Professional Documents
Culture Documents
Project Report
On
Working Capital
Management of hindustan
Cocacola
Session 2013-15
Submitted in partial fulfillment for the requirement of the
award of degree in
Master of Business Administration
SUBMITTED TO:
SUBMITTED BY:
Mukesh Kumar
Roll No. 1371270056
MBA (3rd Sem.)
ACKNOWLEDGEMENT
A project is never the sole product of a person whose name has appeared on the cover. Even the
best effort may not prove successful without proper guidance. For a good project one needs
proper time, energy, efforts, patience, and knowledge. But without any guidance it remains
unsuccessful. I have done this project with the best of my ability and hope that it will serve its
purpose.
It was really a great learning experience and I am really thankful to Mr Rahul Mishra
(EXCUTIVE MANAGER) who not only helped me in the successful completion of this report
but also spread his precious and valuable time in expanding my knowledge base.
After the completion of this Project I feel myself as a well aware person about the
Research Procedure and the complexities that can arose during the process. Also I get an insight
of the advertising industry and its effectiveness in promoting sales. Finally, I am also grateful to
all those personalities who have helped me directly or indirectly in bringing up this project
report.
Mukesh Kumar
PREFACE
As a student of MBA (MASTER OF BUSINESS ADMINISTRATION)
one of the most reputed professional courses. The attractive feature of the
MBA DEGREE is that along with theory we also get to have the exposure of
the practical environment.
The topic for my summer project is:-
Mukesh Kumar
DECLARATION
(Mukesh Kumar)
TABLE OF CONTENTS
1.0
Executive Summary
2.0
Introduction
Objectives
3.0
Industry Profile
4.0
Company Profile
5.0
6.0
Research Methodology
7.0
8.0
9.0
Bibliography
10.0
Annexure
CHAPTER- 1
1.1 INTRODUCTION
1.2 NEED OF THE STUDY
1.3 SCOPE OF THE STUDY
1.4 OBJECTIVE OF THE STUDY
1.1 INTRODUCTION
Today India is one of the most potential markets with the population of around 1000 million
people. There is a growth of 30% in the soft drink industry. These factor are the reason for the
entry of two giants in the soft drink industry in the world to enter in the Indian market. The cola
giants coke and Pepsi, together control almost 96% of entire Indian market while other
companies has only share 4%.
In a long span, a culture transforms itself over and over. The map is remade attitude change for
better or worse. Processes are invented, hailed as revolutionary and discarded obsolete. So it was
one hundred year was a very much different world from what we have today, but at least one
sense, not very different at call. Many reasons have been advanced to explain the last century
with over 100 yrs. Of interrupted growth despite war, economic depression and other
disturbances there be something that sets soft drink apart from the consumer culture.
COMPANY PROFILE
In 1886, Dr. John Pemberton was created the formula of Coca-Cola, a pharmacist in Atlanta,
Georgia. The drink was sold ad-refreshing elixir at the fountain counter of Jacobs Pharmacy of
which Dr. John Pemberton was part owner, unaware that the pharmacist had given birth to
caramel colored syrup, which is now the chief ingredient of the worlds favorite drink. Today the
white-on-red flow of Coca-Cola is familiar sight in more then 195 countries. The syrup combines
with the carbonate water to fuel a $16.2 billion corporation that has captured a 46% slice of the
global soft drinks market. The company estimates that the drink is served more than 773 million
times every day and if all Coke ever produced were filed in standards bottles and placed end to
end it would wrap around the equator 21, 161 times.
The story of Coca-Cola is a story of a drink and its charm with the consumed. The story of
ecstasy and again that the drink has caused to those dedicated to its growth Pemberton first
managed to sell and average of 9 drinks per day, though a shop called Jacobs Pharmacy, in 1891,
Candler bought Coca-Cola company with the initial stock of $1,00,000. Coca-Cola was
registered at the US patent office in 1893, and began selling at soda fountains for 5 cents a glass
of therapeutic refreshment 1894; I got into bottles, courtesy a candy merchant Joseph
Boedenharn of Mississippi.
Five years later; the drink was being bottled on a regular basis under a region wise franchising
system; and its first competitor Pepsi Cola, Coca-Colas first bottling plant opened in
Chattanooga, Tennessee followed by another in Atlanta in 1900. The unique taste of cola was an
outstanding success. Over the next two decade the number of plants crossed 1000. The
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company broadened its horizons when Robert Woodruff the son of a banker who acquired to
Company for $25 million in 1919, assumed charge in 1923. He began by upgrading bottling
operations, brought in innovations like a six-bottle carry home carton, and gear up advertising
support.
As a time went by the company brought out some new aerated drinks. The first one Fanta
appeared in the selves in 1960. Its birth was an accident; the companys German name is an
attempt to produce Coca-Cola without some key ingredients, turned out into an orange flavored
drink instead. Its strategists who feared the dependence on just one put a cap on growth
welcomed it. While fanta was being rolled out the company bought minute made cosrp. This in
1967 was combined with Duncan foods to pave way for the Coca-Cola foods. Several beverages
followed the most notable being Sprite, a lemon drink developed in the late 1950 and formally
launched in 1961.
Coca-Cola had diversified the company into businesses and it even had a steam generator and
boiler making division. The best insurance policy that he figured was to let coke evolve to the
summer slacking it with variants, even reinventing if needed. In 1982, the company launched
what is now considered among the worlds most successful brand extensions Diet Coke under
the leadership of Sergio Zyman, the head of U.S marketing. The idea was to retain the loyalty for
the health conscious drinker who loved the taste but hated the calories. After this it came out with
caffeine free versions of its main drinks. Yet in the US the company kept losing ground to Pepsi.
