Dabur Working Capital Management Dabur India

Project Report

Working Capital Management

Undertaken At

Dabur India Limited

Submitted In The Partial Fulfillment For The Award Of The Degree Of

MASTER OF BUSINESS ADMINISTRATION

[email protected] TABLE OF CONTENTS

1) Acknowledgement 32) Abstract

43) Objectives 54) Research methodology 65) Introduction 86) Overview of industry 97) Company Profile 178) Working capital management 359) Conclusion 54 10) Bibliography 56ACKNOWLEDGEMENT

Gratitude is a hearts memory and putting the feelings of the heart into words, is an art. Those who excel in this art are ultimately successful.

Determination, hard work, and patience are the key to success. Completing a project of this magnitude would not have been possible without the encouragement & support of many people. At this point of time I would like to acknowledge all those who have made a major contribution in its development.

I also express my sincere regards to all the executive & staff members of Finance & other departments of the company who immensely cooperated in completion of my project report.

Lastly, I would like to thank the God Almighty, my family members, my faculty members and all those left unknowingly without whom the completion of this project would not have been possible.

Certificate of Completion And Originality Of Work

This is to certify that .. has accomplished the project titled WORKING CAPITAL MANAGEMENT, under my guidance and supervision.

This project is being submitted by her in the partial fulfillment of requirements of MBA Program of Bharati Vidyapeeth University New Delhi.

ABSTRACT

This project discusses about the Working Capital Management of Dabur India Limited. A good way to judge a company's cash flow prospects is to look at its Working Capital Management (WCM). Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest, and meet capital requirements and payments. Understanding A Companys cash flow health is essential to make investment decisions.

The project in the initial stage began with the research of the financials of Dabur India Limited through the Annual Reports and the official website of the company www.dabur.com. Basically the purpose for the research was to understand as to what exactly is working capital, why do companies require working capital, what is the ideal ratio of working capital to be maintained by the Company, etc. After the research data was collected which was to be analyzed and compared with the data of other companies (Hindustan Lever Ltd., Cadbury India Ltd., Nestle India Ltd., Britannia Industries and Marico Ltd.) to see how well the company is handling and managing its finances.

The collected data was sorted out as per the requirements of the project. Out of the entire financials, the Profit and Loss Accounts, Balance Sheets and The Cash Flow Statements were the most important as for calculating the working capital and the ratios, as accurate data was available in them.

The data till the year 2009-2010 has been analyzed and the working capital and ratios for Six major FMCG companies that are: Dabur India Ltd., Hindustan Lever Ltd., Cadbury India Ltd., Nestle India Ltd., Britannia Industries and Marico Ltd. have been compared.

OBJECTIVES

( To understand the concept of Working Capital.

( To understand the trend exhibited by the working capital over the period.

( To analyze the overall short-term fund requirements of the Company.

( To analyze the current working mechanism of Sources and Investments of

funds in the Company.

( To understand the need and importance of working capital finance in an

Organization.

( To study the financing pattern of working capital that prevails in DABUR

INDIA LTD.

( To prepare a report on Comparative study of Dabur vs. the other top

Ranked FMCG companies.

RESEARCH METHODOLOGY

SOURCES AND METHODS:

The following sources have been sought for the preparation of this report:

Secondary sources like previous years annual reports, reports on working

Capital for research, analysis and comparison of the data gathered.

CHAPTER-1INTRODUCTION

This project deals with the Working Capital Management of Dabur India Limited. Dabur India Limited is the Fourth Largest FMCG Company. The basic meaning of Working Capital in a simple language is CURRENT ASSETS less CURRENT LIABILITIES. Cash is the lifeline of every business and hence working capital management plays an important role in functioning of a business. Working capital comprises a number of different items and its management is difficult since these are often linked. Hence altering one item may impact adversely upon other areas of the business. Management must ensure that a business has sufficient working capital. Too little will result in cash flow problems highlighted by an organization exceeding its agreed overdraft limit, failing to pay suppliers on time, and being unable to claim discounts for prompt payment. In the long run, a business with insufficient working capital will be unable to meet its current obligations and will be forced to cease trading even if it remains profitable.

On the other hand, if an organization ties up too much of its resources in working capital it will earn a lower than expected rate of return on capital employed which is not at all a desirable situation.

The primary objective of working capital management is to ensure that sufficient cash is available to-Meet day-to-day cash flow needs; Pay wages and salaries when they fall due; Pay creditors to ensure continued supplies of goods and services; Pay government taxation and providers of capital dividends; and Ensure the long-term survival of the business entity.

Inter firm comparison can be done with the help of ratio analysis as ratio analysis allows comparison of one industry/firm to another. Since financial ratio analysis looks at relationships inside the industry/firm, an industry/firm of one size can be directly compared to a second industry/firm (or a collection of industries/firms), which may be larger or smaller or even in a different business.

