A

SUMMER TRAINING REPORT

ON
WORKING CAPITAL MANAGEMENT

DABUR INDIA LTD.

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE
AWARD OF
BACHELOR OF BUSINESS ADMINISTRATION

SESSION -2009-2012
AFFILIATED TO CH.CHARAN SINGH UNIVERSITY, MEERUT

SUBMITTED TO SUBMITTED BY:-

PROF. SUBHRO SEN GUPTA KARAN DUTTA
(LECTURER OF BBA DEPT.) ROLL NO : 9343568
BBA-VTH SEMESTER

I.T.S- MANAGEMENT & IT INSTITUTE

An ISO 9001:2008 Certified Institute and NBA Accredited
(Approved by AICTE)
G.T Road, Mohan Nagar, Ghaziabad-201007 (U.P)
Phone: +91 120-4174900 Fax: 0120- 4174913 Website: www.itsgzb.ac.in

1
 ACKNOWLEDGEMENT

I am thankful to My Faculty & my project guides giving me opportunity to work on such a

nice project as my project. ‘Gratitude is a heart’s memory’ and putting the feelings of heart
into words, is an art. Those who excel in this art are ultimately successful.

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

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

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

KARAN DUTTA
ROLL NO : 9343568
BBA-VTH SEMESTER

2
 CONTENTS

PARTICULARS

1. INTRODUCTION OF THE STUDY

2. OBJECTIVES OF THE STUDY

3. ABOUT THE COMPANY

i. INTRODUCTION:
(a) Dabur Groups
(b) Dabur Products
(c) Milestone To Success
(d) IT Initiatives
(e) Commitment To Enviroment
(f) Manufacturing Facilities
(g) Awards

ii. COMPANY PROFILE

(A) Hundred years of caring
(B) Founding Thoughts
(C) Company’s History

WORKING CAPITAL MANAGEMENT

1. Defining working capital

2. Concept of Working Capital

3. Operating Cycle

4. Components of working capital

5. Working capital policy

3
 CONTINUE…..

PARTICULARS

6. Working capital Financing

i. Cash Management
ii. Receivable Management
iii. Inventory Management
iv. Budgetary Control System

7. Importance of Good Working Capital Management

8. Blue Print of Good Working Capital Management Policy
9. Research Methodology
(a) Research Design
(b) Sample Size
(c) Instrument
(d) Collection of Data
10. Data Analysis and Data Interpretation
i. Details of Current Assets
ii. Change in Current Assets
iii. Details of current Liability
iv. Change in Current Liability
v. Change in Working Capital
11. Ratio Analysis
12. Performance Highlights
13. Research And Findings
14. Recommendations
15. Limitations
16. Bibliography
17. Questionnaire

4
 INTRODUCTION OF THE STUDY

Finance function is a core function in any organization. I financial management is that

managerial activity which is concerned with planning and counseling of firm’s financial

resources. One such area of financial management is “Working Capital” and management

of this is known as “Working Capital Management”. In practice, a firm has to employ

short-term assets and short run sources of financing. The management of such assets, and

short run sources of financing. The management of such assets, described as working capital

management or current assets as working capital management is current assets management

is one of the most important aspects of overall financial management. Technically the

management is an integral part of the overall financial management. To that extent it is

similar to the long-term decision making process because both entail an analysis of the effects

of the risk and profitability.

The management is concerned with the problems that arise in attempting to manage current

assets, the current liabilities and the interrelationship that exist between them. The term

current assets refer to those assets, which in ordinary course of business can be, or will be

turned into cash within one year without undergoing a diminution in value and without

disrupting the operations of the firm. CL are those liabilities which are intended at their

inception to the paid inn ordinary course of business, within a year, out of CA’s or earnings

of the owner.

The goal of working capital management is to manage firm’s current assets and current

liabilities in such a way that a satisfactory level of working capital is maintained.

5
 OBJECTIVES OF THE STUDY

The present study DABUR INDIA LTD. 22, SITE IV, Sahibabad, Ghaziabad-U.P.has been

undertaken to evaluate the management of working capital by the company by establishing

the following objectives which answer the followings:

 To evaluate the working capital management of the company

 To assess the funds investments in current assets.

 To assess the sources of funds used to finance current assets

 To assess the proportion of long term and short term funds to finance current assets

 To assess the management of inventory and techniques followed upon by the company.

6
7
Dabur India Limited has marked its presence with some very significant achievements and
today commands a market leadership status. Our story of success is based on dedication to
nature, corporate and process hygiene, dynamic leadership and commitment to our partners
and stakeholders. The results of our policies and initiatives speak for themselves.

 
 Leading consumer goods company in India amongest turnover of Rs.1899.57 Crore
(FY02)

 2 major strategic business units (SBU) - Consumer Care Division (CCD) and
Consumer Health Division (CHD)

 3 Subsidiary Group companies - Dabur Foods, Dabur Nepal and Dabur

International and 3 step down subsidiaries of Dabur International - Asian
Consumer Care in Bangladesh, African Consumer Care in Nigeria and Dabur
Egypt.

 13 ultra-modern manufacturing units spread around the globe

 Products marketed in over 50 countries

 Wide and deep market penetration with 47 C&F agents, more than 5000
distributors and over 1.5 million retail outlets all over India 

CCD, dealing with FMCG Products relating to Personal Care and Health Care

 Leading brands -

 Dabur - The Health Care Brand

 Vatika-Personal Care Brand

 Anmol- Value for Money Brand

8
  Hajmola- Tasty Digestive Brand

 and Dabur Amla, Chyawanprash and Lal Dant Manjan

with Rs.100 crore turnover each

 Vatika Hair Oil & Shampoo the high growth brand

 Strategic positioning of Honey as food product, leading to

market leadership (over 40%) in branded honey market 

 Dabur Chyawanprash the largest selling Ayurvedic medicine

with over 65% market share.

 Leader in herbal digestives with 90% market share

 Hajmola tablets in command with 75% market share of

digestive tablets category

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

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines 

 Has more than 250 products sold through prescriptions as well

as over the counter

 Major categories in traditional formulations include:

-AsavArishtas
-RasRasayanas
-Churnas
- Medicated Oils

 Proprietary Ayurvedic medicines developed by

Daburinclude:
-NatureCare

 Isabgol
-Madhuvaani

9
 - Trifgol

 Division also works for promotion of Ayurveda through

organised community of traditional practitioners and
developing fresh batches of students 

10
11
 DABUR GROUP

With a basket including personal care, health care and food products, Dabur India Limited has set up
subsidiary Group Companies across the world that can manage its businesses more efficiently. Given the
vast range of products, sourcing, production and marketing have been divested to five leading group
companies that conduct their operations independently:

12
13
 PRODUCTS

HEALTH SUPPLIMENT :
 Dabur chyawanprash
 Dabur Glucose D

DIGESTIVES :
 Hajmola Mast Masala
 Anardana
 Hajmola
 Hajmola Candy
 Hajmola Candy Fun2
 Pudin Hara (Liquid and Pearls)
 Pudin Hara G
 Dabur Hingoli

BABY CARE :
 Dabur Lal Tail
 Dabur Baby Olive Oil
 Dabur Janma Ghunti

NATURAL CURES :
 Shilajit Gold
 Nature Care
 Sat Isabgol
 Shilajit
 Ring Ring
 Itch Care
 Back - Aid
 Shankha Pushpi
 Dabur Balm
 Sarbyna Strong

