A

Project Report
On

“Working Capital Management of

hindustan Cocacola”
Session 2013-15

Submitted in partial fulfillment for the requirement of the award of degree in

Master of Business Administration

SUBMITTED TO: SUBMITTED BY:

Mukesh Kumar
Mr. Rishi Raj Roll No. 1371270056
MBA (3rd Sem.)

IIMT COLLEGE OF MANAGEMENT

K.P. 3 Greater NOIDA G.B NAGAR (UP)-201306

1
 ACKNOWLEDGEMENT

A project is never the sole product of a person whose name has appeared on the cover. Even the
best effort may not prove successful without proper guidance. For a good project one needs
proper time, energy, efforts, patience, and knowledge. But without any guidance it remains
unsuccessful. I have done this project with the best of my ability and hope that it will serve its
purpose.

It was really a great learning experience and I am really thankful to Mr Rahul Mishra
(EXCUTIVE MANAGER) who not only helped me in the successful completion of this report
but also spread his precious and valuable time in expanding my knowledge base.

After the completion of this Project I feel myself as a well aware person about the
Research Procedure and the complexities that can arose during the process. Also I get an insight
of the advertising industry and its effectiveness in promoting sales. Finally, I am also grateful to
all those personalities who have helped me directly or indirectly in bringing up this project
report.

Mukesh Kumar

2
 PREFACE

As a student of MBA (MASTER OF BUSINESS ADMINISTRATION) one of

the most reputed professional courses. The attractive feature of the MBA DEGREE is that along
with theory we also get to have the exposure of the practical environment.

The topic for my summer project is:-

“Working Capital Management of hindustan cocacola

The Project Report revolves around the identifying distribution and share gaps of Pepsi
Co. The objectives are predefined and the task is to accomplish them.

The study was confined geographically to selected areas of Greater Noida. The whole
process during the report is well planned, the primary data collection is done from the Balance
Sheet and Profit & Loss Account .

Mukesh Kumar

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 DECLARATION

I Mukesh Kumar , a student of MBA of

IIMT COLLEGE OF MANAGEMENT
respectively hereby declare that the
Project Report on “Working Capital
Management of hindustan cocacola” is the
outcome of my own work and the same
has not been submitted to any other
University/Institute for the award of any
degree or any Professional degree.

4
 (Mukesh Kumar)

5
 TABLE OF CONTENTS

1.0 Executive Summary

2.0 Introduction
Objectives
3.0 Industry Profile
4.0 Company Profile
5.0 Issues and challenges facing the organization
6.0 Research Methodology
7.0 Management of Working capital
8.0 Recommendations and Conclusion
9.0 Bibliography
10.0 Annexure

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CHAPTER- 1

1.1 INTRODUCTION

1.2 NEED OF THE STUDY

1.3 SCOPE OF THE STUDY

1.4 OBJECTIVE OF THE STUDY

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1.1 INTRODUCTION

Today India is one of the most potential markets with the population of around 1000 million

people. There is a growth of 30% in the soft drink industry. These factor are the reason for the

entry of two giants in the soft drink industry in the world to enter in the Indian market. The cola

giants coke and Pepsi, together control almost 96% of entire Indian market while other

companies has only share 4%.

In a long span, a culture transforms itself over and over. The map is remade attitude change for

better or worse. Processes are invented, hailed as revolutionary and discarded obsolete. So it was

one hundred year was a very much different world from what we have today, but at least one

sense, not very different at call. Many reasons have been advanced to explain the last century

with over 100 yrs. Of interrupted growth despite war, economic depression and other

disturbances there be something that sets soft drink apart from the consumer culture.

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COMPANY PROFILE

DOUGLASN DAFT (chairman of the board and chief executive officer)

THE COCA COLA COMPANY

Douglas N. Daft was elected chairman board of director and chief executive officer of the Coca-

Cola company on Feb. 17, 2000 Mr. Daft is the 11th chairman of the board in the history of

company Mr. Daft 60 joined the company in 1969 as planning officer in Sydney, Australia

office. He held of increasing responsibility throughout Asia and in 1982 was named vice

president of Coca-Cola Far East Ltd.

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HISTORY OF COCA -COLA

In 1886, Dr. John Pemberton was created the formula of Coca-Cola, a pharmacist in Atlanta,

Georgia. The drink was sold ad-refreshing elixir at the fountain counter of Jacob’s Pharmacy of

which Dr. John Pemberton was part owner, unaware that the pharmacist had given birth to

caramel colored syrup, which is now the chief ingredient of the worlds favorite drink. Today the

white-on-red flow of Coca-Cola is familiar sight in more then 195 countries. The syrup combines

with the carbonate water to fuel a $16.2 billion corporation that has captured a 46% slice of the

global soft drinks market. The company estimates that the drink is served more than 773 million

times every day and if all Coke ever produced were filed in standards bottles and placed end to

end it would wrap around the equator 21, 161 times.

The story of Coca-Cola is a story of a drink and its charm with the consumed. The story of

ecstasy and again that the drink has caused to those dedicated to its growth Pemberton first

managed to sell and average of 9 drinks per day, though a shop called Jacob’s Pharmacy, in

1891, Candler bought Coca-Cola company with the initial stock of $1,00,000. Coca-Cola was

registered at the US patent office in 1893, and began selling at soda fountains for 5 cents a glass

of therapeutic refreshment 1894; I got into bottles, courtesy a candy merchant Joseph

Boedenharn of Mississippi.

Five years later; the drink was being bottled on a regular basis under a region wise franchising

system; and its first competitor Pepsi Cola, Coca-Cola’s first bottling plant opened in

Chattanooga, Tennessee followed by another in Atlanta in 1900. The unique taste of cola was an

outstanding success. Over the next two decade the number of plants crossed 1000. The company

10
broadened its horizons when Robert Woodruff the son of a banker who acquired to Company for

$25 million in 1919, assumed charge in 1923. He began by upgrading bottling operations,

brought in innovations like a six-bottle carry home carton, and gear up advertising support.

As a time went by the company brought out some new aerated drinks. The first one “Fanta”

appeared in the selves in 1960. Its birth was an accident; the company’s German name is an

attempt to produce Coca-Cola without some key ingredients, turned out into an orange flavored

drink instead. Its strategists who feared the dependence on just one put a cap on growth

welcomed it. While fanta was being rolled out the company bought minute made cosrp. This in

1967 was combined with Duncan foods to pave way for the Coca-Cola foods. Several beverages

followed the most notable being “Sprite”, a lemon drink developed in the late 1950 and formally

launched in 1961.

Coca-Cola had diversified the company into businesses and it even had a steam generator and

boiler making division. The best insurance policy that he figured was to let coke evolve to the

summer slacking it with variants, even reinventing if needed. In 1982, the company launched

what is now considered among the world’s most successful brand extensions ‘Diet Coke’ under

the leadership of Sergio Zyman, the head of U.S marketing. The idea was to retain the loyalty for

the health conscious drinker who loved the taste but hated the calories. After this it came out

with caffeine free versions of its main drinks. Yet in the US the company kept losing ground to

Pepsi. Zyman, a former Pepsi marketer argued that the correct strategy was to replace 98 year old

with better tasting cola, label it as “New Coke” and blare the news which is exactly what the

company did more than a decode ago in 1985. But when placed on the shelves it did not budge.

On wide spread protest it was recalled after 79 days. The company has about 100 brands in its

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portfolio but Coke, Fanta and Sprite account for most of its sales. In 1994, the real thing’s coke

sold over 52.5 billion liters. For the taste of it diet coke along with Coca-Cola light sold 8.5

billion liters, which makes it the worlds two top non-cola drinks sold over 6.5 billion liters each.

Which sprite aimed at the independent youngster two does not care what as others drink (the as

line “obey you’re a thrust”)? In 1993, Coca-Cola reentered India after 16 years long exile, four

years Pepsi made its debut India. While Coke plays on brand nostalgia, Pepsi address the young

crowd, which unlike a in America is a dominate ort if the population here.

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BRIEF OF THE ORGANIZATION

Hindustan Cocacola Beverages Pvt. Ltd, a bottling company was started during the year

1986 in Bangalore due to the humble services by Mr. S. N. Ladhani, the Managing

Director of the company, with and initial capital of Rs. 25 Lac. Hindustan Cocacola

Beverages Pvt. Ltd has a franchisee agreement with Parle exports for hundred years to

manufacture and sell its products.

During November 1993, Parle export sold all its 60 franchises to Coca-Cola in India in order

to compete with Pepsi. Each franchisee can cover up 16 districts. The company is in

business of manufacturing and selling Coca Cola and other soft drinks owned by Coca Cola

like Thumsup, Limca, Fanta, Maaza, Kinley Soda in area allocated to Bareilly franchisee

which covers districts such as Badaun, Moradabad, Rampur, Pilibhit, Shahjahanpur,

Lakhimpur Khiri.

M/s Hindustan Cocacola Beverages Pvt. Ltd has its production unit having capacity of 600

bottles per minute, located at Parsakhera Industrial Estate, 12 Kilometer away from Bareilly

town on Delhi highway. In state of Uttranchal the company establish a sales depot at Kichha.

As the product of company is sold in returnable containers ( Glass bottles in plastic Shells)

large area is required for storage of empty glass bottles as well as filled glass bottles.

