SUMMER TRAINING REPORT SUBMITTED TOWARDS THE

PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN

MASTERS IN BUSINESS ADMINISTRATION

“ANALYSIS OF WORKING CAPITAL FOR COCA

COLA COMPANY”

SUBMITTED TO SUBMITTED BY
Jagbinder singh
MBA-III
ROLL NO. 95323565253

SWAMI SATYANAND COLLEGE OF MANAGEMENT AND TECHNOLOGY,

AMRITSAR

1
 ACKNOWLEDGMENT

I express our deepest gratitude to whole staff of Amritsar crown caps pvt. Ltd. for his
invaluable guidance and blessings and for his unwavering support during the entire course of
this project work.

I am very grateful to our Principal Mr. Suresh Seth for providing an environment to
complete our project successfully.

I express our sincere thanks to HOD Mr. Sudesh kumar, for his constant
encouragement and support throughout our course, especially for the useful suggestions given
during the course of the project period.

We are very grateful to our internal guide, Lecturer Miss Kanika, for being
instrumental in the completion of our project with his complete guidance.

We would also like to thank our Project Coordinator Mr. Aman for his support
during the entire course of this project work.

We also thank all the staff members of our college for their help in making this
project a successful one.

Finally, we take this opportunity to extend our deep appreciation to our family and
friends, for all that they meant to us during the crucial times of the completion of our project.

2
 CONTENTS

s. no. Chapters Page no.

1 Introduction to Soft drink industry
2 Introduction to Company
2.1 Plant profile – ACCPL
2.2 Manufacturing process
2.3 Packaging process
2.4 Conclusion
3 Research methodology
4 Data analysis & interpretation
Financial analysis
4.1 Liquidity Ratios
4.2 Solvency/Leverage Ratios
4.3 Profitability Ratios
4.4 Coverage Ratios
4.5 Activity Ratios
4.6 Assets Turnover Ratios
4.7 Return On Investment Ratios
4.8 Investor Ratios
5 Conclusion & Recommendations
6 Bibliography

3
Chapter – 1

SOFT DRINK INDUSTRY

4
 A soft drink (also referred to as soda, pop, soda pop, coke or fizzy drink) is a drink that
typically contains no alcohol, though may contain small amounts (typically less than 0.5% by
volume) and is usually referred to as a sugary drink. Soft drinks are often carbonated and
commonly consumed while chilled or at room temperature. Some of the most common soft
drinks include cola, flavoured water, sparkling water, iced tea, sweet tea, sparkling lemonade
(or other lemon-lime soft drinks), squash, fruit punch, root beer, orange soda, grape soda,
cream soda, and ginger ale.

The term "soft" is employed in opposition to "hard", i.e. drinks with high alcoholic content by
volume. Generally it is also implied that the drink does not contain milk or other dairy
products. Hot chocolate, hot tea, coffee, tap water, juice and milkshakes also do not fall into
this classification.

Many carbonated soft drinks are optionally available in versions sweetened with sugars or
with non-caloric sweeteners, such as diet soda.

The first marketed soft drinks (non-carbonated) in the Western world appeared in the 17th
century. They were made from water and lemon juice sweetened with honey. In 1676, the
Compagnie des Limonadiers of Paris was granted a monopoly for the sale of lemonade soft
drinks. Vendors carried tanks of lemonade on their backs and dispensed cups of the soft drink
to thirsty Parisians.

INTRODUCTION TO INDUSTRY

Soft drinks by definition are carbonated drinks that are non-alcoholic. Carbonated soft drinks
are also referred to as soda, soda pop, pop, or tonic.

 1798 The term "soda water" first coined.

 1810 First U.S. patent issued for the manufacture of imitation mineral waters.
 1819 The "soda fountain" patented by Samuel Fahnestock.
 1835 The first bottled soda water in the U.S.
 1850 A manual hand & foot operated filling & corking device, first used for bottling
soda water.
 1851 Ginger ale created in Ireland.
 1861 The term "pop" first coined.
 1874 The first ice-cream soda sold.
 1876 Root beer mass produced for public sale.
 1881 The first cola-flavoured beverage introduced.
 1885 Charles Aderton invented "Dr Pepper" in Waco, Texas.
 1886 Dr. John S. Pemberton invented "Coca-Cola" in Atlanta, Georgia.
 1892 William Painter invented the crown bottle cap.
 1898 "Pepsi-Cola" is invented by Caleb Bradham.
 1899 The first patent issued for a glass blowing machine, used to produce glass
bottles.
 1913 Gas motored trucks replaced horse drawn carriages as delivery vehicles.
 1919 The American Bottlers of Carbonated Beverages formed.
 1920 The U.S. Census reported that more than 5,000 bottlers now exist.
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  Early 1920's the first automatic vending machines dispensed sodas into cups.
 1923 Six-pack soft drink cartons called "Hom-Paks" created.
 1929 The Howdy Company debuted its new drink "Bib-Label Lithiated Lemon-Lime
Sodas" later called "7 Up". Invented by Charles Leiper Grigg.
 1934 Applied colour labels first used on soft drink bottles, the colouring was baked on
the face of the bottle.
 1952 The first diet soft drink sold called the "No-Cal Beverage" a ginger ale sold by
Kirsch.
 1957 The first aluminium cans used.
 1959 The first diet cola sold.
 1962 The pull-ring tab first marketed by the Pittsburgh Brewing Company of
Pittsburgh, PA. The pull-ring tab was invented by Alcoa.
 1963 The Schlitz Brewing Company introduced the "Pop Top" beer can to the nation
in March, invented by Ermal Fraze of Kettering, Ohio.
 1965 Soft drinks in cans dispensed from vending machines.
 1965 The reseal able to invented.
 1966 The American Bottlers of Carbonated Beverages renamed The National Soft
Drink Association.
 1970 Plastic bottles are used for soft drinks.
 1973 The PET (Polyethylene Terephthalate) bottle created.
 1974 The stay-on tab invented. Introduced by the Falls City Brewing Company of
Louisville, KY.
 1979 Mello Yello soft drink is introduced by the Coca Cola Company as competition
against Mountain Dew.
 1981 The "talking" vending machine invented.

Soft drink production

Soft drinks are made either by mixing dry ingredients and/or fresh ingredients (e.g. lemons,
oranges, etc.) with water. Production of soft drinks can be done at factories, or at home.

Soft drinks can be made at home by mixing either a syrup or dry ingredients with carbonated
water. Carbonated water is made using a home carbonation system or by dropping dry ice
into water. Syrups are commercially sold by companies such as Soda-Club.

U.S. containers in 2008. Various sizes from 8-67.6 US fl oz (237 ml -2 l) shown in can, glass
and plastic bottles

In the United States, soft drinks are sold in 3, 2, 1.5, 1 liter, 500 ml, 8, 12, 20 and 24 U.S.
fluid ounce plastic bottles, 12 U.S. fluid ounce cans, and short eight-ounce cans. Some Coca-
Cola products can be purchased in 8 and 12 U.S. fluid ounce glass bottles. Jones Soda and
Orange Crush are sold in 16 U.S. fluid ounce (1 U.S. pint) glass bottles. Cans are packaged in
a variety of quantities such as six packs, 12 packs and cases of 24, 36 and 360. With the
advent of energy drinks sold in eight-ounce cans in the US, some soft drinks are now sold in
similarly sized cans. It is also common for carbonated soft drinks to be served as fountain
drinks in which carbonation is added to a concentrate immediately prior to serving.

6
In Europe, soft drinks are typically sold in 2, 1.5, 1 litre, 500 ml plastic or 330 ml glass
bottles; aluminium cans are traditionally sized in 330 ml, although 250 ml slim cans have
become popular since the introduction of canned energy drinks and 355 ml variants of the
slim cans have been introduced by Red Bull more recently. Cans and bottles often come in
packs of six or four. Several countries have standard recyclable packaging with a container
deposit, typically ranging from € 0.15 to 0.25. The bottles are smelted, or cleaned and
refilled; cans are crushed and sold as scrap aluminium.

In Australia, soft drinks are usually sold in 375 ml cans or glass or plastic bottles. Bottles are
usually 390 ml, 600 ml, 1.25 or 2 litre. However, 1.5 litre bottles have more recently been
used by the Coca-Cola Company. South Australia is the only state to offer a container
recycling scheme, recently having lifted the deposit from 5 cents to 10 cents. This scheme is
also done in the Philippines; people usually buy glass bottles and return them in exchange for
a small amount of money.

In Canada, soft drinks are sold in cans of 236 ml, 355 ml, 473 ml, and bottles of 591 ml, 710
ml, 1 l, 1.89 l, and 2 l. The odd sizes are due to being the metric near-equivalents to 8, 12, 16,
20, 24 and 64 U.S. fluid ounces. This allows bottlers to use the same-sized containers as in
the U.S. market. This is an example of a wider phenomenon in North America. Brands of
more international soft drinks such as Fanta and Red Bull are more likely to come in round-
figure capacities.

In India, soft drinks are available in 200 ml and 300 ml glass bottles, 250 ml and 330 ml cans,
and 600 ml, 1.25 l, 1.5 l and 2 l plastic bottles.

7
Chapter – 2

INTRODUCTION TO COMPANY

8
HISTORY OF COCA COLA
In May, 1886, Coca Cola was invented by Doctor John Pemberton a pharmacist from Atlanta,
Georgia. John Pemberton concocted the Coca Cola formula in a three legged brass kettle in
his backyard. The name was a suggestion given by John Pemberton's bookkeeper Frank
Robinson.

Birth of Coca Cola

Being a bookkeeper, Frank Robinson also had excellent penmanship. It was he who first
scripted "Coca Cola" into the flowing letters which has become the famous logo of today.
The soft drink was first sold to the public at the soda fountain in Jacob's Pharmacy in Atlanta
on May 8, 1886.

About nine servings of the soft drink were sold each day. Sales for that first year added up to
a total of about $50. The funny thing was that it cost John Pemberton over $70 in expanses,
so the first year of sales were a loss.

Until 1905, the soft drink, marketed as a tonic, contained extracts of cocaine as well as the
caffeine-rich kola nut.

Asa Candler

In 1887, another Atlanta pharmacist and businessman, Asa Candler bought the formula for
Coca Cola from inventor John Pemberton for $2,300. By the late 1890s, Coca Cola was one
of America's most popular fountain drinks, largely due to Candler's aggressive marketing of
the product. With Asa Candler, now at the helm, the Coca Cola Company increased syrup
sales by over 4000% between 1890 and 1900.