HAIR CARE OIL :

 Amla Hair Oil
 Amla Lite Hair Oil
 Vatika Hair Oil
 Anmol Sarson Amla

HAIR CARE SHAMPOO :

 Vatika Henna Conditioning Shampoo
 Vatika Anti Dandruff Shampoo

14
  Anmol Natural Shine Shampoo

SKIN CARE :
 Gulabari
 Vatika Fairness Face Pack

ORAL CARE :
 Dabur Red Gel
 Dabur Red Toothpaste
 Dabur Lal Dant Manjan
 Dabur Binacca Toothbrush

REAL :
 Real Fruit Juice
 Real Active

HOMMADE :

 Cooking Paste
 Coconut Milk
 Tomato Puree

AYURVEDIC SPECIALITIES :
 Dashmularishta
 Ashokarishta
 Lauhasava
 Mahanarayan Tail
 Juritap
 Madhuvani
 Lavan Bhaskar Churna

15
 INTERNATIONALRANGE :

HEALTH CARE :
 Dabur Chyawanprash
 Pudinhara
 Hajmola Tablets
 Dabur Honey
 Shilajit

SKIN CARE :
 Natural Soap

ORAL CARE :
 Herbal Tooth Paste

HAIR CARE :
 Vatika Shampoo and Conditioners
 Dabur Amla Hair Oil

FOODS:

 Real juices
 Homemade Foods Products

Dr. BURMAN (RUSSIA)

 Health Supplements
 Ayurvedic Tooth Paste

16
17
 MILESTONES

 1884 - Established by Dr. S K Burman at Kolkata

 1896 - First production unit established at Garhia

 1919 - First R&D unit established

 Early 1900s - Production of Ayurvedic medicines

 1930 - Automation and upgradation of Ayurvedic products manufacturing

initiated

 1936 - Dabur (Dr. S K Burman) Pvt. Ltd. Incorporated

 1940 - Personal care through Ayurveda

 1949 - Launched Dabur Chyawanprash in tin pack

 1957 - Computerisation of operations initiated

 1970 - Entered Oral Care & Digestives segment

 1972 - Shifts base to Delhi from Calcutta

 1978 - Launches Hajmola tablet

 1979 - Dabur Research Foundation set up

18
 1979 - Commercial production starts at Sahibabad, the most modern
herbal medicines plant at that time

 1984 - Dabur completes 100 years

 1988 - Launches pharmaceutical medicines

 1989 - Care with fun

 1994 - Comes out with first public issue

 1994 - Enters oncology segment

 1994 - Leadership in health care

 1996 - Enters foods business with the launch of Real Fruit Juice

 1996 - Real blitzkrieg

 1998 - Burman family hands over management of the company to

professionals

 2000 - The 1,000 crore mark

 2001 - Super specialty drugs

 2002 - Dabur record sales of Rs 1163.19 crore on a net profit of Rs 64.4

crore

 2003 - Dabur demerges Pharmaceuticals business

19
 2005 - Dabur aquires Balsara

 2006 - Dabur announces bonus after 12 years

2006 - Dabur crosses $2 bin market cap, adopts US GAAP

20
 Our major IT Initiatives

 Implementation of Manufacturing Process ERP for frontend operations;

 Supply chain and working capital management to control manufacturing, distribution
planning, invoicing, receivables, banking and schemes;
 Integration with Baan (backend ERP) initiated last year in production units and head
office;
 Intranet based Employee Management System for payroll and HRIS;

Future Challenges

 Target of end-to-end networking by end of financial year 2002-03

 Extending the Supply Chain Automation to both ends, in Secondary Sales and e-
Procurement;
 Launch of E -Procurement using Free Markets' online bidding engine. 

Vendor Managed inventories for fast moving raw materials and packaging materials, and
outsourced manufacturers' systems to be integrated with the BaaN ERP system. 

21
 COMMITMENT TO ENVIROMENT

Ancient wisdom of conservation

From times immemorial, Indian sages and men of wisdom have understood and appreciated
the value of nature and its conservation. Our ancestors recognised that if we grabbed from
nature beyond what was healthy, it would lead to all round degradation, and even the
extinction of humanity. That is why nature was sanctified and worshipped in the form of
gods and goddesses.
Dabur upholds the tradition
Today, we at Dabur also value nature's bounty. Without the fruits of nature, the vision of
Dabur would never have been fulfilled. And that is the reason for our unfailing commitment
to ecological conservation and regeneration. We would like to follow the principles of our
ancient texts, which say:

"Dehi me dadami te" - "you give me, and I give you".

 
Back to Nature
Rare herbs and medicinal plants are our most valuable resource, from which all our products
are derived. Due to overexploitation of these resources and unsustainable practices, these
plants and herbs are fast reaching the point of extinction. In view of this critical situation,
Dabur has initiated some significant programmes for ecological regeneration and protection
of endangered plant species.
 

Plants for Life

22
We have set up the "Plants for Life" project in the mountainous regions of the Himalayas.
Under the project, a high-tech greenhouse facility has been set up for developing saplings of
rare and endangered medicinal plants. Fully computer-controlled and monitored, this
greenhouse maintains the highly critical environmental parameters required for their
survival. We are also developing quality saplings of more than 20 herbs, 8 of them
endangered, through micro propagation.

In addition, satellite nurseries spread across mountain villages and contract cultivation of
medicinal herbs helps in maintaining the ecological balance. These measures have also
helped provide local cultivators the scientific knowledge for harvesting herbs and a steady
source of income. So that they are not forced to exploit the environment to earn a livelihood.
 
Living a Green Heritage
These are significant steps that can contribute to a better world for coming generations. To
whom we would like to bequeath a world not bereft of nature. But full of flowering and fruit
bearing trees, animals, birds and humans living in good health and complete harmony.

23
MANUFACTURING FACILITIES

24
25
 AWARDS

      Archive 

Dabur CEO Dabur CFO Dabur wins ICSI Dabur amongst The second
amongst 25 Best amongst India's National Award top 'HOT annual listing of
of the Best India's top three CFOs for Excellance in FMCG' the smartest chief
truly world class Corporate Companies financial officers
managers Governance in India Inc.

Dabur India in Dabur amongst Dabur India ranks Dabur India India's most
Forbes "Best top 10 Great 53rd Most rated IInd most valuable
under a Billion" Place to Work Valuable Indian dynamic FMCG companies
Company company
   

  LDM into Limca Book of records 2005  

 FORBES: Amongst the top 20 “Best under a billion” companies in India under $ 1
billion recognized by FORBES
 Great Places to work – Ranked 10th among the Top 25 Great Places to Work
 ICSI award for Excellence in Corporate Governance
 Market Cap crosses $ 1 billion. Best performing stock in the NSE in 2005 with
122% growth
 The Economic Times company of the year – nominated amongst the top 10
 Economic Times – 42nd in the list of top 500 companies this year, 2nd in FMCG
 BT 500 – 53rd in Business Today ranking on 500 India's Most Valuable Companies
 Chairman nominated for the E&Y Entrepreneur of the year award
 CEO – Among top 25 - Smart Managers of the Year.