Company has maintained huge storage capacity in respect of bottles, which is located

adjacent to the production unit. Hindustan Cocacola Beverages Pvt. Ltd is owned by Ladhani

Group which owns three more bottling plants located at Baranbanki, Faizabad, and Hathras

having head office located at Bangalore.

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 LOCATION

OF HCPL

The Hindustan Cocacola Beverages, in Dasna , is located in the area that affects the

Working Capital because of the following factors.

 HCPL produces the beverages that are a seasonal product.

 Weather of Dasna is typical of the cities of Western Uttar Pradesh. The city falls in

the Rohilkhand area and thus can be considered as a semi-arid region. The summers

are scorching with daytime temperature hovering around 37°C to 45°C. Nights are

relatively cooler with minimum temperature falling to 27-28°C. The summers set in

the month of April and persist till June end. Venturing out during day without proper

protection might lead to heatstroke.

 Monsoon sets in June end but brings very little respite to the simmering city. The

average annual rainfall is in the range of 400-500 Millimeters that is precisely

14
 contributed by the Southwest jet of monsoon. Winters set in the month of November

and persist till February. Winters are quite chilly with minimum temperature hovering

around 4-5°C.

 The selling of coke product varies according to the weather and temperature.

 The production policy is also been divided into three seasons: -

Peak Season

Lean Season

Off Season

As according to the seasonal production policy the level of purchase of Raw Material

others also varies. And most importantly the requirement of Working Capital also changes

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DISTRIBUTION NETWORK OF HINDUSTAN COCACOLA

BEVERAGES PVT. LTD.

As stated earlier that this particular plant has been taken over by Hindustan Cocacola

Beverages Pvt Limited from the Coca-Cola India. With the passage of time, company has

extended its distribution network from 60 to 230 distributors alongwith 05 depots and covers

over 16 districts under its belt and they are still growing. The names of the district are as

follows.

1. Dasna 2. Badaun

3. Shahjahanpur 4. Pilibhit

5. Rampur 6. Moradabad

7. Chamoli 8. Chandausi

9. Pitoragarh 10. Karayanprayag

11. Rudraprayag 12. Kichha

13. Lakhimpur Khiri 14. Haldwani

15. Bageshwar 16. Ranikhet

Right from the first year of the incorporation the company is running in top profit. This is

because of many reasons. One of them is being excellent marketing strategy adopted by the

company. Also the company gives goods margins to the retailers along with various lucrative

from time to time.

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 HINDUSTAN COCACOLA BEVERAGES LIMITED

“CORPORATE STRUCTURE”

“PLANT”

HEAD OFFICE
BANGALORE

DASNA FAIZABAD HATHRAS BARABANK

I

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 PRODUCTS OF THE COMPANY

Aerated Water:

Company is engaged in production of aerated water sweetened as well as non sweetened.

Products are manufactured exclusively on behalf of Coca Cola India P Limited for

distribution in allocated area to this franchise. Aerated water covered under chapter heading

22 of Central Excise and Tariff Act and valuation of product is governed by section 4A of

Central Excise Act as the product is covered under Standard Weight and Measurement Act.

This product is liable to highest applicable rate of tax under VAT Act @12.5%.

Fruit Juices:

Along-with aerated water company is also manufacturing fruit juice based drinks (Mango

Pulp based in the name of Maaza and orange juice based drinks in the name of Minute Maid

Pulpy Orange or MMPO). This product is exempted from Excise duty and is chargeable to

4% rate of tax under VAT Act.

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Beside other applicable statutes company itself maintain stringent quality norms. It has

recently successfully undergone ISO 18001:2007 and E3/S3 norms.

Products of company are packed and sold in returnable glass bottles and in PET bottles in

various pack sizes as per market demand. Under backward integration company has

established production capacity of producing PREFORMS – an injection blown to form PET

bottle.

All the products are in the form of Beverages have limited shelf life varying from 3 months

to 6 months. Company has various internal controls to assure timely withdrawal of expired /

products approaching expiry to maintain the quality of product. Production cycle of product

is very short that vary from few hours to a day so company has very nominal inventory in the

form of WIP. Products are usually consumed in moderate hot to very hot climate so the sale

of products vary with in year due geographical location of plant and franchise area. It peaks

in the month of May and June as summers are extremely hot and humid. Depending upon the

demand and seasonality of product the inventory requirements also vary with in year with

maximum inventory in the month of March and April and almost nil inventories in the month

of Nov and December.

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1.2 Need of study

Every business needs some amount of working capital. The needs for working capital, arises

due to time gap between production and realization of cash from sales. There is an operating

cycle involved in sales and realization of cash. There are time gaps in purchases of raw

material and production, and sales, and realization of cash.

Thus, working capital is needed for the following purposes:-

 For the purchase of raw material, component and spares.

 To pay wages and salaries.

 To incur day to day expenses and overhead costs such as fuel, power and office

expenses etc.

 To meet the selling costs such as packing, advertising etc.

 To provide credit facilities to the customers.

 To maintain the inventories of raw material, work in progress, store, spares, and

finished stock

For studying the need of working capital in a business, one has to study the business under

varying circumstances such as new concern, as a growing and one, which has attained

maturity. A new concern requires a lot of funds to meets its initial requirement such as

promotion and formation etc. These expenses are called preliminary expenses and are

capitalized. The amount needed for working capital depends upon the size of the company

and the ambition of its promoters, greater the size of the business unit, generally will be the

requirement of the working capital. The requirement of the working capital goes on

increasing with the growth and expansion of the business until its gains maturity. At

maturity, the amount of working capital required is called normal working capital.
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1.3 SCOPE OF THE STUDY:
Secondary data used in this study. I collected the secondary data from the sources of the

annual reports of the firm, journals, periodicals. Apart from conducting this research work on

the basis of these information , various techniques of financial management e.g. comparative

statement, trend analyses, ratio analyses etc. were used in present study. To present the broad

view so far the purpose of the analyses and to make it easy to understand the

problem/concept of few graphs and tables shall also be presented. In each chapter the

analyses has been compared with the actual management practices of the company under

study.

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1.4 OBJECTIVE OF THE STUDY

 To analyse working capital position of Coca-Cola

 To have an understanding of liquidity aspects Coca Cola

 To understand the relationship between working capital position and

company profitability.

 To critically analyse the cash position of coca cola.

 To gain an insight into cash management models adopted by coca cola.

 To understand the impact of inventory levels and tradeoff between

profitability and liquidity.

 To study the effect of working capital on the companies profit

maximization and wealth maximization.

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 CHAPTER- 2

2.1 RESEARCH METHODOLOGY

2.2 LIMITATIONS

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2.1 RESEARCH METHODOLOGY

Achieving accuracy in any research requires a deep study regarding the subject. The research

methodology adopted is basically based on primary data via which the most recent and

accurate piece of first hand information could be collected. Secondary data has been used to

support primary data whenever needed. In data collection two methods are used, one is

qualitative and one is quantitative method. In quantitative technique, analysis tool to find the

share of coca-cola in Dasna.

SOURCES OF DATA
Method of data collection is secondary data. I collected secondary data by magazines,

journals , newspapers and various websites related to the coca-cola on internet.

RESEARCH DESIGN
I have used descriptive research design technique.

TYPES OF RESEARCH METHODOLOGY

EXPLORATORY RESEARCH-:
Type of research carried out is exploratory in nature. The objective of such research is to

determine the approximate area where the drawback of the company lies and also to identify

the course of action to solve it for the purpose the information provided useful for giving

right suggestion to the company.

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DATA COLLECTION METHOD

SECONDAY DATA-: Secondary data is the data which is already been collected. The

secondary data which is used in this study are as follows-: Books, journals, newspapers,

magazines.

PERIOD OF STUDY: 5 YEARS From (2009-2013)

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2.2 LIMITATIONS OF THE STUDY:

Following limitations were encountered while preparing this project:

1. Limited data:-

This project has completed with annual reports; it just constitutes one part of Data collection i.e.

Secondary. There were limitations for primary data Collection because of confidentiality.

2. Limited period:-

This project is based on five year annual reports. Conclusions and Recommendations are

based on such limited data. The trend of last five year May or may not reflect the real working capital

position of the company

3. Limited area:-

Also it was difficult to collect the data regarding the competitors and their Financial

information. Industry figures were also difficult to get.

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SWOT ANALYSIS OF COCA COLA COMPANY

STRENGTHS

 Brand Portfolio

 Plant Location

 Effective Distribution Channel

 Sharply focused positioning of all the products

 High Quality Products

 Advanced Plant Technology

 Patent rights

 Good Inventory System

WEAKNESS

 Lack of proper Incentives

 Hindustan Coca cola Beverage Ltd is unable to cater the demand of Dasna region

properly

 After Sales Services

 Company is unable to provide credit:

 Lack of proper training

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OPPORTUNITIES

 Launch Fanta Apple

 Potential Rural Market

THREAT

 Competitions between Coca-Cola and Pepsi

 Illegal distribution by some distributor and salesman

 Better after sales service provided by Pepsi

 Schemes floated by Pepsi affects the sale of pet

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 CHAPTER -3

1. DESCRIPTIVE WORK ON

SUBTOPIC OF STUDY

29
1. DESCRIPTIVE WORK ON SUBTOPIC OF STUDY

Working Capital Management

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MEANING OF WORKING CAPITAL

Working capital is commonly defined as the difference between current assets and current

liabilities. Efficient working capital management requires that firms should operate with

some amount of working capital, the exact amount varying from firm to firm and depending,

among other things on the nature of industry.w

Capital required for a business can be classified in two main categories viz.