Advertising was an important factor in John Pemberton and Asa Candler's success and by the
turn of the century, the drink was sold across the United States and Canada. Around the same
time, the company began selling syrup to independent bottling companies licensed to sell the
drink. Even today, the US soft drink industry is organized on this principle.

Death of the Soda Fountain - Rise of the Bottling Industry

Until the 1960s, both small town and big city dwellers enjoyed carbonated beverages at the
local soda fountain or ice cream saloon. Often housed in the drug store, the soda fountain
counter served as a meeting place for people of all ages. Often combined with lunch counters,
the soda fountain declined in popularity as commercial ice cream, bottled soft drinks, and fast
food restaurants became popular.

New Coke

On April 23, 1985, the trade secret "New Coke" formula was released. Today, products of the
Coca Cola Company are consumed at the rate of more than one billion drinks per day.

9
PLANT PROFILE –ACCPL

10
Section 1: INTRODUCTION TO AMRITSAR CROWN CAPS PVT. LTD.
Unit Description
The Plant is located near Village Nawankot, Amritsar - Jalandhar GT Road Amritsar
Surrounded by Lush green Paddy Fields. The Plant is located in the area of 7.75 acres.
Henceforth the units will be written as ACCPL.
The manufacturing facility is capable of producing flavoured carbonated soft drink ( Coca
cola, Limca, Fanta Orange, Sprite, Thums Up and Fanta Apple) in the pack size of 200ml,
300ml & 1000 ml in returnable glass bottles & 600 ml and 2000 ml packs in Non Returnable
PET bottles. Non flavoured carbonated soft drink ( Kinley Soda ) in the packs size of 300 ml
in RGB & 600 ml in NRPET bottles and flavoured non carbonated beverage ( Maaza
Mango ) in pack size of 250 ml in RGB.
The Product portfolio varies depends up on the market requirement.
The Plant has two CSD and one Non CSD manufacturing lines :
a) RGB Line of 600 BPM for RGB & 105 BPM for 2 Litres PET pack
b) 2 PET Lines one of 150 BPM and second of 300 BPM for various PET pack.
c) 220 BPM Line of RGB (Non CSD) Maaza for 250 ml pack.

The ACCPL produces all the above mentioned products and supplies to Wave Beverages
( P ) Ltd. for further distribution. Products other than the mentioned above are out-sourced
from Franchisees through our distributors’ network as required.
The Quality System of the company uses The Coca-Cola Management System (TCCMS Ev
3) and ISO 9001:2008 as its basis .
The food safety management system is also an integral part of ACCPL QMS.

ACCPL have also established and implemented Environment and Safety Management
system for continually improving their Environmental and OHS performance and
management system.

Section 2 : Plant Capacity

Plant Capacity as on May 2010.

Capacity:

Lines & Utilities Capacity Established in

11
Maaza Plant 220 BPM 1987

CSD RGB 600 BPM 1995

PET 83 BPM 2006

66 BPM 2008
300 BPM 2010
Boiler 3 Ton x 2 , 2 Ton x1

Refrigeration 380 TR

ETP 769m3 /day

WTP 40m3/hr(CSD) , 15m3/hr (Maaza)

Co2 Tanker 20 TonX1, 30 TonX1

Genset (CSD & Maaza) 500 KVAx2 , 250 KVA x3 , 125 KVAx1 ,
750 KVAx3 ( Inbuilt acoustic )

Electricity 1993.534 KVA (Sanction Connected load)

Here, is a small overview of the manufacturing Processes.

Manufacturing Process of softdrink industry

12
OPENING

INTRODUCTION
4

Every day, in more than 195 countries, millions of people enjoy the beverages of The Coca-
Cola Company.

13
5 These beverages are manufactured at bottling and canning plants all around the world. At
every plant, the manufacturing process is a critical link in the value chain. It ensures that
customers and consumers always receive the consistent high quality they expect

6 This section gives an overview of the beverage manufacturing process, from the time the
raw ingredients and empty containers arrive at the plant until the finished product is packaged
and put on a pallet.

VARIETY OF PRODUCTS AND PACKAGES

To provide both customers and consumers with the beverages they want, The Coca-Cola
Company offers a wide variety of products and packaging.

8 The best-known brands are carbonated beverages such as Coca-Cola, diet Coke, and
Sprite.

9 However, ACCPL also produce non-carbonated beverages, such as Minute

MaidOrange Juice, Nestea*, and Powerade.

10 Their beverages are packaged in many different types of containers — bottles, cans, and
boxes. These containers come in sizes ranging from 4-ounce cans to 3-liter plastic bottles.

11 Some of these containers are refillable and others are not. Refillable bottles made of glass
can be returned to the production facility to be washed and refilled with product.

12 Non-refillable glass and plastic bottles, as well as cans, are also commonly used in most
areas of the world. These containers can be recycled, when properly disposed of by
consumers.

13 The equipment and requirements may vary for each type of product and package.
However, the basic production process remains the same.

14
14

This section follows the process for

manufacturing our most widely recognized product — Coca-Cola in
refillable glass bottles.

15

In every step of this process, as in all

areas of the value chain, the focus is on quality. To guarantee the consistency of our
beverages throughout the world, all plants authorized to manufacture our products build
quality into every operation and procedure.

16

This quality depends on three critical elements…

 The right information,
 The right technology, and
 The right people.
15
These elements are evident throughout the production process.

THE PRODUCTION PROCESS

17 Now let’s take a tour of a beverage manufacturing facility and see how the production
process works.

18 The Filler
The filler is the focal point of the process. Here two streams — the product and the
package — meet to become the finished beverage that consumers enjoy.

19 Let’s follow each of these streams as they progress toward the filler. We will start where
the raw ingredients are processed and combined to create the Coca-Cola product.

20 Then we will go to the production line, where we will follow the bottles through the
cleaning area, into the filling room, and out to the secondary packaging area.

Raw Ingredients to Product

21 The taste and quality that consumers expect start with the raw ingredients. These are
carefully processed and tested to ensure that they meet all of the standards of The Coca-Cola
Company.

22 The raw materials go through a series of steps to become product. First water, sweetener,
and concentrate are blended to produce syrup. The syrup is then proportioned with additional
water, and carbon dioxide is added to create the product.

23 Water Treatment Room

The Coca cola company start their tour in the water treatment room.

24 Water is one of the major ingredients in our beverages. To ensure that the raw water does
not affect the taste or appearance of the product, the Company requires that it go through a
multiple barrier treatment system.

25 Conventional Chemical Treatment

This plant uses Conventional Chemical Treatment in which chemicals are added to raw
water in a reaction tank. These chemicals cause particles in the water to stick together and
settle to the bottom. Chlorine is added to disinfect any microorganisms.

26 Sand Filter
Next, the water passes through a sand filter to remove any remaining organic particles…

27 Carbon Filter
And then through a carbon purifier to remove all tastes and odors.

28 Polishing Filter

16
 Finally the water is sent through a polishing filter, which removes any small particles of
carbon that may remain in the water after it leaves the carbon purifier.

29

The treated water is now ready to be used in

the beverage manufacturing process. It is also used when sanitizing the lines and tanks that
come in contact with ingredients or product.

30 Sweetener
• Dry refined sugar
• Liquid sugar
• High fructose starch syrup

Another key ingredient is the sweetener. Nutritive sweetener, such as dry refined sugar, liquid
sugar, or high fructose starch syrup, is used in Coca-Cola.

31 Sugar Storage Room

This plant uses dry refined sugar. In the sugar

storage room, the sugar is weighed and tested.

32Simple Syrup
The dry sugar is delivered from sugar storage to the syrup room, where it is dissolved and
filtered to remove any unacceptable odors or tastes. The dissolved and filtered sugar is called
simple syrup.

33Mixing Simple Syrup

17
Final Syrup
It is pumped into another tank where it is mixed with more treated water and the key
ingredient — concentrate — which gives Coca-Cola its distinctive flavor. The result is final
syrup.

34 Each stage of the syrup manufacturing process is monitored by quality control technicians
who test for taste, odor, and color.

35

They also perform the °Brix test. This test is

critical to ensure that the syrup has the correct proportions
of sweetener and water.
36

Once the final syrup is ready for production, it

is pumped to the proportioner, which is usually in the filling room.

37Treated Water Finalup

Here final syrup and more treated water are mixed in carefully measured proportions.
Although the mixing is done automatically, a technician periodically checks to make sure that
the correct ratio of syrup to water is maintained.

38 CO2
In this process, carbon dioxide is added to give Coca-Cola its effervescence. The finished,
carbonated product is ready for the filler.

18
The Package

39 The Package
Now let’s return to the production line and look at the second stream that meets at the filler
— the package.

40 When bottles arrive from the supplier or the marketplace, they are received by the
warehouse and stored until they are needed at the production line.

41 The returned bottles are sorted either manually or automatically to remove any
competitors’ bottles and to separate our bottles by size and type.

42 According to production needs, a forklift operator takes the pallets of empty bottles from
the warehouse…
43 Depalletizer
And transfers them to the depalletizer. Here the cases are either manually or automatically
removed from the pallet and placed on a conveyor.

44 Uncaser
Next the bottles are removed from the case. Again, this can be done manually or
automatically. In the latter instance, an uncaser lifts the bottles out of the cases and lowers
them onto the empty bottle conveyor.

45 The cases move along one conveyor to a case washer where they are cleaned. The
damaged ones are removed to ensure that sturdy, attractive cases carry the finished product.

46 Because all refillable bottles — whether new or returned — must be washed, the bottles
continue on another conveyor toward the bottle washer.

47 An operator removes any remaining bottles that are damaged, extremely dirty, or
unsuitable for this production run. Sometimes returned bottles have the
crowns or caps still on them. These must be removed, either manually or automatically,
before the bottles reach the bottle washer.

48 At the bottle washer, an automatic feeder aligns the bottles and directs them into carrier
pockets, where they are securely held for their trip through the
washer. An operator makes sure all bottles are aligned, so they feed smoothly into the washer.

19
49 To ensure cleanliness, the bottles are washed at high temperatures for a required period of
time to remove any dirt, debris, or liquid that remains in the bottles.

50 Pre rinse
The bottles move in a continuous flow through the washer. First, they go through a pre rinse,
which removes any loose dirt or beverage from the inside
and outside of the bottles.

51 Caustic Solution
Next they soak in caustic solution that removes the labels and remaining dirt. They are then
washed with a pressure spray of hot caustic solution.