26
 Udyog Ratna for Chairman and Gr. Director from Uttranchal government and
Himachal Pradesh Government.
 Dabur Foods got 4 Awards At The 7th Annual Dairy & Beverages Seminar
 Tallest inflatable and longest billboard made during the Kumbh mela and submitted to
Limca Book of records have been published in 2005

27
28
 OVER HUNDRED YEARS OF CARING

Dabur commenced operation in 1884 and is today a multi – locational, multi – product
enterprise. The company has major interest in health and beauty care.

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

The company manufactures and markets a range of oncologicals. Dabur is one of the
companies in the world to product PACLITAXEL – AN ANTI CANCER DRUG. The
company has developed its own Eco – friendly process to manufacture this drug from raw
material stage.

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

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

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

29
 Founding Thoughts

"What is that life worth which cannot bring

comfort to others"

The doorstep ‘Daktar’

The story of Dabur began with a small, but visionary endeavour by Dr. S. K.
Burman, a physician tucked away in Bengal. His mission was to provide
effective and affordable cure for ordinary people in far-flung villages. With
missionary zeal and fervour, Dr. Burman undertook the task of preparing
natural cures for the killer diseases of those days, like cholera, malaria and
plague.  
Soon the news of his medicines traveled, and he came to be known as the
trusted 'Daktar' or Doctor who came up with effective cures. And that is
how his venture Dabur got its name - derived from the Devanagri rendition
of Daktar Burman. Dr. Burman set up Dabur in 1884 to produce and
dispense Ayurvedic medicines. Reaching out to a wide mass of people who
had no access to proper treatment. Dr. S. K. Burman's commitment and
ceaseless efforts resulted in the company growing from a fledgling medicine
manufacturer in a small Calcutta house, to a household name that at once
evokes trust and reliability.

30
 COMPANY’S HISTORY

1884 Birth of Dabur

1896 Setting up a manufacturing plant
Early 1900s Ayurvedic medicines
1919 Establishment of research laboratories
1920 Expands further
1936 Dabur India (Dr. S.K. Burman) Pvt. Ltd.
1972 Shift to Delhi
1979 Sahibabad factory / Dabur Research Foundation
1986 Public Limited Company
 
1992 Joint venture with Agrolimen of Spain
1993 Cancer treatment
1994 Public issues
1995 Joint Ventures
1996 3 separate divisions
1997 Foods Division / Project STARS
1998 Professionals to manage the Company
2000 Turnover of Rs.1,000 crores
2003   Dabur demerges Pharma Business
2005   Dabur aquires Balsara
2006   Dabur announces Bonus after 12 years
2006   Dabur crosses $2 Bin market Cap, adopts US GAAP

31
32
 Defining Working Capital

The term working capital refers to the amount of capital which is readily available to an
organisation. That is, working capital is the difference between resources in cash or readily
convertible into cash (Current Assets) and organisational commitments for which cash will
soon be required (Current Liabilities).

Current Assets are resources which are in cash or will soon be converted into cash in "the
ordinary course of business".

Current Liabilities are commitments which will soon require cash settlement in "the ordinary
course of business".

Thus:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of working capital are

reported under the following headings:

33
 Current Assets

 Liquid Assets (cash and bank deposits)

 Inventory
 Debtors and Receivables

Current Liabilities

 Bank Overdraft
 Creditors and Payables
 Other Short Term Liabilities

34
 CONCEPT OF WORKING CAPITAL

There are two concepts of Working Capital:

Gross Working Capital

It refers to the firm’s investment in total current or circulating assets.

Net Working Capital

The term “Net Working Capital” has been defined in two different ways:

(i) It is the excess of current assets over current liabilities. This is, as a matter of fact,

the most commonly accepted definition. Some people define it as only the

difference between current assets and current liabilities. The former seems to be a

better definition as compared to the latter.

(ii) It is that portion of a firm’s current assets which is financed by long-term funds.

For example, a business requires investment in current assets such as cash, accounts

receivable and short-term investment etc., to the extent of Rs. 15,000. A part of this

requirement can be financed by the firm by purchasing on credit of this requirement can be

financed by the firm by purchasing on credit or postponing certain payments or, in other

words, by creation of current liabilities such as accounts payable, outstanding expenses, etc.

Suppose the amount of current liabilities comes to Rs. 10,000. This means the business still

needs Rs. 5,000 for its working purposes. This amount will have to be financed from long-

term sources of funds as indicated in the definition of Net Working Capital given above.

35
NEED FOR WORKING CAPITAL

It has already been stated in the preceding chapter that the basic objective of financial

management is to maximize shareholder’ wealth. This is possible only when the company

earns sufficient profit. The amount of such profit largely depends upon the magnitude of

sales. However, sales do not convert into cash instantaneously. There is always a time gap

between the sale of goods and receipt of cash. Working Capital is required for this period in

order to sustain the sales activity. In case adequate working capital is not available for this

period, the company will not be in a position to purchase raw materials, pay wages and other

expenses required for manufacturing the goods to be sold.

OPERATING CYCLE

From the above, it is clear that working capital is required because of the time gap between

the sales and their actual realization in cash. This time gap is technically termed as “operating

cycle” of the business.

In case of a manufacturing company, the operating cycle is the length of time necessary to

complete the following cycle of events :

(i) Conversion of cash into raw material;

(ii) Conversion of raw materials into work-in-process;

(iii) Conversion of work-in-process into finished goods;

(iv) Conversion of finished goods into accounts receivable, and

(v) Conversion of accounts receivable into cash.

This cycle will be repeated again and again.

The operation cycle of manufacturing business can be shown as in the following chart.

36
 Accounts
Receivable

FINISHED
Cash
GOODS

RAW WORK-IN-
MATERIALS PROCESS

Operating Cycle of a Manufacturing Business.

In the case of a “trading firm” the operating cycle will include the length of time required to
convert (i) cash into inventories, (ii) inventories into account receivable, and (iii)
accounts receivable into cash.

In the case of a “financing firm”, the operating cycle includes the length of time taken for
(i) conversion of cash into debtors, and (ii) conversion of debtors into cash.

PERMANENT WORKING CAPITAL

This refers to that minimum amount of investment in all current assets which is required at all

times to carry out minimum level of business activities. In other words, it represents the
37
current assets required on a continuing basis over the entire year. Tandon Committee has

referred to this type of working capital as “core current assets”.

The following are the characteristic of this type of working capital :

1. Amount of permanent working capital remains in the business in one form or one

form or another. This is particularly important from the point of view of financing.

The suppliers of such working capital should not expect its return during the life-

time of the firm.

2. It also grows with the size of the business. In other words, greater the size of the

business, greater is the amount of such working capital and vice versa.

Permanent working capital is permanently needed for the business and therefore it should be

financed out of long-term funds. This is the reason why the current ratio has to be

substantially more than ‘1’, as explained in the Chapter “Ratio Analysis” earlier.

38
TEMPORARY WORKING CAPITAL

The amount of such working capital keeps on fluctuating from time to time on the basis of

business activities. In other words, it represents additional current assets required at different

times during the operating year. For example, extra inventory has to be maintained to support

sales during peak sales period. Similarly, receivable also increase and must be financed

during period of high sales. On the other hand investment in inventories, receivables, etc.,

will decrease in periods of depression.

Suppliers of temporary working capital can expect its return during off season when it is not

required by the firm. Hence, temporary working capital is generally financed from short-term

sources of finance such as bank credit.