1) Fixed capital, &

2) Working capital.

Every business needs funds for two purposes for establishment and to carry out its day-to-day

operations. Long-term funds are required to create production facilitates.

Through purchase of fixed assets such as plants and machinery, land, building, furniture, etc.

Investments in these assets represents that part of its capital which is blocked on permanent

or fixed basis and is called working. Funds are also needed for short-term purpose for the

purchase of raw material, payment of wages and other day-to-day expenses, etc. These funds

are known working capital. In simple words, working capital refers to that part of the firm’s

capital, which is required for financing term or current assets such as cash, marketable

securities, debtors and inventories. Funds thus invested in current assets keep revolving fast

are being constantly converted into cash and this cash flows out again in stage for other

current assets. Hence, it is also known as revolving or circulating capital or short-term

capital..

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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified on two bases:-

A) On the basis of concept:-

On the basis of concept, working capital can be classified as,

 Gross working capital

 Net working capital

B) On the basis of time:-

On the basis of time, working capital can be classified as,

 Permanent or fixed working capital

 Temporary or variable working capital

Gross working capital:-

The gross working capital is the capital invested in the total current assts of the

enterprises. Current assets are those assets, which can be converted into cash within a

short period, normally an accounting year.

Gross working capital = Total current assets

Net working capital:-

The term net working capital refers to the excess of current assets over current liabilities, or

say,

Net working capital = current assets – current liabilities

Net working capital can be positive or negative. When the current assets exceed the current

liabilities the working capital is positive and the negative working capital results when the
32
current liabilities are more than the current assets. Current liabilities are those liabilities,

which are intended to be paid in the ordinary course of business within a short period of

normally one accounting year out of the current assets of the income of the business. The

gross working capital concept is financial or going concern concept whereas net working

capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometime preferred to the concept of working capital for the following

reasons:-

 It enables the enterprise to provide correct amount of working capital at correct time.

 Every management is more interested in total current assets with which it has to

operate then the sources from where it is made available.

 It takes into consideration of the fact every increase in the funds of the enterprise

would increase its working capital.

 The concept is also useful in determining the rate of return on investment in working

capital.

 The net working capital concept, however, is also important for the following

reasons:-

 It is a qualitative concept, which indicates the firm’s ability to meet its operating

expenses the short-term liabilities.

 It indicates the margin of protection available to short term creditor

 It is an indicator of financial soundness of enterprise.

 It is suggesting the need of financing a part of working capital requirement out of the

permanent sources of funds.

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Permanent or fixed working capital

Permanent or fixed capital is the minimum amount, which is required to ensure effective

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm

has to maintain a minimum level of current assets is called permanent or fixed working

capital as this part of working capital is permanently blocked in current assets. As the

business, grow the requirement of working capital also increase due to increase in current

assets.

Temporary or variable working capital

Temporary or variable working capital is the amount of working capital, which is required to

meet the seasonal demands and some special exigencies. Variable working capital can further

be classified as seasonal working capital and special working capital. The capital required to

meet the seasonal need of the enterprise is called the seasonal working capital. Special

working capital is that part of working capital which is required to meet special exigencies

such as launching of extensive marketing campaign for conducting research etc.

Temporary working capital differs from permanent working capital in the sense that it is

required for short periods and cannot be permanently employed gainfully in business.

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FACTORS DETERMINING THE WORKING CAPITAL

REQUIREMENT

1. Nature of business:-

The management of working capital is very critical in FMCG utility undertaking such as

electricity, water supply and railways because they offer cash sales only and supply services

not products and no funds are tied up in inventories and receivables. On the other hand, the

trading and financial firm requires less investment in fixed assets but have to invest large

amounts in current assets. The manufacturing undertaking requires sizable amount of

working capital along with fixed investments.

2. Production policy:-

The determination of working capital needs depends upon the production policy of the

business. The demand for certain products is seasonal i.e.; such products are purchased in

certain months of a year. For such industries, two types of production policy can be followed.

Firstly they can produce the goods in the months of demand or secondly, they produce for the

whole year. If the second alternative were followed, it would mean that until the time of

demand finishes, product would have to be kept in stock. It would require additional working

capital.

3. Length of production cycle:-

The longer the manufacturing time, the raw material and other supplies have to be carried for

a longer time in the process with progressive increment of labor and service costs before the

final product is obtained. Therefore, working capital is directly proportional to the length of

the manufacturing process.

35
4. Rate of stock turnover: -

There is an inverse co-relationship between the quantum of working capital and the velocity

or speed with which the sales are effected. A firm having a higher rate of stock turnover will

need lower amount of working capital as compared to a firm having a low rate of turnover.

5. Credit policy:

Credit policy affects the working capital requirements in two ways:

(a) Terms of credit allowed by customer to the firm,

(b) Terms of credit available to the firm.

A concern that purchases its requirements on credit and sells its product/services on cash

requires lesser amount of working capital and vice-versa.

6. Working capital cycle:-

The speed with which the working cycle completes one cycle determines the requirements of

working capital. Longer the cycle larger is the requirement of working capital.

36
7. Rate of growth and expansion of business:-

The larger size businesses require more permanent and variable working capital in

comparison to small business. If a company is growing, its working capital requirements will

also go on increasing. Thus, the growing concerns require more working capital as compared

to the stable industries.

8. Seasonal variation:-

Generally, during the busy season, a firm requires larger working capital than in the slack

season.

9. Business fluctuation:-

In period of boom, when the business is prosperous, there is a need for larger amount of

working capital due to rise in sales, rise in prices, optimistic expansion of business etc. On

the contrary in time of depression, the business contracts, sales decline, difficulties are faced

in collection from debtors and the firm may have a large amount of working capital idle.

10. Earning capacity and dividend policy:-

Some firms have more earning capacity then other due to quality of their products, monopoly

conditions, etc. Such firms may generate cash profits from operations and contribute to their

working capital. The dividend policy also effects the requirement of working capital. A firm

maintaining a steady high rate of cash dividend irrespective of its profit needs more working

capital than the firm that retains larger part of its profits and does not pay so high rate of cash

dividend.

37
11. Price level changes:-

Price level changes also affect working capital needs. If the prices of different goods

increase, to maintain same level of production, more working capital is needed.

12. Availability of raw material:-

Availability of raw material on the continuous basis affects the requirement of working

capital. There are certain types of raw materials, which are not available regularly. In such a

situation firm requires greater working capital to meet the requirements of production. Some

raw materials are available in particular season only for example wool, cotton, oil seeds, etc.

They have to keep greater working capital.

13. Magnitude of profit:-

Magnitude of profit is different for different businesses. Nature of product, control on the

market and ability of managers etc. Determine the quantum of profit. If the profit margin is

high, it will help to arrange funds internally, which will also increase the working capital.

14. Other factor:-

a) Management ability

b) Irregularities of supply

c) Import policy

d) Assets structure

e) Importance of labor

38
FACTORS AFFECTING WORKING CAPITAL OF HCPL

1) Nature of business: - HCPL is engaged in manufacturing (bottling) of soft drinks

hence it needs efficient management of working capital for its day to day operations.

2) Production policy: - production policy, in HCPL, is divided seasons according to the

sales made/estimated by the management. Makes the different level of production for

different seasons: -

a) Peak season b) Lean season c) Off season

3) Expansion of business:- owners of HCPL always tries to expand their business by

manufacturing new products launched by their principals i.e. Coca cola India limited. The

company is currently expanding business by manufacturing performs (injections) use in

production of plastic bottles.

4) Business fluctuation: - seasonal industries located in geographical area where

temperature varies wildly summer being very hot and extremely cold winters. So accordingly

demand for product varies as maximize in summer & minimized in winters.

5) Credit policy: - credit allowed by HCPL to its customers is advance payment for sale of

aerated water/fruit juices and credit allowed by supplier to the firm varies from 15 days to 1

month.

6) Length of manufacturing cycle: - length of the production cycle is 01 to 02 days so it

again increases the working capita requirements.

39
7) Price level changes: - fluctuation in the price of raw material is quite often which
fluctuate working capital requirement. In terms of HCPL, the cost of raw material which is
required for manufacturing soft drinks going on high which again increases its working
capital requirements.

MANAGEMENT OF WORKING CAPITAL

Management of working capital means management of all aspects of current assets and

current liabilities. Basically, Working capital management is concerned with the

problems that arise in attempting to manage the current assets, current liabilities and

the interrelationship that exist between them.

Financial management should determine the quantum and structure3 of current assets. It

should also see that current assets are financed from the proper sources. Management should

also see that current liabilities are paid in time, while managing the working capital.

The main objective of working capital management is to manage current assets and current

liabilities in a manner so that working capital can be kept in a satisfactory level. It is also

taken in to account that the working capital should be neither excessive nor inadequate. The

amount of current assets should be adequate to pay the current liabilities in time and adequate

security margin can be maintained. Accordingly, proper balance among the different

constituents of current assets is maintained so that no current has more than require amount

invested in it.

40
Management of working capital affects profitability, risk and liquidity of the business

significantly. Management should, therefore, maintain proper balance among there factors

while managing working capital. If the quantum of working capital is more, it will increase

liquidity, but decrease profitability and risk. If working capital relatively declines, it will

decrease liquidity but cause an increase in profitability and risk.