Zyman, a former Pepsi marketer argued that the correct strategy was to replace 98 year old with
better tasting cola, label it as New Coke and blare the news which is exactly what the company
did more than a decode ago in 1985. But when placed on the shelves it did not budge. On wide
11
spread protest it was recalled after 79 days. The company has about 100 brands in its portfolio
but Coke, Fanta and Sprite account for most of its sales. In 1994, the real things coke sold over
52.5 billion liters. For the taste of it diet coke along with Coca-Cola light sold 8.5 billion liters,
which makes it the worlds two top non-cola drinks sold over 6.5 billion liters each. Which sprite
aimed at the independent youngster two does not care what as others drink (the as line obey
youre a thrust)? In 1993, Coca-Cola reentered India after 16 years long exile, four years Pepsi
made its debut India. While Coke plays on brand nostalgia, Pepsi address the young crowd,
which unlike a in America is a dominate ort if the population here.
12
13
LOCATION
OF HCPL
The Hindustan Cocacola Beverages, in Dasna , is located in the area that affects the
Working Capital because of the following factors.
HCPL produces the beverages that are a seasonal product.
Weather of Dasna is typical of the cities of Western Uttar Pradesh. The city falls in the
Rohilkhand area and thus can be considered as a semi-arid region. The summers are
scorching with daytime temperature hovering around 37C to 45C. Nights are
relatively cooler with minimum temperature falling to 27-28C. The summers set in
the month of April and persist till June end. Venturing out during day without proper
protection might lead to heatstroke.
Monsoon sets in June end but brings very little respite to the simmering city. The
average annual rainfall is in the range of 400-500 Millimeters that is precisely
14
contributed by the Southwest jet of monsoon. Winters set in the month of November
and persist till February. Winters are quite chilly with minimum temperature hovering
around 4-5C.
The selling of coke product varies according to the weather and temperature.
The production policy is also been divided into three seasons: Peak Season
Lean Season
Off Season
As according to the seasonal production policy the level of purchase of Raw Material
others also varies. And most importantly the requirement of Working Capital also changes
15
As stated earlier that this particular plant has been taken over by Hindustan Cocacola
Beverages Pvt Limited from the Coca-Cola India. With the passage of time, company has
extended its distribution network from 60 to 230 distributors alongwith 05 depots and covers
over 16 districts under its belt and they are still growing. The names of the district are as
follows.
1. Dasna
2. Badaun
3. Shahjahanpur
4. Pilibhit
5. Rampur
6. Moradabad
7. Chamoli
8. Chandausi
9. Pitoragarh
10. Karayanprayag
11. Rudraprayag
12. Kichha
14. Haldwani
15. Bageshwar
16. Ranikhet
Right from the first year of the incorporation the company is running in top profit. This is
because of many reasons. One of them is being excellent marketing strategy adopted by the
company. Also the company gives goods margins to the retailers along with various lucrative
from time to time.
16
PLANT
HEAD OFFICE
BANGALORE
DASNA
FAIZABAD
HATHRAS
BARABANK
I
17
Aerated Water:
Company is engaged in production of aerated water sweetened as well as non sweetened.
Products are manufactured exclusively on behalf of Coca Cola India P Limited for
distribution in allocated area to this franchise. Aerated water covered under chapter heading
22 of Central Excise and Tariff Act and valuation of product is governed by section 4A of
Central Excise Act as the product is covered under Standard Weight and Measurement Act.
This product is liable to highest applicable rate of tax under VAT Act @12.5%.
Fruit Juices:
Along-with aerated water company is also manufacturing fruit juice based drinks (Mango
Pulp based in the name of Maaza and orange juice based drinks in the name of Minute Maid
Pulpy Orange or MMPO). This product is exempted from Excise duty and is chargeable to
4% rate of tax under VAT Act.
18
Beside other applicable statutes company itself maintain stringent quality norms. It has
recently successfully undergone ISO 18001:2007 and E3/S3 norms.
Products of company are packed and sold in returnable glass bottles and in PET bottles in
various pack sizes as per market demand. Under backward integration company has
established production capacity of producing PREFORMS an injection blown to form PET
bottle.
All the products are in the form of Beverages have limited shelf life varying from 3 months
to 6 months. Company has various internal controls to assure timely withdrawal of expired /
products approaching expiry to maintain the quality of product. Production cycle of product
is very short that vary from few hours to a day so company has very nominal inventory in the
form of WIP. Products are usually consumed in moderate hot to very hot climate so the sale
of products vary with in year due geographical location of plant and franchise area. It peaks
in the month of May and June as summers are extremely hot and humid. Depending upon the
demand and seasonality of product the inventory requirements also vary with in year with
maximum inventory in the month of March and April and almost nil inventories in the month
of Nov and December.
19
21
22
CHAPTER- 2
2.1 RESEARCH METHODOLOGY
2.2 LIMITATIONS
23
SOURCES OF DATA
Method of data collection is secondary data. I collected secondary data by magazines,
journals , newspapers and various websites related to the coca-cola on internet.
RESEARCH DESIGN
I have used descriptive research design technique.
24
25
1. Limited data:This project has completed with annual reports; it just constitutes one part of Data collection i.e.
Secondary. There were limitations for primary data Collection because of confidentiality.
2. Limited period:This project is based on five year annual reports. Conclusions and Recommendations are
based on such limited data. The trend of last five year May or may not reflect the real working capital
position of the company
3. Limited area:Also it was difficult to collect the data regarding the competitors and their Financial
information. Industry figures were also difficult to get.