COMPETITORS MARICO LTD.

Marico groups history can be traced back to 1862 when Kanji Morarji, started a small trading business in Mumbai. The family set up the Bombay Oil Industries Ltd (BOIL) in 1948 with manufacturing facilities in Mumbai for coconut oil extraction plant, vegetable oil refinery and a chemical plant. Marico was incorporated in 1988 to take over the then 40-year old consumer products business of BOIL. The division was engaged in marketing of coconut oil, edible oil, instant starch, fruit jams etc Earlier the brands of Saffola and Parachute were owned by Bombay Oil Industries Limitedand Marico was given access to use these brands for perpetuity. In FY00, the brands were transferred to the company for a consideration of Rs300mn.

Marico has 5 factories, located at Sewree in Mumbai, Jalgaonin Maharashtra, Palakkad in Kerala, Saswad in Pune and Ponda in Goa.

Marico is the market leader in the hair oil segment, with its Parachute and Hair & Care brands. It is also one of the leading players in the branded edible oil segment with strong brands like Saffola and Sweekar. Besides hair and edible oil, the company has a presence in niche segments like Instant Starch (Revive), Anti lice shampoo (Mediker) and food products like jams and sauces (Sil). Marico also has a fee based marketing arrangement with Procter & Gamble (P&G) for marketing a few P&G brands through its own network. Parachute, Saffola and Sweeker are the key earnings drivers, contributing to almost 80% of Maricos turnover.

Fast moving consumer goods (FMCG) business is built on the two pillars of brand equity and distribution network. Brand equities are built over a period of time by consistent high quality and aggressive advertisement and marketing. Availability near the consumer through a wide distribution channel is another crucial success factor, as products are small value, frequently purchased, daily use items. Competition is intense, and players have to remain cost effective and provide value for money to consumers to retain market shares. The company is, at present, highly dependent on its three main brands -- Parachute, Saffola and Sweekar. The growth in this category will be difficult to sustain in the longer run due to increasing competition. Recently, Hindustan Lever acquired Cococare (it already has Nihar under its fold), which will see an intensification of competition in the coconut oil category.

Marico has maintained Parachute market share despite severe competition. New edible oil products are launched with 'Good for Health' positioning under the Saffola brand and catering to regional taste requirements through the Sweekar franchise. In the hair oil segment, the company has successfully launched value added Parachute variants. A new brand Shanti Amla, in the amla hair oil category dominated by Dabur, has been launched during FY02 and has been extremely successful.

HINDUSTAN LEVER LTD.

Three Unilever companies were merged in 1956 to form HLL. These companies were Hindustan Vanaspati Manufacturing Company -edible oil (established in 1931), Lever Brothers India Limited- soaps (1933) and United Traders-personal products (1935). Ponds joined the Unilver fold through a global acquisition in 1986. In the last decade, HLL has expanded its operations by the merger and takeover route. It acquired TOMCO a Tata group company (1993), merged Unilever group companies Brooke Bond Limited (1996) and Ponds' India (1998), and has acquired cosmetic business of another Tata group company Lakme (1998).

Hindustan Lever Limited is the largest FMCG Company in the country, with a turnover of Rs118bn. The companys business sprawls from personal and household care products to foods, beverages and specialty chemicals. The company has a dominating market share in most categories that it operates in such as toilet soaps, detergents, skincare, hair care, color cosmetics, etc. It is also the leading player in food products.

HLL is the market leader in the detergent and toilet soap industry with market share of 60% and 40% respectively. HLLs turnover has now grown to Rs118bn, with soaps and personal products contributing 57% to turnover and beverages and food products contributing to 29% of turnover.

Britannia Industries Ltd.

Britannia was incorporated in 1918 as Britannia Biscuits Co Ltd in Calcutta. In 1924, Pea Frean UK acquired a controlling stake, which later passed on to the Associated Biscuits International (ABI) a UK based company. During the 50s and 60s, Britannia expanded operations to Mumbai, Delhi and Chennai. In 1987, Nabisco, a well known European food company, acquired ABI. In 1989, J M Pillai, a Singapore based NRI businessman along with the Groupe Danone acquired Asian operations of Nabisco, thus acquiring controlling stake in Britannia. In 1977, the Government reserved the industry for small scale sector, which constrained Britannia's growth.

Britannia's controlling stake is jointly with Groupe Danone and Nusli Wadia. Groupe Danone is one of the leading players in the world in bakery products business. It acquired interest in Britannia Industries in 1989 and acquired controlling stake in 1993.Nusli Wadia group is one of the leading industrial houses in the country, with interests mainly in textiles and petrochemicals.