If business wants to earn more profit, it will have to bear higher risk. Risk means inability of

the firm to pay current liabilities in time.

Working capital management is three dimensional in nature:-

1) It concerned with the formulation of policies with regard to profitability,

Liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets.

3) It is concerned with the decisions about the composition and level of current liabilities.

Policies regarding to
Profitability, Liquidity and
Risk

Composition of level
of Current liabilities Of level of current
Current liabilities assets

41
Dimensions of working capital

Existing System Of Working Capital In HCPL

To maintain the optimum level of working capital in such a organization is really a

challenging task. The three basic components that determine the level of working capital in

any organization are:-

 Cash

 Debtors

 Inventory

On the basis of our research in the HCPL, these basic components are managed in the

organization, in the under mentioned manner.

42
 TABLE OF WORKING CAPITAL

PARTICULARS 2011 2012

CURRENT ASSETS:-

DEBTOR 2,297,000 426,780

INVENTORY 23,887,000 37,736,000

CASH 286,000 6,971,000

LOAN & ADVANCES 54,642,000 103,279,000

DEPOSITS 3,886,310 3,087,910

OTHER C.A. 25,622,000 28,673,000

TOTAL 110,620,310 180,173,690

   
CURRENT LIABILITIES: -
CREDITORS 38,718,000 20,480,000

ADVANCE FROM CUSTOMERS 2,645,000 2,223,000

PROVISIONS 3,744,000 4,198,000

TOTAL
45,107,000 26,901,000

NET WORKING CAPITAL 65,513,310 153,272,690

Interpretation: -

The product portfolio has been increased to include fruit juices in the year 2011 due to which

company has accommodated huge inventory of fruit pulp and to assure timely procurement,

company has made advance payment which has doubled from previous year.

Sundry debtor level depends on two measure issues: -

One is volume of credit sales and another is credit period allowed to customer. It is the

essence of every business that to sale on credit and allow credit period to the customer in

43
such a competitive market, following factors may be considered before allowing credit

period to the customer: -

 Nature of the product

 Credit worthiness of the customer, which varies from customer to customer.

 Quantum of advance received from customers

 Credit policy of company, say number of days allowed to customer for payment to

the customers.

 Cost of debtors

 Manufacturing cycle time of the product etc.

Debtors Management

There are mainly three aspects of Management of Debtors: -

1. Credit policy: -

The credit policy is to determine. It involves a trade off between the profits on additional sale

that arises due to credit being extended on one hand and the cost of carrying those debtors

and bad debts losses on the other.

44
In HCPL, there is one year contract with organizations that want to relate as dealer/agent.

This agreement requires an amount in form of security which is given by the dealer. While

placing an order, the dealer has to make advance payment. There are some big dealers, to

whom credit is allowed.

2. Credit analysis: -

This requires determining as how risky is to advance credit to a particular customer.

Before the undertaking of any dealer/agent, selling agents (of HCPL) analyses the

information about them. It includes the followings: -

 What is the existing business of the party.

 How much experience they have.

 The amount of capital, they have invested

 Infrastructure position like: - location, electricity (accessibility), storing.

 Minimum load that they will ask to deliver

 Goodwill position of the party

 What is the Storage Capacity of the dealer.

 Quality maintenance of the dealer.

 Guarantee that is given to HCPL

3. Control of receivables: -

This requires to the firm to follow up debtors and decide about a suitable credit collection

policy. It involves both lying down of credit policy and execution of such policies.

45
In HCPL, Credit is allowed to the bumper sellers (dealers), but after the time placing one

order on credit, the dealer can not place next order (until the payment is made).

There is a cost of maintaining receivables, which comprises cost of: -

 The company requires additional funds as resources are blocked in receivables, which

involves a cost in the form of interest (loan fund) or opportunity cost (own fund).

 Administrative cost, which includes record keeping, investigation of credit worthiness

etc.

 Collection cost .

 Defaulting cost or bad debts

46
DEBTORS MANAGEMENT IN HC PL

2011 2012
PARTICULARS
Total debtors 2,297,000 426,780

Turnover 242,579,000 309,750,000

3.5 days 0.5 days

TOTAL TO TURNOVER

Debtor collection period = Debtors *365 / Turnover

Total debtors to turnover are the relationship between total debtors and turnover, in no. of
days.
Interpretation: -
The reason behind such a ratio is that they, in HCPL, take advance payment from their

dealers in either form Cash or draft. Credit facility is allowed in only few conditions like: -

Bumper sellers (dealers)

Long distance (too much of time spending in delivery)

& others

As stated earlier, HCPL sell the beverages to their dealers and normally, takes the advance

payment. But this transaction also creates a hidden debt on the dealer which is that of Empty

Bottles.

In fact, for example, when HCPL sell 100Rs Coke (to the dealer), they take 100Rs as the

advance, and this does not add the value of bottle which may be 400Rs.

47
Steps involved in management of debts: -

The following steps are involved in debtors Management

 There should a close contact with the customers.

 There should be proper age – wise analysis of the debtors.

 There should be proper classification between collectible between collectible debtors

and bad debts.

 Bad debts should be written of as early as possible after making all efforts for its

collection.

 Product cycle should be minimized so that cost of the product should not become

high to the agreed amount because of time factor.

 There must be a provision of discount for early payment of debts by the customers.

 Regular checking of the records of the debtors is essential so as to analysis the current

position of that organization.

 While making a policy, regarding the debtors the point should be considered that

customer having excellent past record, follow the lenient policy is adopted for

doubtful customers.

 Manage the working capital according to need as recovering the debt from customer

as early as possible while, get extension of payment of dues on the company of others

as suppliers of raw material as late as possible.

48
  Enhanced public image.

MANAGEMENT OF CASH

It is the duty of the finance manager to provide adequate cash to all segments of the

organization. At the same time, he/she has also to ensure that no funds are blocking in idle

cash as this will involve cost in terms of interest to the concern. A sound cash management

scheme has to maintain the twin objective of liquidity and cost.

Meaning of Cash Management

The term cash management refers to the management of cash and ‘near cash assets’ while

cash includes coins, currency notes, cheques, bank drafts, and the demand deposits, the near

cash assets include marketable securities and time deposits with banks. Such securities and

deposits are easily convertible into cash.

49
MOTIVES FOR HOLDING CASH

In spite of the fact that cash does not earn any substantial return for the business, it is held by

the concern with the following motives.

1. Transaction motive: A Company enters a variety of business transaction resulting both

inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to

meet the business obligations in such situation, it necessary to maintain adequate cash

balance. Thus, a firm with the motive of making routine business payments maintains cash

balance.

2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out

of unexpected contingencies such as floods, strikes, obsolesces, sharp increase in prices of

raw materials, presentation of bills for payment earlier than expected date. More amount of

cash will be kept by the firm if there is more possibility of such contingencies.

3. Speculative motive: A concern should also keep cash balance to take advantage of

unexpected business opportunities. Such motive is there of speculative nature.

4. Compensation motive: Banks provide certain services to their customers free of charge.

So they usually require the customers to keep minimum cash balance with them which

enables them to earn interest and compensate for the free services rendered.

50
REASONS OF CASH MANAGEMENT

Cash management involves the following four basic problems.

1. Controlling level of cash: One of the basic objectives of cash management is to minimize

the level of cash balances with the firm. This objective is sought to be achieved by means of

the following:

a) Preparing cash budget: Cash budget is the most important device for planning and

controlling the use of cash. It involves the future receipts and payments of the firm. On the

basis of this information the finance manager can determine the future cash needs of the firm.

b) Providing for unpredictable discrepancies: - Cash budget whose discrepancies between

cash receipts and payments on the basis of normal business activities.

c) Availability of alternative source of funds:- A firm may need not keep large cash

balance. If it has arrangements with banks for borrowing money in times of emergencies.

2. Controlling of cash inflow: In order to prevent fraudulent diversion of cash receipt and

speeding up collections of cash, an adequate control on cash inflow is necessary. A properly

installed internal check system can, to a great extent, a minimize the possibility of fraudulent

diversion of cash. Speedier collection of cash can be made possible by adoption of the

following two techniques: -

a) Concentration banking system: It is a system of decentralizing collection of account

receivables. According to this system, BBPL offices are authorized to collect the payment

from the customers, and deposit in the local bank accounts. This system facilities fast

51
movement of funds. This system is good in case of the firms having their spread over a large

area.

b) Lock box system: This system is more popular in the USA and is further step in speeding

up collection of cash. This system has been devised to element delay arising in cash of the

concentration banking system on account of a time gap between actual receipt of cheques by

the regional collection centers and its deposits in the local bank account. Under this system

company hires a post office box and instructs its customers for there remits to the box. It also

reduces the chances of frauds in the cash collection process and controls the cash inflows

better. In order to avoid the unnecessary pockets of idle funds, the company should maintain

minimum number of the bank account.

3. Controlling outflows of cash: - An efficient control over cash outflows is equally

important for conserving cash and reducing financial requirements. Control over cash

outflows signifies slow disbursement in order to control the outflows of cash efficiently, a

firm should keep in view the following considerations: -

a) Centralized system for cash payments: Should be followed as compared to decentralized

system in cash of collections. All payments should be made from a single control account,

i.e., from the central office of the company. However, the local office of the company may

pay local expenses.

b) Payment should be made on the due dates: Neither before nor after. The company

should neither lose cash discount nor its prestige on account of delayed payments. The

company should, there fore, made payments within the terms offered by the suppliers.

