early 1900s – Production of AYURVEDIC medicines
Dabur identifies nature-based Ayurvedic medicines as its area of specialization. It
is the first company to provide health care through scientifically tested and
automated production of formulations based on our traditional science.
1930 – Automation and upgradation of Ayurvedic products manufacturing
initiated
1940 – Personal care through Ayurveda
Dabur introduces Indian consumers to personal care through Ayurveda, with the
launch of Dabur Amla hair oil. So popular is the product that it becomes the
largest selling hair oil brand in India.
1949 – Launched Dabur Chyawanprash in tin pack
Widening the popularity and usage of traditional Ayurveda products continues.
The ancient restorative Chyawanprash is launched in packaged form, and
becomes the first branded Chyawanprash in India.
1957 – Computerization of operations initiated
1970 – Entered Oral Care & Digestive segment Addressing rural markets where
home made oral care is more Popular then multinational brands, Dabur
introduces Lal Dant Manjan. With this a conveniently packaged herbal tooth
powder is made available at affordable costs to the masses.
1972 – Shifts base to Delhi from Kolkata
1978 – Launches Hajmola tablet
Dabur continues to make innovative products based on traditional formulations
that can provide holistic care in our daily life. An Ayurvedic medicine used as a
digestive aid is branded and launched as the popular Hajmola tablet.
1979 – Dabur Research Foundation set up
1979 – Commercial production starts at Sahibabad, the most modern herbal
medicines plant at the time
1984 – Dabur completes 100 years
1988 – Launches pharmaceutical medicines
1989 – Care with fun
The Ayurvedic digestive formulation is converted into a children’s fun
product with the launch of Hajmola Candy. In an innovative move, a curative
products is converted to a confectionary item for wider for wider usage.
1994 – Comes out with first public issue
1994 – Enters oncology segment
1994 – Leadership in health care
Dabur establishes its leadership in health care as one of only
Two companies worldwide to launch the anti-cancer drug
Intaxel (Paclitaxel).
1996 – Enters foods business with the launch of Real Fruit juice.
1996 – Real blitzkrieg
Dabur captures the imagination of young Indian consumers with the launch of
Real Fruit Juices- a new concept in the Indian food market. The first local brand
of 100% pure natural fruit juices made to international standards, Real becomes
the fastest growing and largest selling brand in the country.
1998 – Burman family hands over management of the company to professionals.
2000 – The 1,000 Crore mark
Dabur establishes its market leadership status by staging a turnover of Rs.1000
Crores. Across a span of over a 100 years, Dabur has grown from a small
beginning based on traditional health care. To a commanding position amongst an
august league of large corporate businesses.
2001 – Super specialty drugs
With the setting up of Dabur Oncology’s sterile cytotoxic facility, the company
gains entry into the highly specialized area of cancer therapy. The state-of-art
plant and laboratory plant in the UK have approval from the MCA of UK. They
follow FDA guidelines for production of drugs specifically for European and
American markets.
2002 – Dabur records sales of Rs.1163.19 crore on a net profit of Rs.64.4 crore.
2003 – Dabur demerges Pharmacueitcals business
Maintaining global standards
As a reflection of its constant efforts at achieving superior quality standards,
Dabur became the first Ayurvedic products company to get ISO 9002
Certification.
Science for nature
Reinforcing its commitment to nature and its conservation, Dabur Nepal, a
subsidiary of Dabur India, has set up fully automated greenhouses in Nepal. This
scientific Landmark helps to produce sapling of rare medicinal plants that are
under threat of extinction due to ecological degradation.
2005 – Dabur acquires Balsara
2006 – Dabur announces bonus after 12 years
2007 – Dabur crosses $2 bin market cap, adopts US GAAP.
2008 – Dabur crosses $4 bin market cap, adopts US GAAP.
DABUR WORLDWIDE
Dabur’s mission on popularizing a natural lifestyle transcends national boundaries. Today
there is global awareness of alternative medicine, nature-based and holistic lifestyles and
an interest in herbal products. Dabur has been in the forefront of popularizing this
alternative way of life, marketing its products in more than 50 countries all over the
world.
Our products world wide
We have spread ourselves wide and deep to be in close touch with our overseas
consumers.
Offices and representatives in Europe, America, Africa.
A special health care and personal care range successfully selling in markets of
the Middle East, Far East and several European Countries.
Inroads into European and American markets that have good potential to
resurgence of the back-to-nature movement.
Export of Active Pharmaceutical Ingredients (APIs), manufactured under strict
international quality benchmarks, to Europe, Latin America, Africa, and other
Asian countries.
Export of food and textile grade natural gums, extracted from traditional plant
sources.
Partnerships and Production
Strategic partnerships with leading multinational food and health care
companies to introduce innovations in products and services.
Manufacturing facilities spread across 3 overseas location to optimize production
by utilizing local resources and the most modern technology available.
ACCOLADES
February 23, 2006 : Dabur India the first company to achieve Rs.500 crore
manufacturing milestone in Uttarnchal. It is the largest employer in that region.
January 16, 2006 : Dabur bags ICSI National Award for excellence in corporate
governance.
September 26, 2005 : Bagged the UHYOG RATNA award for Dabur’s commendable
contributions for economic development in the state of Himachal Pradesh.
July 08, 2005 : Won UDYOG RATNA award for Dabur’s immense contributions to the
states economic development by the government of Uttaranchal.
2003 : Dabur India limited gets crisil corporate governance and value creation rating.
2002 : Dabur Nepal Pvt. Ltd. Gets certificate of hazard analysis and critical control point
(HACCP) plan verification for manufacturing of fruit juices and tomato puree.
2001 : Dabur gets certificate of good manufacturing practices to manufacture Ayurveda,
siddha, or unani drugs.
1995 : Dabur becomes the first Ayurvedic products company in India to get ISO 9002
Certification.
