Working Capital Management of Indian FMCG Companie

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/323414186
Working Capital Management of Indian FMCG Companies: A Conceptual

Analysis
Research · December 2014

DOI: 10.13140/RG.2.2.20587.64806
CITATIONS READS
0 11,403
1 author:
Ashok Panigrahi
Narsee Monjee Institute of Management Studies
109 PUBLICATIONS 392 CITATIONS
SEE PROFILE
All content following this page was uploaded by Ashok Panigrahi on 27 February 2018.
The user has requested enhancement of the downloaded file.

Journal of Business Analysis
Working Capital Management of Indian FMCG

Companies: A Conceptual Analysis
Management of Working Capital is one of the most important
functions of corporate management. Every organization whether public
or private, profit oriented or not, irrespective of its size and nature of
business, needs adequate amount of working capital. The efficient
working capital management is most crucial factor in maintaining
survival, liquidity, solvency and profitability of the any business
organization. As working capital is defined as current assets over
current liabilities, at the time of determination of working capital,
quality of current assets especially size of debtors and inventory are
important factors. Significance of working capital also increases, as it
is directly associated to the liquidity position of the corporate.
Dr. Ashok Kumar Panigrahi However, in some cases, current assets are lower as compared to
current liabilities (known as negative working capital) then how can a
Associate Professor in Finance firm manage the level of liquidity? Negative working capital arises in
cash base business, efficient utilization of resources and sound
NMIMS University, Shirpur. inventory management etc., which leads to minimum stock of inventory
etc., and the overall impact is lower level of current assets. On the
E-mail: panigrahi.ak@gmail.com other hand, due to better contract and negotiations to the creditors and
suppliers, they are extending more liberal credit, which enhances the
level of current liabilities. Study of negative working capital is
M - 8888810975
important to understand the efficiency of the corporate, which
enhances the earning capacity. Keeping in view the significance of
working capital management as a gray area of corporate finance
function, an attempt has been made to examine the working capital
trends and practices particularity in FMCGs sector in India by
selecting top two FMCG companies (named as Hindustan Unilever
Limited, Nestle India Limited).The study is based on secondary data i.e.
Annual Reports of the selected companies. The period of study is ten
years and traditional method of data analysis and ratio analysis as
tools of financial statement analysis for examine the degree of
efficiency of working capital management has been adopted. Finally, it
is found that companies in which negative working capital exist,
profitability is more and shareholders are getting more dividend and
capital appreciation, which maximizes the shareholders’ value in the
long run.
Key Words: Working Capital, Profitability, Liquidity,