Britannia's plants are located in the 4 major metro cities - Kolkatta, Mumbai, Delhi and Chennai. A large part of products are also outsourced from third party producers. Dairy products are out sourced from three producers - Dynamix Dairy based in Baramati, Maharashtra, Modern Dairy at Karnal in Haryana) and Thacker Dairy Products at Howrah in West Bengal.

Britannia is the market leader in the organized biscuit and bakery product market in India. Biscuits contribute to more than 80% of Britannia's total turnover. Other products include bread and cakes. Britannia diversified into dairy products in 1997 with processed cheese.

The entry of new MNCs has not posed a direct threat to Britannia, as these MNCs have positioned their brands in the premium/health segment. Britannia has maintained market leadership with a 40% volume share and 48% value market share in the organized sector. FMCG major HLL is expected to venture into the segment. Britannia has been aggressive in new launches and marketing during the last 2 years anticipating the competition. It has also recently acquired Kwality Biscuits, gaining a strong foothold in the southern market.

Nestle India Ltd.

Nestle was promoted by Nestle Alimentana, Switzerland, a wholly owned subsidiary of Nestle Holdings Ltd., Nassau, Bahama Islands. Nestle is one of the oldest food MNC operating in India, with a presence of over a century. For a long time, Nestle Indias operations were restricted to importing and trading of condensed milk and infant food. Over the years, the Company expanded its product range with new products in instant coffee, noodles, sauces, pickles, culinary aids, chocolates and confectionery, dairy products and mineral water.Nestle was incorporated as a limited company in 1959. Nestle S A Switzerland, is one of the leading companies in the global foods industry. The principal activities of the group encompass beverages (with Nescafe as the flagship brand), milk products, processed foods, cooking aids, bakery products, chocolates, confectioneries, pharmaceutical products (ophthalmic, surgical instruments etc).

Nestle has a presence in 83 countries worldwide. It has a total number of 509 factories out of which 220 are located in Europe, 153 in America and 136 in Africa, Asia and Oceania.

Nestle started its manufacturing operations with Milkmaid in 1962 at Moga factory. Manufacturing of Nescafe started in 1964 at the same factory. The company set up another factory at Cherambadi in Tamil Nadu, for manufacture of infant foods, coffee etc. The company set up its Nanjangad (Karnataka) factory in 1989 and the Samlakha (Haryana) factory in 1992. The Ponda (Goa) factory started operations in 1995.

The Company set up its sixth manufacturing unit in 1997 at Bicholim in Goa.

Nestl India manufactures products of truly International quality under brand names such as MILKMAID, EVERYDAY, CERELAC, LACTOGEN, MAGGI, NESCAFE, NESCAFE SUNRISE, NESTEA, MILO, KITKAT, MILKY BAR, MUNCH, POLO, NESTLE MILK, NESTLE DAHI, NESTLE FRUIT N MILK and NESTLE FRUIT N DAHI.

Cadbury India Ltd.

Cadbury was originally incorporated as a wholly owned subsidiary of Cadbury Schweppes Overseas Ltd (CSOL) in 1948. The companys original name was Cadbury Fry (India) Ltd.In 1982; the name was changed to Hindustan Cocoa Products. The current name was restored in Dec 89. In 1986, Cadbury forayed into biscuits with Cadbury Butter, Glucose and Bournvita brands. The business however, could not take off and was discontinued 3-4 years later. In 1989, Cadbury diversified into ice creams with Dollops and Lops top brands, which were sold off to Brooke Bond in 1994.

Cadburys manufacturing operations started in Mumbai in 1946, which was subsequently transferred to Thane. The company, way back in 1964, pioneered cocoa farming in India to reduce dependence on imported cocoa beans. In 1977, the company also took steps to promote higher production of milk. In 1995, Cadbury expanded Malanpur plant in a major way. The Malanpur plant has modernized facilities for Gems, clairs, and Perk etc.

The Cadbury management has been unable to achieve the volume growth targets set during the last two years. The company remains dependent on a single category Chocolates to drive growth.CHAPTER-3

COMPANY PROFILE

OVER HUNDRED YEARS OF CARING

Dabur commenced operations in 1884 and is today a multi- location, multi-product enterprise. The company has major interests in health and beauty care.

Dabur is a leader in Ayurveda the traditional Indian health care system.

The company has 12 manufacturing plants in India, Nepal and Egypt. Dabur products are also manufactured in Dubai.

Dabur has a transactional network of 19 offices servicing both rural and urban markets in India.

The company has sales and marketing offices in Dubai and London. Dabur products are available in over 50 countries.

FOUNDING THOUGHTS What is that life worth which cannot bring comfort to others.The DoorstepDAKTAR

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 and 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. 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. S. K. Burman's commitment and ceaseless efforts resulted in the company growing from a fledgling medicine manufacturer in a small Calcutta house, to a household name that at once evokes trust and reliability.