CORPORATE GOVERNANCE
Good corporate governance and transparency in action of the management is key to a
strong bond of trust with company’s stakeholder. Dabur understands the importance of
good governance and hence constantly avoided an arbitrary decision making process. Our
initiatives towards this end include:
Professionalisation of the Board
Lean and active Board (reduced from 16 to 10 members)
Less number of promoters on the Board
More professionals and independent Directors for better management
Governed through Board committees for Audit, Remuneration, Shareholder
Grievance, Compensation and Nominations
Meets all corporate Governance code requirements of SEBI
CORPORATE CITIZENSHIP
When our Founder Dr.S.K.Burman first established Dabur, he had a vision the saw
beyond the profit motive. In his words, “What is that life worth which cannot bring
comfort to others”. This idle of a humane and equitable society led to initiatives taken
to give back some part of what Dabur has gained from the community.
Our major initiatives in the Social sector include:
Establishment of the Sustainable Development Society, or Sundesh, in 1993 a
non-profit organization to promote research and welfare activities in rural
areas.
Promoting health and hygiene amongst the underpriviledged through the
Chunni Lal Medical Trust.
Organizing the Plant and Life Program for school children to create
environmental awareness amongst young minds.
OUR COMMITMENT TO THE ENVIRONMENT
Ancient wisdom of conversation
From times immemorial, Indian sages and men of wisdom have understood and
appreciate the value of nature and its conservation. Our ancestors recognized that if we
grabbed from nature beyond what was healthy, it would lead to all round degradation,
and even the extinction of humanity. That is why nature was sanctified and worshipped in
the form of gods and goddesses.
Dabur upholds the tradition
Today, we at Dabur also value nature’s bounty. Without the fruits of nature, the vision of
Dabur would never have been fulfilled. And that is the reason for our unfailing
commitment to ecological conservation and regeneration. We would like to follow the
principles of our ancient texts, which says:
“Delhi dadamite” – “you give me, and I give you”.
IT INITIATIVES
In Dabur India Limited knowledge and technology are key resources, which have helped
the company achieve higher levels of excellence and efficiency. Towards this overall
goal of technology-driven performance, Dabur is utilizing Information Technology in a
big way. This will help in integrating a vast distribution system spread all over India and
across the world. It will also cut down costs and increase profitability.
Our major initiatives Implementation of Manufacturing process ERP for fronted operations.
Supply chain and working capital management to control manufacturing,
distribution planning, invoicing, receivables, banking and schemes.
Integration with Baan (backend ERP) initiated last year in production units and
head office.
Intranet based Employee Management System for payroll and HRIS.
Future Challenges Target of end-to-end networking by end of financial year 2002-03.
Extending the Supply Chain Automation to both ends, in secondary sales and e-
Procurement.
Launch of e-Procurement using Free Markets’ online bidding engine.
Vendor managed inventories for fast moving raw materials and packaging
materials, and outsourced manufacturers’ systems to be integrated with the BaaN
ERP system.
STRATEGIC INTENT
We intended to significantly accelerate profitable growth. To do this we will:
Focus on growing our core brands across categories, reaching out to a new
geographies, within and outside India, and improve operational efficiencies by
leveraging technology.
Be the preferred company to meet the health and personal grooming needs of our
target consumers with safe, efficacious, natural solutions by synthesizing our deep
knowledge of ayurveda and herbs with modern science.
Provide our consumers with innovative products within easy reach.
Build a platform to enable Dabur to become a global ayurvedic leader.
Be a professionally managed employer of choice, attracting, developing and
retaining quality personnel.
Be responsible citizens with a commitment to environmental protection.
Provide superior returns, relative to our peer group, to our shareholders
HEALTH CARE PRODUCTS
Dabur Chyacanprash Dabur Glucose D
Hajmola Mast MasalaAnardanaHajmola
Hajmola CandyPudin Hara(liquid and pearl)Pudin hara GDabur Hingoli
Dabur Lal TailDabur baby
Olive OilDabur Janam
Ghutti
Shilajit GoldNature CareSat IsabgolShilajit
Itch GuardRing GuardBack- AidShankha PushpiDabur BalmSarbyna strong
Amla Hair OilAmla Lite Hair OilVatika Hair OilAnmol Sarson
Amla
Vatika Henna Conditioning Shampoo
Vatika Anti-Dandruff ShampooAnmol Natural Shine Shampoo
Anmol Silky Black ShampooVatika Root Strengthening
Shampoo
GulabriVatika Fairness Face
PackVatika Saffron Glow
Soap With Sandal
Dabur Red GelDabur Red ToothpasteDabur Lal Dant ManjanDabur Binaca ToothpasteBabool ToothpasteMiswak ToothpastePromise Tooth paste
Ayurvedic Products
DashmularisthAshokaristhaLauhasavaMahanarayan TailJuritap
MadhuvaniLavan Bhaskar Churan
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL – CONCEPTUAL VIEW
“Working Capital, also called net current assets, is the excess of current assets
over current liabilities. All organizations have to carry working capital in one form or
another. The efficient management of working capital is important from the point of
view of both liquidity and profitability. Poor management of working capital means
that funds are unnecessary tied up in idle assets hence reducing the ability to invest in
productive assets such as a plant and machinery, so affecting the profitability”.
Working capital management may be defined as the management of firm’s
sources and uses of working capital in order to maximize the wealth of the shareholders.
The proper working capital management requires both the medium term planning(say
upto three years) and also the immediate adaptations to changes arising due to
fluctuations in operating levels of the firm.
CONCEPT OF WORKING CAPITAL
1) GROS WORKING CAPITAL (TOTAL WORKING CAPITAL) :
The gross working capital refers to the firm’s investment in all the current assets
taken together. The total investments in all the individual current assets is the
gross working capital. For example, if a firm has a cash balance of Rs.50,000 ,
debtor of Rs.70,000 and inventory of raw materials and finished goods has been
assessed at Rs.1,00,000 , then the gross working capital of the firm is
Rs.2,20,000(i.e. Rs.50,000 + Rs.70,000 + Rs.1,00,000).
2)NET WORTH CAPITAL : The term working capital may be defined as the
access of total current assets over total current liabilities. The current liabilities refers to
those liabilities which are payable with in a period of one year. The extent, to which the
payments of these current liabilities are delayed, the firm gets the availability of funds for
that period. So, a part of the funds required to maintain current assets is provided by
current liabilities and the firm will be required to invest the funds in only those current
assets which are not financed by the current liabilities.