26
WEAKNESS
Lack of proper Incentives
Hindustan Coca cola Beverage Ltd is unable to cater the demand of Dasna region
properly
After Sales Services
Company is unable to provide credit:
Lack of proper training
27
OPPORTUNITIES
Launch Fanta Apple
Potential Rural Market
THREAT
Competitions between Coca-Cola and Pepsi
Illegal distribution by some distributor and salesman
Better after sales service provided by Pepsi
Schemes floated by Pepsi affects the sale of pet
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CHAPTER -3
1. DESCRIPTIVE WORK ON
SUBTOPIC OF STUDY
29
30
31
Net working capital:The term net working capital refers to the excess of current assets over current liabilities, or
say,
Net working capital = current assets current liabilities
32
Net working capital can be positive or negative. When the current assets exceed the current
liabilities the working capital is positive and the negative working capital results when the
current liabilities are more than the current assets. Current liabilities are those liabilities,
which are intended to be paid in the ordinary course of business within a short period of
normally one accounting year out of the current assets of the income of the business. The
gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital for the following
reasons: It enables the enterprise to provide correct amount of working capital at correct time.
Every management is more interested in total current assets with which it has to
operate then the sources from where it is made available.
It takes into consideration of the fact every increase in the funds of the enterprise
would increase its working capital.
The concept is also useful in determining the rate of return on investment in working
capital.
The net working capital concept, however, is also important for the following
reasons: It is a qualitative concept, which indicates the firms ability to meet its operating
expenses the short-term liabilities.
It indicates the margin of protection available to short term creditor
It is an indicator of financial soundness of enterprise.
33
It is suggesting the need of financing a part of working capital requirement out of the
permanent sources of funds.
Permanent or fixed capital is the minimum amount, which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm
has to maintain a 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, grow the requirement of working capital also increase due to increase in current
assets.
Temporary or variable working capital is the amount of working capital, which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further
be classified as seasonal working capital and special working capital. The capital required to
meet the seasonal need of the enterprise is called the seasonal working capital. Special
working capital is that part of working capital which is required to meet special exigencies
such as launching of extensive marketing campaign for conducting research etc.
Temporary working capital differs from permanent working capital in the sense that it is
required for short periods and cannot be permanently employed gainfully in business.
34
3. Length of production cycle:The longer the manufacturing time, the raw material and other supplies have to be carried for
a longer time in the process with progressive increment of labor and service costs before the
final product is obtained. Therefore, working capital is directly proportional to the length of
the manufacturing process.
4. Rate of stock turnover: There is an inverse co-relationship between the quantum of working capital and the velocity
or speed with which the sales are effected. A firm having a higher rate of stock turnover will
need lower amount of working capital as compared to a firm having a low rate of turnover.
5. Credit policy:
Credit policy affects the working capital requirements in two ways:
(a)
(b)
A concern that purchases its requirements on credit and sells its product/services on cash
requires lesser amount of working capital and vice-versa.
6. Working capital cycle:The speed with which the working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working capital.
36
7. Rate of growth and expansion of business:The larger size businesses require more permanent and variable working capital in
comparison to small business. If a company is growing, its working capital requirements will
also go on increasing. Thus, the growing concerns require more working capital as compared
to the stable industries.
8. Seasonal variation:Generally, during the busy season, a firm requires larger working capital than in the slack
season.
9. Business fluctuation:In period of boom, when the business is prosperous, there is a need for larger amount of
working capital due to rise in sales, rise in prices, optimistic expansion of business etc. On
the contrary in time of depression, the business contracts, sales decline, difficulties are faced
in collection from debtors and the firm may have a large amount of working capital idle.
10. Earning capacity and dividend policy:Some firms have more earning capacity then other due to quality of their products, monopoly
conditions, etc. Such firms may generate cash profits from operations and contribute to their
working capital. The dividend policy also effects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profit needs more working
37
capital than the firm that retains larger part of its profits and does not pay so high rate of cash
dividend.
11. Price level changes:Price level changes also affect working capital needs. If the prices of different goods
increase, to maintain same level of production, more working capital is needed.
12. Availability of raw material:Availability of raw material on the continuous basis affects the requirement of working
capital. There are certain types of raw materials, which are not available regularly. In such a
situation firm requires greater working capital to meet the requirements of production. Some
raw materials are available in particular season only for example wool, cotton, oil seeds, etc.
They have to keep greater working capital.
13. Magnitude of profit:Magnitude of profit is different for different businesses. Nature of product, control on the
market and ability of managers etc. Determine the quantum of profit. If the profit margin is
high, it will help to arrange funds internally, which will also increase the working capital.
14. Other factor:a) Management ability
b) Irregularities of supply
c) Import policy
d) Assets structure
38
e) Importance of labor
b) Lean season
c) Off season
39
5) Credit policy: - credit allowed by HCPL to its customers is advance payment for sale of
aerated water/fruit juices and credit allowed by supplier to the firm varies from 15 days to 1
month.
7) Price level changes: - fluctuation in the price of raw material is quite often which
fluctuate working capital requirement. In terms of HCPL, the cost of raw material which is
required for manufacturing soft drinks going on high which again increases its working
capital requirements.
Financial management should determine the quantum and structure3 of current assets. It
should also see that current assets are financed from the proper sources. Management should
also see that current liabilities are paid in time, while managing the working capital.
The main objective of working capital management is to manage current assets and current
liabilities in a manner so that working capital can be kept in a satisfactory level. It is also
40
taken in to account that the working capital should be neither excessive nor inadequate. The
amount of current assets should be adequate to pay the current liabilities in time and adequate
security margin can be maintained. Accordingly, proper balance among the different
constituents of current assets is maintained so that no current has more than require amount
invested in it.
Management of working capital affects profitability, risk and liquidity of the business
significantly. Management should, therefore, maintain proper balance among there factors
while managing working capital. If the quantum of working capital is more, it will increase
liquidity, but decrease profitability and risk. If working capital relatively declines, it will
decrease liquidity but cause an increase in profitability and risk.
If business wants to earn more profit, it will have to bear higher risk. Risk means inability of
the firm to pay current liabilities in time.
