Contents

WORKING CAPITAL:.................................................................................................................... 5
WORKING CAPITAL MANAGEMENT OF FAUJI FOODS: .............................................................. 6
LIQUIDITY AND WORKING CAPITAL: ...................................................................................... 6
LIQUIDITY RATIOS OF FFL: .......................................................................................................... 6
CURRENT RATIO: .................................................................................................................... 6
QUICK RATIO: ......................................................................................................................... 7
RETURN ON INVESTMENT AND WORKING CAPITAL: ............................................................ 7
APPROACH FOLLOWED BY THE COMPANY IN MANAGING WORKING CAPITAL: ...................... 8
CONCLUSION: ............................................................................................................................. 8
 FAUJI FOODS LIMITED
Fauji Foods Limited is a flourishing company in the food industry of Pakistan. It is
on the way of struggle to compete other brands in quality and sales. It is improving its
position by introducing new lines of dairy products and other products. Nurpur is a leading
dairy farming brand of Pakistan since 1966. Its key products include nurpur milk, nurpur
butter and other dairy products. It has recently launched new line of juices Must and tea
whitener. It is keeping its spirits high in improving the financial conditions of the company as
Pakistan has a wide potential for livestock and dairy farming. Dairy Industry is a growing
industry in Pakistan. Its key motto is “Transforming lives through nourishment.”

WORKING CAPITAL:
There are two major concepts in working capital. Net working capital and
gross working capital. Net working capital is:

Current Assets – Current Liabilities

And gross working capital is the firm’s investment in current assets. The
administration of the firm’s current assets and the financing needed to support the firm’s
current assets is known as working capital management. Current assets include cash,
accounts receivable and marketable securities of the firm. For a manufacturing firm, current
assets form more than half of its fixed assets. Working capital is essential to creditors
because it shows the liquidity of the firm.
WORKING CAPITAL MANAGEMENT OF FAUJI FOODS:
According to the balance sheet of FFL for the year 2017, the current assets for
the company equaled an amount of 4,005,422,450 and its current liabilities were equal to
2,353,208,556. The difference between both of them is its working capital which is equal to
1,652,213,894. The difference of the current assets and current liabilities is positive which
means that the currents assets are more than the current liabilities.

LIQUIDITY AND WORKING CAPITAL:

The current assets tells us about the liquidity of the firm. The greater the current
assets, the higher is the liquidity of the firm. The current assets of FFL are less than half of its
fixed assets. But in comparison to the current liabilities, the current assets are about double
the current liabilities which means the company is highly liquid. High liquidity of the firm
means it is not able to maintain its cash resources with its needs and its capital management
is not efficient. Excessive working capital results in substandard Return on Investment of the
firm. The higher the liquidity of the firm, the lower its profitability. Profitability is inversely
related to the liquidity of the firm.

LIQUIDITY RATIOS OF FFL:

Liquidity ratios are used to measure the ability of the firm to meet its short
term obligations. Two major liquidity ratios i.e. current ratio and quick ratios of FFL are
calculated below:

CURRENT RATIO:
The formula for calculation of current ratio is:

CURRENT ASSETS / CURRENT LIABILITIES

The current ratio for FFL is

4,005,422,450 / 2,353,208,556

=1.70

This ratio indicates that the company has Rs. 1.70 of current assets for every 1 rupee of its
current liabilities. This ratio is indicating a high level of liquidity of FFL which is not good. The
company has idle resources lying with it.
QUICK RATIO:
Quick ratio is same like current ratio but it excludes inventory from the current
ratio because it is least liquid of all the current assets.

Quick ratio for FFL is calculated below:

CURRENT ASSETS -INVENTORIES / CURRENT LIABILITIES

4,005,422,450-1,021,155,966 / 2,353,208,556

=1.26

FFL has an ideal quick ratio.

RETURN ON INVESTMENT AND WORKING CAPITAL:

To know about the profitability of the firm, we need to calculate the Return on
Investment ROI of the firm. ROI is calculated by the formula underneath:

ROI = NET PROFIT / TOTAL ASSETS

To calculate the return on investment of FFL we need to know the net profit of
the firm for the year and its total assets.

ROI OF FFL = (2,288,261,859) / 1,1907,266,434

= (00.1921)

The company generated net loss for the year so the return in investment is also
negative. The company is going towards losses. When the currents assets of the increase its
profitability decreases. The return in investment of FFL is 19% negative. As the current
assets decrease, total assets decrease and the profitability would increase. Hence
profitability varies inversely with liquidity. As FFL is highly liquid is not generating profits.
Increased profitability comes at a cost of reduced profitability. This indicates that the
company simply has done nothing with its assets.
APPROACH FOLLOWED BY THE COMPANY IN MANAGING WORKING
CAPITAL:
FFL is following a conservative approach in managing its resources. It is highly
liquid. It is carrying a lot of liquid resources to pay off its short term obligations. High
liquidity of FFL indicates that it is following a conservative approach in managing its working
capital. Moreover, the major part of its working capital is financed by long term financing
which equals an amount of 4,450,000,000 rather than the short term financing. Its short
term borrowings are equal to 1,449,501,368. Conservative approach means risk free
approach which leads to lower profitability as higher the risk, higher the return. There are
certain advantages and disadvantages of following the conservative approach. This
approach results in smoothening the operations of the firm without any stoppages like delay
in procurement time of the inventory resulting in high customer satisfaction. The insolvency
risk is avoided by following a conservative approach because it has lesser needs for the
short term financing. Because a major portion of the working capital is financed by long
term borrowings the interest rate is therefore high for the long term loans. The company
has idle funds and inventory residing with it which cost carrying expenses which impact
profitability. Conservative approach mostly indicates ‘inefficient working capital
management’.

CONCLUSION:
These calculations and data is indicating the FFL needs to efficiently manage its
working capital in order to increase its profitability. Working capital plays an important role
in determining the profitability of the firm. It should be efficient enough to manage its
assets and liabilities to generate profits. To be profitable firm in future FFL needs to manage
its current assets and current liabilities effectively.