The gross concept is sometimes preferred to the net concept of working capital for the
following reasons:
a) It enables the enterprise to provide correct amount of working capital at the right
time.
b) Every management is more interested in the total current assets with which it has
to operate than the sources from where it is made available.
c) The gross concept takes into consideration the fact that every increase in the funds
of the enterprise would increase its working capital.
d) The gross concept of working capital is more useful in determining the rate of
return on investments in working capital.
The net working capital concept, however, is also important for the following reasons:
a) It is a qualitative concept which indicates the firm’s ability to meet its operating
expenses and short-term liabilities.
b) It indicates the margin of protection available to the short-term creditors, i.e., the
excess of current assets over current liabilities.
c) It is an indicator of the financial soundness of an enterprise.
d) It suggests the need for financing a part of the working capital requirements out
of permanent sources of funds.
COMPONENTS OF WORKING CAPITAL
A large amount of working capital remains tied up in various working capital
components like :
a) Raw materials
b) Work-in-progress
c) Finished goods
d) Receivables etc.
An industry has to hold raw materials and work-in-progress to maintain production flow
and finished goods to meet the timely needs of its customers. The working capital
requirement is, therefore, directly linked with the level of inventory and the time taken by
the purchaser of the goods to pay the amount.
1) RAW MATERIALS:
The stocking of raw materials is linked to a number of factors like level of production,
location of resources of supply and availability position, storing capacity of godowns,
seasonal availability and price etc.
2) WORK-IN-PROGRESS:Every industry is essentially required to carry some stocks at various stages which lie as
semi finished goods at various stages of production.
3)FINISHED GOODS:
The quantum and value of finished goods depends upon the type and variety of products.
This also depends upon the lot sizes, which are required to be delivered, and availability
of inspection staff. The seasonal effect in some products like fans, coolers, refrigeration,
air conditioner etc, can also force to carry a higher level of finished goods inventory in
the off-season.
4) RECEIVABLES:
The amount of money outstanding at a particular point of time representing realization
against sales is termed as receivables. These receivables are influenced by a number of
factors like credit policy, market strategy, pricing policy, type of buyers, credit allowed
by companies etc.
CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified into two ways:
a) on the basis of concept
b) on the basis of time
On the basis of concept, working capital is classified as gross working capital and net
working capital. This classification is important from the point of view of the financial
manager. On the basis of time, working capital may be classified as:
a) Permanent or fixed working capital.
b) Temporary or variable working capital.
1) Permanent or fixed working capital:It is the minimum amount which is required to ensure effective utilization of fixed
facilities and for maintaining the circulation of current assets. There is always a minimum
level of current assets, which is continuously required by enterprise to carry out its
normal business operations. For example, every firm has to maintain a minimum level of
raw materials, work-in-progress, finished goods and cash balances.
2) Temporary or variable working capitalIt is the amount of working capital which is required to meet the seasonal demands and
some special exigencies. Variable working capital can be further classified as seasonal
working capital and special working capital. Most of the enterprise have to provide
additional working capital to meet the seasonal and special needs.
PRINCIPLES OF WORKING CAPITAL
The basic objective of working capital management is to avoid over investment or under
investment in current assets, as both the extremes involve the adverse consequences.
Over investment in current assets may lead to reduced profitability due to cost of block
funds, extra storing space required, extra efforts for follow up, possibility of malpractice
etc.
The objective of working capital management is to ensure
optimum investment in current assets. In other words, working capital management
intends to ensure that the investment in current assets is reduced to the minimum possible
extent. However, the normal of the organization should not be affected adversely. If the
normal operations of the organizations are affected adversely, reducing the investment in
current assets is fruitless.
NEED OR OBJECTS OF WORKING CAPITAL
Working capital is needed for the following purposes:
1) For the purchase of raw materials, components and spares.
2) To pay salaries and wages.
3) To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses etc.
4) To meet the selling costs as packaging ,advertising etc.
5) To provide credit facilities to the customers.
6) To maintain the inventories of raw material, work-in-progress, stores and spares
and finished stock.
IMPORTANCE OF WORKING CAPITAL
Working capital is the lifeblood and nerve center of a business. Just as circulation of
blood essential in the human body for maintaining life, working capital is very essential
to maintain the smooth running of a business. No business can run successfully without
an adequate amount of working capital. The main advantages of maintaining adequate
amount of working capital are as follows:
1) Solvency of the business:Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.
DEBTOR
CASH
RAW MATERIALS
FINISHED GOODS
WORK IN PROGRESS
2) Goodwill:Sufficient working capital enables a business concern to make prompt payments
and hence help in creating and maintaining goodwill.
3) Easy loans:A concern having adequate working capital, high solvency and good credit
standing can arrange loans from banks and other on easy and favorable terms.
4) Cash discounts:Adequate working capital is also enables a concern to avail cash discounts in the
purchases and hence it reduces costs.
5) Regular supply of raw material:Sufficient working capital ensures regular supply of raw materials and continuous
production.
6) Regular payment of salaries, wages and other day-to-day commitments:A company which has ample working capital can make regular payments of
salaries, wages, and other day-to-day commitments which raise the morale of its
employees, increases their efficiency, reduces wastages and costs and enhances
production and profits.
7) Ability of face crisis:Adequate working capital enables a concern to face business crises in
emergencies such as depression because during such periods, generally, there is
much pressure on working capital.
8) High Morale:Adequate of working capital creates an enviroment of security, confidence, high
morale, and creates overall efficiency in business.
9) Quick and regular return on investment:Every investor wants a quick and regular return on his investments. Sufficiency of
working capital enables a concern to pay quick and regular dividends to its
investors, as there may not be much pressure to plough back profits. This gains
the confidence of its investors and creates a favorable market to raise additional
funds in the future.
FACTORS DETERMINING WORKING CAPITAL REQUIREMENT
The working capital needs of a firm are determined and influenced by various factors. A
wide variety of considerations mat effect the quantum of working capital required and
these considerations may vary from time to time. Following are some of the factors
which are relevant in determining the working capital needs of the firm.