The diagrams given below illustrates the difference between permanent and temporary

working capital. In Gif. 1, permanent working capital is fixed over a period of time, while

temporary working Capital is fluctuating. In Fig. 2, the permanent working capital is

increasing over a period of time with increase in the level of business activity. This happens

in case of a growing company. Hence, the permanent working capital line is not horizontal

with the base line as in Fig. 1.

39
 COMPONENTS OF WORKING CAPITAL

The key components of working capital are as follows:

Stocks

These consists stocks of raw materials, work-in-progress and finished goods, together with
stocks of consumables and spare parts. Nan-manufacturing concerns will not carry raw
material and work-in-progress stocks.

Debtors

Debtors represent money owed at any point in time to the firm in respect of goods and
services which it has supplied on the credit to its customers. Debtors will also include any
prepayments in respect of goods and services (e.g. pre payments of rents and insurance).

Investment

These will include short-term, easily liquidated, investments such as marketable securities.
Marketable securities are financial assets on which a company can earn a rate of return by
investing temporarily surplus cash and which are readily and quickly convertible back into
cash with minimal risk of loss to their value, for e.g. treasury bill (Tbs) and certificate of
deposits (Cds).

Cash
40
This will include cash in hand, cash held in current bank account, and cash held in demand
deposit accounts with bank and other financial institutions. Cash plus marketable securities
collectively represent a firm’s liquid assets.

Current Liabilities

These represent the amount actually owed at any point in time by the firm and technically due
to be paid within one year of balance sheet date. They will include amounts due to trade
creditors for goods and services supplied, interest and principal due ton any short-term
borrowings, and payments due in respect of taxes, dividends, and so forth.

41
 WORKING CAPITAL POLICIES

Matching Approach

When a firm follows matching approach (also known as hedging approach), long-term
financing will be used to finance fixed assets and permanent current assets and short-term
financing to finance temporary or variable current assets.

Conservative Approach

The financing policy of the firm is said to be conservative when it depends more on long-
term funds for financing needs. Under a conservative plan, the firm finances its permanent
assets and also a part of temporary current assets with long-term financing. In the period
when the firm has no need for temporary current assets, the idle long-term funds can be
invested in tradable securities to conserve liquidity.

Aggressive Approach

An aggressive policy is said to be followed by the firm when it uses more short-term
financing than warranted by the matching plan. Under this, 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.

42
 WORKING CAPITAL FINANCING

TRADE CREDIT:

It refers to the credit extended by the supplier of goods and services in the normal course of
transaction/business/sale of the firm. Although most of the trade credit is on open account as
accounts payable, the suppliers of goods do not extend credit indiscriminately.

BANK CREDIT:

It is primarily institutional source of working capital finance. It is provided by banks in five

ways:

 Cash credits/overdrafts,
 Loans,
 Purchase/discount bills,
 Letter of credit, and
 Working capital term loans.

COMERCIAL PAPERS (CP):

It is a short term unsecured negotiable instrument, consisting of usance promissory notes with
a fixed maturity. It is issued on a discount on face value basis but it can also be issued in
interest-bearing form. A CP when issued by a company directly to the investor is called a
direct paper. Companies which are able to raise funds through CPs have better financial
standing.

43
FACTORING:

It provides resources to finance receivables as well as facilitates the collection of receivables.

It can be defined as an agreement in which receivables arising out of sale of goods/services
are sold by a firm (client) to the ‘factor’ (a financial intermediary) as a result of which the
title of the goods/services represented by the said receivables passes on the factor. Realization
of credit sales is the main function of factoring services.

Working capital management is also the management of:

 Cash
 Receivables
 Inventory

CASH MANAGEMENT

The term ‘cash’ with reference to cash management is used in two senses. In a narrow sense,
it is used broadly to cover currency and generally accepted equivalents of cash, such as
cheques, drafts and demand deposits in bank. The broad view of cash also includes near-cash
assets, such as marketable securities and time deposits in banks.

There are three primary motives for maintaining cash balances:

1. Transaction Motive: This refers to the holding of cash to meet routine

cash requirements to finance the transactions which a firm carries on in the
ordinary course of business . Such motives refers to the holding of cash to
meet anticipated obligations whose timing is not perfectly synchronized with
cash receipts.

44
2. Precautionary Motive: A firm may have to pay cash for purposes
which cannot be predicted or anticipated. This cash balance held in reserve for
such random and unforeseen fluctuations in cash flows.
3. Speculative Motive: It refers to the desire of the firm to take advantage of
opportunities which presents themselves at unexpected moments and which
are typically outside the normal course of business.

BASIC STRATEGIES

The cash budget, as a cash management tool, would throw light on the net cash
position of a firm. After knowing the cash position, the management should work
out the basic strategies to the employed to manage its cash. These strategies are
essentially related to the cash cycle together with the cash turnover. The cash
cycle refers to the process by which cash is used to purchase materials from which
are produced goods, which are then sold to customers, who later pay the bills. The
cash turnover means the number of times cash is used during each year.

Cash management strategies are intended to minimize the operating cash balance
requirement.

The basic strategies that can be employed are:

 Stretching Accounts Payable,

 Efficient Inventory-Production Management,
 Speedy Collection of Accounts Receivable, and
 Combined Cash Management Strategies.

45
 Cash Management Models

Several types of cash management models have been recently designed to help in

determining optimum cash balance. These models are interesting and are beginning to be

used in practice. Two of such models are being given below :

(1) Baumol Model

This model was suggested by William J. Baumol. It is similar to one used for determination

of economic order quantity, explained later in the chapter. According to this model, optimum

cash level is that level of cash where the carrying costs and transactions costs are the

minimum.

Carrying costs

This refers to the cost of holding cash, namely, the interest foregone on marketable securities.

They may also be termed as opportunity cost of keeping cash balance.

Transaction costs

This refers to the cost involved in getting the marketable securities converted into cash. This

happens when the firm falls short of cash and has to sell the securities resulting in clerical,

brokerage, registration and other costs.

There is an inverse relationship between the two costs. When one increases, the other

decreases. Hence, optimum cash level will be at that point where these two costs are equal.

46
Thus, the optimum cash balance is Rs. 15,000. The average cash balance will be taken at

Rs. 7,500 (i.e., 15,000/2). In other words, the firm should make four (i.e. 60,000/15,000)

transactions regarding sale of marketable securities for conversion into cash during the

month. This can be verified as follows :

No. of Amount Average Transaction Opportunity Total

Transactions conversion cash Cost Cost Cost
of securities balance
Rs.
Rs. Rs. Rs. Rs.
2 30,000 15,000 20 75 95
4 15,000 7,500 40 37.5 77.5
6 10,000 5,000 60 25 85

The above tables shows that the total cost of holding cash is the least when the cash

balance is kept at Rs. 15,000. This may, therefore, be taken as the optimum cash

balance. As will be seen from the table, the transaction cost and the opportunity cost are

just equal to each other at this level.

There are two limitations of the optimum cash model given in the preceding pages :

(i) Cash payments are assumed to be steady over the period of time specified. When
the cash payment becomes lumpy, it may be appropriate to reduce the period for
which calculations are made so that expenditures during the period are relatively
steady;
(ii) Cash payments are seldom predictable. Hence, the model may not give 100%
correct results.