52
c) Playing float: - Technique should be used by the company for maximizing the availability

of funds. The term ‘float’ means the account tied up in checks which have been issued by

company but not hav been yet been presented for payment by the creditors. As a result of a

time lag between issue of a cheque and its actual presentation, the actual bank balance of a

firm may be more than the balance shown in the books. The difference is called ‘payment of

float’. The longer the ‘float period’ the greater would be the benefit of the firm.

TOOLS OF CASH CONTROL

1. Cash Budget: It is most significant tool of controlling the use of cash. It provides a

comparison between actual and budgeted cash receipts and disbursements locating the points

of deviations, if any. The financial manager, after ascertaining the reasons for deviations

between the actual and budgeted figures, can take the necessary action to remove.

2. Inflows and outflows of cash: In order to check the change in cash position of the firm

from one period to another, a cash flow statement is prepared. It helps management in

controlling inflows and outflows of cash.

3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial

ratios are used for this purpose. There ratios include current ratio, liquidity ratio, receivables

turnover ratio, and inventory turnover ratio and cash position ratios.

53
Cash Management in HCPL

Hindustan Coca-Cola Beverages Private limited is engaged in manufacturing and selling of

fast moving consumer goods. Cash is required in bulk for procurement and other

manufacturing activities while is usually collected in small quantity from consumers in such

kind of industries. To manage the collection of sale proceed company has adopted three way

distribution network.

Following is the structure of distribution in HCPL: -

HCPL

Direct
Depot Selling

Sole Selling
Agents

54
In Depot:

Company is maintaining depots for sales and collection of funds in various remote areas.

These depots serve the distributors and FAT agents in case of urgent requirement by

distributed storage of finished goods. They also act as cash collection centers of company

where nearby distributors are advised to remit funds to depots instead of plant at Bareilly

this cash collected at depots is deposited in CBS bank account maintained by the company

and information is forwarded on daily basis. Cash disbursals against expenditure are

incurred by plant at Bareilly under centralized system of payment except in case of

emergency with prior approval of central office.

Sole Selling Agent:

Company is selling all the products in their allotted franchise area through sole selling agents

appointed on yearly basis. By this channel company is able to collect the sale proceeds well

on or before due dates as and when required by the company. Company is also able to

mitigate the risk of bad debts through this distribution channel.

Direct Selling:

For sale of finished goods to area other than one allotted under franchise agreement,

company has adopted direct sales channel and sell directly to bottler of that area. Usually

funds are collected in advance through R.T.G.S. mode so as to reduce the float.

55
Beside this for payments company has adopted the policy of making all the payments in

excess of Rs.2000/- by way of account payee cheque/ DD except in case of payment of

freights where this limit is Rs.19000/-.

INVENTORY

Inventories represent investment of a firm’s funds. The objective of the inventory

management should be the maximization of the value of the firm. The firm should therefore

consider:

(a) Costs,

(b) Return, &

(c) Risk factors in establishing its inventory policy.

Tow types of costs are involved in the inventory maintenance:

1- Ordering costs: - requisition, placing of order, transportation, and staff services,

ordering costs are fixed per order size increases.

2- Carrying costs: - warehousing, handling, clerical and staff services, insurance and

taxes. Carrying cost increases.

The firm should minimize the total cost (ordering cost + carrying cost). The economic order

quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The

following formula can be used to determine EOQ:

EOQ= (2AO/C)^1/2

Where,

A= annual requirement.
56
O= per order cost

C= per unit carrying cost.

When should the firm place an order to replenish inventory?

The inventory level at which the firm places order to replenish inventory is called reorder

point. It depends on

(a) The lead time &

(b) The usage rate.

Under perfect certainty about the usage rate, the instantaneous delivery (i.e. Zero lead

time), the reorder point will be

=Lead-time * Usage rate + safety stock.

The firm should strike a trade-off between the marginal rate of return and marginal cost of

funds to determine the level of safety stock.

A firm, which carries a number of items in inventory, which differ in value, can follow a

selective control system. A selective control system, such as the a-b-c analysis, classifies

inventories in to three categories according to the value of item.

A- Category consists of highest value items,

B- Category consists of high value items,

C- Category consists of lowest value items.

57
More categories of inventories can also be created. Tight control may be applied for high-

value items and relatively loose control for low-value items.

HCPL holds inventory analyzing with ABC method & VED method both. In ABC analysis,

in Group A they keep: -

Essence Sugar

Preform Plastic Closer

CO2 Crown cock

Pulp (Orange & Mango)

Function of inventory control

Functions to be performed in the field of inventory control are:

1. Setting up norms for carrying inventory.

2. Determining what items to be stocked.

3. Setting rules for inventory replenishments.

4. Receiving, storing and issuing inventory items as needed.

5. Maintaining records of inventory quantities and values.

6. Identifying and deposing of slow moving, non-moving, obsolete or damage inventories.

7. Furnishing summary information on inventory position for control purposes.

58
INVENTORY MANAGEMENT IN HCPL

Inventories are valued at lower of cost or net realizable value except waste which is valued at

estimated realizable value as certified by the management. The basis of determining cost for

various categories of inventories in the company are as follows:

Treaded goods: - First In First out Method based on actual cost

The selling of HCPL changes in different seasons (as mentioned earlier) and the stock level

also. They have to increase the inventory level minimum 2 months before the peak season to

achieve the target selling. Some advance money to the suppliers also has to be given to

continuously receive the raw material.

Similarly 2 months before the lean season the inventory level is brought down as the selling

goes down. The Inventory level is reduced also before the off season come.

Following study of the selling ledger to identify the real fluctuation in figures: -

59
  Sales
  HINDUSTAN COCACOLA BEVERAGES
PRIVATE LIMITED 2011-2012
Particulars 1-Apr-2011 to 31-Mar-2012
  Transactions Closing
  Debit Credit Balance
Opening Balance      
April   33,366,483 33,366,483
May   42,746,314 76,112,797
June   36,766,707 112,879,503
July   9,727,499 122,607,002
August   10,719,558 133,326,560
September   10,051,407 143,377,967
October   4,789,250 148,167,217
November   1,991,477 150,158,694
December   1,434,629 151,593,323

January   5,813,385 157,406,708

February   9,582,289 166,988,997
March   65,935,279 232,924,276
Grand Total   232,924,276 232,924,276

A sudden change in selling from Feb. (95,82,000) to march(6,59,35,000) shows that how

requirement of inventory changes because of the change in season. This requires a very tight

focus in keeping the inventory.

60
Inventory Record of past two yrs

PARTICULAR 2011 2012

Store & spare parts - -

Raw Materials 19,888,000 32,690,000

Finished & Traded goods 3,999,000 5,046,000

Waste - -

Work in process - -

TOTAL 23,887,000 37,736,000

Turnover 242,579,000 309,750,000

Avg. Inventory 40,490,500 49,679,500

Inventory turnover ratio 5.99 6.23

Days of Inventory holding 60.92 58.54

Opening Stock in the year20 11 is – 33,20,7000

Inventory turnover ratio= sales / Avg. inventory

Days of inventory holding= 365 / Inventory turnover Ratio

Interpretation:

From the above table we can see that the days of inventory holding are decreases from 61in

20012 to 59 in 013 which is good for the company because it decrease the cost of kept

inventory for the shorter period and company should take measure to control increase in no.

of days of inventory holding.

61
NEED OF INVENTORY MANAGEMENT

 Stiff competition, globalization of trade and liberalization.

 Achieving, increasing and positive EVA.

 Cost reduction.

 Energy conservation

 Conservation of natural resources.

 Better, work environment.

 Improved health and safety.

ANALYSIS OF CASH MANAGEMENT

FORMULA 2011 2012

Current Current assets / 110,620,310/ 180,173,690/

Ratio current liabilities 45,107,000 = 2.45 26,901,000 = 6.70

Liquidity Ratio Liquid assets / 2,583,000/ 45,107,000 7,397,780/ 26,901,000

current liabilities = 0.058 = 0.275

INTERPRETATION

As we know that the current ratio of any company should revolve around 2:1 and from the

above table we can see that the BBPL’s current ratio is too much above the standard. This
62
means that the price of company’s current asset is 6 times of the price of its current liabilities

which means that the company can easily meets its current liabilities from its current assets.

Now we compare of the company’s position according to the liquidity ratio. As we know the

standard of the liquid ratio is 1:1. In case of the company it is quiet lower than standards but

in line with the industry that come to 0.3 on annual basis.

Cash conversion cycle indicate that company is able to generate the cash back in about 16

days from the day of deployment which is better than that of industry due to efficient

collection channel.

Cash Conversion Cycle

The cash conversion cycle is a measure of working capital efficiency, often giving valuable

clues about the underlying health of a business. The cycle measures the average number of

days that working capital is invested in the operating cycle. It starts by adding days inventory

outstanding (DIO) to days sales outstanding (DSO). This is because a company "invests" its

cash to acquire/build inventory, but does not collect cash until the inventory is sold and the

accounts receivable are finally collected.