1) Basic nature of business :The working capital requirement is closely related to the nature of the firm. In case of
FLEX ENGINEERING LTD., a manufacturing company, different types of
production processes are performed. One unit of raw material introduced in the
production schedule may take a long period before it is available as finished goods for
sale. Funds are blocked not only in raw materials but also in labor expenses and
overheads at every stage of production. The operating cycle is usually a longer one
and sales are made generally on credit terms. So, there is always a requirement of
substantial amount of working capital.
2)Business cycle fluctuation :Different phases of business cycle i.e. boom, recession, recovery etc. also affect the
working capital requirement. In case of recession period there is usually a dullness in
business activities and there will be an opposite effect on the level of working capital
requirement. There will be fall in inventories and cash requirement etc.
3) Seasonal operations :If a firm operating in goods and services having seasonal fluctuations in demand, then
the working capital requirement will also fluctuate with every change. If the
operations are smooth and even throughout the year the working capital requirement
will be constant and will not be affected by the seasonal factors.
2) Market Competitiveness:It has an important bearing on the working capital needs of firm. In view of
competitive conditions prevailing in the market, the firm may have to offer liberal
credit terms to the customer resulting in higher debtors. On the other hand, a
monopolistic firm may not require a large working capital. It may ask the customers
to pay in advance or to wait for some time after placing the order.
3) Credit Policy :Credit policy means the totality of terms and conditions on which goods are sold and
purchased. A firm has to interact with two types of credit policies at a time. One, the
credit policy of the supplier of raw materials, goods etc., and two, the credit policy
relating to credit which it extends to its customers. In both the cases, however, the
firm while deciding the credit policy, has to take care of the credit policy of the
market. For example, a firm might purchasing goods and services on credit terms but
selling goods only for cash. The working capital requirement of this firm will be
lower than that of a firm which is purchasing cash but has to sell on credit basis.
4) Supply ConditionsThe time taken by a supplier of raw materials, goods etc. after placing an order, also
determines the working capital requirement. If goods are received as soon as ordered
or in a short period after placing an order, then the purchaser will not like to maintain
a high level of inventory of that good. Otherwise, larger inventories should be kept
e.g. in case of imported goods.
4) Nature of Products :Whether the products manufactured by the industry are influenced by seasonal factors
e.g. sugar, tea, jute, vegetable oil, fans, refrigerators etc.
5) Operating Cycle :Time taken from the stage when cash is put into the business upto the stage when
cash is realized from sale of finished goods.
Thus, working capital requirement of a firm is determined
by a host of factors. Every consideration is to be weighted relatively to determine the
working capital requirement. Further, the determination of working capital
requirement is not once a while exercise, rather a continuous review must be made in
order to assess the working capital requirement in the changing situation.
NEGETIVE WORKING CAPITAL
ADVANTAGE:
A negative working is a sign of managerial efficiency in a business with low inventory
and accounts receivables ( which means they operate on an strictly cash basis ).
Dabur India Limited has a negative working capital Rs. crores in the financial year
200 – 200 which shows that the company is extremely good in controlling its cash flows.
It has efficient financial management through which has it enabled in bringing down the
working capital figure to a negative one.
LIMITATIONS:
In any other situation, it is a sign a company may be facing bankruptcy or serious
financial trouble.
So having a negative working capital may prove a boon or bane.
FINANCING OF WORKING CAPITAL
The working capital requirements of a concern can be classified as:
(a) Permanent or Fixed working capital requirements.
(b) Temporary or Variable working capital requirements.
The various sources for the financing of working capital are as follows:
SOURCES OF WORKING CAPITAL
Permanent or Fixed Temporary or Variable 1)Debentures 1)Commercial Banks 2)Public deposits 2)Indigenous Banks 3)Ploughing-back of 3)Trade Creditors profits 4)Installment Credit 4)Loans from financial 5)Advances
institution 6)Factoring 5)Shares 7)Accrued Expenses
8)Commercial Paper
Permanent or fixed working capital requirment Shares:
A company can issue various types of shares as equity shares, preference shares and
deferred shares. According to the Companies Act 1956, however, a public company
cannot issue deferred shares. Preference shares carry preferential right in respect of
dividend at a fixed rate and in regard to the repayment of capital at the time of
winding up the company. Equity shares do not have any fixed commitment charge
and the dividend on these shares is to be paid subject to availability of sufficient
profits.
Debentures:A debenture is an instrument issued by the company acknowledging its debt to its
holder. The debenture holder are the creditor of the company fixed rate of interest is
paid on debentures. The interest on debentures is a charge against profit and loss
account.
Public Deposits: They are the fixed deposits accepted by a business enterprise directly
from the public. This source of raising short term and medium term finance was very
popular in the absence of bank facilities.
Ploughing Back of profits:It means the reinvestments by concern of its surplus earnings in the business. It is most
suitable for an established firm for its expansion, modernization and replacement etc. It is
the cheapest rather cost-free source of finance, need not to keep securities, no dilution of
control, stable dividend policy and confidence of the public.
Loans from financial institution:This source of finance is more suitable to meet the medium term demands of working
capital. Interest is charged on such loans at a fixed rate and the amount of the loan is to be
repaid by way of installments in a number of years.
Tempoary or variable working capital requirment
Indigenous Bankers:Private money-lenders and other country bankers used to be the only source of finance
prior to the establishment of commercial banks. They used charge very high rates of
interest and exploited the customers to the largest extent possible.
Trade Credit:It refers to the credit extended by the suppliers of goods in the normal course of business.
The trade credit arrangement of a firm with its suppliers in an important source of short-
term finance. The credit worthiness of a firm and the confidence of its suppliers are the
main basis of securing trade credit.
Installment Credit:This is another method for short-term financing by which the assets are purchase and the
possession of the goods is taken immediately but a payment is made in installments over
a predetermined period of time. Generally interest is charge on unpaid price.
Advances:Some business house get advances from their customers against the order and this is the
source of short-term finance for them. It is cheap source of finance and in order to
minimize their investment in working capital. Some firm having long production cycle
specially the firm manufacturing industrial products preferred to take advances from
customers.
Accrued Expenses:The expenses which have been incurred but not yet due and hence not yet paid. They
simply represent a liability that a firm has to pay for the services already rendered by the
employees. Example – wages, salary etc.