Bankruptcy, Working Capital Cycle.
Annual Journal of Technocrats Institute of Technology – MBA Volume – 04, December, 2014
Introduction
All the studies on working capital generally states that for the improvement in profitability we
should manage our working capital effectively and most of the studies recommended to have
good amount of working capital in the organization. All the researches on this topic conclude
that the companies should avoid under-investment in working capital if they want higher profit
margins. With negative working capital there can be a danger of insolvency but it is not true
forever. If the company is having a good image in the market and good relation with their
creditors it can get the benefit from the negative working capital also. Hence, the question arises
that having negative working capital is good for an organization or not and if a company is
earning profit continuously with having negative working capital, can we say that it is a sign of
managerial efficiency or there might be the chances of possible bankruptcy of the company?
Keeping these views in mind, this research article explains the conceptual background of the
negative working capital and how it affects profitability of the corporate.
Study says that out of the total BSE 200 companies, 23 have negative working capital — their
current liabilities or payables are higher than current assets or receivables. This essentially means
the companies do not have to deploy their own capital or borrow from banks to carry out their
routine business activities. It is actually very good to have negative working capital because this
entitles companies to earn relatively better returns on capital and equity. This also shows the
operational efficiency of a company. But just this would not be enough. The companies should
also have good fundamentals. Such companies are preferred by investors as they reward
shareholders relatively better. The BSE 200 companies have an average returns on capital and
shareholders’ funds at about 20 per cent, which is far less than the 32-35 per cent returns
generated by companies with negative working capital. More important, the top ten companies
with negative working capital have a dividend payout ratio of 62 per cent, which is far greater
than the average 26 per cent of the BSE 200 companies.
Study of negative working capital is important to understand the efficiency of the corporate,
which enhances the earning capacity. Negative working capital arises in cash based businesses,
because of efficient utilization of resources and sound inventory management etc., which leads to
minimum stock of inventory and the overall impact is lower level of current assets. On the other
hand, due to better contract and negotiations to the creditors and suppliers, they are extending
more liberal credit, which enhances the level of current liabilities. Concurrently, liquidity is also
significant from short term solvency point of view, which does not exist in case of negative
working capital. Negative working capital is a reverse situation as compared to normal working
capital. It is a situation in which current assets are lower as compared to current liabilities. A
negative working capital is an indication of managerial efficiency in a business with low
inventory and account receivables. This happens because customer pays in advance and so
quickly, the business enjoys cash transactions; products are delivered and sold to the customer
before the company even pays their suppliers and creditors. Negative Working capital doesn't
always mean bad financial condition; it indicates that most of the day to day activities are funded
by customers rather than company’s own working capital. Some latest examples are movie
theaters -customers are paying first and distributors are normally paid later on; Schools/
educational institutions- fees paid in advance by the students annually, whereas faculties are
getting salary after one month. When an organization uses supplier’s credit and customers'
advance to fulfill their day to day needs, it leads to a situation of lower or negative working
capital. Banks, financial institutions, distributors, retailers with cash business or advance
payment contract have negative working capital. Normally, when we analyze working capital, it
always refers to normal or positive working capital (excess or current assets over current
liabilities). However, there are certain situations in which working capital is in negative form
(excess of current liabilities over current assets). In that situation, how can a company manage
liquidity with the negative working capital? Leading FMCG Companies, Nestle India Limited
and Hindustan Uniliver Limited is taken as a case, to analyze the negative working capital and its
impact on the profitability and earning capacity of the firms. Finally, it is found that companies
in which negative working capital exist, profitability is more and shareholders are getting more
dividend and capital appreciation, which maximizes the shareholders’ value in the long run.
In modern business, the concept of negative working capital is significant for the following
reasons:
• It indicates operational efficiency of a corporate. That means without or lowers current assets
the firm is managing day to day operations in an efficient manner. Eventually, it reduces cost of
working capital and maximum earnings for the shareholders, which is the ultimate goal of the
financial management.
• Concept of negative working capital is important to analyze liquidity position of corporate.
When current assets are lower than current liabilities, what about the liquidity position of the
corporate, how are they discharging current obligations in the short period. Traditionally,
liquidity ratios are the measurement of liquidity of a firm with the ideal standard of 2:1. Negative
working capital indicates lower cost of working capital (another way is higher profitability), but
at the same time, it indicates poor liquidity (worried situation for the creditors, etc.) or we can
say company is overburdened with current liabilities, which is not good for any situation
especially in a period of recession, etc.
• Another important impact of negative working capital is cash recovery or realization situation.
Negative working capital indicates quick realization of cash recourses (conversion of debtors in
to cash) or one can say working capital cycle is shorter (for a days or maybe less than that). At
the same time, payable policy of the company is to take longer time for payment against creditor.
It indicates significant variations in the credit policy towards suppliers and customers. To
analyze, explain and focus on all these situations, a study of negative working capital and its
impact on liquidity, profit earning capacity and overall impact on shareholders’ value creation is
important in the contemporary scenario.
To understand the how negative working capital works, let us analyze Warner Brothers / Wal-
Mart situation. When Wal-Mart ordered the 500,000 copies of a DVD, they were supposed to
pay Warner Brothers within 30 days. What if by the sixth or seventh day, Wal-Mart had already
put the DVDs on the shelves of its stores across the country? By the twentieth day, they may
have sold all of the DVDs. In the end, Wal-Mart received the DVDs, shipped them to its stores,
and sold them to the customer (making a profit in the process), all before they had paid Warner
Brothers! If Wal-Mart can continue to do this with all of its suppliers, it doesn't really need to
have enough cash on hand to pay all of its accounts payable. As long as the transactions are
timed right, they can pay each bill as it comes due, maximizing their efficiency.
There are many ways to create negative working capital. Most important method is to minimize
the size of current assets with favorable contract and agreement to the suppliers and other parties
(to delay payments) and the same time, try to minimize credit facilities or maximize cash based
business (collection of cash before the disbursement of actual payments to the various parties).
When maximum customers are paying in advance, low or negative working capital is created.
Another way to minimize the size of current assets is to adopt efficient collection method or
brand oriented collection policy. Many companies are trying to minimize their cash resources
with efficient utilization of funds. Some companies are effectively using ERP system involving
trade partners in planning and monitoring working capital items to reduce the level of working
capital. Efficient cash collection and inventory management system provides an opportunity to
run business with the negative working capital, because most of the suppliers are granting 30
days credit in general. Companies who are able to operate and maintain with negative working
capital, have advantages to receive funds without cost as a form of credit from their suppliers
which will enhance ROI in a significant manner. However, non-availability of liquid resources is
not a good situation at any time (especially in the stage of growth and boom). Hence, the
question arises that having negative working capital is good for an organization or not and if a
company is earning profit continuously with having negative working capital, can we say that it
is a sign of managerial efficiency or there might be the chances of possible bankruptcy of the
company?
Objective of Study
Much has been written and studied about working capital management and profitability of the
firm in different industries but this research is limited to the study of two companies only of
FMCG sector named Nestle India Limited and Hindustan Uniliver Limited. It will benefit the top
managers and policy makers of various companies regarding decision on optimum level of
working capital, ways of managing it and overall policies on working capital management. And
also it gives clear understanding about the relation between working capital components and
corporate profitability. Besides, the study helps as a guideline for those who conduct their study
on similar topic and it gives brief information for the shareholders, prospective customers and
creditors of a firm regarding profitability in relation to efficient working capital management and
policy. Finally, the study benefits the researcher to obtain new knowledge about the problem
under study and gives clear picture about the discipline called research.
Research Methodology
In order to achieve the main research objectives quantitative methods have been adopted. The
purpose of using such approach is to gather data that help the researcher to investigate cause-
effect relationships. In this particular case, the effect is the company’s profitability and the
research is targeted at identifying significant causes, i.e. determinants on profitability related to
working capital. A brief explanation about the data collection and analysis method adopted is
given below.
To gather data on working capital component and profitability, it is apparent to use survey of
structured documentary review. Accordingly, to achieve its objective companies audited
financial statement especially balance sheet and income statement was reviewed. Annual reports
were thoroughly seen for all the details and schedules detailing the various important
components such as assets, liabilities, sales, profit etc. Once data were found acceptable, data
entry and process were made using Microsoft EXCEL. Analysis of data was undertaken with the
help of ratio calculations and plotting of graphs.
Negative Working Capital: Indian FMCG Companies
In India, negative working capital is equally popular at par with the global companies such as;
McDonald’s and Amazon.com. In India, HUL and Nestlé are the Fast Moving Consumer Goods
(FMCG) companies, having negative working capital for more than the last ten years. Now the
question arises as to how they are managing day to day operations smoothly without sufficient
liquidity. Nestle India is one of the leading FMCG companies having sound marketing network,
distribution channels and strong brands which will aid financial benefits over competitors. As
other FMCG companies such as HUL, Britannia, ITC, Colgate, and Dabur, etc. belong to similar
business segment mostly have positive working capital (except few years).Conventionally, the
FMCG Companies are famous for negative working capital due to efficient supply chain
management. This industry has lower level of debtors, which are usually financed by creditors or
suppliers; this situation offers them some gains related to negative working capital. Another
situational gains for FMCG industry is their turnover does not depend\upon their production (like
other Mfg. industry), it depends upon the capability to sales in the competitive market, therefore
maximum resources are utilized for marketing and promotion of product rather than
manufacturing activities, etc. (because most of their products are manufactured by small
companies under contract production agreement). Similarly development of SCM, ERP and JIT,
etc. made effective management of inventory and resources, which will significantly minimize
the size of current assets. In current assets nearly 50% part is in the form of inventory, but in
FMCG companies due to efficient supply chain management and efficient inventory holding,
level of inventory comes down to significant lower level as compared to other industry (such as
manufacturing). Similarly due to the cash base of business, level of debtors are also lower which
significantly decreases the level of current assets another important change in the nature of
investors is, rational thinking about investment. Nowadays strategic investors are also focusing
on working capital management of a company, because it is directly associated to earning
capacity of the firm. A study of top Indian companies having higher return on capital employed
shows many companies is having negative working capital.
Share Holders Value Creation