Receivables are essentially loans extended to customers that consume working capital;

therefore, greater levels of DIO and DSO consume more working capital. However, days

payable outstanding (DPO), which essentially represent loans from vendors to the company,

are subtracted to help offset working capital needs. In summary, the cash conversion cycle is

measured in days and equals DIO + DSO – DPO:

63
Here we extracted two lines from HCPL’s most recent income statement and a few lines

from their working capital accounts.

2011 2012
From Income Statement
Net Sales 242579000 309750000
Cost of Goods Sold (COGS) 114236000 153540000
Assets (from Balance sheet)

Accounts receivable trade 2297000 426780

Inventories 23887000 37736000
Liabilities (from Balance sheet)
Accounts payable 38718000 20480000

Here are the accounts needed to calculate the cash conversion cycle. From the income

statement, you need net sales and COGS. From the balance sheet, you need receivables,

inventories and payables. Below, we show the two-step calculation. First, we calculate the

three turnover ratios: receivables turnover (sales/average receivables), inventory turnover

(COGS/average inventory) and payables turnover (purchases/average payables). The

turnover ratios divide into an average balance because the numerators (such as sales in the

receivables turnover) are flow measures over the entire year.

64
Also, for payables turnover, some use COGS/average payables. That's okay, but it's slightly

more accurate to divide average payables into purchases, which equals COGS plus the

increase in inventory over the year (inventory at end of year minus inventory at beginning of

the year). This is better because payables finance all of the operating dollars spent during the

period (that is, they are credit extended to the company). And operating dollars, in addition to

COGS, may be spent to increase inventory levels.

The turnover ratios do not mean much in isolation; they are used to compare one company to

another. But if you divide the turnover ratios into 365 (for example, 365/receivables

turnover), you get the "days outstanding" numbers. Below, for example, a receivable

turnover of 227 becomes 2 days sales outstanding (DSO). This number has more meaning; it

means that, on average, HCPL collects its receivables in 2 days.

Turnover Ratios:

Receivables (Sales/Avg. Receivables): 227

=3097500/Avg. of [22,97,000 & 4,26,780]

Inventory (COGS/Avg. Inventory): 4.98

=153540000/Avg. of [23887000 & 37736000]

Payables (Purchases/Avg. Payables): 6.2

=183232300/avg. of [38718000 & 20480000]

65
Day’s Outstanding (365/Turnover Ratios)

Days Sales Outstanding (DSO) 365/227 + 2days

Days Inventory Outstanding (DIO) 365/4.98 +73 days

Days Payable Outstanding (DPO) 365/6.2 - 57 days

Cash Conversion Cycle = 16 days

Here is a graphic summary of HCPL’s cash conversion cycle for 2008. On average, working

capital spent 16 days in HCPL’s operating cycle:

HCPL’s WORKING CAPITAL

Traditional analysis of working capital is defensive; it asks, "Can the company meet

its short-term cash obligations?" But working capital accounts also tell you about the

66
operational efficiency of the company. The length of the cash conversion cycle (DSO+DIO-

DPO) tells you how much working capital is tied up in ongoing operations. And trends in

each of the days-outstanding numbers may foretell improvements or declines in the health of

the business.

67
1.DATA ANALYSIS AND WORKING CAPITAL

Working Capital Management in COCA COLA

Working Capital are the fund required for day to day operations of the firm. It is said to be

Blood of a Business. The goal of Working Capital Management is to manage the firm’s

Current Assets and Liabilities in such a way that a satisfactory level of Working Capital

maintained.

Concepts of Working Capital

There are two concepts of working capital:

(1) Gross Working Capital – A Corporation’s working capital consists of its investment in

current assets.

(2) Net Working Capital – A Corporation’s working capital consists of the difference

between current assets and current liabilities.

Current Assets – Current assets refers to those assets which in the ordinary course of

business can be, or will be, converted into Cash within one year without undergoing a

diminution in value disrupting the operations of the firm.

Major Current Assets

(1) Cash
(2) Marketable Securities
(3) Account Receivables
68
 (4) Inventory
(5) Loan and Advances

Current Liabilities - Current liabilities are those liabilities which are intended, at their

inception, to be paid in the ordinary course of business, within a year, out of the current

assets or earning of the concern.

Current Liabilities

(1) Account Payable

(2) Bills Payable

(3) Bank Overdrafts

(4) Outstanding Expenses

Type of Working Capital - There are two type of working capital:

(1) Fixed, Regular or Permanent working capital :– Business activity does not come to an

end after the realization of cash from customers. For a company the process is continuous

and, hence, the need for a regular supply of working capital. However, the magnitude of

working capital required is not constant, but fluctuating. To carry on business, a certain

minimum level of working capital is necessary on a continuous and uninterrupted basis. For

all practical purposes, this requirement has to be met permanently as with other fixed assets.

This requirement is referred to as Permanent, Regular or fixed working capital.

69
(2) Variable, Seasonal or Special working capital : – Any amount over and above the

permanent level of working capital is temporary, fluctuating or variable working capital. The

position of the required working capital is needed to meet fluctuations in demand consequent

upon changes in production and sales as a result of seasonal changes.

DIMENSIONS OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned wit all aspects of managing current assets and

current liabilities.

The following chart indicates some significant dimensions of working capital management

very much requiring the attention of financial manager:-

70
 Dimension of working capital management

Investment in Financing of
Current assets Current assets

 Appropriate level of  Spontaneous

Investment  Short-terms and
 Type of current assets Long-terms
 Kind of current assets problems (how to
Fixed and variables mix determine
financing

Inter-relatedness Voltality & Reversibility

Inter-relation of various current Change in investment in current

assets assets & financing
Current assets via current liabilities Current assets & current
Liabilities as resersible

Analysis of working capital and measuring the efficiency in the management of working

capital:-

The working capital magnitude of a concern should be neither inadequate nor too

excessive as compared to its requirement. Maintaining adequate level of working capital

ensure the improvement in profitable. Financial mangers all the time strive to strike a

balance between working capital requirement and the working capital magnitude.

71
This is being done by analyzing and examine the changes in individuals components of

working capital i.e. items of current asset and items of current liabilities when we make a

deep examination of various component of working capital within an objectives to insure

its adequacy or otherwise it is know as “ANALYSIS OF WORKING CAPITAL”

The following techniques are used in an analysis of performance:-

(A) Schedule of working capital changes

(B) Fund statement

(C) Ratio analysis

(A) SCHEDULE OF WORKING CAPITAL CHANGE:-

This technique is based on currents items, i.e. current asset and current liabilities only. In

working capital are defined using current items as excess of current asset over current

liabilities. Thus,

NETWORKINGCAPITAL=CURRENTASEET–CUREENT LIAIBITES

As such, change in net working capital is due to change in current asset and change in

current liabilities.

(B) FUND STATEMENT:-

This approach based is on current items indicates as how management has used the long

term source of fund for working capital. The information relating to working capital

72
 change (flow) may be presented in a statement from know as fund flow statement. This

statement presents a view of diver’s sources of fund increase the working capital and

each item of uses of fund decrease working capital. Thus if we added the amount coming

from each sources to the opening balance working capital and thus we can find out the

change in working capital during a particular period.

(C)RATIO ANALYSIS :-

Working capital analysis with the help of ratios may be undertaken with an objective to
examine the following

(a) Efficiency in use of working capital.

(b) Liquids of working capital elements.

(c) Structural health of working capital.

(1)EFFICIENCY OF WORKING CAPITAL:- The efficiency with which working

capital is being used by the management may be analyzed in term of over all working capital
and also in terms of its constitute parts:-

Efficiency of overall working capital:-

Cost of sales or net sales

Working capital management = Working capital

Cost of sales or net sales

Current assets turnover = current assets

Working capital turnover indicates the rates of working capital utilization in the

company. This ratio can be compared either over a period of time or with that of industry

73
 average. In the case of comparison over a period of time and increasing ratio is the

indicator of more intensive use of working capital over a period of time.

When compared with the industry average, a higher working capital turnover ratio

indicates that the amount of working capital in the company is less than that required by

its operations. If the ratio is lower than the industry average it may indicate that working

capital in the company is more than required.

Liquidity of working capital elements: - The various elements of working capital are

inventory of all types, receivables, cash and payables. If there is proper balance between

the individual current assets and level of sales activity. This may indicate that these have

been managed efficiently.

1. For judging the efficiency in the use of capital invested in inventory:-

Cost of sales

Inventory turnover = average inventory

365* average inventory

Average holding period (days) = cost of sales

Raw materials consumed

Raw materials inventory turnover = average inventory of raw materials

365* average inventory of raw materials

74
 Raw materials holding period = raw materials consumed

Cost of goods manufactured

Work- in- progress inventory turnover = average inventory of W. I. P.

Average inventory of W.I.P.

Conversion period (days) = cost of goods manufactured

Cost of goods sold

Finished goods inventory turnover = average inventory of finished goods

2. For judging the efficiency in the use of capital blocked in receivables i.e. goods
sold on credit to customers the following ratios may be used:-

Total credit sales

Receivable turnover = average receivables

365* average receivables

Average collection periods (days) = total credit sales

For judging the cash efficiency :-

Cash operating expenses

Cash turnover ratio = average cash balance

365* average cash balance

Cash holding period = cash operating expenses

75
 3. Payables are kind of current liabilities and constitute important sources of

spontaneous financing for working capital. While judging the efficiency in the use

of working capital, payables should also be analyzed :----

Total credit purchases

Payables turnover = average payables

365* average payables

Average payment period = total credit sales

(2) LIQUIDITY OF WORKING CAPITAL ELEMENTS:-

liquidity of working capital is an important aspect to be analyzed by the management for

maintaining proper liquid resources to meet both operational requirements as well as

financing commitment of repayment of borrowings/loans.