Deferred Income:These are the incomes received in advance before supplying goods and services. They
represent funds received by a firm for which it has to supply goods or services in future.
These funds increase the liquidity of firm and constitute important source of working
capital. However firms having great demand for its production and service and good
reputation in the market can demand deferred income.
Factoring:A factor is a financial institution which offer services relating to management that arising
out of credit sales.
Features of factoring
1) The factor selects the account of the client that would be handled by it establishes
along with the client, the credit limit applicable to the selected account.
2) The factor assumes responsibility for collecting the debts of account handed by it. For
each discount the factor pays to the client at the end of the credit period or when account
is collected.
3) The factor advances money to the client against the yet not collected amount and
advances up to 70 to 80% of the face value.
4) Factoring is done on two bases:-
i) Recourse – when the credit risk is born by the client.
ii) Non-recourse – when the credit risk is born by factor.
5) Besides interest or advances against the debt the factor charges a commission which
may be 1% or 2% of the face value.
Advantage 1) Factoring ensures a definite pattern of cash inflows from credit sales.
2) Contineous factoring may eliminate the need of separate collection department in the
business.
Disadvantage1) The cost of factoring is much higher then other short-term borrowing.
2) Factoring of debt may be view or perceived as a sign of financial weakness.
Commercial Banks:They the most important source of working capital or short-term capital. The major
portion of working capital loans are provided by commercial banks. The different forms
in which firms acquire credit or working capital are:-
i. Loan
ii. Cash credit
iii. Overdraft
iv. Letter credit
v. Purchasing or discounting of bill
Loans:
When a bank make an advance payment in lumpsum amount against sum security it is
called loan. In case of a loan a specified amount is sentioned by the bank to the customer.
This entire amount is paid to the borrow in cash or credit to his account. Commercial
banks generally provide short-term loans up to one year for meeting working capital
requirement. But now short-term financing by the bank exceeded from one year.
Cash Credit:
A cash credit is an arrangement by which bank allows his customer to borrow money up
to a certain limit against tangible securities or garranttes. The customer can withdraw
from the cash credit limit according to limit sentions. He can also deposit the surplus
amount he has. The interest is charged on the daily amount in the account.
Overdraft:
It means an agreement with the bank by which a current account holder is allow to
withdraw more than the balance to his credit up to a certain limit. There are no restriction
for operation of overdraft limit. The interest is charged daily on overdrawn balances.
Letter of Credit:
A letter of credit is an undertaking by the bank to honor the obligation of customer up to
a specific amount, should the customer failed to do so, it help the customer to obtain
credit from the supplier that their bills up to a specific amount would be honored. If the
customer fails to pay the amount on the due date to its supplier, the bank assumes the
liability of its customer for the purchase made under letter of credit.
Purchasing and Discounting of Bills:
It is the most important form in which bank lends money without collateral security. This
seller draws a bill of exchange on the buyer of goods on credit. The bank purchase bills
payable on demand and credit the customer’s account with amount of bill less discount.
At the maturity of bill bank presents the bill to its acceptor for payment. In case the bill
discounted is dishonored, the bank reggogs the full amount of bill from the customer
along with the expenses incurred by it in this connection.
In the Indian circumstances, banks play a very important in financing the
working capital requirement of the organizations. We will consider the bank as a source
of financing the working capital requirement of the organization under the following
heads:
What should be the amount of assistance?
What should be the form in which working capital assistance is extended?
What security should be obtained for working capital assistance?
What re the various applicable regulations to be considered by the banks while
extending the working capital assistance?
DIL’S Bankers include the following:
Punjab National Bank
Standard chartered Bank ltd.
Hong Kong and Shanghai Banking Corporation Ltd.
State Bank of India
HDFC Bank
IDBI Bank
Citibank
Commercial Papers:It includes unsecured promissory note issued by firm to raise short-term funds but only
large companies with their high credit rating and sound financial health can issue
commercial papers. It can help to raise short-term fund. For issuing commercial paper the
company should fulfill certain eligibility criteria:
i. It should be listed in stock exchange.
ii. Its network should be atleast 10crore.
iii. The maximum permissible finance of 25crore not exceeding 30% of working
capital.
iv. Who can invest in Commercial Papers:
Individual
Banks
Corporate bodies incorporated in India
Unincorporated bodies
Non-resident Indians
Foreign institutional investors
CASH MANAGEMENT
Cash is one of the current asset of a business. It is needed at all the times to keep the
business going. A business concerned should always keep sufficient cash for meeting its
obligations. Any shortage of cash will hamper the operations a concern and any excess of
it will be unproductive. For some person cash means only money in the form of currency
or cash in hand and cash at bank. Cash itself does not produce goods and services. It is
used as a medium to acquire other assets. It is the other assets, which are used in
manufacture of goods and services.
MOTIVES FOR HOLDING CASH
1) Transaction motive: A firm needs cash for making transactions in the day to day
operations. The cash is needed to make a purchase, pay expenses, taxes, dividend etc.
2) Precautionary motive : A firm is required to keep cash for meeting various
contingencies. Though cash inflows and cash outflows are anticipated but there may be
variations in these estimates. For example – a debtor who was to pay after 7 days may
inform his inability to pay; on the other hand a supplier who used to give credit for 15
days or may not have to stock to supply or he may not be in a position to give credit at
present. In these situations, he will need cash to keep his production running.
3) Speculative motive : Speculative motive relates to holding of cash for investing in
profitable opportunities as and when they arise. Such opportunities donot come in a
regular manner. These opportunities cannot be scientifically predicted out only
conjectures can be made about their occurance.
The entire exercise on working capital management is for the purpose of preventing cash
being kept idle within the firm and in the process, losing opportunities of earning a return
and /or incurring additional cost in the process of converting cash into other form of
assets, such as inventories and accounts receivable. While there is need to have a certain
amount of cash in order to have the ability to settle transactions promptly on the due
dates, keeping more cash than what is required would mean loss of opportunities to earn a
return. If however, the cash kept within the firm has come from borrowings, then the
company will have to pay interest charges for the money even though it is kept idle.