(2) Miller-Orr Model

Baumol model is not suitable in those circumstances when the demand for cash is not steady
and cannot be known in advance. Miller-Orr Model helps in determining the optimum level
of cash in such circumstances. It deals with cash management problem under the assumption
47
of stochastic or random cash flows by laying down control limits for cash balances. These
limits consists of an upper limits (h), lower limit (o) and return point (z). When cash balance
reaches the upper limit, a transfer of cash equal to “h-z” is effected to marketable securities.
When it touches the lower limit, a transfer equal to “z-o” from marketable securities to cash
is made. No transaction between cash and marketable securities to cash is made during the
period when the cash balance stays between the high and low limits. The model is illustrated
in the form of the following chart:

The above chart shows that when cash balances reaches the upper limit, an amount equal to
“h-z” is invested in the marketable securities and cash balance comes down to ‘z’ level.
When cash balance touches the lower limit marketable securities of the value of “z-o” are
sold and the cash balance again goes up to ‘z’ level.

The upper and lower limits are set on the basis of opportunity cost of holding cash, degree of
likely fluctuation in cash balances and the fixed costs associated with securities transactions.

The optimal value of z, the return point for securities transactions, can be determined by the
following formula:
3b
A=3 4t
Where
b = fixed cost associated with a security transaction
= variance of daily net cash flows
i = interest rate per day on marketable securities
The optimal value of his simply 3z.

With these control limits set, the Miller-Orr Model of cash management minimizes the total
costs (fixed and opportunity) of cash management. Since the method assumes that cash flows
are random, the average cash balance cannot exactly be determined in advance. However, it
is approximately (z + h) 3, which will be higher than that suggested by Baumol’s EOQ
Model.

The Miller-Orr Model assumes the transfer cost as independent of the amount of transfer and
the direction. It also assumes that net cash flows are completely stochastic. These assumption
may not be true on many occasions.

48
In general, it may be said that the cash model gives the finance manager a bench mark for
judging the optimum cash balance. It does not have to be used as a precise rule governing his
behaviour. The model merely suggests what would be the optimal balance under a set of
assumptions. The actual balance may be more or less if the assumptions do not hold good
entirely.

49
 RECIEVABLE MANAGEMENT

The term receivables is defined as ‘debt owed to the firm by customers arising from sale of
goods or services in the ordinary course of business’. When a firm makes an ordinary sale of
goods or services and does not receive payment, the firm grants trade credit and creates
accounts receivable which could be collected in the future. Receivable management is also
called trade credit management.

CREDIT POLICIES

The credit policy of a firm provides a framework to determine:

a. Whether or not to extend credit to a customer and

b. How much credit to extend?

The credit policy decision of a firm has two broad dimensions:

1. Credit Standards: it represents the basic criteria for the extension of credit to
customers. The trade-off with reference to credit standards covers:
I. The collection cost,
II. The average collection period/cost of investment in accounts receivable,
III. Level of bad debt losses, and
IV. Level of sales.
V.
2. Credit Analysis: It involves two basic steps:
I. Obtaining credit information internally (filling forms and documents
giving details about financial operations) and externally (through bank
references, financial statement, trade references etc.)

II. Analysis of credit information through qualitative and

quantitative aspects.

50
CREDIT TERMS

The stipulations under which goods are sold on credit are referred to as credit terms. It has
three components:

1. Credit period,
2. Cash discount, and
3. Cash discount period.

51
 INVENTORY MANAGEMENT

Inventories often constitute a major element of the total working capital and hence it has been

correctly observed, “good inventory management is good financial management”.

Inventory management covers a large number of issues including fixation of minimum and

maximum levels; determining the size of the inventory to be carried; deciding about the issue

price policy; setting up receipt and inspection procedure; determining the economic order

quantity; providing proper storage facilities, keeping check on obsolescence and setting up

effective information system with regard to the inventories. However, management of

inventories involves two basic problems:

(i) Maintaining a sufficiently large size of inventory for efficient and smooth

production and sales operations;

(ii) Maintaining a minimum investment in inventories to minimize the direct-indirect

costs associated with holding inventories to maximize the profitability.

Inventories should neither be excessive nor inadequate. If inventories are kept at a high level,

higher interest and storage costs would be incurred. On the other hand, a low level of

inventories may result in frequent interruption in the production schedule resulting in

underutilization of capacity and lower sales. The objective of inventory management is,

therefore, to determine and maintain the optimum level of investment in inventories which

help in achieving the following objectives :

(i) Ensuring a continuous supply of materials to production department facilitating

uninterrupted production.

(ii) Maintaining sufficient stock of raw material in period of short supply;

(iii) Maintaining sufficient stock of finished goods for smooth sales operations;

(iv) Minimizing the carrying costs;

52
COST OF HOLDING INVENTORY

One operating objective of inventory management is to minimize cost. Excluding the cost of
merchandise, the costs associated with inventory fall into two basic categories:

 Ordering or acquisition or Set-up costs, and

 Carrying Costs

BENEFITS OF HOLDING INVENTORY

Inventory is to act as a buffer to decouple or uncouple the various activities of a firm so that
all do not have to be pursued at exactly the same rate.

The key activities are:

I. Purchasing
II. Production, and
III. Selling.

Since inventory enables uncoupling of the key activities of a firm, each of them can be
operated at the most efficient rate.

53
TECHNIQUES

The major problem areas that comprise the heart of inventory control are:

I. The order quantity problem,

II. The classification problem to determine the type of control required,
III. The order point problem, and
IV. Safety stocks.

CLASSIFICATIN PROBLEM:

Determination of Economic Order Quantity (EOQ)

Determination of the quantity for which the order should be placed is one of the important

problems concerned with efficient inventory management. Economic Order Quantity refers to

the size of the order which gives maximum economy in purchasing any item of raw material

or finished product. It is fixed mainly after taking into account the following costs.

(i) Ordering Cost : It is the cost of placing an order and securing the supplies. It varies
from time to time depending upon the number of orders placed and the number of items

ordered. The more frequently the orders are placed, and fewer the quantities purchased on

each order, the greater will be the ordering cost and vice versa.

(ii) Inventory carrying cost : It is the cost of keeping items in stock. It includes

interest on investment, obsolescence losses, store-keeping cost, insurance premium, etc.

The larger the value of inventory, the higher will be the inventory carrying cost and vice

versa.

The former cost may be referred as the “cost of acquiring” while the latter as the “cost of

holding” inventory. The cost of acquiring decreases while the cost of holding increases with

54
every increase in the quantity of purchase lot. A balance is, therefore, struck between the

two opposing factors and the economic ordering quantity is determined at a level for which

aggregate of two costs is the minimum.

Formula :

Q= 2UxP
S

Q= Economic ordering quantity

U = Quantity (units) purchased in a year (month)
P = Cost of placing an order
S = Annual (monthly) cost of storage of one unit.

ABC Analysis

ABC analysis is a technique of exercising selective control over inventory items. The

technique is based on this assumption that a firm should not exercise the same degree of

control on items which are more costly as compared to those items which are less costly.

According to this approach, the inventory items are dividend into three categories – A, B, C.

Category A may include more costly items, while category B may consist of less costly items

and category C of the least costly items. Thus, A,B,C, analysis concentrates on

important items and therefore is also known control by importance and exception (CIE).

This approach is also known as “proportional value analysis” (PVA), since the items are

classified in importance of their relative value.