Shareholders value creation is the ultimate agenda for every corporate. There are two ways to
create value for shareholders
(1)Higher dividend as compared to other corporate.
(2) Higher value of shares in the open market (capital appreciation in the way of higher market
capitalization).
Both these can be obtained by the company with higher profitability or reduced cost of capital,
which will enhance overall efficiency in the day to day operations with the sound working
capital management.
HUL, Nestle and Godrej Consumers Products Ltd have ROCE in excess of 40%.The success of
this high return is associated with the way these companies have managed their working capital
management cycles.
Leveraging on Supply Chain
FMCG companies first sell their goods and later on pay their raw material
suppliers. This is possible only when the companies are huge in size and account for the bulk of
turnover for their suppliers. Strong brand loyalty of FMCG Sector helps them maintain a low
inventory as well as generate speedy sales. In such a situation, they are always in a position to
arm-twist the suppliers by taking more credit. Thus the products are sold to the customers and
the cash generated even before the company pays its suppliers. The additional cash generated can
be utilized for other purposes. Nestle collects its money from customers in just four days
(average collection period), whereas it pays in 52 days to its raw material suppliers. HUL, which
had a net negative working capital, has been able to maintain its creditor days at 64 as compared
to receivable days at 16. Godrej Consumer Products (GCPL) is another company with negative
working capital maintains creditor days at 53,compared to average debtors of six days only.
The strong distribution and dominant position in the FMCG industry has made these companies
to bargain with the debtors and creditors to expand the payment cycle in favor of the company.
The FMCG companies have been able to keep their creditors almost equal to debtors and
inventory, which have resulted in a lot of cash generation for these companies, which is again
invested in the business. These companies also make investment in short-term papers and call
money, which allows them to earn good returns. Traditionally, the FMCG companies are known
for maintaining negative working capital which is leveraged on strong supply chain management.
Since this industry accounts for very negligible amount of debtors, the whole trade is financed by
creditors from the production side and vendors and dealers from the supply side.
Profile of Nestle India Limited
Nestle India Ltd, one the biggest players in FMCG segment, is a subsidiary of Nestle S.A. The
company has presence across India with 7 manufacturing facilities and four branch offices
spread across the region. The four branch offices in the country help facilitate the sales and
marketing of its products. They are in Delhi, Mumbai, Chennai and Kolkata.
It has a presence in milk & nutrition, beverages, prepared dishes & cooking aids & chocolate &
confectionery segments. The company is engaged in the food business. The food business
incorporates product groups, such as milk products and nutrition, beverages, prepared dishes and
cooking aids, chocolates and confectionery.
The brands and products of the company are focus of continuous innovation so that they meet
and exceed consumers’ expectations. The company seeks a clear-cut advantage over
competitors’ products and to ensure its products are available wherever, whenever and however
the customers want them. Although profitability may be considered the governing factor of a
business, nevertheless the management of working capital can effectively bring to a halt, or to its
ultimate downfall, what might otherwise be a successful and profitable company.
Profile of Hindustan Uniliver Limited (HUL)
HUL is India's largest consumer goods company based in Mumbai, Maharashtra. It is owned by
the British-Dutch company Unilever which controls 52% majority stake in HUL. Its products
include foods, beverages, cleaning agents and personal care products.
HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as
Hindustan Lever Limited through a merger of Lever Brothers, Hindustan Vanaspati Mfg. Co.
Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and has employee strength of
over 16,500 employees and contributes to indirect employment of over 65,000 people. The
company was renamed in June 2007 as “Hindustan Unilever Limited”.
With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin
care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water
purifiers, the Company is a part of the everyday life of millions of consumers across India. Its
portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair
& Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sun silk, Pepsodent, Closeup, Axe,
Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit.
Working Capital Analysis of Nestle India Ltd.