Liquidity ratio indicates the extent to which a company will be able to meet its short-term

obligations. Such as: ----

Current assets

Current ratio = current liabilities

Current assets – inventory

Quick ratio or liquid ratio = current liabilities

Cash + marketable securities

Cash ratio = current liabilities

76
A higher current ratio indicates more liquidity of the company and more ability to pay its

current obligations. A low value of current ratio means that company may find it difficult to

pay the current obligations. Acid- test ratio is often used to supplement the information given

by current ratio.

Cash ratio is the most rigorous test of the liquidity position of a company and is not much

used in practice.

(3) STRUCTURAL HEALTH OF WORKING CAPITAL:-

The structural health of working capital in a business is generally studied by analyzing the

shifts and changes between various elements of working capital. This is done through

decomposition analysis under the value of individual items is presented in relation to total

value of the current assets and the value of current assets to the value of total assets. The

following ratios are generally used to analysis the structure of working capital.

 Ratio of current assets to total assets

 Ratio of cash to current assets

 Ratio of receivables to current assets

 Ratio of receivables to current assets

 Ratio of inventory to current assets

77
 CHAPTER-4

1.DATA ANALYSIS AND

INTERPRETATION

78
 RATIO ANALYSIS OF THE ANNUAL REPORT OF MOON

BEVERAGES LTD. COCA COLA

1. CURRENT RATIO = Current Assets

Current Liabilities
T-1

YEARS CURRENT CURRENT RATIO

ASSETS LIABILITIES
(Rs. In Thousands) (Rs. In Thousands)

2009-2010 299,817 84,116 3.56

2010-2011 329,443 99,610 3.31

2011-2012 379,200 136,498 2.78

2012-2013 500,880 192,416 2.60

G-1

Ratio

4
3.5
3
2.5
2 Ratio
1.5
1
0.5
0
2009-2010 2010-2011 2011-2012 2012-2013

79
CURRENT RATIO ACCORDING TO ANNUAL REPORT
As seen from the table the current ratio of the company shows a general downward trend

from 3.56 in (2009-2010) to 2.60 in (2012-2013). This indicate that the current liabilities

higher increasing in the comparison of current assets. The short-term solvency position of

the company is sound, but not good because the current ratio of the company decreasing

year by year.

ACID TEST RATIO

2. ACID TEST RATIO = Quick Assets

Current Liabilities

T-2

YEARS QUICK CURRENT RATIO

ASSETS LIABILITIES
( Rs. In Thousands) (Rs. In Thousands)

2009-2010 180,839 84,116 2.15

2010-2011 218,539 99,610 2.19

2011-2012 235,814 136,498 1.73

2012-2013 301,121 192,416 1.56

G-2
80
 Ratio

2.5
2
1.5
Ratio
1
0.5
0
2009-2010 2010-2011 2011-2012 2012-2013

ACID TEST RATIO:

As seen from the table the Acid test ratio of the company shows a general downward trend

from 1.73 in (2011-2012) to 1.56 in (2012-2013). This indicates that the current liabilities

higher increasing in the comparison of Quick assets. The short-term liquidity position of the

company is sound in the year (2009-2010) and (2010-2011) but in the (2011-2012) and

(2012-2013) short-term liquidity position is not good because the current ratio of the

company decreasing year by year.

81
ANALYSIS OF CURRENT ASSETS:

NET CURRENT ASSETS TREND

T-3
YEAR 2009-2010 2010-2011 2011-2012 2012-2013
NET
CURRENT 215,701 229,833 260,702 308,464
ASSETS

The graph rises from 215701 in 09-10 to 308464 in 12-13. This table indicates that the assets

are increasing year by year and the company well control to the liabilities from 09 to 013.

82
NET CURRENT ASSETS TO GROSS CURRENT ASSETS

T-4

YEARS NET CURRENT GROSS CURRENT RATIO

ASSETS ASSETS
( Rs. In Thousands) ( Rs. In Thousands)

2009-2010 215,701 299817 .72

2010-2011 229,833 329443 .70

2011-2012 260,702 379200 .69

2012-2013 308,464 500880 .62

G-4

Ratio

0.74
0.72
0.7
0.68
0.66
Ratio
0.64
0.62
0.6
0.58
0.56
2009-2010 2010-2011 2011-2012 2012-2013

83
 NET CURRENT ASSETS TO GROSS CURRENT ASSETS:

This ratio has been taken to have an estimate of the relationship total current assets to a

structure that includes current liabilities also. The falling trend of this ratio would indicate the

soundness of the working capital management. The year 12-13 is the ideal year of the

company for the working capital management, in which time the working capital was good,

but next three year the ratio is falling down.

CASH MANAGEMENT IN COCA COLA:

2. CASH RATIO ( CASH & BANK BALANCE )

CURRENT LIABILITIES

T-5

YEARS CASH & BANK CURRENT RATIO

BALANCE LIABILITIES
( Rs. In Thousands) ( Rs. In Thousands)

2009-2010 9,906 84,116 .117

2010-2011 14,069 99,610 .141

2011-2012 12,503 136,498 .091

2012-2013 14,508 192,416 .075

G-5

84
 Ratio

0.14
0.12
0.1
0.08
Ratio
0.06
0.04
0.02
0
2009-2010 2010-2011 2011-2012 2012-2013

CASH RATIO :-

This ratio has the purpose of assessing the proportion of cash to current liabilities in the

working capital set-up and the trend of the two. In any working capital structure current

liabilities serve to relieve the requirements of the cash. The effect of rising current liabilities

in the structure is to shorten cash holding periods, and to increase Cash Turnovers.

As seen from the table the current ratio of the company shows a general downward

trend from .117 in (2009-2010) to in (2012-2013).

85
 3. CASH TO GROSS CURRENT ASSETS RATIO :-
( CASH & BANK BALANCE )
TOTAL CURRENT ASSETS

T-6

YEARS CASH & BANK TOTAL CURRENT RATIO

BALANCE ASSETS
(Rs. In Thousand) (Rs. In Thousands)

2009-2010 9,906 299,817 .033

2010-2011 14,069 329,443 .042

2011-2012 12,503 379,200 .032

2012-2013 14,508 500,880 .028

G-6
Ratio

0.045
0.04
0.035
0.03
0.025
Ratio
0.02
0.015
0.01
0.005
0
2009-2010 2010-2011 2011-2012 2012-2013

86
 CASH TO GROSS CURRENT ASSETS RATIO

This ratio has been used to see the trend of the level of cash in the total current assets

structure of the company. On the strengths of the falling down cash balances during the last

two years of our period ,the ratio registers a downing trend which is not healthy for the

proportion of increase of cash in the total current assets structure of the company .

4. CASH TO INVENTORIES RATIO ( CASH & BANK BALANCE )

INVENTORIES

T–7

YEARS CASH & BANK INVENTORIES RATIO

BALANCE (Rs. In Thousands)
(Rs. In Thousands)

2009-2010 9,906 118,978 .083

2010-2011 14,069 110,904 .126

2011-2012 12,503 143,386 .087

2012-2013 14,508 199,759 .072

G-7

87
 Ratio

0.14
0.12
0.1
0.08
Ratio
0.06
0.04
0.02
0
2009-2010 2010-2011 2011-2012 2012-2013

CASH TO INVENTORIES RATIO

One of the major purposes of cash is to pay for inventory. The relationship of these two

current assets is mutually complimentary.

However, the trend of the ratio of Cash to Inventory in a business that is normally

expanding and where cash is being effectively managed and controlled, should be a

decreasing one. The trend of cash to inventory ratio is falling down in last two years.

Therefore it shows that the cash is effectively utilized by the company as a result low

closing balances of cash can be observed in these two years.

88
 CASH TO NET CURRENT ASSETS RATIO :-
( CASH & BANK BALANCE )
CURRENT ASSETS – CURRENT LIABILITIES

T–8

YEARS CASH & BANK NET CURRENT RATIO

BALANCE ASSETS
(Rs. In Thousands) (Rs. In Thousands)

2009-2010 9,906 215,701 .045

2010-2011 14,069 229,833 .061

2011-2012 12,503 260,702 .047

2012-2013 14,508 308,464 .047

G-8

Ratio

0.07
0.06
0.05
0.04
Ratio
0.03
0.02
0.01
0
2009-2010 2010-2011 2011-2012 2012-2013

89
CASH TO NET CURRENT ASSETS RATIO :-

Cash to Net Current Assets Ratio is used to measure the relation of cash to net current

assets. Therefore this ratio is considered with the purpose of estimating the progression of

cash as relieved by the trend of Current Liabilities in the working capital set-up of the

company .

This ratio shows a mixed trend due to abnormally rising level of cash during the period

and the generally rising trend of Current Liabilities with some fluctuations. The ratio

shows a nearly constant movement during the last two years which indicates a control on

the front of Current Assets on the strength of Current Liabilities.

The ratio would have had a similar trend even apart from current liabilities, because in

that situation cash to that extent would have been utilized leaving smaller closing

balances.