Though no define procedure can be laid down for classifying the inventories in A,B,C,

categories as this will depend upon a large number of factors, such as nature and varieties of
55
items, specific requirements of the business, etc., yet the following method is generally

adopted :

(i) The quality of each material expected to be used in a period is estimated;

(ii) The value of each of the above items of materials is found out by multiplying the

quantity of each item with the price;

(iii) The items are then rearranged in the descending order of their value irrespective to

their quantities;

(iv) A running total of all the values will then be taken;

(v) It will be found that a small number of a first few items may amount to a large

percentage of the total value of the items. The management then will have to take

a decision as to the percentages of total value or the total number of items which

have to be covered by A, B and C categories.

Inventory surveys in general have shown the following trends regarding the components

of inventories manufacturing organizations :

Category % of total value % of total quantity

A 70 10
B 25 35
C 5 55

While exercising control over stores, items of category A should be given the utmost
attention. Their levels of stock should be strictly controlled. In case of items category B,
ordinary stores routine should be observed but the rules regarding levels of stock may not be
so strictly adhered to as those in category A. items of category C may be procedure may be
dispersed with. However, stock should be kept under some observation so that fresh

supplies may be obtained in time. Order for these materials may also be given in bulk to
economize on ordering and handling costs.

56
ORDER POINT PROBLEM

Another important question pertaining to efficient inventory management is: when should the
order to procure inventory be placed? This aspect of inventory management is covered under
the recorder problem. It is stated in terms of the level of inventory at which an order should
be placed replenishing the current stock of inventory.

Recorder point = lead time in days * Average daily usage of inventory

The term lead time refers to the time normally taken in receiving the delivery after placing
orders with the suppliers.

The average usage means the quantity of inventory consumed daily.

SAFETY STOCKS

It implies extra inventories that can be drawn down when actual lead time and/or usage rates
are greater than expected. It involves two types of costs:

a. Stock-out costs, and

b. Carrying costs.

The stock-out and the carrying costs are counter balancing. If the firm minimizes the carrying
costs, the stock-costs are likely to rise and vice-versa. The safety stock with the minimum
carrying and stock-out costs is the economic (appropriate) level which financial manager
should aim at.

Budgetary Control System—

Budgetary control aims at maximization of profits of the organization through effective

planning and control. Various policies and strategies are subject to periodic review

through budget. Optimum utilization of funds is achieved by making a suitable or proper

57
forecasting of the inflow / outflow of the funds of organization within a specified

period of time. A close coordination is possible in a very well defined pattern among the

various units, Head Office and Marketing Offices. Budgeting helps in creating the cost

consciousness between everyone to work efficiently so that the targets can be achieved.

Budgeting helps in planning for marking arrangement of working capital and long term

fund requirements in advance. Budgetary control supplies basis of internal audits.

Monitoring of Capital and Revenue Budgets-

The capital as well as Revenue budgets received from all the units, marketing officers are

reviewed by Executive Director, Finance Director, Marketing Director and Managing

Director. The budgets received from the plants to change as decided by all above top

management and thereafter the same is consolidated at Head Office (Corporation Office,

New Delhi).

Types of Budgets—
1. Capital Budget :
Capital Budget concerns with plant and machinery and other major capital items of plants

or otherwise. In involves a very detailed exercise at the unit or concerned office level

where each of the unit has to review closely all the items individually, previous year

capital budget and also proposals for new items / projects which are essentially either for

rehabilitation or replacement or for some level essential requirements of the plant.

2.Revenue Budget :
Revenue budget is being prepared to know the profitability of the organization for the

ensuring year. It is being prepared on the basis of the current prevailing market price

of each cost element after considering the normal inflation rate prevailing at the time

of preparation of revenue budget. It lays emphasis on the operations of the

organization for the ensuring year. It is being prepared on the basis of the current
58
 prevailing market price of each cost element after considering the normal inflation

rate prevailing at the time of preparation of revenue budget. It lays emphasis on the

operations of the organization for the next year having regard to objectives achieved

as decided and policies to be pursued.

The main parts of Revenue Budget are :

a. Production Budget

b. The production budget is compiled by the unit concern-

 Considering Last year’s production

 ECA Allocation

 Production Plan given to the Government

The Importance of Good Working Capital Management

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

From a department's point of view, excess working capital means operating inefficiencies.

Approaches to Working Capital Management

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

Working capital management takes place on two levels:

59
 Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management
 The individual components of working capital can be effectively managed by using
various techniques and strategies

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

Furthermore, working capital management is not an end in itself. It is an integral part of the
department's overall management. The needs of efficient working capital management must
be considered in relation to other aspects of the department's financial and non-financial
performance.

60
 BLUE PRINT FOR A GOOD WORKING CAPITAL
MANAGEMENT POLICY

GENERAL ACTIONS

 Set planning standards for stock days, debtor days and creditors days;
 Having set planning standards (as above) KEEP TO THEM. Impress on staff that
these targets are just as important as operating budgets and standard costs;

 Instill an understanding amongst the staff that working capital management

produces profits.

ACTIONS ON STOCKS

 Keep stock levels as low as possible, consistent with not running out of stock and not
ordering stock in uneconomically small quantities. “Just-in-Time” stock management
is fine, as long as it is “Just-in-Time” and never fails to deliver on time;
 Consider keeping stock in suppliers’ warehouses, drawings on it as needed and saving
warehousing costs.

ACTION ON DEBTORS / CUSTOMERS

 Asses ALL significant new customers for their ability to pay. Take references,
examine accounts, and ask around. Try not to take on new customers who would be
poor payers;

61
  Re-asses ALL significant customers periodically. Stop supplying existing customers
who are poor payers – you may lose sales, but you are QUALITY of business rather
than QUANTITY of business. Sometimes poor – paying customers suddenly (and
magically!!) find cash to settle invoices if their supplies are being cut off. If customers
can’t pay / won’t pay your competitors have them – give your competitors a few more
problems;
 Consider factoring sales invoices – the extra cost may be worth it in terms of quick
payment of sales revenue, less debtor administration and more time to carry out your
business (rather than spend time chasing debts);
 Consider offering discounts for prompt settlement of invoices, but only if the
discounts are lower than the costs of borrowing the money owed from other sources.

ACTION ON CREDITORS
 Do NOT pay invoices too early - take advantage of credit offered by suppliers – it’s
free;
 Only pay early if the supplier is offering a discount. Even then, consider this to be an
investment. Will you get a better return by using working capital to settle the invoice
and take the discount than by investing the working capital in some other way? ;
 Establish a register of creditors to ensure that creditors are paid on the correct date –
not earlier and not later.

62
 RESEARCH METHODOLOGY

I have completed my project titled – “WORKING CAPITAL MANAGEMENT” in

“DABUR INDIA LIMITED”. During my tenure I have learned various procedures and
techniques involved in calculation of Working capital management. I have also learned the
role of Working capital management in day to day working of DABUR INDIA LIMITED.

As I have stated above my project title is WORKING CAPITAL MANAGEMENT and if one
wants to calculate working capital, he / she will not do so without having the values of
current assets and current liabilities because,
Working Capital = Current Assets – current Liabilities
For this purpose I have made a detailed analysis of current assets and current liabilities. It
also tells us how the current assets and current liabilities affect the working capital of the
company.
Working capital management is also the management of Inventory. To know the changes in
Inventory, I have also made the detailed analysis of the Inventory.
I also have made the detailed analysis of the Key Financials of the company
along with its subsidiary to check whether there is any changes in the Financial Performance
of the company or not.