The table below shows the component-wise analysis of the working capital of Nestle India Ltd.
from the year 2004 to 2013.
Components of Working Capital of Nestle India Ltd. (Rs. In Crores)

Gross
Cash & Working Net
Sundry Loans and Current
Year Inventory Bank Capital Working
Debtors Advances Liabilities
Balances (Current Capital
Assets)
2004 216.67 26.17 9.45 168.91 421.20 680.05 -258.85
2005 253.1 30.52 3.64 194.33 481.59 747.18 -265.59
2006 276.22 55.76 6.53 175.12 513.63 836.1 -322.47
2007 401.22 53.49 15.75 186.23 656.69 1,027.30 -370.61
2008 434.91 45.59 12.66 162.67 655.83 1,259.76 -603.93
2009 498.74 64.19 26.73 184.85 774.51 1,501.18 -726.67
2010 575.95 63.29 19.45 200.17 858.86 1,751.62 -892.76
2011 734.04 115.42 25.55 256.36 1,131.37 2,216.96 -1,085.59
2012 745.58 87.57 236.96 180.6 1,250.71 2,315.32 -1,064.61
2013 735.93 84.27 749.36 229.61 1,799.17 2,756.03 -956.86
Source : www.moneycontrol.com
Working Capital Analysis of Nestle India Ltd. (Rs. In Crores)
3000
Year
2500
Inventory
2000
Sundry Debtors
1500
1000 Cash & Bank Balances
500 Loans and Advances
0 Gross Working Capital (Current