CASH TO DEBTORS RATIO:- ( CASH & BANK BALANCE )

SUNDRY DEBTORS

T-9

90
YEARS CASH & BANK SUNDRY DEBTORS RATIO
BALANCE (Rs. In Thousands)
(Rs. In Thousands)

2009-2010 9,906 170,933 .057

2010-2011 14,069 204,470 .068

2011-2012 12,503 223,311 .055

2012-2013 14,508 286,613 .050

G-9
Ratio

0.08
0.07
0.06
0.05
0.04 Ratio
0.03
0.02
0.01
0
2009-2010 2010-2011 2011-2012 2012-2013

CASH TO DEBTORS

Debtors and Cash share a contrary relationship with each other in the working Capital

structure of any company. If in any year the depts. Are cleared on large extent then it

may result in high cash balances for the company .

91
But if the debts are cleared on a regular basis then it may prove helpful for the company ,

as then the company can get sufficient cash balance and this will obviate the need to

arrange for cash from external sources to meet exigencies.

The ratio of Cash To Debtors must necessarily follow a reducing trend , because an

increase in the level of debtors which is not exceedingly high is indicative of increasing

sales . On the other hand, an exceeding level of cash at the end of the period indicates

Idle Resources that are costly.

In Coca Cola this ratio registers a decreasing trend from the F.Y (2011-12 onwards ) to

the last year of our period. This is clearly due to the decreasing level of cash over the

period, with abnormally low level from the F.Y ( 2012-13 ).

92
 Inventory to Current Asset

Inventory to Current Asset = Inventory

Current Asset
T - 10

Year Inventory Current Asset Ratio

2009-10 118,978 299,817 .396

2010-11 110,904 329,443 .336

2011-12 143,386 379,200 .378

2012-13 199,759 500,880 .398

G - 10

93
 Ratio

0.42
0.4
0.38
0.36 Ratio
0.34
0.32
0.3
2009-2010 2010-2011 2011-2012 2012-2013

INVENTORY TO CURRENT ASSETS

Inventory in COCA COLA is unique for not having any raw material or finished goods. The

inventory consist of fuel spares & components, loose tools, chemicals & consumables &

others. As the operation & maintenance in power generation is continuous & regular

exercise, the inventory becomes not only critical but voluminous in all its aspects. COCA

COLA has different units as the finances had been tied up with conditions of technological

cooperation & technical assistance from different collaborating countries & financial

institution. As a result COCA COLA has a larger inventory of components & spares than

goods have been required under the condition of uniform technology. The fact of continuous

operation & maintenances ensures certain inventory on a permanent basis for security of

operations this along with the fact that due to technological change & change of phase from

the initial to the later or from the initial synchronization to the later stable operation a large

quantum of inventory is rendered surplus.

This large inventory has been attempted to be controlled by close monitory economy.

However addition to the installed capacity being a regular feather of the company’s

94
development & the on set of the phase of renovation & modernization has resulted in &

enlargement of inventory in the later years of our period.

OTHERS RATIOS

NET PROFIT RATIO:- NET PROFIT(BEFOR TAX)*100

SALES

Net Profit Ratio in 2012 = 85955*100

1160039

= 7.41

Net Profit Ratio in 2013 = 108283*100

1392760

= 7.77

Net Profit in 2012 = 85955

Net Profit in 2013 = 108283
Sales in 2012 = 1160039
Sales in 2013 = 1392760

95
INVENTORY TURNOVER RATIO:-
NET SALES
AVERAGE INVENTORY

Inventory Turnover Ratio in 2012 = 1156052

127145

= 9.09

Inventory Turnover Ratio in 2013 = 1392760

171572.5

= 8.12

Net Sales in 2012 = 1156052

Net Sales in 2013 = 1392760
Average Inventory in 2012 = 127145
Average Inventory in 2013 = 171572.5

96
 WORKING CAPITAL TURNOVER RATIO:-
NET SALES
NET WORKING CAPITAL

Working Capital Turnover Ratio in 2012 = 1156052

281427

= 4.11

Working Capital Turnover Ratio in 2013 = 1392760

383362

= 3.63

Net Sales in 2012 = 1156052

Net Sales in 2013 = 1392760
Net Working Capital in 2012 = 281427
Net Working Capital in 2013 = 383362

97
 DEBTORS TURNOVER RATIO:- SALES
AVERAGE DEBTORS

Debtors Turnover Ratio in 2012 = 1156052

213890.5

= 5.40

Debtors Turnover Ratio in 2013 = 1392760

808831.5

= 1.72

Net Sales in 2012 = 1156052

Net Sales in 2013 = 1392760
Average Debtors in 2012 = 213890.5
Average Debtors in 2013 = 808831.5

98
 FIXED ASSETS TURNOVER RATIO:-
COST OF GOODS SOLD
NET FIXED ASSETS

Fixed Assets Turnover Ratio in 2012 = 1348159

601304

= 2.24

Fixed Assets Turnover Ratio in 2013 = 1625859

702492

= 2.31

Cost of Goods Sold in 2012 = 1348159

Cost of Goods Sold in 2013 = 1625859
Net Fixed Assets in 2012 = 601304
Net Fixes Assets in 2013 = 702492

99
ASSETS TURNOVER RATIO:- COST OF GOODS SOLD
TOTAL ASSETS

Assets Turnover Ratio in 2012 = 1348159

1063705

= 1.27

Assets Turnover Ratio in 2013 = 1625859

1286089

= 1.26

Cost of Goods Sold in 2012 = 1348159

Cost of Goods Sold in 2013 = 1625859
Total Assets in 2012 = 1063705
Total Assets in 2013 =1286089

100
 AVERAGE COLLECTION PERIOD:-
TRADE DEBTORS *365
NET SALES

Average Collection Period in 2012 = 223311*365

1156052

= 70.51

Average Collection Period in 2013 = 286613*365

1392760

= 75.11

Trade Debtors in 2012 = 223311

Trade Debtors in 2013 = 286613
Net Sales in 2012 = 1160039
Net Sales in 2013 = 1392760

s
101
CHAPTER- 5

5.1 CONCLUSION

5.2 SUGGESTION

102
5.1 CONCLUSION

Hindustan Coca cola Beverages Private Limited is using best possible tools for efficient and

effective management of its working capital. Company has adopted excellent system for

appraisal of selling agents so as to collect receivables in time and avoid bad debt losses.

Suppliers of raw material and primary packing material are appraised by company on annual

basis from the list of suppliers approved from Coca Cola India P Limited (quality approval),

these suppliers are limited in numbers so they enjoy monopolistic terms of payments at the

time of season due to which company has to provide huge advances for timely procurement

of material thereby blocking huge working capital as advance to suppliers. Company should

try to negotiate with suppliers and Coca Cola India Limited to break this cartel so as to

deploy their working capital more effectively.

After completing my project on working capital management in HCPL, I have learnt how to

manage working capital in efficient manner. This project helps me in understanding the daily

requirement of such a big manufacturing firm in FMCG business.

103
5.2 SUGGESTIONS

While analyzing the working capital of HCPL I have found the current assets are increasing

32.09% in the year 2013 as the comparison of 2012.

 Percentage increase in the sale was 20.48%.

 By analyzing the Net Profit Ratio I have seen that net profit of the company has been

high in 2013as compare to 2012. but the company again proved its operational efficiency by

increasing in profit in 2012-2013.

 By analyzing the asset turnover ration I have seen that the investment in the assets is

not good since the ratio is decreasing in 2012-2013 as compare to 2011-2012.

 By analyzing the working capital turnover ratio I have seen that the volume of sales is

increasing from 2012 to 2013 with relatively small amount of working capital. This indicates

that the company’s operations are efficient during this year.

 By analyzing the fixed asset turnover ratio I have seen that investment in fixed asset

are not judicious since the ratio is decreasing even the sales are growing during 2011-

2012and 2012-2013.

 By analyzing the inventory turnover ratio I have seen that the inventory turnover ratio

is decreasing from 9.09 times in the year 2012 to 8.12 times in the year 2013. This indicates

that the company’s managing its liquid assets has been not satisfied and the company is

blocking its more and more fund in holding inventory.

104
 By analyzing the debtor’s turnover ratio I have seen that the debtor’s turnover ratio is

decreasing in 2013 as the comparision of 2012. This indicates that the debts are not

collecting promptly.

 By analyzing the debt collection ratio I have seen that the average collection period is

increasing from 70.26 days in the 2012 to 75.026 days in 2013. This also proves company’s

inefficiency in the collection of debts and debts are not collected on time.

105
 CHAPTER- 6

1.BIBLIOGRAPHY

106
1.BIBLIOGRAPHY

A. BOOKS

 I M Pandey, Financial Management, Vikas Publishing House Pvt. Ltd, New Delhi,

2010

 V K Bhalla, Working Capital Management, Anmol Publication Pvt Ltd, Ahemdabad,

1998

 Hrishikesh Bhattacharya, Working Capital Management – Strategies & Techniques,

P.H.I Learning Pvt Ltd, New Delhi, 2004

 Dr. A K Garg, Basic Business Finance, Swati Prakashan , Delhi,

 http://www.scribd.com

 http://www.management paradise.com

B. MAGAZINES

 Business today vol.15, June 2010, Page-23.

 Business world vol.8, Jan 2010, Page-19.

 India today July 2011, Page-36.

107