COMPANYS HISTORY

1884 Birth of Dabur

1896 Setting up of a manufacturing plant

Early 1900s 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 Three separate divisions

1997 Foods Division / Project STARS1998 Professionals to manage the Company

2000 Turnover of Rs.1, 000 crore

2002 Net sales reached Rs.1163.19 corores.

2003 Demerged its Pharmaceuticals Division

2005 Dabur acquires balsara

2006 Dabur approves FCCB/GDR/ADR up to $200billion

2007 Dabur food merged with Dabur India

2008 Acquire Fem care Pharma

2009 Dabur red Toothpaste joins Billion rupee brand club

DABUR AT A 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 stake holders. The results of our policies and initiatives speak for themselves. Leading consumer goods company in India with a excellent turnover

Three major Strategic Business Units (SBU) Family Products Division (FPD), Health Care Products (HCPD) and Dabur Ayurvedic Specialties (DASL).

Thirteen Ultra-Modern manufacturing units spread across four Countries.

Products marketed in over 50 Countries.

FPD, dealing with personal care, the largest SBU contributing to 45% sales of Dabur

Products related to hair care, Skin care, Oral care and Foods.

3 Leading brands- Vatika, Amla Hair Oil and Lal Dant Manjan with Rs.100 Crore turnover each.

Vatika Hair oils and Shampoo the high growth brand.

Strategic positioning of honey as food product, leading to market leadership (over 40%) in branded honey market.

HCPD, dealing with daily health care, Second largest SBU with 28% share in sales

Products related to Health Supplements, Digestive, Baby Care and Natural Cures.

Leadership in Ayurvedic and Herbal products market with highly popular brands.

Dabur Chyawanprash the largest selling Ayurvedic and Herbal products market with highly popular brands.

Leader in Herbal Digestives with 90% market share.

Hajmola tablets in command with 75% market share of digestive tablets category.

Dabur Lal Tail tops baby massage oil market with 35% of total share.

DASL, 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:

Asav Arishtas

Ras Rasayanas

Churans

Medicated Oils

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 UNITSDabur has three major Strategic Business Units (SBUs) namely:

Family Products Division with a share of 45% in its total sales.

Dabur Ayurvedic Specialities having a share of 27% in its total sales.

Health Care Products with a share of 28% in the total sales. DABURS CORE VALUESVISION

Dedicated to the health and well being of every household.

MISSION:

To fully export our core competencies in the field of Ayurvedic and Herbal products by identifying the consumer needs and aiming for full consumer satisfaction.

PRINCIPLES

OWNERSHIP

This is our company. We accept personal responsibility, and accountability to meet business needs.

PASSION FOR WINNING

We all are the leaders in our area of responsibility, with a deep commitment to deliver the results. We are determined to be the best at doing what matters the most.

PEOPLE DEVELOPMENT

People are our most important asset. We add value through result driven training, and we encourage and award excellence.

CONSUMER FOCUSWe have superior understanding of consumer needs and develop products to fulfill them better.

TEAM WORKWe work together on the principle of mutual trust and 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 the consumers, with business partners and with each other.

DABUR WORLD WIDEDabur's mission of 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.

DABUR products World Wide

Dabur has spread widely and deeply to be in close touch with overseas consumers.

Offices and representatives in Europe, America and Africa;

A special herbal 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 due 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.

PRODUCTS

HEALTH SUPPLEMENTS:

Dabur Chyawanprash

Dabur Glucose D

DIGESTIVES:

Hajmola Mast Masala

Anardana

Hajmola

Hajmola Candy

Hajmola Candy Fun2

Pudin Hara(Liquid and Pearls)

Pudin Hara G

Dabur Hingoli

BABY CARE:

Dabur Lal Tail

Dabur Baby Olive Oil

Dabur Janma Ghunti

NATURAL CURES:

Shilajit Gold

Nature Care

Sat Isabgol

Shilajit

Ring Ring

Itch Care

Back-Aid

Shankha Pushpi

Dabur Balm

Sarbyna Strong

HAIR CARE OIL:

Amla Hair Oil

Amla Lite Hair Oil

Vatika Hair Oil

Anmol Sarson Amla

HAIR CARE SHAMPOO:

Vatika Henna Conditioning Shampoo

Vatika Anti Dandruff Shampoo

Anmol Natural Shine Shampoo

SKIN CARE:

Gulabari

Vatika Fairness Face Pack

ORAL CARE:

Dabur Red Gel

Dabur Red Toothpaste

Dabur Lal Dant Manjan

Dabur Binaca Toothbrush

REAL:

Real Fruit Juice

Real Activ

HOMMADE:

Cooking Pastes

Coconut Milk

Tomato Puree

CAPSICO RED

LEMONEEZ

Dashmularishta

Ashokarishta

Lauhasava

Mahanarayan Tail

Juritap

Madhuvani

Lavan Bhaskar Churn

HEALTH CARE: Dabur Chyawanprash

Pudinhara

Hajmola Tablets

Dabur Honey

Shilajit

SKIN CARE:

Natural Soaps

ORAL CARE:

Herbal Tooth Paste

HAIR CARE:

Vatika Shampoos and Conditioners

Dabur Amla Hair Oil

FOODS:

Real Juices

Homemade Food Products

DR.BURMAN (RUSSIA)

Health Supplements

Ayurvedic Toothpastes

RE-ENGINEERING FOR VALUE CREATION

Dabur has re-organized two of its biggest SBUs- the Family Products Division (Personal Care Products) and the Health Care Division into a single SBU. This initiative will eliminate overlaps and reduce costs by leveraging synergies of scale.

Re-engineering internal operations to leverage strengths and synergies, improve scale, reduce cost and optimize efficiencies are key for improved value creation. To derive maximum values on these parameters, Dabur has emerged its erstwhile SBUs- The Family Product Division and Health Care Products Division into one.

The common arrangement will eliminate any overlaps in the distribution and retail network, provide economies of scale and help the Company be more responsive to market needs.

Focus will be on product categories and resources will be pooled to strengthen individual categories with aggressive sales and marketing initiatives.

This move will inject a new impulse in Dabur and also boost the Companys sales effort

DEMERGING FOR VALUE CREATION

The demerger of Daburs FMCG and Pharmaceutical businesses is a value-enhancing move representing a win-win situation for both these businesses. A clear line of sight and focused growth strategies would provide exponential growth opportunities and greater value for shareholders.

This demerger of Daburs FMCG and Pharmaceutical business is a major restructuring move undertaken by the Company to provide greater focus and independence to the two businesses.

The FMCG business, which will be the main business of Dabur India, will concentrate on strengthening its core competencies in Personal Care, Health Care and Ayurveda.

The new Pharmaceutical Company- Dabur Pharma Ltd.- will focus on its expertise in Allopathy, Oncology Formulations and Bulk drugs. The Company is already a leader in the Oncology segment in India and will follow aggressive strategies to pursue its global ambitions.

Both these companies will have dedicated management teams, with the freedom and resources to pursue their independent growth strategies.

Dabur believes that the sum of parts will far exceed the value of the single entity.

CHAPTER-4

WORKING CAPITAL MANAGEMENT

INTRODUCTION TO WORKING CAPITAL

Working Capital is the Life-Blood And Controlling Nerve Center of a Business

The term Working Capital refers to the capital required for day-to-day operations of a business enterprise. It is represented by excess of Current assets over Current Liabilities. It is necessary for any organization to run successfully its affairs, to provide for adequate working capital. Too large investment in Current Assets means blocking the capital that can be used productively elsewhere. On the other hand too little investment can be expensive. For example, insufficient inventory may cause loss of sales to Customers.

All this indicates that proper estimation of the Working Capital requirements is a must for running the business efficiently and profitably.

Working capital is therefore:-

PRIVATEWORKING CAPITAL =Current Assets ||stock + debtors + cash - Current liabilities

The importance of having working capital is best understood as 'costs expended before payment received for goods/service provided to the customer'. Therefore, no capital means no production and no customers, which means no capital...

There are basically two concepts of working capital-

Gross Working Capital:

It is the amount of capital invested in the total Current assets of the enterprise. Current assets are those assets, which in ordinary course of business can be converted into cash within a short period of normally one accounting year.

Net Working Capital:

It refers to the difference between net current assets and liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. Net working capital can be positive or negative. A positive net working capital will arise when current assets increase current liabilities. A negative working capital will arise when current liabilities are in excess of current assets.

Current Assets:

Current assets, sometimes called liquid assets, are those resources of a firm, which are either held in the form of cash or are expected to be converted in cash within the accounting period in one-year duration. The operating cycle is the time taken to convert the raw materials into finished goods and convert receivables (goods sold on credit) into cash.

Current Assets include:

Cash in hand

Bank balances

Bills Receivables

Sundry Debtors (less provision for bad debts)

Short term loans and advances

Inventories of stocks, as:

Raw material

Work in progress

Stores and spares

Finished Goods

Temporary Investments of surplus funds

Prepaid expenses

Accrued Incomes.

Current Liabilities:

Current Liabilities are debts payable within an accounting period. Current assets are converted into cash to pay current liabilities.

Current Liabilities include:

Bills Payable

Sundry creditors or Accounts Payable

Accrued or Outstanding expenses

Short term loans, Advances or deposits.

Dividends Payable

Bank Overdraft

Provision for taxation, if it does not amount to appropriation of profits.