52 Final Rinse
Finally, jets of potable water rinse the bottles to remove the caustic solution and cool the
bottles.

53Throughout the washing process, technicians monitor the temperature and soak time. They
also test the concentration level of the caustic solution to ensure that it is sufficient to clean
the bottles, but not so much that it harms them.

54 To ensure that the bottles are acceptable for filling, they go through post wash inspection
— a visual inspection, an electronic inspection, or both.

55

This plant has both. At the visual inspection

station, bottles are examined by an inspector who removes
bottles that have residual water, foreign material, or damage.

56 Next, the electronic inspection detects foreign material and defects that cannot be easily
seen by the human eye. It rejects any unacceptable bottles.

The Filler

57 Filling Room
After passing these inspections, the bottles are ready to be filled with Coca-Cola product.

58 Fillers vary in size and level of technology. Yet they all use the same basic filling
principle to ensure consistent fill height in every bottle.

20
59 CO2 Enters
Bottles enter the filler in rapid succession. As each bottle is sealed to the filler, a valve opens.
Carbon dioxide fills the bottle until the pressure is equalized. This “counter pressuring”
ensures a smooth, accurate fill and a minimal amount of foaming.

60 Product Enters
Once the pressure is equalized in the bottle, the filling valve opens, allowing the product to
flow into the bottle by gravity. As the product enters the bottle, it displaces the carbon
dioxide.

61 Filling Stops
When no more carbon dioxide can escape from the bottle, the filling stops.

62 Snift Valve Opens

A snift valve opens to release headspace gas, and then quickly closes. The snift valve
reduces the pressure in the bottle to prevent foaming when the filler releases the bottle.

63 After the bottles are discharged from the filler, a machine adds a leak-proof closure to
ensure the freshness of the product. On some bottles this closure
is a metal crown. On others it is a plastic screw cap.

64 The bottles pass through a finished product inspection where they are examined either
visually or electronically. This inspection ensures that every bottle is filled with the correct
amount of product.

65
•• Product
•• Date
•• Location
•• Amount
Next, the bottle receives a date code. This coding system enables them to maintain accurate
records of where and when products are manufactured. It also helps them to rotate stock
properly so coco cola company can ensure fresh beverages for their consumers.

66 Production Line
The bottles are now conveyed to the secondary packaging area of the production line.

67 Most refillable bottles have paper or plastic labels that are attached at a labeling machine.
The labeler uses special non-toxic glue to attach the product labels to the bottles. Some
refillable bottles have ACL (applied color labels) printed on them.

68 Case Packer
The case packer channels the bottles into rows. As the case slides under the bottles, the
packer gently lowers them into place.

69 Palletizer
After they are packed, the bottles move on a case conveyor to the palletizer. Here, the
palletizer lines up the cases and places them one layer at a time onto the pallet. Layers are
added until the standard numbers of cases are on the pallet.

21
70 The manufacturing process is complete. A forklift operator now moves the pallets to the
warehouse where the product is stored until it goes to a distribution center or to the customer.

OTHER PACKAGE REQUIREMENTS

71 Now that you have seen how a refillable glass bottle of Coca-Cola is manufactured, let’s
take a quick look at how the requirements of other packages and products affect the
manufacturing process.

72 The process for plastic refillable bottles — REFPET or REFPEN — is much the same as
what you just saw, except visual and electronic inspections are mandatory before the bottle
washer.
73 During electronic inspection, detectors sample the air inside the bottle and reject any
bottles that have non product residues.

74 Then at the visual prewash inspection station, which immediately follows the electronic
detector, an inspector again checks for bottles that contain non product residues and foreign
matter. The rejected bottles are removed from the line and destroyed.

75 Non-refillable glass and plastic bottles are wrapped in a protective cover when they arrive
at the warehouse. Therefore, they are just rinsed, instead of washed, and the inspections
associated with the washing process are
not required.

76 Similarly, cans are not washed, but rinsed with either water or air jets. They also go
through a seamer, instead of a capper, to seal the lid to the can.

77 The type of product can also affect the manufacturing process. The production line we just
toured is a cold-fill carbonated beverage line.

78 If the plant manufactures bottled water, most of the process is similar to what we have just
seen, except the water must be treated by ultraviolet light before it is put into the bottle.

79 Some non-carbonated beverages, especially those that contain fruit juice, require special
equipment to blend the product and to pasteurize it. Because some of the ingredients may be
microbiologically sensitive, the temperature must be carefully maintained. Also, during the
filling process, the heat of the beverage sanitizes the bottle. This is called a hot-fill line.

CRITICAL ELEMENTS

80 Throughout the beverage manufacturing process, company ensure a high-quality product

that meets their customers’ and consumers’ expectations. At The Coca-Cola Company,
quality is not just a laboratory function — it is everyone’s responsibility.

81 Every day ACCPL work with their suppliers to ensure that they have the best raw
ingredients and materials.

82 Company use rigorous quality control procedures and tests to guarantee the consistent
high quality of their products.

22
83 They follow Good Manufacturing Practices (GMP) in maintaining clean production areas
and sanitizing equipment regularly.

84 ACCPL rely upon sound maintenance programs to ensure the smooth operation of all
equipment, so that the entire operation runs efficiently.

85 And, they depend on highly skilled operators to keep the plant running at top efficiency.

86 This takes teamwork, training, and frequent communication among all people in the
production facility.

CONCLUSION

87 All of these efforts, which are integral to the value chain, help them run efficient plant
operations and give their customers and consumers the products they expect.

88 A consistent, high-quality product — this is the commitment that The Coca-Cola

Company makes to their customers and consumers, every day, everywhere.

23
Chapter – 3

24
 RESEARCH METHODOLOGY

The training was conducted in the purview of understanding the Working capital
management in industry. Finance department of company facilitate all other departments to
provide finance related resources for manufacturing Processes that includes Production and
Distribution of the products.

This report defines all the Processes of working capital management in the Soft Drink
Industry

The methodology, I have adopted for my study is the various tools, which basically analyze
critically financial position of to the organization:

PROJECT OBJECTIVE

 The project is aimed at evaluating the financial status of Coca cola company and then
doing the comparative analysis with its competitors
 Studying the working capital management at Coca cola Company and estimating the
working capital requirements for 2009-2010 and then forecasting for 2010-2011
 To find out if there is any relationship between the working capital, sales and current
assets of Coca cola

METHODOLOGY

The methodology to be adopted for the project is explained as under:

1. The initial step of the project was studying about the company and then evaluating
the financial position of the company on the basis of ratio analysis.
2. Comparing the firm’s financial position with respect to its competitors i.e.
Pepsico,DABUR and PARLE AGRO with the help of following ratios-

 Liquidity ratios
 Solvency/Leveraging ratios
 Coverage ratios
 Activity/turnover ratios
 Profitability ratios
 Investors ratios
,
3. The project will focus on the study of overall working capital management at the
organizations, for which the following study and analysis will be undertaken:
i ) This project is aimed to estimate the operating plan for the year 2009-2010

25
 ii ) This will also include the calculations and analysis of the operating cycle
for the company.

(iii ) Study of C M A form and to prepare for the current year.

(iv) It will also include the ratio analysis of the financial statement so that the
profitability and liquidity trade off can be analyzed.

SCHEDULE

The complete project will be for duration of 8 weeks. The project has been divided into 2
stages with approximate time period allotted to each stage. Both the stages along with their
approximate timelines are as follows:

STAGE 1 (APPROX 2 WEEKS)

The study of company’s financial position by doing ratio analysis of the financial statement
so that the profitability and liquidity condition of the organization can be studied closely and
then comparing it with the financial statements of Pepsico, Dabur, Parle Agro.

STAGE 2 (APPROX 6 WEEKS)

The study of the overall working capital management of the company will be the first stage.
Under this stage the operating plan will be prepared and the study and analysis of the C M A
form will be done. This will include the estimation of working capital requirement for 2009,
forecasting for 2010 and regression analysis and T test for finding out the relationship
between working capital, sales and current assets.

SCOPE OF THE STUDY

Studying working capital management of the Coca cola company and benchmarking it with 2
of its competitors.

LIMITATIONS

In spite of my continued efforts to make the project as accurate and wide in scope as possible,
certain limitations are becoming evident while implementing the project. These limitations
cannot be removed and have to be accepted as permanent constraints in implementing the
project.
Some limitations, which have been identified, by me are:

1. Generalizations and calculated assumptions had to be made in some areas

while analyzing the financial statements, ratios etc. due to non-availability of
complete information.
2. The segment wise and product wise study of the various product segments and
units of the company have been excluded from the scope of the project due to
data and time constraints.

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Chapter – 4

27
 FINANCIAL ANALYSIS

4.1 LIQUIDITY RATIOS (SHORT- TERM LIQUIDITY)

Liquidity ratios measure the short term solvency, i.e., the firm’s ability to pay its current dues
and also indicate the efficiency with which working capital is being used.
Commercial banks and short-term creditors may be basically interested in the ratios under
this group. They comprise of following ratios:

CURRENT RATIO OR WORKING CAPITAL RATIO

Current ratio is a relationship of current assets to current liabilities.

‘current assets’ means the assets that are either in the form of cash or cash equivalents or
can be converted into cash or cash equivalents in short time(say within a year) like cash, bank
balances, marketable securities, sundry debtors, stock, bills receivables, prepaid expenses.
‘Current liabilities’ means liabilities repayable in as short time like sundry creditors, bills
payable, outstanding expenses, bank overdraft.

Computation. The ratio is calculated as follows:

Current ratio = Current assets

Current liabilities

Objective.
 The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities with its short-term assets.
 The higher the current ratio, the more capable the company is of paying its
obligations. A ratio under 1 suggests that the company would be unable to pay off its
obligations if they came due at that point. 
 While this shows the company is not in good financial health, it does not necessarily
mean that it will go bankrupt - as there are many ways to access financing - but it is
definitely not a good sign.
 The current ratio can give a sense of the efficiency of a company's operating cycle or
its ability to turn its product into cash.
 An acceptable current ratio varies by industry. For most industrial companies 1.5 is an
acceptable CR. A standard CR for a healthy business is close to 2.
 However, a blind comparison of actual current ratio with the standard current ratio
may lead to unrealistic conclusions. A very high ratio indicates idleness of funds, poor
investment policies of the management and poor inventory control, while a lower
ratio indicates lack of liquidity and shortage of working capital.

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 Current ratio COCA COLA PEPSICO PARLE AGRO
2009 1.1 1.3 1.0

Interpretation
COCA COLA is in a better position to meet its short term obligations as can be seen by a high
current ratio. This is mainly due to high proportion of Loans & Advances and a
significantly low proportion of Debtors.