Working capital management is three dimensional in nature:1) It concerned with the formulation of policies with regard to profitability,
Liquidity and risk.
2) It is concerned with the decisions about the composition and level of current assets.
Policies regarding to
Profitability,
Liquidity
and of current liabilities.
3) It is concerned with the decisions about
the composition
and level
Risk
Composition of level
of Current liabilities
Current liabilities
41
Of level of current
assets
Cash
Debtors
Inventory
On the basis of our research in the HCPL, these basic components are managed in the
organization, in the under mentioned manner.
42
2011
2012
2,297,000
426,780
23,887,000
37,736,000
286,000
6,971,000
54,642,000
103,279,000
3,886,310
3,087,910
25,622,000
28,673,000
CASH
LOAN & ADVANCES
DEPOSITS
OTHER C.A.
TOTAL
110,620,310
180,173,690
38,718,000
20,480,000
2,645,000
2,223,000
PROVISIONS
3,744,000
4,198,000
TOTAL
NET WORKING CAPITAL
Interpretation: -
45,107,000
26,901,000
65,513,310
153,272,690
The product portfolio has been increased to include fruit juices in the year 2011 due to which
company has accommodated huge inventory of fruit pulp and to assure timely procurement,
company has made advance payment which has doubled from previous year.
Sundry debtor level depends on two measure issues: One is volume of credit sales and another is credit period allowed to customer. It is the
essence of every business that to sale on credit and allow credit period to the customer in
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such a competitive market, following factors may be considered before allowing credit
period to the customer: -
Credit policy of company, say number of days allowed to customer for payment to the
customers.
Cost of debtors
Debtors Management
There are mainly three aspects of Management of Debtors: -
1. Credit policy: The credit policy is to determine. It involves a trade off between the profits on additional sale
that arises due to credit being extended on one hand and the cost of carrying those debtors
and bad debts losses on the other.
44
In HCPL, there is one year contract with organizations that want to relate as dealer/agent.
This agreement requires an amount in form of security which is given by the dealer. While
placing an order, the dealer has to make advance payment. There are some big dealers, to
whom credit is allowed.
2. Credit analysis: This requires determining as how risky is to advance credit to a particular customer.
Before the undertaking of any dealer/agent, selling agents (of HCPL) analyses the
information about them. It includes the followings:
3. Control of receivables: This requires to the firm to follow up debtors and decide about a suitable credit collection
policy. It involves both lying down of credit policy and execution of such policies.
45
In HCPL, Credit is allowed to the bumper sellers (dealers), but after the time placing one
order on credit, the dealer can not place next order (until the payment is made).
There is a cost of maintaining receivables, which comprises cost of: The company requires additional funds as resources are blocked in receivables, which
involves a cost in the form of interest (loan fund) or opportunity cost (own fund).
Administrative cost, which includes record keeping, investigation of credit worthiness
etc.
Collection cost .
Defaulting cost or bad debts
46
2012
2,297,000
426,780
242,579,000
309,750,000
PARTICULARS
Total debtors
Turnover
3.5 days
TOTAL TO TURNOVER
0.5 days
In fact, for example, when HCPL sell 100Rs Coke (to the dealer), they take 100Rs as the
advance, and this does not add the value of bottle which may be 400Rs.
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Steps involved in management of debts: The following steps are involved in debtors Management
There should a close contact with the customers.
There should be proper age wise analysis of the debtors.
There should be proper classification between collectible between collectible debtors
and bad debts.
Bad debts should be written of as early as possible after making all efforts for its
collection.
Product cycle should be minimized so that cost of the product should not become
high to the agreed amount because of time factor.
There must be a provision of discount for early payment of debts by the customers.
Regular checking of the records of the debtors is essential so as to analysis the current
position of that organization.
While making a policy, regarding the debtors the point should be considered that
customer having excellent past record, follow the lenient policy is adopted for
doubtful customers.
Manage the working capital according to need as recovering the debt from customer
as early as possible while, get extension of payment of dues on the company of others
as suppliers of raw material as late as possible.
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MANAGEMENT OF CASH
It is the duty of the finance manager to provide adequate cash to all segments of the
organization. At the same time, he/she has also to ensure that no funds are blocking in idle
cash as this will involve cost in terms of interest to the concern. A sound cash management
scheme has to maintain the twin objective of liquidity and cost.
49
50
movement of funds. This system is good in case of the firms having their spread over a large
area.
b) Lock box system: This system is more popular in the USA and is further step in speeding
up collection of cash. This system has been devised to element delay arising in cash of the
concentration banking system on account of a time gap between actual receipt of cheques by
the regional collection centers and its deposits in the local bank account. Under this system
company hires a post office box and instructs its customers for there remits to the box. It also
reduces the chances of frauds in the cash collection process and controls the cash inflows
better. In order to avoid the unnecessary pockets of idle funds, the company should maintain
minimum number of the bank account.
3. Controlling outflows of cash: - An efficient control over cash outflows is equally
important for conserving cash and reducing financial requirements. Control over cash
outflows signifies slow disbursement in order to control the outflows of cash efficiently, a
firm should keep in view the following considerations: a) Centralized system for cash payments: Should be followed as compared to decentralized
system in cash of collections. All payments should be made from a single control account,
i.e., from the central office of the company. However, the local office of the company may
pay local expenses.
b) Payment should be made on the due dates: Neither before nor after. The company
should neither lose cash discount nor its prestige on account of delayed payments. The
company should, there fore, made payments within the terms offered by the suppliers.
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c) Playing float: - Technique should be used by the company for maximizing the availability
of funds. The term float means the account tied up in checks which have been issued by
company but not hav been yet been presented for payment by the creditors. As a result of a
time lag between issue of a cheque and its actual presentation, the actual bank balance of a
firm may be more than the balance shown in the books. The difference is called payment of
float. The longer the float period the greater would be the benefit of the firm.