Therefore, cash management is an important and integral part of working capital
management. In order to keep only a limited amount of cash, policies with regard to
safety stock (of cash) as well as the quantum of cash requirement will have to be
formulated. Speeding up collections too, helps in the process. One important technique
that is highly useful this purpose is the cash budget.
RECEIVABLES MANAGEMENT
Trade credit arises when a firm sells its product or services on credit and does not
receive cash immediately. A firm grants trade credit to protect its sales from competitors
and to attract potential customers to buy its products at favorable terms. Accounts
receivable arise due to credit sales affected by the firm. While it might appear advisable
to sell only against cash, conditions in the market like a highly competitive one, might
compel a company to give credit in order to affect sales. Moreover, extending credit often
results in higher sales and in higher profits. In view of this, there is a need for a firm to
evolve a suitable credit policy and credit terms.
There is also need for effective co-ordinate between the managers who give credit
and those who collect credit. Though practices vary among firms, normally it is the
marketing department which extends credit and financial department which is held
responsible for collecting the credit so extended. The marketing managers in order to
further their sales targets, may not carefully adhere to the policies given by the firm and
might leniently extend credit. This makes the job of the collecting officials from the
finance department very difficult. If the collection is too strict, the firm may lose valuable
sales and if they become to lenient, serious problems may arise due to the loss of liquidity
and increase in bad debts. Responsibilities are often not properly allocated leading to
constant friction between marketing and finance managers.
There is also a tendency or a reluctance to write off bad debts and to continuously carry
them in the books of accounts as amount receivable. It is necessary to carefully examine
each one of the accounts and objectively verify whether they are realizable or not. For
this purpose, a technique known as “aging schedule or aging analysis” is carried out.
This is a tabulation of receivables according to the length of time they have been
outstanding. Take for example a firm which is willing to give credit for a period of 30
days, receivables within 90 days and receivables between 90-120 days and beyond.
A method which is often employed for quicker collection of receivables is to offer a
discount. The firm that offers 30 days credit, the buyer pays 1 percent if payment is made
within 10 days. In other words, for paying within 10 days, the buyer pays less then the
amount billed and for paying between the 11th and 13th day, he pays the full price. The
benefit to the buyer will work out to 18 percent (360/20 *100). If operating costs to the
company are too higher or earning opportunities on the money are greater than 18
percent, extending discount at the rate is indicated, some of the large clients who may not
settle accounts within 10 days, often demand this discount. If this is not acceded to, the
firm might be subjected to the displeasure of its large clients. Thus at times, giving a
discount instead of being helpful to the source of friction between the firm and its clients.
INVENTORY MANAGEMENT
It is often said “when you need money, look to your inventories
before you look to your bankers”. Inventories constitute the most
significant part of current assets of the majority of companies in India. On an
average, inventories constitute approximately 60% of current assets in public
limited companies in India.
Inventories are the stock of products a company is manufacturing for
sale and components that make up the product. Inventories may be in three
forms:
1) Raw materials : These are the materials acquired from a supplier that
are used in the manufacture of goods.
2) Work in progress : Work in progress inventories are semi
manufactured products. They represent products that need moreover
work before they become finished products for sale.
3) Finished goods : Finished goods inventories are the completely
manufactured products, which are awaiting sale.
A company should maintain adequate stock of materials for a continuous supply of the factory for an uninterrupted production. Now a days, many large manufacturers operate on just-in –time(JIT) basis whereby all the components to be assembled on a particular day, arrive at the factory early that morning, no earlier- no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize
stock holding and virtually eliminate the risk of obsolete or damaged stock. Because JIT
manufacturers hold stock for a very short time, they are able to conserve substantial cash.
JIT is a good model to strive for as it embraces all the principles of prudent stock
management.
The key issue for a business is to identify the fast and slow movers with the
objectives of establishing optimum stock levels for each category and, thereby, minimize
the cash tied up in stocks.
Factors to be considered when determining optimum stock levels include:
What are the projected sales of each product?
How widely available are raw materials, components, etc.?
How long does it take for delivery by suppliers?
Can you remove slow movers from your product range without compromising
best sellers? Stock sitting on shelves for long periods of time ties up money,
which is not working for you.
For better stock control, a business concern should take the following steps:
Review the effectiveness of existing purchasing and inventory system.
Know the stock turn for all major items of inventory.
Apply tight controls to the significant few items and simplify controls for the
trivial many.
Sell off outdated or slow moving merchandise- it gets more difficult to sell the
longer you keep it.
Consider having part of your product outsourced to another manufacturer rather
then make it yourself.
Review your security procedures to ensure that no stock “ is going out the
backdoor!”.
Higher than necessary stock levels tie up cash and cost in insurance.
Accommodation cost and interest charges.
ADVANTAGES AND DISADVANTAGES OF SHORT-TERM FINANCING
ADVANTAGES:
Speed: Short-term loan can be obtain much faster than long-term credit restrictive and if
the firm’s business seasonal, it may not want to commit itself to long-term debt for three
reasons:
i. Floating costs are higher for long-term than short-term debt.
ii. Repayment penalties on long-term debt can be expensive.
iii. Long-term loan agreements contain provisions, which constrain the firm’s future
actions.
DISADVANTAGES:
Cost: Interest rates are generally lower on short-term and long-term debt.
Risk: Short-term financing is at disadvantage to long-term, because of the extra risk that
it carries
i. The lender can demand payment on short notice.
ii. The cost of the loan will increase if interest rates increase.
SOURCES OF WORKING CAPITAL
1) Operations
The operations of the business generate revenues and entail expenses.
Revenues augment working capital and expenses, other than depreciation
and other amortizations, decrease working capital. Hence, working capital
increase on account operations is equal to net income + depreciation.
2) Issue of Share Capital
An issue of share capital results in an inflow of working capital because it brings cash
inflow or an increase in short-term receivables.
3) Long term borrowingsWhen a long-term loan is taken, there is an increase in working capital because of cash
inflow. A short-term loan, however, does
not effect on working capital. A short-term increases a current asset(cash) and a current
liability(short-term loan) by the same amount, leaving the working capital position
unchanged.
4) Sales of Non-current assetsWhen a fixed asset or a long-term investment or any other non-current asset is sold there
is capital inflow represented by cash or short-term receivables.