The ratio is acceptable in case of parle agro

For pepsico the ratio is high mainly due to significantly high debtors and Loans & Advances.

LIQUID RATIO OR QUICK RATIO OR ACID TEST RATIO

Liquid ratio is a relationship of liquid assets with current liabilities. It is fairly stringent
measure of liquidity.
Liquid assets are those assets which are either in the form of cash or cash equivalents or can
be converted into cash within a short period. Liquid assets are computed by deducting stock
and prepaid expenses from the current assets. Stock is excluded from liquid assets because it
may take some time before it is converted into cash. Similarly, prepaid expenses do not
provide cash at all and are thus, excluded from liquid assets.

Computation. The ratio is calculated is as under:

Liquid ratio= Liquid assets

Current liabilities

Objective.
 The ratio of current assets less inventories to total current liabilities. This ratio is the
most stringent measure of how well the company is covering its short-term
obligations, since the ratio only considers that part of current assets which can be
turned into cash immediately (thus the exclusion of inventories).
 The ratio tells creditors how much of the company's short term debt can be met by
selling all the company's liquid assets at very short notice. also called acid-test ratio.
 The current ratio does not indicate adequately the ability of the enterprise to discharge
the current liabilities as and when they fall due. Liquid ratio is considered as a
refinement of current ratio as non-liquid portion of current assets is eliminated to
calculate the liquid assets. Thus it is a better indicator of liquidity.
 A quick ratio of 1:1 is considered standard and ideal, since for every rupee of current
liabilities, there is a rupee of quick assets. A decline in the liquid ratio indicates over-
trading, which, if serious, may land the company in difficulties.

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 Quick Ratio COCA COLA PEPSICO PARLE AGRO
2009 .9 0.8 .67

Interpretation
COCA COLA is better off than PARLE AGRO and PEPSICO in meeting the short –term
debts by selling all the liquid assets of the company at a very short notice.
May be that PARLE AGRO and PEPSICO are indulged in over-trading. The company
should try to keep quickratio greater than 1.

4.2 SOLVENCY/LEVERAGE RATIOS (LONG-TERM SOLVENCY)

The term ‘solvency’ implies ability of an enterprise to meet its long term indebt ness and
thus, solvency ratios convey the long term financial prospects of the company. The
shareholders, debenture holders and other lenders of the long-term finance/term loans may be
basically interested in the ratios falling under this group.
Following are the different solvency ratios:

DEBT-EQUITY RATIO

The debt-equity ratio is worked out to ascertain soundness of the long term financial policies
of the firm. This ratio expresses a relationship between debt (external equities) and the equity
(internal equities).
Debt means long-term loans, i.e., debentures, public deposits, loans (long term) from
financial institutions. Equity means shareholder’s funds, i.e., preference share capital, equity
share capital, reserves less losses and fictitious assets like preliminary expenses.

Computation. Te ratio is calculated as under:

Debt-Equity Ratio = Debt (Long-term Loans)

Equity (shareholder’s funds)

Objective.
 The objective of this ratio is to arrive at an idea of the amount of capital supplied to
the concern by the proprietors and of asset ‘cushion’ or cover available to its creditors
on liquidation of the organization.equity.
 It also indicates the extent to which the firm depends upon outsiders for its existence.
In other words, it portrays the proportion of total funds acquired by a firm by way of
loans.

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  A high debt-equity ratio may indicate that the financial stake of the creditors is more
than that of the owners. A very high debt-equity ratio may make the proposition of
investment in the organization a risky one.
 While a low ratio indicates safer financial position, a very low ratio may mean that the
borrowing capacity of the organization is being underutilized.
 The debt/equity ratio also depends on the industry in which the company operates. For
example, capital-intensive industries such as auto manufacturing tend to have a
debt/equity ratio above 2, while personal computer companies have a debt/equity of
under 0.5.
 The readers of financial management may remember that to borrow the funds from
outsiders is one of the best possible ways to increase the earnings available to the
equity shareholders, basically due to two reasons:
a) The expectations of the creditors in the form of return on their investment are
comparatively less as compared to the returns expected by the equity shareholders.

b) The return on investment paid to the creditors is a tax-deductible expenditure.

Debt Equity Ratio COCA COLA PEPSICO PARLE AGRO

2009 0.48 0.49 0.37

Interpretation

In COCA COLA and PEPSICO the proportion of debt to shareholders fund is almost same.
However, in PARLE AGRO there is greater use of capital being supplied by the proprietor.
Borrowing capacity is being underutilised..

TOTAL ASSETS TO DEBTS RATIO

The total asset to debt ratio establishes a relationship between total assets and the total long-
term debts.
Total assets include fixed as well as current assets. However, fictitious assets like
preliminary expenses, underwriting commission, share issue expenses, discount on issue of
shares/debentures, etc., and debit balance of profit and loss account are not included. Long-
term debts refer to debts that will mature after one year. It includes debentures, bonds, and
loans from financial institutions.

Computation. This ratio is computed as under:

Total Assets to Debt Ratio = Total Assets

Long-term debts

Objective.
 This ratio is computed to measure the safety margin available to the providers of long-
term debts. It measures the extent of coverage provided to long term debts by the
assets o the firm.

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  A higher ratio represents higher security to lenders for extending the long-term loans
to the business. On the other hand, a low ratio represents a risky financial position as
it means that the business depends on outside loans for its existence.

Total Assets to Debt Ratio COCA COLA PEPSICO PARLE AGRO

2009 64.2 71.2 50.7

Interpretation
As you can see for our firms, their debt ratios vary from COCA COLA 64.2
Percent, to PEPSICO 71.2 percent. We can conclude that Pepsi is using more financial
Leverage in the firm and thus is exposed to more financial risk than PARLE AGRO and
COCA-COLA.

PROPRIETARY RATIO

The proprietary ratio establishes a relationship between proprietor’s fund and total assets.
Proprietor’s fund means share capital plus reserves and surplus both of capital and revenue
nature. Loss, if any, should be deducted. Funds payable to others should not be added.

Computation. This ratio is worked out as follows:

Proprietor’s Ratio = Proprietor’s Fund or Shareholders Fund

Total Assets

Objective.
 This ratio throws a light on the general financial position of the concern. It shows
the extent to which shareholders own the business. This ratio is of particular
importance to the creditors as it helps them to ascertain the proportion of
shareholder’s funds in the total assets employed in the firm.
 The higher this Proprietary ratio denotes that the shareholders have provided the
funds to purchase the assets of the concern instead of relying on other sources of
funds like bank borrowings, trade creditors and others.
 However, too high a proprietary ratio say 100%  means that management has not
effectively utilize cheaper sources of finance like trade and long term creditors. As
these sources of funds are cheaper, the inability to make use of it might lead to
lower earnings and hence a lower rate of dividend payout.
 This ratio is a test of credit strength as too low a proprietary ratio would mean that
the enterprise is relying a lot more on its creditors to supply its working capital.

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 Proprietary Ratio COCA COLA PEPSICO PARLE AGRO
2009 1.62 1.87 1.41

Interpretation
Highest ratio is for PEPSICO indicating shareholders have provided majority of funds
to purchase the assets instead of relying on others sources of funds.

The equity multipliers of the four firms display that PEPSI has the greatest amount of
leverage, and PARLE AGRO has the lowest

TOTAL DEBT RATIO

Total debt ratio is a relationship of Total Debt of a firm to its Capital Employed.

Computation. This ratio is calculated as under.

Total Debt Ratio = Debt

Capital Employed
Objective.
 A ratio that indicates what proportion of debt a company has relative to its assets. The
measure gives an idea to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.
 A debt ratio of greater than 1 indicates that a company has more debt than assets,
meanwhile, a debt ratio of less than 1 indicates that a company has more assets than
debt. Used in conjunction with other measures of financial health, the debt ratio can
help investors determine a company's level of risk.

Total Debt Ratio COCA COLA PEPSICO PARLE AGRO

2009 0.23 0.21 0.07

Interpretation
COCA COLA uses a greater proportion of debt as compared to
PARLE AGRO and PEPSICO.
PARLE AGRO has a very low ratio debt ratio indicating there is more reliance on capital
provided
by the proprietors.

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FIXED ASSETS TO CAPITAL EMPLOYED RATIO

Fixed assets to Capital employed ratio gives the amount of fixed assets as a percentage of the
capital employed of the company.

Computation. This ratio is calculated as follows:

Fixed Assets to Capital Employed = Net Fixed assets x 100

Capital Employed

Objective.
 This ratio indicates the extent to which the long term funds are sunk into fixed assets.
 It has been an accepted principle of financial management that not only fixed assets
should be financed by way of long-term loans but also a part of current assets or
working capital should be financed by way of long-term funds, and this part may be in
the form of permanent working capital.
 A very high trend of this ratio may indicate that a major portion of long term funds is
utilized for the purpose of fixed assets leaving a small proportion for the investment in
the current assets or working capital.
 A very low trend of this ratio coupled with a constant declining trend of current ratio
may indicate an urgent for the introduction of long-term funds for financing the
working capital in the business.

Fixed Assets to Capital

Employed Ratio COCA COLA PEPSICO PARLE AGRO
2009 1.04 1 0.87

Interpretation
This ratio indicates that a major portion of long-term funds is utilized for the purpose of fixed
assets leaving a small portion for the investment in current assets or working capital. In
PARLE AGRO a small proportion of capital employed is used for the purpose of fixed assets.

INVENTORY TO NET WORKING CAPITAL RATIO

Inventory to Net working Capital Ratio tells how much of a company’s funds are tied up in
inventory.

Computation. The formula is as under:

Inventory to Net Working Capital = Inventory

Net Working Capital

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Objective.

 Keeping track of inventory levels is crucial to determine the financial health of a

business.
 It is preferable to run a business as little inventory as possible on hand, while not
affecting potential sales opportunities.
 If this ratio is high compared to the average for the industry, it could mean that the
business is carrying too much inventory.

Inventory to Net Working

Capital Ratio COCA COLA PEPSICO PARLE AGRO
2009 4.3 7.9 4.5

Interpretation

In COCA COLA Inventory form nearly one-third of the working capital unlike in PEPSICO
where Inventories form majority of the Working capital which is not a healthy proposition.

4.3 PROFITABILITY RATIOS

Profit as compared to the capital employed indicated profitability of the concern. A measure
of ‘profitability’ is the overall measure of efficiency. The different profitability ratios are as
follows:

NET PROFIT RATIO

The Net profit ratio establishes the relationship between net profit and net sales, expressed in
percentage form.