2. Inflows and outflows of cash: In order to check the change in cash position of the firm
from one period to another, a cash flow statement is prepared. It helps management in
controlling inflows and outflows of cash.
3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial
ratios are used for this purpose. There ratios include current ratio, liquidity ratio, receivables
turnover ratio, and inventory turnover ratio and cash position ratios.
53
HCPL
Direct
Selling
Depot
Sole Selling
Agents
54
In Depot:
Company is maintaining depots for sales and collection of funds in various remote areas.
These depots serve the distributors and FAT agents in case of urgent requirement by
distributed storage of finished goods. They also act as cash collection centers of company
where nearby distributors are advised to remit funds to depots instead of plant at Bareilly
this cash collected at depots is deposited in CBS bank account maintained by the company
and information is forwarded on daily basis.
Direct Selling:
For sale of finished goods to area other than one allotted under franchise agreement,
company has adopted direct sales channel and sell directly to bottler of that area. Usually
funds are collected in advance through R.T.G.S. mode so as to reduce the float.
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Beside this for payments company has adopted the policy of making all the payments in
excess of Rs.2000/- by way of account payee cheque/ DD except in case of payment of
freights where this limit is Rs.19000/-.
INVENTORY
Inventories represent investment of a firms funds. The objective of the inventory
management should be the maximization of the value of the firm. The firm should therefore
consider:
(a) Costs,
(b) Return, &
(c) Risk factors in establishing its inventory policy.
Tow types of costs are involved in the inventory maintenance:
1- Ordering costs: - requisition, placing of order, transportation, and staff services,
ordering costs are fixed per order size increases.
2- Carrying costs: - warehousing, handling, clerical and staff services, insurance and
taxes. Carrying cost increases.
The firm should minimize the total cost (ordering cost + carrying cost). The economic order
quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The
following formula can be used to determine EOQ:
EOQ= (2AO/C)^1/2
Where,
A= annual requirement.
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The firm should strike a trade-off between the marginal rate of return and marginal cost of
funds to determine the level of safety stock.
A firm, which carries a number of items in inventory, which differ in value, can follow a
selective control system. A selective control system, such as the a-b-c analysis, classifies
inventories in to three categories according to the value of item.
A- Category consists of highest value items,
B- Category consists of high value items,
C- Category consists of lowest value items.
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More categories of inventories can also be created. Tight control may be applied for highvalue items and relatively loose control for low-value items.
HCPL holds inventory analyzing with ABC method & VED method both. In ABC analysis,
in Group A they keep: Essence
Sugar
Preform
Plastic Closer
CO2
Crown cock
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The selling of HCPL changes in different seasons (as mentioned earlier) and the stock level
also. They have to increase the inventory level minimum 2 months before the peak season to
achieve the target selling. Some advance money to the suppliers also has to be given to
continuously receive the raw material.
Similarly 2 months before the lean season the inventory level is brought down as the selling
goes down. The Inventory level is reduced also before the off season come.
Following study of the selling ledger to identify the real fluctuation in figures: -
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Sales
HINDUSTAN COCACOLA BEVERAGES
Particulars
Closing
Debit
Balance
Credit
Opening Balance
April
33,366,483
33,366,483
May
42,746,314
76,112,797
June
36,766,707
112,879,503
July
9,727,499
122,607,002
August
10,719,558
133,326,560
September
10,051,407
143,377,967
October
4,789,250
148,167,217
November
1,991,477
150,158,694
December
1,434,629
151,593,323
January
5,813,385
157,406,708
February
9,582,289
166,988,997
65,935,279
232,924,276
232,924,276
232,924,276
March
Grand Total
A sudden change in selling from Feb. (95,82,000) to march(6,59,35,000) shows that how
requirement of inventory changes because of the change in season. This requires a very tight
focus in keeping the inventory.
60
PARTICULAR
2011
2012
-
Raw Materials
Finished & Traded goods
19,888,000
32,690,000
3,999,000
5,046,000
Waste
Work in process
TOTAL
23,887,000
37,736,000
Turnover
242,579,000
309,750,000
40,490,500
49,679,500
5.99
6.23
60.92
58.54
Avg. Inventory
Inventory turnover ratio
Days of Inventory holding
Opening Stock in the year20 11 is 33,20,7000
Inventory turnover ratio= sales / Avg. inventory
Interpretation:
From the above table we can see that the days of inventory holding are decreases from 61in
20012 to 59 in 013 which is good for the company because it decrease the cost of kept
inventory for the shorter period and company should take measure to control increase in no.
of days of inventory holding.
61
2011
2012
Current
Current assets /
110,620,310/
180,173,690/
Ratio
Liquidity Ratio
current liabilities
Liquid assets /
45,107,000 = 2.45
2,583,000/ 45,107,000
26,901,000 = 6.70
7,397,780/ 26,901,000
current liabilities
= 0.058
= 0.275
INTERPRETATION
62
As we know that the current ratio of any company should revolve around 2:1 and from the
above table we can see that the BBPLs current ratio is too much above the standard. This
means that the price of companys current asset is 6 times of the price of its current liabilities
which means that the company can easily meets its current liabilities from its current assets.
Now we compare of the companys position according to the liquidity ratio. As we know the
standard of the liquid ratio is 1:1. In case of the company it is quiet lower than standards but
in line with the industry that come to 0.3 on annual basis.
Cash conversion cycle indicate that company is able to generate the cash back in about 16
days from the day of deployment which is better than that of industry due to efficient
collection channel.
Here we extracted two lines from HCPLs most recent income statement and a few lines from
their working capital accounts.