Ratio signifies the relationship between two or more variables to draw some meaningful
information on the basis of which conclusions can be drawn and decision making can be
assisted.

The present study on Working Capital Management is an outcome of the various methods
and procedures followed while collecting and analyzing the data. The following is a brief
discussion on such issues:

 RESEARCH DESIGN

The research design is the conceptual structure with in which research is conducted.
As such the design includes an outline of what the researcher will do from writing the
hypothesis and its operational implications to be final analysis of data. There are two

63
 main research are used for the collection of the data. Descriptive and exploratory
research is used in the collection of the information.

 SAMPLE SIZE

The total strength of Dabur India Ltd. 700 employees. This includes manager,
including General Manager. Only those employees were considered for the purpose of
study that had completed one year of service as on 31-5-2011. I have selected
Random selection techniques for the sample size of 100.This was done for both the
executive and non executive employees of the organization.

 INSTRUMENT
Interview method was adopted to collect the information from executive and non
executive employee’s .This was done with the help of questionnaires being given out
to them for their completion.

 COLLECTION OF DATA

Data for the competition of this study was collected both from primary and secondary
sources.

Primary data was collected from the respondent through questionnaire based survey
in Dabut India Ltd.
Secondary data was collected from the internet, magazines, books and journals were
used for the collection of secondary data.

64
65
 CHANGE IN CURRENT ASSETS

14,000.00
12,000.00ON THE BASIS OF WORKING RESULT
10,000.00
Inventory
8,000.00 DETAILS OF CURRENT ASSETS
S. Debtors
6,000.00 Cash&bank
(Rs. In lacs)
4,000.00 Loans&Adv.
Particulars 2009 2010 2011
2,000.00
0.00
Inventories 10,951.93 12,802.57 11,560.90
2006 2007 2008
Difference 1,850.64 -1,241.67
% Increase 16.89 -9.69

S. Debtors 4,207.22 4,928.27 2,694.25

Difference 721.05 -2,234
% Increase 17.13 -45.33

Cash & Bank 1,188.72 1,065.38 3,804.41

Difference -123.34 2,739.03
% Increase -10.37 257.09

Loans & Adv. 5,584.34 6,400.96 10,376.66

Difference 816.62 3975.7
% Increase 14.62 62.11

66
 CHANGES IN CURRENT
LIABILITIES creditors

14000 security
12000 deposits
10000 amount due
8000
advance from
6000 customers
4000 provisions
2000
0 other liability
2009 2010 2011

67
 DETAILS OF CURRENT LIABILITIES

(Rs. In Lacs)

Particulars 2009 2010 2011

Creditors 11,511.44 13,359.71 13,169.08

Difference 1,848.27 -190.60
% Increase 16.05 -1.42

Security Deposits 23.81 47.24 12.65

Difference 23.43 -34.59
% Increase 98.40 -73.22

Amount due 764.88 876.01 1,041.54

Difference 111.13 165.53
% Increase 14.52

Advance from 101.08 53.71 51.24

customer
Difference -47.37 -2.47
% Increase -46.86 -4.59

Provisions 7,169.81 8,384.94 11,388.94

Difference 1,215.13 3004
% Increase 16.94 35.82

Other liabilities 4,050.86 9,501.38 5,067.55

Difference 5,450.52 -4,433.83
% Increase 134.55 -46.66

68
69
 CHANGES IN WORKING CAPITAL

0
-10 2009 2010 2011
-20
-30
-40 working
capital ratio
-50
-60
-70
-80

70
71
 INTRODUCTION

Financial ratio analysis calculates and compares various ratios of amounts and balances taken
from the financial statements.

The main purposes of working capital ratio analysis are:

 to indicate working capital management performance; and

 to assist in identifying areas requiring closer management

Three key points need to be taken into account when analyzing financial ratios:

 The results are based on highly summarised information. Consequently, situations

which require control might not be apparent, or situations which do not warrant
significant effort might be unnecessarily highlighted;
 Different departments face very different situations. Comparisons between them, or
with global "ideal" ratio values, can be misleading;
 Ratio analysis is somewhat one-sided; favourable results mean little, whereas
unfavourable results are usually significant.

The following ratios are of interest to those managing working capital:

 working capital ratio;

 liquid interval measure;
 stock turnover;
 debtors ratio;
 Creditor’s ratio.

72
Working Capital Ratio:

Current Assets divided by Current Liabilities

The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is,
the level of safety provided by the excess of current assets over current liabilities.

The "quick ratio" a derivative, excludes inventories from the current assets, considering only
those assets most swiftly realisable. There are also other possible refinements.

There is no particular benchmark value or range that can be recommended as suitable for all
government departments. However, if a department tracks its own working capital ratio over
a period of time, the trends-the way in which the liquidity is changing-will become apparent.

Liquid Interval Measure:

Liquid Assets divided by Average Operating Expenses

This is another measure of liquidity. It looks at the number of days that liquid assets (for
example, inventory) could service daily operating expenses (including salaries).

Stock Turnover

Cost of Sales divided by Average Stock Level

This ratio applies only to finished goods. It indicates the speed with which inventory is sold-
or, to look at it from the other angle, how long inventory items remain on the shelves. It can
be used for the inventory balance as a whole, for classes of inventory, or for individual
inventory items.

73
The figure produced by the stock turnover ratio is not important in itself, but the trend over
time is a good indicator of the validity of changes in inventory policies.

In general, a higher turnover ratio indicates that a lower level of investment is required to
serve the department.

Most departments do not hold significant inventories of finished goods, so this ratio will have
only limited relevance.

Debtor Ratio

There is a close relationship between debtors and credit sales to third parties (that is, sales
other than to the Crown). If sales increase, debtors will increase, and conversely, if sales
decrease debtors will decrease.

The best way to explain this relationship is to express it as the number of days that credit
sales are carried on the books:

Credit Sales per Period x Days per period

Average Debtors

The debtor ratio does not solve the collection problem, but it acts as an indicator that an
adverse trend is developing. Remedial action can then be instigated.

Creditor Ratio

This ratio is much the same as the debtor ratio. It expresses the relationship between credit
purchases and the liability to creditors. It can be stated as the number of days that credit
purchases are carried on the books.

74
 RATIO ANALYSIS

PARTICULARS 2010 2011

1.Working Capital Ratio 0.781 0.925

2. Liquid Ratio 0.186 0.211

3. Stock Turnover Ratio 5.02 6.35

4. Debtors Turnover Ratio 27.77 35.93

5.Creditors Turnover Ratio 4.64 4.49

6. Liquid Interval Measure 0.126 0.063

7. Net Working Capital Ratio -18.05 -59.68

8. Fixed Assets Turnover Ratio 0.274 2.890

75
 STAND ALONE PERFORMANCE OF
DABUR INDIA LIMITED

The highlights of Dabur India Limited’s (DIL’s) stand - alone result

for 2006 – 2010 are :
 Revenue from operations increased by 8% from Rs. 1,269 crore
in 2006 – 2007 to Rs.1,370 crore in 2007 – 2010.
 Operating profit [EBIDTA] increased by 29.5% from Rs. 188
crore in 2006 – 2007 to Rs.243 crore in 2007 – 2010.
 Profit after Tax (PAT) increased by 27.7% from Rs. 148 crore in
2006 – 2007 to Rs. 189 crore in 2006 – 2010.
 Return on Capital Employed (ROCE) increased from 38.7 % in
2006 – 2007 to 43.1% in 2007 – 2010.
 Return on Net worth (RONW) increased from 44.5 % in 2006 –
2007 to 45.5 % in 2007 – 2010