USES OF WORKING CAPITAL
1) Payment of DividendThe transaction results in cash (working capital) outflow.
2) Repayment of long-term liabilityThe repayment of long-term loans, debentures and any other long-term liabilities involves cash outflow and hence a use of working capital. The repayment of working liability, it may be noted does not effect the working capital position because it entails an equal reduction in current liabilities and current assets.
3) Purchase of Non-Current AssetsWhen a firm purchases fixed assets, long-term investments or any other non-current assets, it pay cash or incur a short-term debt. Hence, working capital decreases.
Figure below shows the sources and uses of working capital
SOURCES USES
OperationsIssue of share capital
Long-Term Borrowings
Sale of Non-Current assets
Working Capital pool
DividendsRepayment of Long-Term Borrowings
Purchase of Non-Current Assets
COMPARISON OF DABUR’S WORKING CAPITAL WITH OTHER COMPANIES
Company’sName
FinancialYear
CurrentAssets
CurrentLiabilities
Networkingcapital
Dabur India Ltd.
2007-08 471 436 35
Britannia Industries
2007-08 2399.61 2356.68 42.93
HindustanLever Ltd.
2007-08 38878.80 39802.49 -1013.69
Marico Industries
2007-08 1917.25 1066.70 851.11
CadburyIndia Ltd.
2007-08 2175.90 1352.40 823.50
Nestle India Ltd.
2007-08 5512.44 8100.8 -2588.36
WORKING CAPITAL OF DABUR INDIA LIMITED
F/Y 2003 2004 2005 2006 2007 2008
Workingcapital
2300.77 2384.94 1867.31 -16.89 -70.25 -22.95
The above chart displays the working capital of Dabur India Limited. Dabur has been constantly
reducing its working capital and in the year 2003-04, a steep decline has taken place in the
company’s working capital resulting in the company’s working capital going negetive.
This has proved the managerial efficiency at Dabur at its finances. The company has reduced its
payment period from 39 days to a negative of five days, which shows that the company has
enough of funds available on credit for its suppliers, and is collecting money from its debtor at a
fast pace to avoid much of baddebts.
WORKING CAPITAL OF CADBURY INDIA LTD.
F/Y 2000 2001 2002 2003
WorkingCapital 941.34 1079.83 1307.7 823.5
The above graph displays the working capital for various year of Cadbury India Limited. The
working capital of this company has been constantly increases except for the year 2002-03 where
it has declined. This shows that Cadbury India Limited has lot of cash blocked in the form of
current assets. Hence because of this the working capital of company is positive and high.
-
The company needs to strengthen its cash policies and reduce its money blocked in the current
assets. Also, by decreasing the payment period the company can improve upon the working
capital.
WORKING CAPITAL OF HINDUSTAN LEVER LTD
F/Y 1999 2000 2001 2002 2003
WorkingCapital 1872.48 -3733.77 1714.39 300.96 -1013.69
The above graph displays the working capital scenario of Hindustan Lever Limited, one of
the largest FMCG company in the world.
The company has been having an enormous cash for planning out its future investments. The
working capital has been almost nil and negative since the past few years, showing that the
company has an excellent and well planned finances.
A company with negative working capital has a faster period and a slower payment period.
WORKING CAPITAL OF BRITANNIA INDUSTRIES
F/Y 2000 2001 2002 2003 2004
WorkingCapital 51.57 256.96 592.21 746.65 42.03
Britannia Industries Ltd. Working capital was increasing set up from 2000 to 2003, when
finally the company realized it had to do something to control its blockage of free cash in the
current assets.
Thereby, though its managerial skills and efficient functioning the company reduced its
working capital from Rs. 746.65 crores in 2002-03 to Rs. 42.03 crores in 2003-04, a decline
of almost 94%.
WORKING CAPITAL OF NESTLE INDIA LTD.
F/Y 2000 2001 2002 2003 2004
WorkingCapital -745.12 -317.74 -743.81 -1388.53 -2588.36
The above graph displays the working capital of Nestle India Limited, which has been
negative 2000-01.
A brilliant and efficient working and managerial scenario is depicted through the working
capital of the company.
WORKING CAPITAL OF MARICO LIMITED
F/Y 2000 2001 2002 2003 2004
WorkingCapital 494.22 466.88 594.86 827.67 851.51
The graph shown depicts the working capital from the year 2000 to 2004 of Marico
Industries Limited, another renowned FMCG company.
The working capital of this company has been increased continuously, showing that the
company is blocking its cash available in current assets or is incurring large bad debts.
RESEARCH METHODOLOGY
While critically analyzing the role of Budgetary Control Department in the maximization of the profits of the company, we have deeply analyzing the different parameters of controlling the cash management and inventory management with the help of operating cycle time, ABC & XYZ analysis and other methods of controlling the inventory apart from the determination of Economic order quantity and other factors which can’t be ignored while analyzing the cash & inventory management system in the company. For this, we have taken the full advantages of the computerized cash management & material management systems which help us to exactly determined the requirement of the raw & packaging material, stores & spares, according to the production planning for the we take the following data:
i.. Actual requirement as per rolling production programme.
ii. Last year consumption.
iii Cash & credit sales of last year.
iv. Cash & credit purchase of last year.
The duration of the working capital cycle can be put as follows: O = R + W + F + D – CWhereO = Duration of operating cycleR = Raw material and stores periodW = Work in process periodF = Finished stock storage periodD = Debtors’ collection periodC = Creditors payment periodEach of the components of the operating cycle can be calculated as follows:
R = Average stock of raw materials & stores_______Average Raw Material and stores consumption per day
W = Average work-in-process inventory_______Average Cost of production per day
F = Average finished stock inventory______Average Cost of goods sold per day
D = Average book debts_______Average Credit sales per day
C = Average trade creditors_______ Average credit purchases per day
DIL’S MATERIAL MANAGEMENT
PROCESS OF MATERIAL FLOW
MA
TERIALMANAGEMENT
Purchase order placed by purchase department
Receiving of goods at factory gate
Verification of documents at gate through
Issuance of M.N and weighing of loaded trucks
Quality check by quality department
Movement of goods to production departments as per BOM.