2011
2012
Net Sales
Cost of Goods Sold (COGS)
Assets (from Balance sheet)
242579000
114236000
309750000
153540000
2297000
23887000
426780
37736000
Accounts payable
38718000
20480000
Here are the accounts needed to calculate the cash conversion cycle. From the income
statement, you need net sales and COGS. From the balance sheet, you need receivables,
inventories and payables. Below, we show the two-step calculation. First, we calculate the
64
Turnover Ratios:
Receivables (Sales/Avg. Receivables):
=3097500/Avg. of [22,97,000 & 4,26,780]
65
227
4.98
6.2
+ 2days
+73 days
- 57 days
= 16 days
Here is a graphic summary of HCPLs cash conversion cycle for 2008. On average, working
capital spent 16 days in HCPLs operating cycle:
HCPLs WORKING CAPITAL
66
Traditional analysis of working capital is defensive; it asks, "Can the company meet
its short-term cash obligations?" But working capital accounts also tell you about the
operational efficiency of the company. The length of the cash conversion cycle (DSO+DIODPO) 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.
67
(1) Gross Working Capital A Corporations working capital consists of its investment in
current assets.
(2) Net Working Capital A Corporations working capital consists of the difference
between current assets and current liabilities.
Current Assets Current assets refers to those assets which in the ordinary course of
business can be, or will be, converted into Cash within one year without undergoing a
diminution in value disrupting the operations of the firm.
Cash
(2)
Marketable Securities
(3)
Account Receivables
68
(4)
Inventory
(5)
Current Liabilities - Current liabilities are those liabilities which are intended, at their
inception, to be paid in the ordinary course of business, within a year, out of the current
assets or earning of the concern.
Current Liabilities
(1) Fixed, Regular or Permanent working capital : Business activity does not come to an
end after the realization of cash from customers. For a company the process is continuous
and, hence, the need for a regular supply of working capital. However, the magnitude of
working capital required is not constant, but fluctuating. To carry on business, a certain
minimum level of working capital is necessary on a continuous and uninterrupted basis. For
all practical purposes, this requirement has to be met permanently as with other fixed assets.
This requirement is referred to as Permanent, Regular or fixed working capital.
69
(2) Variable, Seasonal or Special working capital : Any amount over and above the
permanent level of working capital is temporary, fluctuating or variable working capital. The
position of the required working capital is needed to meet fluctuations in demand consequent
upon changes in production and sales as a result of seasonal changes.
70
Financing of
Current assets
Investment in
Current assets
Spontaneous
Short-terms and
Long-terms
problems (how to
determine
financing
Appropriate level of
Investment
Type of current assets
Kind of current assets
Fixed and variables mix
Inter-relatedness
Analysis of working capital and measuring the efficiency in the management of working
capital:The working capital magnitude of a concern should be neither inadequate nor too
excessive as compared to its requirement. Maintaining adequate level of working capital
ensure the improvement in profitable. Financial mangers all the time strive to strike a
balance between working capital requirement and the working capital magnitude.
71
This is being done by analyzing and examine the changes in individuals components of
working capital i.e. items of current asset and items of current liabilities when we make a
deep examination of various component of working capital within an objectives to insure
its adequacy or otherwise it is know as ANALYSIS OF WORKING CAPITAL
The following techniques are used in an analysis of performance:(A) Schedule of working capital changes
(B) Fund statement
(C) Ratio analysis
(A) SCHEDULE OF WORKING CAPITAL CHANGE:This technique is based on currents items, i.e. current asset and current liabilities only. In
working capital are defined using current items as excess of current asset over current
liabilities. Thus,
NETWORKINGCAPITAL=CURRENTASEETCUREENT LIAIBITES
As such, change in net working capital is due to change in current asset and change in
current liabilities.
(B) FUND STATEMENT:This approach based is on current items indicates as how management has used the long
term source of fund for working capital. The information relating to working capital
72
change (flow) may be presented in a statement from know as fund flow statement. This
statement presents a view of divers sources of fund increase the working capital and
each item of uses of fund decrease working capital. Thus if we added the amount coming
from each sources to the opening balance working capital and thus we can find out the
change in working capital during a particular period.
(C)RATIO ANALYSIS :Working capital analysis with the help of ratios may be undertaken with an objective to
examine the following
(a) Efficiency in use of working capital.
(b) Liquids of working capital elements.
(c) Structural health of working capital.
(1)EFFICIENCY OF WORKING CAPITAL:-
capital is being used by the management may be analyzed in term of over all working capital
and also in terms of its constitute parts:Efficiency of overall working capital:Cost of sales or net sales
Working capital management =
Working capital
Cost of sales or net sales
current assets
Working capital turnover indicates the rates of working capital utilization in the company.
This ratio can be compared either over a period of time or with that of industry average.
73
In the case of comparison over a period of time and increasing ratio is the indicator of
more intensive use of working capital over a period of time.
When compared with the industry average, a higher working capital turnover ratio
indicates that the amount of working capital in the company is less than that required by
its operations. If the ratio is lower than the industry average it may indicate that working
capital in the company is more than required.
Liquidity of working capital elements: - The various elements of working capital are
inventory of all types, receivables, cash and payables. If there is proper balance between
the individual current assets and level of sales activity. This may indicate that these have
been managed efficiently.
Cost of sales
Inventory turnover =
average inventory
cost of sales
74
average inventory of W. I. P.
2. For judging the efficiency in the use of capital blocked in receivables i.e. goods
sold on credit to customers the following ratios may be used:Total credit sales
Receivable turnover =
average receivables
75
average payables
365* average payables
(2) LIQUIDITY OF WORKING CAPITAL ELEMENTS:liquidity of working capital is an important aspect to be analyzed by the management for
maintaining proper liquid resources to meet both operational requirements as well as
financing commitment of repayment of borrowings/loans.
