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

Tariquewali11@gmail.com

TABLE OF CONTENTS
1) Acknowledgement

2) Abstract

3) Objectives

4) Research methodology

5) Introduction

6) Overview of industry

7) Company Profile

17

8) Working capital management

35

9) Conclusion

54

10) Bibliography

56

ACKNOWLEDGEMENT

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-1
INTRODUCTION
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 Limited and 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, Jalgaon in 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.

10

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

11

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.

12

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.

13

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.

14

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.

15

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.

16

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

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 $200

2007

Dabur food merged with Dabur India

2008

Acquire Fem care Pharma

2009

Dabur red Toothpaste joins Billion rupee brand club

Professionals to manage the Company

17

billion

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.

18

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.

19

DABURS MAJOR STRATEGIC BUSINESS UNITS

Dabur 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.

20

DABURS CORE VALUES

VISION
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.

21

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

TEAM WORK
We work together on the principle of mutual trust 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.

22

DABUR WORLD WIDE

Dabur'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.

23

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

24

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

25

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
26

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

27

Coconut Milk

Tomato Puree

CAPSICO RED

LEMONEEZ

Dashmularishta

Ashokarishta

Lauhasava

Mahanarayan Tail

Juritap

Madhuvani

28

Lavan Bhaskar Churn

HEALTH CARE:

Dabur Chyawanprash

Pudinhara

Hajmola Tablets

Dabur Honey

Shilajit

SKIN CARE:
29

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

30

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.

31

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.

32

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

33

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:Current
WORKING

CAPITAL =

Assets
||

- Current liabilities

stock + debtors + cash

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-

34

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.

35

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.

36

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

37

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

38

Gross

Net

Permanent/

Temporary/

Working

Working

Capital

Capital

Working

Working

Fixed

Variable
Capital

Capital

Regular Reserve
WC

WC

Seasonal Special
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.

39

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

40

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

41

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.

42

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.

43

FINANCING OF WORKING CAPITAL

There are two types of working capital requirements in a companyi)

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

44

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

45

 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.

46

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 shortterm 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.
47

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.

48

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 Name

F/Y

Current

Current

Net

Assets

Liabilities

Working

49

Capital
Dabur India Ltd.
Britannia Industries Ltd.
Hindustan Lever Ltd.
Marico Industries Ltd.

2009-2010
2009-2010
2009-2010
2009-2010

477.72
325.94
3089.74
471.43

471.73
345.08
5493.97
230.75

5.99
-19.14
-2404.23
240.68

Cadbury India Ltd.

Nestle India Ltd.

2009-2010
2009-2010

502.41
589.66

534.02
666.39

-31.61
-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.com

MEASUREMENT 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.

50

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

51

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

52

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.

53

BIBLIOGRAPHY

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

BOOKS

AUTHOR/PUBLICATION
54

 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

55