Net Profit is derived by deducting administratitive and marketing expenses, finance charges
and making adjustments for non-operating expenses and incomes.

Computation. This ratio is calculated as follows:

Net Profit ratio = Net Profit after taxes x 100

Net Sales
Objective.
 The net profit ratio determines the overall efficiency of the business.It indicates that
proportion of sales available to the owners after the consideration of all types of
expenses and costs – either operating or non-operating or normal or abnormal.
 A high net profit indicates profitability of the business. Hence, higher the ratio, the
better the business is.

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 Net Profit Ratio COCA COLA PEPSICO PARLE AGRO
2009 22 20.4 11.38

Interpretation
COCA COLA product has been able to generate a high Net profit ratio among
the three.
For PARLE AGRO the ratio is on a lower side so it should aim to
achieve a higher ratio.

4.4 COVERAGE RATIOS

INTEREST COVERAGE RATIO

The interest coverage Ratio establishes the relationship between PBIT (Profits before interest
and taxes) and Debt interest.

Computation. It is calculated as:

Interest Coverage Ratio = Profit before Interest and Taxes

Debt Interest

The numerator considers the profit before income tax and interest on both term and working
capital borrowings.
The denominator considers the interest charges, which are in the form of interest on long-
term borrowings and not the interest on working capital facilities.

Objective.
 Interest coverage is a financial ratio that provides a quick picture of a company’s
ability to pay the interest charges on its debt.
 The 'coverage' aspect of the ratio indicates how many times the interest could be paid
from available earnings, thereby providing a sense of the safety margin a company
has for paying its interest for any period.
 A company that sustains earnings well above its interest requirements is in an
excellent position to weather possible financial storms.
 As a general rule of thumb, investors should not own a stock that has an interest
coverage ratio under 1.5. An interest coverage ratio below 1.0 indicates the business is
having difficulties generating the cash necessary to pay its interest obligations.

 The ratio suffers from the following limitations:

a) The fixed obligations in the form of preference dividend or installments of long-term

borrowings are not considered.

36
 b) The funds available for meeting the obligations of interest payments may not be
necessarily in the form of profits before interest and taxes only, as the amount of
profits so calculated may consider the amount of depreciation debited to Profit and
Loss Account which does not involve any outflow of funds.

Interest Coverage COCA COLA PEPSICO PARLE AGRO

Ratio
2009 26 32 20.7

Interpretation
Maximum interest coverage is available in case of PEPSICO indicating it is in good capacity to
pay the interest charges on debt. For COCA COLA & PARLE AGRO it is also good.
All companies have been able to generate enough profit necessary to meet their interest
obligations.

This ratio indicates that the cash available for the repayment of the interest will be more than
profit, as depreciation will also be added in profit (because it is a non-cash expense). So
rather than maintaining such high cash firm should try to reinvest its earnings rather then
blocking the available resources.

4.5 ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS

Turnover indicates the speed with which capital employed is rotated in the process of doing
business. Activity ratios measure the effectiveness with which a concern uses resources at its
disposal. The following are the important activity (turnover or performance) ratios:

CAPITAL TURNOVER RATIO

Capital Turnover ratio establishes between the Net Sales and the Capital Employed of a firm.

Computation. This ratio is computed with the help of the following formula:

Capital turnover ratio = Net sales

Capital Employed

Objective.
 This ratio indicates the effectives of the organization with which the capital employed
is being utilized.
 A high capital turnover ratio indicates the capability of the organization to achieve
maximum sales with minimum amount of capital employed. It indicates that the
capital turnover ratio better will be the situation.

Capital Turnover PEPSICO PARLE AGRO

Ratio COCA COLA

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 2009 8.09 9.11 5.30

Interpretation
In PARLE AGRO capital employed is not being utilised effectively to generate
maximum sales.
Capital employed is utilised most effectively in case of COCA COLA & PEPSICO as it has
been successfully able to generate good amount of sales with the capital employed.

Capital turnover ratio indicates that the firm’s capital employed is being efficiently used. This
ratio indicates that the organization is able to achieve maximum sales with minimum amount
of capital employed. It indicates that the capital employed is turned over in the form of sales
more number of times.

WORKING CAPITAL TURNOVER RATIO

The working capital turnover ratio indicates the number of times a unit invested in working
capital produces sale. In other words, this ratio shows the efficiency in the use of short-term
funds for achieving sales.

Working capital is computed by deducting current liabilities from current assets. A careful
handling of the short-term assets and funds will mean a reduction in the amount of capital
employed thereby improving turnover.

Computation. The ratio is calculated as follows:

Working capital turnover ratio = Net sales

Working capital

Objective.
 A company uses working capital (current assets - current liabilities) to fund operations
and purchase inventory. These operations and inventory are then converted into sales
revenue for the company.
 The working capital turnover ratio is used to analyze the relationship between the
money used to fund operations and the sales generated from these operations.
 In a general sense, the higher the working capital turnover, the better because it
means that the company is generating a lot of sales compared to the money it uses to
fund the sales.

 A high, or increasing Working Capital Turnover is usually a positive sign, showing

the company is better able to generate sales from its Working Capital.  Either the
company has been able to gain more Net Sales with the same or smaller amount of
Working Capital, or it has been able to reduce its Working Capital while being able to
maintain its sales. 

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  As such, higher this ratio, the better will be the situation. However, a very high ratio
may indicate overtrading – the working capital being meager for the scale of
operations.

Working Capital COCA COLA PEPSICO PARLE AGRO

Turnover Ratio
2009 7.87 5.35 3.93

Interpretation
In COCA COLA there is better use of working capital for generating sales.
In PARLE AGRO the management needs to utilize the working capital in a better manner so
that it can increase the sales.

INVENTORY TURNOVER RATIOS

Objective.
 A high inventory turnover ratio indicates that maximum sales turnover is achieved with
the minimum investment in inventory. As such, as a general rule, high inventory
turnover ratio is desirable.
 However, the high inventory turnover ratio should be viewed from some more angles.
Firstly, it may indicate that there is under investment in inventory whereby the
organization may loose customer patronage f it is unable to maintain the delivery
schedule. Secondly, high inventory turnover ratio may not necessarily indicate profitable
situation.
 An organization, in order to achieve a large sales volume, may sometimes sacrifice on
profits, whereby a high inventory turnover ratio may not result into high amount of
profits.

On the other hand, a low inventory turnover ratio may indicate over investment in
inventory, existence of excessive or obsolete/non-moving inventory, improper inventory
management, accumulation of inventories at the year end in anticipation of increased
prices or sales volume in near future and so on.
There can be no standard inventory turnover ratio which may be considered ideal. It may
depend on nature of industry and marketing strategies followed by the organization.

Interpretation
COCA COLA has the highest ratio among the category which is a good sign as it
indicates the increasing efficiency in the management of the inventory. This shows that
the company is having sufficient amount of sales. This ratio indicates that maximum sales
turnover is achieved with the minimum investment in inventory.

4.6 ASSETS TURNOVER RATIOS

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 Asset turnover measures a firm's efficiency at using its assets in generating sales or
revenue - the higher the number the better.
 It also indicates pricing strategy: companies with low profit margins tend to have high
asset turnover, while those with high profit margins have low asset turnover.
 A high Assets turnover ratio indicates the capability of the organization to achieve
maximum sales with the minimum investment in assets. It indicates that the assets are
turned over in the form of sales more number of times. S such, higher the ratio, better
will be the situation.

a) TOTAL ASSETS TURNOVER

Computation. This ratio is computed using the following formula:

Total Assets Turnover Ratio = Net Sales

Total Assets

Total Assets
Turnover COCA COLA PEPSICO PARLE AGRO
2009 1.81 2.00 1.75

b) FIXED ASSETS TURNOVER

Computation. This ratio is calculated as follows:

Fixed Assets Turnover Ratio = Net Sales

Fixed Assets
Fixed assets include net fixed assets, i.e., fixed assets after providing for depreciation

Fixed Assets
Turnover COCA COLA PEPSICO PARLE AGRO
2009 1 1.2 0.93
.

DEBTORS TURNOVER RATIO

Computation. The ratio will be computed as:

Debtors Turnover ratio = Net credit sales

Average sundry debtors

Objective.

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  This ratio indicates the speed at which the sundry debtors are converted in the form of
cash. However this intention is not correctly achieved by making the calculations in
this way.

Debtors turnover
Ratio COCA COLA PEPSICO PARLE AGRO
2009 43 37 29

As such this ratio is normally supported by the calculations of Average Collection Period
which is calculated as under:

a) CALCULATION OF DAILY SALES

Net credit Sales

No of Working Day

Daily Sales COCA COLA PEPSICO PARLE AGRO

2009 151 139 97

Interpretation
It is highest in case of COCA COLA followed by PEPSICO and PARLE AGRO
respectively.

b) CALCULATION OF AVERAGE COLLECTION PERIOD:

Average Sundry Debtors

Daily Sales

The average collection period as computed above should be compared with the normal credit
period extended to the customers. If the average collection period is more than normal credit
period allowed to the customers, it may indicate over investment in debtors which may be the
result of over-extension of credit period, liberalization of credit terms and ineffective
collection procedures.

Average Collection
Period COCA COLA PEPSICO PARLE AGRO
2009 11 13 17

Interpretation

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The firm should try to reduce its debtors holding period . By this, the funds which are
blocked with the customers, and hence are becoming idle, can be reduced and that money can
be utilized for other profitable purposes.

CREDITORS TURNOVER RATIO

Creditors Turnover
Ratio COCA COLA PEPSICO PARLE AGRO
2009 6.30 1.97 1.64

Creditor Days COCA COLA PEPSICO PARLE AGRO

2009 57 182 219

Interpretation

The firm is having low credit holding period it can try to increase is so that, those
funds can remain with it for a longer period and can be utilized for fulfilling the
working capital requirement. For this purpose firm can use little strict credit standards
it can also adopt discount policy.

4.7 RETURN ON INVESTMENT

The ratios computed in this group indicate the relationship between the profits of a firm and
investment in the firm. There can be three ways in which the term ‘investment’ may be
interpreted, i.e., Assets, Capital Employed and Shareholder’s Funds. As such, there can be
three broad classifications of ROI:

RETURN ON ASSETS (ROA)

Computation. This ratio is calculated as:

ROA = EBIT
Average Total Assets

Objective.
 An indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate earnings.
 The assets of the company are comprised of both debt and equity. Both of these types
of financing are used to fund the operations of the company. The ROA figure gives
investors an idea of how effectively the company is converting the money it has to
invest into net income.