Liquidity ratio indicates the extent to which a company will be able to meet its short-term
obligations. Such as: ----
Current assets
Current ratio =
current liabilities
Current assets inventory
current liabilities
current liabilities
76
A higher current ratio indicates more liquidity of the company and more ability to pay its
current obligations. A low value of current ratio means that company may find it difficult to
pay the current obligations. Acid- test ratio is often used to supplement the information given
by current ratio.
Cash ratio is the most rigorous test of the liquidity position of a company and is not much
used in practice.
(3) STRUCTURAL HEALTH OF WORKING CAPITAL:The structural health of working capital in a business is generally studied by analyzing the
shifts and changes between various elements of working capital. This is done through
decomposition analysis under the value of individual items is presented in relation to total
value of the current assets and the value of current assets to the value of total assets. The
following ratios are generally used to analysis the structure of working capital.
Ratio of current assets to total assets
Ratio of cash to current assets
Ratio of receivables to current assets
Ratio of receivables to current assets
Ratio of inventory to current assets
77
CHAPTER-4
1.DATA ANALYSIS AND
INTERPRETATION
78
YEARS
CURRENT
ASSETS
(Rs. In Thousands)
CURRENT
LIABILITIES
(Rs. In Thousands)
RATIO
2009-2010
299,817
84,116
3.56
2010-2011
329,443
99,610
3.31
2011-2012
379,200
136,498
2.78
2012-2013
500,880
192,416
2.60
G-1
Ratio
4
3.5
3
2.5
2
1.5
1
0.5
0
Ratio
2009-2010
2010-2011
2011-2012
79
2012-2013
2.
T-2
80
YEARS
QUICK
ASSETS
( Rs. In Thousands)
CURRENT
LIABILITIES
(Rs. In Thousands)
RATIO
2009-2010
180,839
84,116
2.15
2010-2011
218,539
99,610
2.19
2011-2012
235,814
136,498
1.73
2012-2013
301,121
192,416
1.56
G-2
Ratio
2.5
2
1.5
Ratio
1
0.5
0
2009-2010
2010-2011
2011-2012
2012-2013
(2012-2013) short-term liquidity position is not good because the current ratio of the
company decreasing year by year.
2009-2010
2010-2011
2011-2012
2012-2013
215,701
229,833
260,702
308,464
The graph rises from 215701 in 09-10 to 308464 in 12-13. This table indicates that the assets
are increasing year by year and the company well control to the liabilities from 09 to 013.
82
83
YEARS
NET CURRENT
ASSETS
( Rs. In Thousands)
GROSS CURRENT
ASSETS
( Rs. In Thousands)
RATIO
2009-2010
215,701
299817
.72
2010-2011
229,833
329443
.70
2011-2012
260,702
379200
.69
2012-2013
308,464
500880
.62
G-4
Ratio
0.74
0.72
0.7
0.68
0.66
0.64
0.62
0.6
0.58
0.56
Ratio
2009-2010
2010-2011
2011-2012
2012-2013
company for the working capital management, in which time the working capital was good,
but next three year the ratio is falling down.
YEARS
CURRENT
LIABILITIES
( Rs. In Thousands)
RATIO
2009-2010
9,906
84,116
.117
2010-2011
14,069
99,610
.141
2011-2012
12,503
136,498
.091
2012-2013
14,508
192,416
.075
G-5
85
Ratio
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Ratio
2009-2010
2010-2011
2011-2012
2012-2013
CASH RATIO :This ratio has the purpose of assessing the proportion of cash to current liabilities in the
working capital set-up and the trend of the two. In any working capital structure current
liabilities serve to relieve the requirements of the cash. The effect of rising current liabilities
in the structure is to shorten cash holding periods, and to increase Cash Turnovers.
As seen from the table the current ratio of the company shows a general downward
86
3.
YEARS
TOTAL CURRENT
ASSETS
(Rs. In Thousands)
RATIO
2009-2010
9,906
299,817
.033
2010-2011
14,069
329,443
.042
2011-2012
12,503
379,200
.032
2012-2013
14,508
500,880
.028
G-6
Ratio
0.045
0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0
Ratio
2009-2010
2010-2011
2011-2012
87
2012-2013
INVENTORIES
(Rs. In Thousands)
RATIO
2009-2010
9,906
118,978
.083
2010-2011
14,069
110,904
.126
2011-2012
12,503
143,386
.087
2012-2013
14,508
199,759
.072
G-7
88
Ratio
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Ratio
2009-2010
2010-2011
2011-2012
2012-2013
However, the trend of the ratio of Cash to Inventory in a business that is normally
expanding and where cash is being effectively managed and controlled, should be a
decreasing one. The trend of cash to inventory ratio is falling down in last two years.
Therefore it shows that the cash is effectively utilized by the company as a result low
closing balances of cash can be observed in these two years.
89
NET CURRENT
ASSETS
(Rs. In Thousands)
RATIO
2009-2010
9,906
215,701
.045
2010-2011
14,069
229,833
.061
2011-2012
12,503
260,702
.047
2012-2013
14,508
308,464
.047
G-8
Ratio
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
Ratio
2009-2010
2010-2011
2011-2012
90
2012-2013
CASH TO NET CURRENT ASSETS RATIO :Cash to Net Current Assets Ratio is used to measure the relation of cash to net current
assets. Therefore this ratio is considered with the purpose of estimating the progression of
cash as relieved by the trend of Current Liabilities in the working capital set-up of the
company .
This ratio shows a mixed trend due to abnormally rising level of cash during the period
and the generally rising trend of Current Liabilities with some fluctuations.
The ratio
shows a nearly constant movement during the last two years which indicates a control on
the front of Current Assets on the strength of Current Liabilities.