It is a conventional rule to maintain the level of current assets twice the level of current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and at times it may prove to be harmful for the companys reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore prompt and timely action should be taken by the management to improve and correct the imbalances in the liquidity position of the firm.

Gross Working Capital is a Going Concern/Financial Concept where as the Net Working Capital is an Accounting Concept of working capital.

IMPORTANCE OF WORKING CAPITAL

Working capital constitutes part of the Crown's investment in a department. Associated with this is an opportunity cost to the Crown. (Money invested in one area may "cost" opportunities for investment in other areas.) If a department is operating with more working capital than is necessary, this over-investment represents an unnecessary cost to the Crown.

OBJECTIVE:

The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Other objectives of working capital management are as follows: -

( To identify cash flow cycles of the firm.

( To maintain the level of current assets twice the level of current liabilities.

( To help the company to maintain good business relations.

( To determine the future capital, liquidity position and other requirements of

the company.

Working capital management takes place at two levels:

Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management.

The individual components of working capital can be effectively managed by using various techniques and strategies.

When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient

Working capital management must be considered in relation to other aspects of the department's financial and non-financial performance

CLASSIFICATION OF WORKING CAPITAL

Working Capital is classified on the following two basis:

(a) On basis of time

(b) On basis of concept

KINDS OF WORKING CAPITAL

On basis of Concept On basis of Time

Gross Net Permanent/ Temporary/ Working Working Fixed Variable

Capital Capital Working Working

Capital Capital

Regular Reserve Seasonal Special

WC WC WC WC

Permanent or Fixed Working Capital:Is the minimum amount of Working Capital 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 are continuously required by the enterprise to carry out its normal business operations. Example: Every firm has to maintain a minimum amount of raw materials, Work-in-Progress, Finished goods and cash balance.

Minimum level of Current Assets is called permanent or fixed working capital as this part of Working Capital is permanently blocked in Current Assets. As the business grows, requirements of permanent Working capital also increase due to increase in current assets.

i. Regular Working Capital: -It is required to ensure circulation of Current Assets from cash to inventories, from inventories to receivables and from receivables to cash and so on.

ii. Reserve Working Capital: -

It is the excess amount over the requirement for regular Working Capital which may be provided for contingencies that may arise at unstated periods, such as strikes, rise in prices, depression etc.

Temporary or Variable Working Capital:

It is the amount of Working Capital, which is required to meet seasonal demands and some special exigencies such as launching of extensive marketing campaign for conducting research etc.

FACTORS DETERMINING THE WORKING

CAPITAL REQUIREMENTS

Nature or Characteristics of Business-The working capital requirements of an enterprise are basically related to the conduct of the business. Every company according to their nature of business has to maintain a certain level of working capital.

Production Policy-The production policies pursued by the management has a significant effect on the requirements of working capital of the business. The production schedule has a great influence on the level of inventories. The decision of the management regarding automation, etc., will also have its effect on working capital requirements.

Seasonal Variations-Most firms experience seasonal and cyclical fluctuations in the demand for their products and sevices. These business variations effect the working capital requirement, specially the temporary working capital requirement of the firm. When there is an upward swing in the economy, sales will increase; correspondingly, the firms investment in inventories and book debts will also increase. Under boom, additional investment in fixed assets may be made by some firms to increase their productive capacity. This act of the firm will require further additions of working cpital. When there is a decline in the economy sales will fall and consequently, levels of inventories and book debts will also fall.

Credit policy-A company which allows liberal credits to its customers, may have higher sales but will need more working capital as compared to a company which has an efficient debt collection machinery and observing strict terms. The working capital requirements can also be affected by the credit facilities enjoyed by the company.

Rate of growth of Business-As a company grows; it is logical to expect that a large amount of working capital will be required. It is, of course, difficult to determine precisely the relationship between the growth in the volume of business of a company and the increase in its working capital. The composition of working capital in a growing company also shifts with economic circumstances and corporate practices.

Business cycle-Different phases of business cycle i.e, boom, recession, recovery etc. also affect the working capital reuirement. In case of boom condition business activities expand .As a result, the need for cash, inventories etc. increases resulting in more and more funds blocked in these current assets. In case of recession period, there is usually dullness in business activities and there will be an opposite effect on the level of working capital requirement. There will be a fall in inventories and cash requirements etc.

Manufacturing Process/ Length of product cycle-The manufacturing process comprises of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle, larger will be the firms working capital requirements.

WORKING CAPITAL CYCLE

The working capital cycle can be defined as:

The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer.The faster a business expands, the more cash it requires for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash, which will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of firms total profits.

There are two elements in the business cycle that absorbs cash:

Inventory (Stocks and work-in-progress)

Receivables (Debtors owing you money)

The main sources of cash are Payables (your creditors) and Equity and Loans.