42
  The higher the ROA number, the better, because the company is earning more money
on less investment.

Return on Assets
(ROA) COCA COLA PEPSICO PARLE AGRO
2009 14.46 15.81 8.90

Interpretation
For COCA COLA and PEPSICO it is on same side indicating that assets have been utilised
well to generate earnings.
In case of PARLE AGRO it is on a lower side so the management needs to
make sure it utilises the assets well enough to generate good earnings.

RETURN ON CAPITAL EMPLOYED (ROCE)

Computation. The ratio is calculated as:

Profit Before Interest & Taxes x 100

Average Capital employed

Objective.

 It is used in finance as a measure of the returns that a company is realising from its
capital employed.

 It is commonly used as a measure for comparing the performance between businesses

and for assessing whether a business generates enough returns to pay for its cost of
capital.

 ROCE measures the profitability of the capital employed in the business. A high
ROCE indicates a better and profitable use of long-term funds of owners and
creditors. As such, a high ROCE will always be preferred.

Return on Capital
Employed COCA COLA PEPSICO PARLE AGRO
2009 22.9 20.9 17.6

Interpretation
A high ratio in case of COCA COLA & PEPSICO indicates a better and profitable use
of long term funds of ownersand creditors.

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 In case of PARLE AGRO it is satisfactory.

RETURN ON SHAREHOLDER’S FUNDS

It is calculated as:

Profit After Tax x 100

Shareholder’s funds

 This is the most popular ratio to measure whether the firm has earned sufficient
returns for its shareholders or not. As such, this ratio is the most crucial one from the
owners/shareholders point of view. Higher the ratio better will be the situation.

Return On Equity COCA COLA PEPSICO PARLE AGRO

2009 28.73 39.84 20.72

Interpretation
PEPSICO has been able to generate exceptionally high Return On Shareholder’s Funds.
Higher the return more satisfied will be the shareholders.
For COCA COLA it is good but slightly on a lower side. PARLE AGRO product has the
lowest return among the category.

4.8 INVESTOR RATIOS

EARNINGS PER SHARE (EPS)

Computation. The ratio is calculated as:

Net Profit after Taxes – preference Dividend

Number of Equity shares Outstanding

Objective.
 It is widely used ratio to measure the profits available to the equity shareholders on a
per share basis. EPS is calculated on the basis of current profits and not on the basis of
retained profits.
 As such, increasing EPS may indicate the increasing trend of current [profits per
equity share. However, EPS does not indicate how much of the earnings are paid to
the owners by way of dividend and how much of the earnings are retained in the
business.

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 Earnings per share COCA COLA PEPSICO PARLE AGRO
2009 2.93 2.71 1.97

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital – Gross and Net

 Gross Working Capital refers to the firm’s investment in current assets. Current
assets are the assets which can be converted into cash within an accounting year
and include cash, short term securities, debtors, bills receivable (accounts
receivables or book debts) and stock.

 Net Working Capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders, which are expected to
mature for payment within an accounting year, and include creditors (accounts
payable), bills payable and outstanding expenses. Net working capital can be
positive or negative. A positive net working capital will arise when current asset
exceed current liabilities. A negative net working capital occurs when current
liabilities are in excess of current assets.

Focusing on management of current assets

The gross working capital concept focuses attention on two aspects of current assets
management:
a) How to optimize investment in current assets?
b) How should current assets be financed?

The considerations of the level of investment in current assets should avoid two danger
points- excessive or inadequate investment in current assets. Investment in current assets
should be just adequate to the needs of the business firm. Excessive investment in current
assets should be avoided because it impairs the firm’s profitability, as idle investment earns
nothing. On the other hand, inadequate amount of working capital can threaten solvency of
the firm because of its inability to meet its current obligations. It should e realized that the
working capital needs of the firm may be fluctuating with changing business activity. The
management should be prompt to initiate an action and correct imbalances.
Another aspect of the gross working capital points to the need of arranging funds to finance
current assets. Whenever a need for working capital funds arises due to the increasing level of
business activity or for any other reason, financing arrangement should be made quickly.
Similarly, if suddenly, some surplus funds arise they should not be allowed to remain idle,
but should be invested in short term securities. Thus, the financial manager should have

45
knowledge of the sources of working capital funds as well as investment avenues where idle
funds may temporarily are invested.

Focusing on Liquidity management

Net working capital is a qualitative concept. It indicates the liquidity position of the firm and
suggests the extent to which working capital needs may be financed by permanent sources of
funds. Current assets should be sufficiently in excess of current liabilities to constitute margin
or buffer for maturing obligations within the ordinary operating cycle of business. In order to
protect their interests, short- term creditors always like a company to maintain current assets
at a higher level than current liabilities. However, the quality of current assets should be
considered in determining level of current assets vis-à-vis current liabilities. A weak liquidity
position possesses a threat to the solvency of the company and makes it unsafe and unsound.
A negative working capital means a negative liquidity, and may prove to be harmful for the
company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of
current assets. Therefore, prompt and timely action should be taken by management to
improve and correct the imbalances in the liquidity position of the firm.

For every firm, there is a minimum amount of net working capital, which is permanent.
Therefore, a portion of working capital should be financed with permanent sources of funds
such as equity share capital, debentures, long-term debt, preference share capital or retained
earnings. Management must, therefore, decide the extent to which the current assets should
be financed with equity capital or borrowed capital.

It may be emphasized that both gross and net concepts of working capital are equally
important for the efficient management of working capital. There is no precise way to
determine the exact amount of gross or net working capital of a firm. A judicious mix of long
and short term finances should be invested in current assets. Since current assets involve cost
of funds, they should be put to productive use.

OPERATING AND CASH CONVERSION CYCLE

A firm should aim at maximizing the wealth of its shareholders, so the firm should earn
sufficient returns from its operations. Earning a steady amount of profit requires successful
sales activity. The firm has to invest enough funds in current assets for generating sales.
Current assets are needed because sales do not convert into cash instantaneously. There is
always an Operating cycle involved in the conversion of sales into cash.
There is difference between current and fixed assets in terms of their liquidity. A firm
requires many years to recover the initial investment in fixed assets such as plant and
machinery or land and building. On the contrary, investment in current assets is turned over
many times in a year. Investment in current assets such as inventories and debtors (accounts
receivable) is realized during the firm’s operating cycle that is usually less than a year.
OPERATING CYCLE is the time duration required to convert sales, after the
conversion of resources into inventories, into cash.
The operating cycle of manufacturing company involves three phases:

 Acquisition of resources such as raw material, labour power and fuel etc.
 Manufacture of the product which includes conversion of raw materials into work-
in-progress into finished goods.

46
  Sale of the product either for cash or on credit. Credit sales create account receivable
for collection.

These phases affect cash flows, which most of the time, are neither synchronized nor certain.
They are not synchronized because cash flows usually occur before cash inflows.

Cash inflows are uncertain because sales and collections which give rise to cash inflows are
difficult to forecast accurately, on the other hand, are relatively certain. The firm is, therefore,
required to invest in current assets for a smooth, uninterrupted functioning. It needs to
maintain liquidity to purchase raw materials and pay expenses such as wages and salaries,
other manufacturing, administrative and selling expenses and taxes as there is hardly a
matching between cash inflows and outflows. Cash is also held to meet any future exigencies.
Stocks of raw materials and work-in-progress are kept to ensure smooth production and to
guard against non-availability of raw material and other components. The firm holds stock of
finished goods to meet the demand of customers on continuous basis and sudden demand
from some customers. Debtors are created because goods are sold on credit for marketing and
competitive reasons. Thus, a firm makes adequate investment in inventories, and debtors, for
smooth, uninterrupted production and sale.

Length of Operating Cycle

The length of the operating cycle can be calculated in two ways:

a) Gross Operating Cycle
b) Net Operating Cycle

a) Gross Operating Cycle

The grass operating cycle of a manufacturing concern is the sum of Inventory Conversion
Period and debtors (receivable) conversion period. Thus, Gross Operating Cycle is gives as
follows:

Inventory conversion Period + Debtors Conversion Period

Inventory Conversion Period:

The inventory conversion period is the total time needed for producing and selling the
product. It is the sum of (1) raw material conversion period, (2) work-in-progress conversion
period, and (3) finished goods conversion period.

 Raw material conversion period

The raw material conversion period is the average time period taken to convert material into
work-in-progress. Raw material conversion period depends on: (a) Raw material
consumption per day, and (b) Raw material inventory. Raw material consumption par day is
given by the total raw material consumption divided by the number of days in the year (say
360). The raw material conversion period is obtained when raw material inventory is divided
by raw material consumption per day.

Raw material conversion period = Raw material inventory

47
 [Raw material consumption]/360

 Work-in-progress conversion period

Work-in-progress conversion period is the average time taken to complete the semi-finished
or work-in-progress. It is given by the following formula:

Work-in-progress conversion period = work-in-progress inventory

[Cost of production]/360

 Finished goods conversion period

Finished goods conversion period is the average time taken to sell the finished goods. It can
be calculated as follows-

Finished goods inventory

[Cost of goods sold]/360

Debtor’s conversion period:

Debtor’s conversion period is the average time taken to convert debtors into cash. It
represents the average collection period. It is calculated as follows:

Debtors
[Credit sales]/360

b) cash conversion or Net operating cycle

Net operating cycle is the difference between Gross operating cycle and creditors (payables)
Deferral period.

Creditor’s deferral period:

Creditor’s deferral period is the average time taken by the firm in paying its suppliers. It is
calculated as follows:

Creditors
[Credit purchases]/360

In practice, a firm may acquire resources (such as raw materials) on credit and temporarily
postpone payment of certain expenses. Payables, which a firm can defer, are spontaneous
sources of capital to finance investment in current assets. The creditor’s deferral period is
the length of time the firm is able to defer payments on various resource purchases.

Net operating cycle is also referred to as cash conversion cycle. It is the net time interval
between cash collections from sale of the product and cash payments for resources acquired
by the firm. It also represents the time interval over which additional funds, called working

48
capital, should be obtained in order to carry out the firm’s operations. The firm has to
negotiate working capital from sources such as commercial banks. The negotiated sources of
working capital financing are called non-spontaneous sources. If net operating cycle of a
firm increases, it means further need for negotiated working capital.