The ratio would have had a similar trend even apart from current liabilities, because in
that situation cash to that extent would have been utilized leaving smaller closing
balances.
T-9
91
YEARS
SUNDRY DEBTORS
(Rs. In Thousands)
RATIO
2009-2010
9,906
170,933
.057
2010-2011
14,069
204,470
.068
2011-2012
12,503
223,311
.055
2012-2013
14,508
286,613
.050
G-9
Ratio
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
Ratio
2009-2010
2010-2011
2011-2012
2012-2013
CASH TO DEBTORS
Debtors and Cash share a contrary relationship with each other in the working Capital
structure of any company. If in any year the depts. Are cleared on large extent then it
may result in high cash balances for the company .
92
But if the debts are cleared on a regular basis then it may prove helpful for the company ,
as then the company can get sufficient cash balance and this will obviate the need to
arrange for cash from external sources to meet exigencies.
The ratio of Cash To Debtors must necessarily follow a reducing trend , because an
increase in the level of debtors which is not exceedingly high is indicative of increasing
sales . On the other hand, an exceeding level of cash at the end of the period indicates
Idle Resources that are costly.
In Coca Cola this ratio registers a decreasing trend from the F.Y (2011-12 onwards ) to
the last year of our period. This is clearly due to the decreasing level of cash over the
period, with abnormally low level from the F.Y ( 2012-13 ).
93
Inventory
Current Asset
T - 10
Year
Inventory
Current Asset
Ratio
2009-10
118,978
299,817
.396
2010-11
110,904
329,443
.336
2011-12
143,386
379,200
.378
2012-13
199,759
500,880
.398
G - 10
94
Ratio
0.42
0.4
0.38
0.36
Ratio
0.34
0.32
0.3
2009-2010
2010-2011
2011-2012
2012-2013
95
development & the on set of the phase of renovation & modernization has resulted in &
enlargement of inventory in the later years of our period.
OTHERS RATIOS
= 85955*100
1160039
= 7.41
= 108283*100
1392760
= 7.77
96
= 1156052
127145
= 9.09
Inventory Turnover Ratio in 2013 = 1392760
171572.5
= 8.12
97
= 1156052
281427
4.11
= 1392760
383362
3.63
98
= 1156052
213890.5
= 5.40
Debtors Turnover Ratio in 2013
=
= 1392760
808831.5
1.72
99
= 1348159
601304
= 2.24
= 1625859
702492
=
2.31
= 1348159
= 1625859
= 601304
= 702492
100
= 1348159
1063705
= 1.27
= 1625859
1286089
=
1.26
101
= 223311*365
1156052
= 70.51
= 286613*365
1392760
= 75.11
102
CHAPTER- 5
5.1 CONCLUSION
5.2 SUGGESTION
103
5.1 CONCLUSION
Hindustan Coca cola Beverages Private Limited is using best possible tools for efficient and
effective management of its working capital. Company has adopted excellent system for
appraisal of selling agents so as to collect receivables in time and avoid bad debt losses.
Suppliers of raw material and primary packing material are appraised by company on annual
basis from the list of suppliers approved from Coca Cola India P Limited (quality approval),
these suppliers are limited in numbers so they enjoy monopolistic terms of payments at the
time of season due to which company has to provide huge advances for timely procurement
of material thereby blocking huge working capital as advance to suppliers. Company should
try to negotiate with suppliers and Coca Cola India Limited to break this cartel so as to
deploy their working capital more effectively.
After completing my project on working capital management in HCPL, I have learnt how to
manage working capital in efficient manner. This project helps me in understanding the daily
requirement of such a big manufacturing firm in FMCG business.
104
5.2 SUGGESTIONS
While analyzing the working capital of HCPL I have found the current assets are increasing
32.09% in the year 2013 as the comparison of 2012.
By analyzing the Net Profit Ratio I have seen that net profit of the company has been
high in 2013as compare to 2012. but the company again proved its operational efficiency by
increasing in profit in 2012-2013.
By analyzing the asset turnover ration I have seen that the investment in the assets is
By analyzing the working capital turnover ratio I have seen that the volume of sales is
increasing from 2012 to 2013 with relatively small amount of working capital. This indicates
that the companys operations are efficient during this year.
By analyzing the fixed asset turnover ratio I have seen that investment in fixed asset
are not judicious since the ratio is decreasing even the sales are growing during 20112012and 2012-2013.
By analyzing the inventory turnover ratio I have seen that the inventory turnover ratio
is decreasing from 9.09 times in the year 2012 to 8.12 times in the year 2013. This indicates
that the companys managing its liquid assets has been not satisfied and the company is
blocking its more and more fund in holding inventory.
105
By analyzing the debtors turnover ratio I have seen that the debtors turnover ratio is
decreasing in 2013 as the comparision
collecting promptly.
By analyzing the debt collection ratio I have seen that the average collection period is
increasing from 70.26 days in the 2012 to 75.026 days in 2013. This also proves companys
inefficiency in the collection of debts and debts are not collected on time.
106
CHAPTER- 6
1.BIBLIOGRAPHY
107
1.BIBLIOGRAPHY
A. BOOKS
I M Pandey, Financial Management, Vikas Publishing House Pvt. Ltd, New Delhi, 2010
V K Bhalla, Working Capital Management, Anmol Publication Pvt Ltd, Ahemdabad,
1998
Hrishikesh Bhattacharya, Working Capital Management Strategies & Techniques,
P.H.I Learning Pvt Ltd, New Delhi, 2004
Dr. A K Garg, Basic Business Finance, Swati Prakashan , Delhi,
http://www.scribd.com
http://www.management paradise.com
B. MAGAZINES
Business today vol.15, June 2010, Page-23.
Business world vol.8, Jan 2010, Page-19.
India today July 2011, Page-36.
108