When it comes to managing working capital- TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital.

As a consequence, you could reduce the cost of bank interest or youll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

FINANCING OF WORKING CAPITAL

There are two types of working capital requirements in a company-

i) Permanent or Fixed Working Capital Requirements

ii) Temporary or Variable Working Capital Requirements

Depending on the above mentioned requirements following are the sources of financing working capital-

SOURCES

Long Term Sources Short Term Sources

Shares

Commercial Banks

Debentures

Commercial paper

Public Deposits Trade Creditors

Loans from Financial institutions Installment credit

Accounts payables

Accrued Expenses

SOURCES OF WORKING CAPITAL

Dabur India Limited as a successful Company in FMCG sector has the following sources available for the fulfillment of its working capital requirements in order to carry on its operations smoothly.

BANKS:

These include the following banks:

Punjab National Bank

Standard Chartered Bank Ltd.

Hong Kong and Shanghai Banking Corp. Ltd.

State Bank Of India

HDFC Bank Ltd.

IDBI Bank Ltd.

Citibank

COMMERCIAL PAPERS:

Commercial Papers have become an important tool for financing working capital requirements of a company.

Commercial Paper is an unsecured promissory note issued by the company to raise short- term funds. The buyers of the Commercial Papers include banks, insurance companies, unit trusts and companies with surplus funds to invest for a short period with minimum risk.

Dabur India Limited issues Commercial Papers and had commercial worth Rs. 1000 lacs in the year 2002-03.

WORKING CAPITAL ANALYSIS

Working capital is one of the most difficult financial concepts to understand for the small-business owner. In fact, the term means a lot of different things to a lot of different people.

By definition, Working Capital is the amount by which current assets exceed current liabilities.

A useful tool for the small-business owner is the operating cycle. The operating cycle analyzes the Accounts Receivable, Inventory and Accounts Payable cycles in terms of days. In other words, accounts receivables are analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to turn over the sale of a product (from the point it comes in your door to the point it is converted to cash or an account receivable). Accounts payables are analyzed by the average number of days it takes to pay a supplier invoice.

Most businesses cannot finance the Operating Cycle (accounts receivable days + inventory days) with accounts payable financing alone. Consequently, working capital financing is needed. This shortfall is typically covered by the net profits generated internally or by externally borrowed funds or by a combination of the two.

Most businesses need short-term working capital at some point in their operations. For instance, retailers must find working capital to fund seasonal inventory buildup between September and November for Christmas sales. But even a business that is not seasonal occasionally experiences peak months when orders are unusually high. This creates a need for Working Capital to fund the resulting Inventory and Accounts Receivable buildup.

Some small businesses have enough cash reserves to fund seasonal Working Capital needs. However, this is very rare for a new business. If your new venture experiences a need for short-term Working Capital during its first few years of operation, you will have several potential sources of funding. The important thing is to plan ahead. If you get caught off guard, you might miss out on the one big order that could have put your business over the hump.

Here are the five most common sources of short-term working capital financing:

Equity

Trade Creditors

Factoring

Line Of credit

Short-term Loans

Equity: If your business is in its first year of operation and has not yet become profitable, then you might have to rely on equity funds for short-term working capital needs. These funds might be injected from your own personal resources or from a family member, friend or third-party investor.

Trade Creditors: If you have a particularly good relationship established with your trade creditors, you might be able to solicit their help in providing short-term working capital. If you have paid on time in the past, a trade creditor may be willing to extend terms to enable you to meet a big order. For instance, if you receive a big order that you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from your supplier if 30-day terms are normally given. The trade creditor will want proof of the order and may want to file a lien on it as security.

Factoring: Factoring is another resource for short-term working capital financing. Once you have filled an order, a factoring company buys your account receivable and then handles the collection. This type of financing is more expensive than conventional bank financing but is often used by new businesses.

Line Of Credit: Banks to new businesses do not often give Lines of credit. However, if your new business is well capitalized by equity and you have good collateral, your business might qualify for one. A line of credit allows you to borrow funds for short-term needs when they arise. The funds are repaid once you collect the accounts receivable that resulted from the short-term sales peak. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only.

Short-term loan: While your new business may not qualify for a line of credit from a bank, you might have success in obtaining a one-time short-term loan (less than a year) to finance your temporary working capital needs. If you have established a good banking relationship with a banker, he or she might be willing to provide a short-term note for one order or for a seasonal inventory and/or accounts receivable buildup.

In addition to analyzing the average number of days it takes to make a product (inventory days) and collect on an account (account receivable days) vs. the number of days financed by accounts payable, the operating cycle analysis provides one other important analysis.

From the operating cycle, a computation can be made of the dollars required to support one day of accounts receivable and inventory and the dollars provided by a day of accounts payable.