76
 PERFORMANCE HIGHLIGHTS

SALES (Rs. CRORE)

3500
3000
2500
Pharma
2000
FMCG
1500
FMCG+Pharma
1000
500
0
2006 2007 2008 2009 2010

PROFIT AFTER TAX (Rs. CRORE)

600
500
400 Pharma
300 FMCG
FMCG+Pharma
200
100
0
2006 2007 2008 2009 2010

77
 RETURN ON CAPITAL EMPLOYED (%)

200

150
Pharma
100 FMCG
FMCG+Pharma
50

0
2006 2007 2008 2009 2010

RETURN ON NET WORTH (%)

50
40 Pharma
30
FMCG
20
10 FMCG+Pharma
0
2006 2007 2008 2009 2010

78
 NET WORKING CAPITAL (Rs.crore)

500
400
300 Pharma
200 FMCG
FMCG+Pharma
100
0
-100 2006 2007 2008 2009 2010

79
 FINDINGS

 Working Capital Ratio: An ideal Ratio is 2 : 1. while the ratio for the year 2006
- 2008 was 0.781 : 1 and ratio for the year 2007 – 2010 is 0.925 : 1 which is lower
than the ideal ratio. A low ratio indicates lack of liquidity and shortage of working
capital. Lower level of liquidity is associated with increasing level of risk.

 Liquid Ratio: An ideal ratio is 1 : 1. while the ratio for the year 2004 – 2005 was
0.186 : 1 and ratio for the year 2005 – 2010 is 0.211 : 1, which is lower than the ideal
ratio. This indicates that the liquidity of the company is very unsatisfactory.

 Stock Turnover Ratio: This ratio indicates whether stock has been efficiently
used or not. The purpose of this ratio is to check up whether only the required
minimum amount has been invested in stock. The ratio for the year 2004 – 2005 was
5.02 times and the ratio for the year 2005 – 2010 is 6.35 times which is higher than
the previous year. Higher the ratio, the better it is since it indicates that more sales are
being produced by a unit of investment in stock. The ratio shows the better
performance, it means that the investment in stocks is leading to higher sales.

 Debtors Turnover Ratio: This ratio indicates the efficiency of staff entrusted
with collection of amount due from debtors. The ratio for the year 2004 – 2006 was
27.77 times and the ratio for the year 2007 – 2010 is 35.93 times, which is higher than
the previous year. Higher ratio indicates economy and efficiency in

collection of amounts due.

 Creditor Turnover Ratio: This ratio indicates the velocity with which the
payments for credit purchase are made to creditors. The ratio for the year 2004 – 2005
was 4.64 times and the ratio for the year 2006 – 2010 is 4.49 times, which is a bit
lower than the previous year. A lower ratio indicates that the creditors are being paid
promptly and the firm is not taking the full advantage of credit facilities.

80
 Net Working Capital Turnover Ratio: This ratio indicates the number of
times a unit invested in Working Capital produce sale. The ratio for the year 2004 –
2005 was -18.05 times and the ratio for the year 2007 – 2009 is -59.68 times, which is
lower than the previous year that too a negative value. Lower ratio is not good for the
firm as this shows the lack of liquidity in the firm.

 Fixed Assets Turnover Ratio: This ratio indicates that hoe efficiently or
otherwise the fixed assets are used. The ratio for the year 2004 – 2005 was 0.274
times and the ratio for the year 2007 – 2010 is 2.89 times, which is higher than the
previous year. The high ratio indicates that there is improvement in the utilization of
fixed assets.`

81
 RECOMMENDATIONS

 Working Capital Ratio is lower than the ideal one and a lower ratio indicates the lack
of liquidity. Dabur must maintain enough cash balance or other liquid assets so that it
never faces problem of payments to liabilities.
 Liquid Ratio is lower than the ideal ratio which indicates that the liquidity of the firm
is very unsatisfactory. There is a decline in liquid ratio of Dabur and the decline in the
liquid ratio indicates over – trading which, if serious, may land the company in
difficulties.
 Stock Turnover Ratio is increased by 1.32 times which means that more sales are
being produced by a rupee of investment in stocks. The company should maintain the
high ratio trend to produce more sales by a unit of investment in stocks. A proper
Inventory Turnover ratio enables the business to earn a reasonable margin of profits.
 Debtors Turnover Ratio has been increased by 8.16 times which means that debts are
being collected more quickly. The company should get the ratio higher so that the
economy and efficiency in collection of amounts is maintained. A standard ratio
should be set up for measuring the efficiency. A ratio lower than the standard would
indicate inefficiency.
 Creditors Turnover Ratio has been decreased by 0.15 times which means that the
company is not taking the full advantage of credit facilities. The firm should try to
increase this ratio as the high ratio indicates that the firm is enjoying actually the
credit promised by the suppliers.

 Net Working Capital Turnover Ratio has been decreased by 77.73 times which is not
a good sign for the firm. Dabur India Limited Should try to maintain this ratio high as
the high ratio is better for the firm. This ratio indicates the efficiency or otherwise
utilization of short – term funds in making the sales.
 Fixed Assets Turnover Ratio has been increased by 2.616 times which shows that firm
is utilising the fixed assets. The firm should try to maintain this ratio high because a
low ratio indicates that fixed assets is remained idle.

82
 LIMITATIONS

1) Time was a major constraint, in completing the project. As the project was very
vast and there was paucity of time.

2) From the different financial institutions we could not get the data of ending year
2008 so i am not able to comparative study on the ending year 2008.

3) During the analysis i have taken those financial institutions which have the same
accounting policies.

4) Some of miner factor where neglected during the analysis because of lack of time
how ever i try to put in my best in the limited period and covered the major
factor.

83
 BIBLIOGRAPHY

AUTHORS NAME PUBLICATION/BOOK

V.K Bhalla Anmol / Financial Management
R.P. Rastogi S.Chand / Financial Management
Khan & Jain Anmol / Financial Management
S.N. Maheshwari Vidya / Financial & Management Accounting

WEBSITES :

 www.google.com
 www.studyfinance.com
 www.dabur.com

OTHERS :

 Annual Reports (2009 – 2010)

 Annual Reports (2010 – 2011)

84
 QUESTIONNAIRE ON WORKING CAPITAL
MANAGEMENT

Name

Name of the organization

Designation

1. Do you think that study of Working Capital Management help to improve the
quality of work of an organization?
Yes No
2. Do you think that the Fund investment in
current assets good for proper running of
the organization?

Yes No

3. Do you think that Dabur India ltd. has proper management on working capital?

Yes No

4. Working capital management has a great role in a business. Do you think it is

true?

Yes No

5. Proper management of Working Capital plays a vital role in providing information

in each & every step of decision making. Do you agree with this statement?

Yes No

85
6. Do you think that size of an organization effect management of working capital of
an organization?

Yes No

7. Do you think that proper data related to current assets and current liabilities help to
interpret the working capital of an organization?
Yes No

8. Do you think that Dabur India ltd. has a better performance on management of
Working Capital?

Yes No

9. Do you think that Working Capital Ratio is lower than the ideal one and a lower
ratio indicates the lack of liquidity?

Yes No

10. Same accounting policy of a financial institution effect the working capital of an
organization?

Yes No

86