Production of finished goods
Movement of finished goods to warehouse after payment of exercise
Finished goods move to other locations as per CSCC
Recheck with the supplier by contacting him
Acceptance of goods
Return to the supplier
* If on test-yellow line* If approved-green line* If rejected-red line
FINANCIAL STATEMENTS ANALYSIS
MEANING AND CONCEPT OF FINANCIAL ANALYSIS
the trend of these factors as shown in a series of statements. The term ‘financial analysis’
also known as ‘analysis and interpretation of financial statement’ refers to the process of
determining financial strengths and weaknesses of the firm by establishing strategic
relationship between the items of balance sheet, profit and loss account and other
operative data. Financial statement analysis is largely a study of relationship among the
various financial factors in a business as disclosed by a single set of statements, and the
study of
The purpose of financial analysis is to diagnose the information contained in
financial statements so as to judge the profitability and financial soundness of the firm.
The analysis and interpretation of financial statement is essential to bring out the mystery
behind the figures in financial statement. Financial Statement Analysis is an attempt to
determine the significance and meaning of the financial statement data so that forcast
may be made of the future earnings, ability to pay interest and debt maturities ( both
current and long-term ) and profitability of a sound dividend policy.
TYPES OF FINANCIAL STATEMENT
Financial Statements primarily comprise two statements:1) the position statement or the Balance Sheet2) the income statement or the Profit and Loss A/C
BALANCE SHEET
The Balance Sheet is one of the important statements depicting the financial strength of
the concern. It shows on the hand the properties the it utilizes and on the other hand the
sources of those properties. The balance sheet shows all the assets owned by the concern
and all the liabilities and claims.
The table below shows the financial position (balance sheet ) Dabur India Ltd. For the year
ended 31st March 2007:-
INCOME STATEMENT AND PROFIT AND LOSS ACCOUNT
Income statement is prepared to determine1 the operational position of the
concern. It is a statement of revenues earned and the expenses incurred for earning that
revenue. If there is excess of revenues over expenditures it will show a profit and if the
expenditures are more than the income then there will a loss. The income statement is
prepared for a particular period, generally a year.
The table below shows the income statement (profit or loss a/c) of Dabur India Ltd., for
the year ended 31st March 2007:-
CASH FLOW STATEMENT
Cash plays a very important role in the entire economic life of a business. A firm
need cash to make payments to its suppliers, to incur day-to-day expenses and to pay
salaries, wages, interest and dividend. It is very essential for a business to maintain an
adequate balance of cash. But many times a concern operate profitabily and yet becomes
very difficult to pay taxes and dividend. This may be because:-
1) although huge profits have been earned yet cash may not have been received
2) even if cash have been received, it may have drained out (used) for some other
purposes
Information about the cash flows of an enterprise is useful in providing users of financial
statements with a basis to access the ability of the enterprise to generate cash and cash
equivalents and the need of the enterprise to utilize those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an enterprise to
generate cash and cash equivalents and the timing and security of their generation.
Cash flow analysis yields a large number of distinct advantages in the crucial task of
setting debt policy :
1) It focuses on the solvency of the firm during adverse circumstances.
2) It takes into consideration the balance sheet changes and other cash flows that
do not appear in the profit and loss account.
3) It gives an insight into the inventory of financial reserves available in the event
of recession
4) It views the problem in a dynamic context of time.
A cash flow statement summarizes the causes of changes in cash position of a business
enterprise between dates of two balance sheets.
WORKING CAPITAL ANALYSIS OR MEASURING THE WORKING CAPITAL
The analysis of working capital can be conducted through a number of devices such as:
1) Ratio Analysis2) Fund Flow Analysis3) Budgeting
RATIO ANALYSIS
A ratio is a simple arithmetical expression of the relationship of 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 followingratio may be calculated for this purpose:
i. Current Ratioii. Acid Test Ratio
iii. Inventory Turnover Ratioiv. Receivables Turnover Ratiov. Payables Turnover Ratio
vi. Working Capital Turnover Ratiovii. Working Capital Leverage Ratio
viii. Ratio of Current Liabilities to Tangible Net Worth
Funds flow analysis is a technical device designated to study the sources were put. It is an effective management tool to study changes in the financial position (working capital) of a business enterprise between beginning and ending financial statements dates. The funds flow analysis consists of:
i. Preparing schedule of changes in working capital, andii. Statement of sources and application of funds.
WORKING CAPITAL BUDGET
A budget is financial and/ or quantitative expression of business plans and as a part of total budgeting process of business, is prepared estimating future performance for future. The objective of a working capital budget is to ensure availability of funds as and when needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budgets for various elements of working
RATIO ANALYSIS
DABUR INDIA LTD. CADBURY INDIA BRITANIA
LTD.
2005 2006 2005 2006 2005 2006
RATIOS
Current 0.9 1.85 1.6 1.95 1.02 1.35
Ratio
Quick 0.44 1.09 0.9 1.47 0.44 0.9
Ratio
Inventory 11.38 7.6 8.89 11.98 14.69 21.37
Turnover
Ratio
HINDUSTAN LEVER MARICO LTD. NESTLE
LTD. INDIA
LTD.
2006 2005 2006 2005 2006
2005
Current 0.97 1.01 1.8 1.95 0.61
0.74
Ratio
Quick 0.52 0.56 0.88 0.9 0.2
0.26
Ratio
Inventory 8.78 9.34 10.72 9.77 12.42
11.76
Turnover
Ratio
After comparing the working capital of all the industries undertaken ,it can be seen that Nestle in the winner of all. It hes made the best use of its cash flows and managed its current assets in the best possible manner.
The second winner is Hindustan Lever Limited but it can be noticed
that the progress has been not stable.
Dabur India Limited stands third well ahead of Cadbury, Marico and
Britannia Industries limited. The working capital in the year 2003 was
Rs. 1867 million which went down to Rs –70 million. That indicates
that how well Dabur had utilized its managerial efficiency.
Financial Management By
Khan and Jain
Financial Management By I.M Pandey
www.Dabur.com
www.google.co.in
www.britannia.com
www.maricoindia.com
www.nestleindia.com
www.cadburyindia.com
www.hll.com