Working capital has a direct impact on CASH FLOW in a business. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make any venture successful.

The primary objective of working capital management is to ensure that sufficient cash is available to:

Meet day-to-day cash flow needs;

Pay wages and salaries when they fall due;

Pay creditors to ensure continued supplies of goods and services;

Pay government taxation and providers of capital dividends; and

Ensure the long-term survival of the business entity.

Poor working capital management can lead to:

Over-capitalization (and therefore waste through under utilization of resources and hence poor returns); and

Overtrading (trying to maintain a level of sales which is higher than working capital can sustain for businesses which extend credit terms, more sales means more debtors and higher working capital demands).

COMPARISON OF WORKING CAPITALS OF DIFFERENT COMPANIES

(Fig. in Cr.)

Company NameF/YCurrent AssetsCurrent LiabilitiesNet Working Capital

Dabur India Ltd.2009-2010477.72471.735.99

Britannia Industries Ltd.2009-2010325.94345.08-19.14

Hindustan Lever Ltd.2009-20103089.745493.97-2404.23

Marico Industries Ltd.2009-2010471.43230.75240.68

Cadbury India Ltd.2009-2010502.41534.02-31.61

Nestle India Ltd.2009-2010589.66666.39-76.73

Sources-Annual report of Dabur India ltd(2009-2010), Hindustan Lever ltd.(2009-2010), magazines like Business world, Business India, Business Today, articles from news papers like Economic times, Business line And websites like-www.marico.com, www.nestle.com,www.moneycontrol.comMEASUREMENT OF WORKING CAPITAL EFFICIENCY

The cash conversion cycle is a measure of working capital efficiency, often giving valuable clues about the underlying health of a business. The cycle measures the average number of days that working capital is invested in the operating cycle. It starts by adding days inventory outstanding (DIO) to days sales outstanding (DSO). This is because a company "invests" its cash to acquire/build inventory, but does not collect cash until the inventory is sold and the accounts receivable are finally collected.

Receivables are essentially loans extended to customers that consume working capital; therefore, greater levels of DIO and DSO consume more working capital. However, days payables outstanding (DPO)--which essentially represent loans from vendors to the company--are subtracted to help offset working capital needs.

In summary, the cash conversion cycle is measured in days and equals DIO + DSO DPO .Working capital accounts also tell you about the operational efficiency of the company. The length of the cash conversion cycle (DSO+DIO-DPO) tells you how much working capital is tied up in ongoing operations. And trends in each of the days-outstanding numbers may foretell improvements or declines in the health of the business.

NEGATIVE WORKING CAPITAL

ADVANTAGE:

A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis).

Dabur India Limited has a negative working capital Rs -70.25 Corore in the financial year 2004-2005 which shows that the company is doing extremely well in controlling its cash flows. It has efficient financial management through which it has enabled in bringing down the Working Capital figure to a negative one.

LIMITATION:

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 for the Company.

CHAPTER-6

CONCLUSION

Profitability Position-Profitability refers to the ability of the business to earn profit. It shows the efficiency of the business. Profitability position of a company can be judged by the profitability ratios of the company as these ratios measure the profit earning capacity of the company. The inter firm comparison shows that HLL is the company which is having the best profitability position among all the companies with the help of which we can conclude that HLL is having a good profit earning capacity .Liquidity or short term financial position-liquidity shows the financial soundness of the business and also whether the current assets of the company are sufficient to meet its short term liabilities. Inter firm comparison shows that all the companies are having current ratio less than 2:1 which shows that the short term financial position of the is not supposed to be very sound. In the same way, standard liquid ratio sis 1:1 ,the inter firm comparison shows that only Cadbury is the company which has better capacity to meet its current obligations and along with Cadbury, Marico is also having a better liquidity position than other companies

Solvency or long term financial position- Solvency means the ability of the business to meet its outside liabilities and by solvency position we mean the long term financial position of the company. Inter firm comparison shows that all the companies are having a good solvency position which can be determined by the different ratios used to calculate the solvency position.

Turnover position-Turnover means sales which has direct relationship with the performance of the business. More sales means the business is more active and has better performance, lesser sales shows inactivity of the business, poor performance and lesser productivity. The inter firm comparison shows that all the companies have a good turnover which shows that all the companies are performing well, but among all the companies Nestls turnover is more than other companies.

BIBLIOGRAPHY

The following sources have been sought for the preparation of this report.

BOOKS

AUTHOR/PUBLICATION

Financial Management

Khan and Jain

OTHER SOURCES-Other sources include annual report of Dabur India ltd., Hindustan lever ltd., articles from news papers like Economic times, Business world, Times of India(business section),magazines like Business India, Business world, Business today.

WEBSITES

www.dabur.com www.icicidirect.com www.studyfinance.com www.google.com EMBED Word.Picture.8

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