There are two ways of calculations of cash conversion cycle. One is that depreciation and
profit should be excluded in the computation of cash conversion cycle since the firm’s
concern is with cash flows associated with conversion at cost; depreciation is a non-cash item
and profits re not costs.
A contrary view air that a firm has to ultimately recover total costs and make profits;
therefore the calculation of operating cycle should include depreciation, and even the profits.
The above operating cycle concept relates to a manufacturing firm. Non-manufacturing firms
such as wholesalers and retailers will not have the manufacturing phase. They will acquire
stock of finished goods and convert them into debtors and debtors into cash. Further, service
and financial enterprises will not have inventory of goods
(cash will be their inventory). Their operating cycles will be the shortest. They need to
acquire cash, then lend (create debtors) and again convert lending into cash.

BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should have adequate working
capital to run its business operations. Both excessive as well as inadequate working capital
positions are dangerous from the firm’s point of view.
Excessive working capital means holding costs and idle funds, which earn no profits for the
firm. The dangers of excessive working capital are as follows:

 It results in unnecessary accumulation of inventories. Thus, chances of inventory

mishandling, waste, theft and losses increase.
 It is an indication of defective credit policy and slack collection period. Consequently,
higher incidence of bad debts results, which adversely affects profits.
 Excessive working capital makes management complacent which degenerates into
managerial inefficiency.
 Tendencies of accumulating inventories tend to make speculative profits grow. This
may tend to make dividend policy liberal and difficult to cope with in future when the
firm is unable to make speculative profits.

Inadequate working capital is also bad as it not only impairs the firm’s profitability but also
results in production interrupts and in efficiencies and sales disruptions. Inadequate working
has the following dangers:

 It stagnates growth. It becomes difficult for the firm to undertake profitable projects
for non-availability of working capital funds.
 It becomes difficult to implement operating plans and achieve the firm’s profit target.
 Operating inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments.
 Fixed assets are not efficiently utilized for the lack of working capital funds

49
  Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc.
 The firm loses its reputation when it is not in a position to honour its short-term
obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain the right amount of working capital
on a continuous basis. A firm’s net working capital position is not only important as an index
of liquidity but it is also used as a measure of the firm’s risk. Risk in this regard means
chances of the firm’s being unable to meet its obligation on due date. The lenders consider a
positive net working capital as a measure of safety. All other things being equal, the more the
net working capital a firm has, the less likely that it will default in meeting it current financial
obligations.

DETERMINANTS OF WORKING CAPITAL

Nature of business:

The working capital requirement of the firm is closely related to the nature of its business. A
service firm, like an electricity undertaking or a transport corporation, which has a short
operating cycle and which sells predominantly on cash basis, has a modest working capital
requirement. On the other hand, a manufacturing concern like a machine tools unit, which has
a long operating cycle and which sells largely on credit, has a very substantial working
capital requirement.

Seasonality of operations:

Firms, which have marked seasonality in their operations usually, have highly fluctuating
working capital requirements. If the operations are smooth and even through out the year the
working capital requirement will be constant and will not be affected by the seasonal factors.

Production policy:
A firm marked by pronounced seasonal fluctuations in its sales may pursue a production
policy, which may reduce the sharp variations in working capital requirements.

Market conditions:
The market competitiveness has an important bearing on the working capital needs of a firm.
When the competition is keen, a large inventory of finished goods is required to promptly
serve customers who may not be inclined to wait because other manufactures are ready to
meet their needs. In view of competitive conditions prevailing in the market the firm may
have to offer liberal credit terms to the customers resulting in higher debtors. Thus, the
working capital requirements tend to be high because of greater investment in finished goods
inventory and account receivables. On the other hand, a monopolistic firm may not require
larger working capital. It may ask customer to pay in advance or to wait for some time after
placing the order.

Conditions of Supply:
The time taken by a supplier of raw materials, goods, etc. after placing an order, also
determines the working capital requirement. If goods as soon as or in a short period after

50
placing an order, then the purchaser will not like to maintain a high level of inventory f that
good. Otherwise, larger inventories should be kept e.g. in case of imported goods.

Business Cycle Fluctuations:

Different phases of business cycle i.e., boom, recession, recovery etc. also effect the working
capital requirement. In case of recession period there is usually dullness in business activities
and there will be an opposite effect on the level of wor5king capital requirement. There will
be a fall in inventories and cash requirement etc.

Credit policy:
The credit policy means the totality of terms and conditions on which goods are sold and
purchased. A firm has to interact with two types of credit policies at a time. One, the credit
policy of the supplier of raw materials, goods, etc., and two, the credit policy relating to
credit which it extends to its customers. In both the cases, however, the firm while deciding
the credit policy has to take care of the credit policy o the market. For example, a firm might
be purchasing goods and services on credit terms but selling goods only for cash. The
working capital requirement of this firm will be lower than that of a firm, which is purchasing
cash but has to sell on credit basis.

Operating Cycle:
Time taken from the stage when cash is put into the business up to the stage when cash is
realized.

Thus, the working capital requirement of a firm is determined by a host of factors. Every
consideration is to be weighted relatively to determine the working capital requirement.
Further, the determination of working capital requirement is not once a whole exercise; rather
a continuous review must be made in order to assess the working capital requirement in the
changing situation. There are various reasons, which may require the review of the working
capital requirement e.g., change in credit policy, change in sales volume, etc.

ISSUES IN WORKING CAPITAL MANAGEMENT

Working capital management refers to the administration of all components of working

capital – cash, marketable securities, debtors (receivables), and stock (inventories) and
creditors (payables). The financial manager must determine levels and composition of current
assets. He must see that right sources are tapped to finance current assets, and that current
liabilities are paid in time.

There are many aspects of working capital management which make it an important function
of the financial manager.
 Time. Working capital management requires much of the financial manager’s time.
 Investment. Working capital represents a large portion of the total investment in
assets. Actions should be taken to curtail unnecessary investment in current assets.
 Criticality. Working capital management has great significance for all firms but it is
very critical for small firms. Small firms in India face a severe problem of collecting

51
 their dues debtors. Further, the role of current liabilities is more significant in case of
small firms, as, unlike large firms, they face difficulties in raising long-term finances.
 Growth. The need for working capital is directly related to the firm’s growth. As
sales grow, the firm needs to invest more in inventories and debtors. Continuous
growth in sales may also require additional investment in fixed assets.

Liquidity vs. Profitability: Risk-Return Trade-off

A large investment in current assets under certainty would mean a low rate of return on
investment for the firm, as excess investment in current assets will not earn enough return. A
smaller investment in current assets, on the other hand, would mea interrupted production and
sales, because of frequent stock-outs and inability to pay creditors in time due to restrictive
policy.
Given a firm’s technology and production policy, sales and demand conditions, operating
efficiency etc., its current assets holdings will depend upon its working capital policy. These
policies involve risk-return trade-offs. A conservative policy means lower return and risk,
while an aggressive policy produces higher return and risk.
The two important aims of the working capital management are: profitability and solvency.
Solvency, used in the technical sense, refers to the firm’s continuous ability to meet maturing
obligations. If the firm maintains a relatively large investment in current assets, it will have
no difficulty in paying claims of creditors when they become due and will be able to fill all
sales orders and ensure smooth production. Thus, a liquid firm has less risk of insolvency;
that is, it will hardly experience a cash shortage or a stock-out situation. However, there is a
cost associated with maintaining a sound liquidity position. A considerable amount of the
firm’s will be tied up in current assets, and to the extent this investment is idle, the firm’s
profitability will suffer.

To have higher profitability, the firm may sacrifice solvency and maintain a relatively low
level of current assets. When the firm does so, its profitability will improve as fewer funds
are tied up in idle current assets, but its solvency would be threatened and would be exposed
to greater risk of cash shortage and stock-outs.

ESTIMATING WORKIN CAPITAL NEEDS

 Current Assets Holding Period. To estimate working capital requirement on the

basis of average holding period of current assets and relating them to costs based on
the company’s experience in the previous years. This method is essentially based on
the operating cycle concept.

 Ratio of Sales. To estimate working capital requirements as a ratio of sales on the

assumption that current change with sales

 Ratio of Fixed Investment. To estimate working capital requirements as a

percentage of fixed investment.

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POLICIES FOR FINANCING FIXED ASSETS

A firm can adopt different financing policies vis-à-vis current assets. Three types of financing
may be distinguished:

 Long-term Financing. The sources of long-term financing include ordinary share

capital, preference share capital, debentures, long-term borrowings from financial
institutions and reserves and surplus (retained earnings).

 Short-Term Financing. The short-term financing is obtained for a period less than
one year. It is arranged in advance from banks and other surplus of short-term finance
in the money market. It includes working capital funds from banks, public deposits,
commercial paper, factoring of receivables etc

 Spontaneous Financing. It refers to the automatic sources of short-term funds arising

in the normal course of a business. Trade (supplier’s) credit and outstanding expenses
are examples of spontaneous financing.

The real choice of financing current assets, once the spontaneous sources of financing have
been fully utilized, is between the long-term and short-term sources of finance.
Depending on the mix of short-term and long-term financing, the approach followed by a
company may be referred to as:
 Matching approach
 Conservative approach
 Aggressive approach

Matching Approach
The firm following matching approach (also known as hedging approach) adopts a financial
plan which matches the expected life of the sources of funds raised to finance assets. For e.g.,
a ten-year loan may be raised to finance a plant with an expected life of ten years. The
justification for the exact matching is that, since the purpose of financing is to pay for the
assets, the source of financing for short-term assets is expensive, as funds will not be utilized
for the full period. Similarly, financing the long-term assets with short-term financing is
costly as well as inconvenient as arrangement for the new short-term financing will have to
be made on a continuing basis.

Conservative approach

Under a conservative plan, the firm finances its permanent assets and also a part of temporary
currents assets with long-term financing. In the periods when the firm has no need for
temporary current assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity. The conservative plan relies heavily on long-term financing and,
therefore, the firm has less risk of facing the problem of shortage of funds.

53
Aggressive approach

An aggressive approach policy is said to be followed by the firm when it uses more short-
term financing than warranted by the matching plan. The firm finances a part of its permanent
current assets with short term financing. The relatively more use of short-term financing
makes the firm more risky.

INVENTORY MANAGEMENT

 INTRODUCTION: Inventories constitute the most significant part of current assets

of a; large number majority of companies in India. On an average, inventories are
approximately 60 % of current assets in public limited companies in India. Because of
the large size of the inventories maintained by the firm, a considerable amount of
funds is required to be committed to them. It is, therefore, absolutely imperative to
manage inventories efficiently and effectively in order to avoid unnecessary
investment.

Inventories are stock of the product a company is manufacturing for sale and components that
make up the product. The various forms in which inventories exist in a manufacturing
company are:

 Raw materials are those basis inputs that re converted into finished product through
the manufacturing process. Raw materials inventories are those units, which have
been purchased and stored for future productions.

 Work-in-progress inventories are semi-manufactured products. They represent those

products that need more work before they become finished products for sale.

 Finished goods inventories are those completely manufactured products, which are
ready for sale. Stocks of the raw materials and work-in-process facilitate production,
while stock of finished goods is required for smooth marketing operations. Thus the
inventories serve as a link between the production and the consumption of goods.

The levels of the three kinds of inventories for the firm depend on the nature of the business.
A manufacturing firm will have substantially high level of finished goods inventories and no
raw material and work-in progress inventories within manufacturing firm, there will be
differences.

THE OPERATING CYCLE AND WORKING CAPITAL

The working capital requirement of a firm depends, to a great extent up on operating cycle of
the firm. The operating cycle may be defined as the time duration starting from the
procurement of goods or raw material and ending with the sales realization the length and

54
nature of the operating cycle may differ from one firm to another depending on the size and
nature of the firm.
The investment in working capital is influenced by four key events in the production and
sales cycle form:

 Purchase of raw materials

 payment of raw materials
 sale of finished goods
 collection of cash for sales

Operating cycle period: the firm begins with the purchase of raw material, which are paid
for after a delay, which represents the accounts payable period. The firm converts raw
material into finished goods and then sell the same. The time that, elapses between the
purchase of raw material and the collection of cash for the sales is referred to as the operating
cycle. The length or time duration of the operating cycle of any firm can be defined as the
sum of its inventory conversion period and the receivables conversion period.

A) Inventory Conversion period (ICP): The time lag between the purchase of
raw material and the sale of finished goods is the inventory conversion period.
In the manufacturing firm ICP consists of raw materials conversion period
(RPCP), work-in-progress conversion period (WPCP), and the finished goods
conversion period (FGCP).
RMCP refers to the period for which the raw material is generally kept in stores
before it is used by the production department. The WPCP refers to the period for
which the raw material remains in the production process before it is taken out s a
finished product. The FGCP refers to the period for which finished goods remain
in stores before being sold to a customer.

B) Receivables conversion period (RCP): It is the time required to convert the credit sales
into cash realization. It refers to the period between the occurrence of credit sales and
collection from debtors.

The total of ICP and RCP is also known as Total Operating Cycle period (TOCP). The firm
might be getting some credit facilities from the supplier o a material, wage earners, etc. this
period for which the payment of these parties are deferred or delayed is known as Deferral
Period (DP). The Net Operating Cycle (NOC) of the firm is arrived at by deducting the DP
from the TOCP. NOC is also known as cash cycle.

RMCP = (AVG. raw material stock/ Total raw materials stock)*365

WPCP = (avg. work-in process/ Total work-in-process)*365
FGCP = (Avg. finished goods/ Total cost of goods sold)*365
RCP = (Avg. receivables / Total credit purchase)*365
DP = (Avg. creditors / Total credit purchase)*365

In respect of these formulations, the following points are note worthy:

55
 a) The “Average” value in the numerator is the average of opening balance and closing
balance of the respective item. However, if only the closing balance is available, then
even the closing balance may be taken as the “Average”.
b) The figure “365” represents number of days in a year. It may also be taken as “360”
for the ease of calculation.
c) The “total” figure in the denominator refers to the total value of the item in a
particular year.
d) In the calculation of RMCP, WPCP, ad FGCP. The denominator is calculated at cost-
basis and the profit margin has been excluded. The reason big that there is no
investment of funds in profit as such.

The working capital ratios are calculated for the Coca Cola Company and final holding
month for the inventories, debtors and creditors are given below in the table.

Working Capital

For the year 2009

Total Operating Cycle = RMCP + WP/FGCP + RCP

= .48 + .37 + 1.79
= 2.64

Net Operating Cycle = TOC – DP

= 2.64 - .57
= 2.07

WORKING CAPITAL LIMITS

FUND BASED CREDIT LIMITS

1. CASH CREDIT/PACKING CREDIT:

The cash credit facility is similar to the overdraft arrangement. It is the most popular method
of bank finance for working capital in India. Under the cash credit facility, a borrower is
allowed to withdraw funds from the bank up to the cash credit limit. He is not required to
borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his
requirement and repay by depositing surplus funds in his cash credit account. Cash credit is
sanctioned against the security of current assets. Cash credit is the most flexible arrangement
from the borrower’s point of view.

2. DISCOUNTING OF BILLS

56
Under the purchase or discounting of bills, a borrower can obtain credit from a bank against
its bills. The bank purchase or discounts the borrower’s bills. He amount provided under this
agreement is covered within the overall cash credit or overdraft limit
Before purchasing or discounting the bills, the bank satisfies itself as credit worthiness of the
drawer. Though, the item “bills purchased” implies that the bank becomes owner of the bill.
In practice, bank hold bills as security for the credit. When a bill is discounted, the borrower
is paid he discounted amount of the bills, (visa, full amount of bill minus the discount
charged by the bank). The bank collects full amount on maturity. The major part of bank
borrowings comes through Discounting Bills. On this firm has to pay interest of 12%.

NON-FUND BASED

1. LETTER OF CREDIT
Commonly used in international trade, the letter of credit is now used in domestic trade as
well. A letter of credit, or L/C, is used by a bank on behalf of its customers (buyer) to the
seller. As per this document, the bank agrees to honour drafts on it for the supplies made
to the customer if the seller fulfills the conditions laid down in the L/C.
The L/C serves several useful functions:

(i) It virtually eliminates credit risk, if the bank has a good standing.
(ii) It reduces uncertainty, as the seller knows the conditions that should be fulfilled
receive payment.
(iii) It offers safety to the buyer who wants to ensure that payment is made only in
conformity with the conditions of the L/C.

Letter of credit is non-fund based source credit that is why it is available at very low rate i.e.
0.5%.

2. BANK GURANTEE
Bank Guarantee is very similar to Letter of Credit but it is provided for much longer
period compared to letter of credit. Very small portion of working capital is funded by
Bank Guarantee.

OBSERVATIONS

Audited Estim. Projn.

2008 2009 2010
TOP (months) 2.84 2.89 2.93
NOP (months) 2.07 2.22 2.27

 Coca Cola Company is having low holding period for the inventories which shows
that it is following aggressive policy, which might result in loss of sales.
Therefore, in my opinion the firm should try to shift towards more “conservative policy”.
The selection of right kind of policy is very necessary for the full utilization of fixed
assets. Because of low inventory level, the firm may not be able to fulfill its customers’
instantaneous needs.

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 2008 2009 2010
Average collection period/debtors holding period (days) 69.54 50.56 50.56

 The firm should try to reduce its debtor holding period especially domestic debtor
holing period which is slightly high. By this, the funds, which are blocked with
the customers, and hence are becoming idle, can be reduced and that money can
be utilized for other profitable purposes.

2008 2009 2010

creditor days/ credit holding period 27.91 48.5 33.53

 The firm is having low credit holding period it can try to increase is so that, those
funds can remain with it for a longer period n can be utilized for fulfilling the
working capital requirements. For this purpose firm can be little strict credit
standards it can also adopt discount policy.

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Chapter – 5

59
 CONCLUSION & RECOMMENDATIONS

Current assets to fixed assets ratio

Coca Cola Company should determine the optimal level of current assets so that the
wealth of the shareholder’s is maximized. It needs current assets and fixed assets to
support a particular level of current assets. As the firm’s output and sales are increasing
and will also increase in projected year 2010, it shows that company needs to increase the
current assets.

The level of current assets can be measured by relating current assets to fixed assets.
Dividing current assets by fixed assets vs. CA/FA ratio. Assuming a constant level of
fixed assets, a higher CA/FA ratio indicates a conservative assets policy and a lower
CA/FA ratio means an aggressive current policy other factors remaining constant.

audited estimated projn.

Year 2008 2009 2010
Current assets 7803 8778 9632
Fixed assets 20698 21304 22096
CA/FA 0.38 0.41 0.44

Company has an aggressive policy till 2008. This implies that company is incurring high
risk and low liquidity but in projected year 2009 company is moving from aggressive
policy to conservative policy in which there will be greater liquidity and lower risk. So I

60
would suggest the company to maintain conservative policy rather than the aggressive
one so as to cope up with the anticipated changes and operating condition.

Current assets financing Policy

Two types of policies- conservative which depends upon long-term sources like
debentures and aggressive which depends heavily upon short term bank finance and seek
to reduce dependence on long term financing are suggested. The following table shows
the ratio between the long term and short term sources for Coca Cola Company

Conservative policy on one hand reduces the risk that the firm will be unable to repay or
replace its short-term debt periodically. It, however, enhances the cost of financing
because the long term sources of finance, debt and equity, have a higher cost associated
with them. In 2008 the financial charges were Rs. 2284 lacks in 2009 it is estimated to be
Rs. 2261 lacks. Hence it would be suggested to go for more short- term financing as it
may reduce the interest cost which will increase profitability in return.

The Cost Trade Off

It is a different way of looking into risk-return trade off in terms of the cost of
maintaining a particular level of current assets. There are two types of cost involved—the
cost of liquidity and the cost of illiquidity
If the firm’s level of current assets is very high, then it has excessive liquidity. Its return
on assets will be low, as funds tied up in idle cash and stocks earn nothing and high level
of debtors reduces profitability. Thus, the cost increases with the level of current assets.

The cost of illiquidity is the cost of holding insufficient current assets. Coca Cola
Company is presently not in a position to honour its obligations because it carries too
little cash. This may force Coca Cola Company to borrow at high rate of interest. This
will adversely affect the credit worthiness of Coca Cola Company.
Thus company should maintain its current assets at the level where the sum of both-cost
of liquidity and cost of illiquidity is minimized.

Flexibility
It is relatively easy to refund short-term funds when for funds diminishes. Long-term
funds such as debenture loan or preference capital cannot be refunded before time. Hence,
Coca cola company. Should try to anticipate more in short-term funds than long-term
funds as it will reduce the interest rate and will increase the liquidity.

Reduce the Operating cycle

Coca cola Company. Should try to reduce its operating cycle. In year ended 2009
company debtor collection period is 50 days. It shows that company collecting period is
very high. That’s why unnecessarily company blocked its money with debtors. Hence
company should try to adopt new policies like cash credit policy and discount credit
policy.

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Chapter -6

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 BIBLIOGRAPHY

 I.M PANDEY
 M.Y KHAN
 SHASHI K. GUPTA

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