1 2 3 4 5 6 7 8 9 10 Assets)
-500
Current Liabilities
-1000
Annual Journal of Technocrats Institute of Technology – MBA Net Working
Volume Capital
– 04, December, 2014
-1500
Financial Ratios of Nestle India Ltd.

Number of
Year Current Ratio Inventory Debtors Days In Return On
Turnover Turnover Working Capital
Ratio Ratio Capital Employed (%)
2004 0.62 10.34 77.05 -41.8 119.2
2005 0.64 9.87 87.32 -33.83 127.18
2006 0.61 10.28 65.35 -32.26 120.01
2007 0.64 8.79 64.09 -35.85 150.33
2008 0.52 11.39 87.37 -35.17 163.97
2009 0.52 11.61 93.68 -41.86 160.29
2010 0.49 12.33 98.22 -37.78 135.06
2011 0.51 11.6 83.83 -40.92 63.73
2012 0.54 11.55 82.04 -39.57 55.43
2013 0.65 12.37 105.92 -29.89 47.79
The table shows that, the net working capital is negative throughout the study period. In any
normal situation, a negative net working capital is a sign of company’s probable bankruptcy or
serious financial trouble. But the Return on Capital Employed (ROCE) shows good figures for
all the years claiming that company has earned excellent returns even with negative working
capital. This is possible only because of managerial efficiency of the organization. From the table
above, we can see that the Current Ratio (CR) of Nestle India has moved in between 0.49 to
0.65, during the period of study. This is much below the ideal current ratio of 2:1. This indicates
that the company has current liabilities much more than its current assets which led to an earning
of high rate of return. The company has been able to generate cash so quickly, and customers
paying upfront that the business have no problem raising the cash. Hence profitability could not
be linked to the net working capital. Instead, a negative working capital proves to be a sign of
managerial efficiency in their business with low inventory and accounts receivable (which means
they operate on an almost strictly cash basis). The company tries to attack the growth in Working
Capital sensibly, not by focusing on absolute value which in some previous years was impacted
by double-digit inflation, but by targeting days covers for inventories, accounts receivable and
accounts payable. Nestle India Ltd is a good example which proves that negative Working
capital doesn't always mean bad financial condition; it indicates that most of the day to day
activities are funded by customers rather than company’s own working capital.
Working Capital Analysis of Hindustan Uniliver Limited (HUL)

The table below shows the component-wise analysis of the working capital of HUL from 2003-
04 to 2013-14. The table shows that, the net working capital is negative throughout the study
period. In any normal situation, a negative net working capital is a sign of company’s probable
bankruptcy or serious financial trouble. But the Return on Capital Employed (ROCE) shows
good figures for all the years claiming that company has earned excellent returns even with
negative working capital. This is possible only because of managerial efficiency of the
organization.
Components of Working Capital of HUL (Rs. In Crores)

Gross
Cash & Loans Working Net
Sundry Current
Year Inventory Bank and Capital Working
Debtors Liabilities
Balances Advances (Current Capital
Assets)
2003-04 1,470.44 489.27 102.98 1,013.04 3,075.73 3,854.10 -778.37
2004-05 1,321.77 522.83 103.77 902.04 2,850.41 4,371.36 -1,520.95
2005-06 1,547.71 440.37 170.8 1,150.06 3,308.94 4,792.23 -1,483.29
2006-07 1,953.60 443.37 200.11 1,083.28 3,680.36 5,302.31 -1,621.95
2008-09 2,528.86 536.89 190.59 1,196.95 4,453.29 5,968.06 -1,514.77
2009-10 2,179.93 443.37 231.37 1,068.31 3,922.98 6,935.52 -3,012.54
2010-11 2,810.77 440.37 1,628.47 1,061.68 5,941.29 7,503.14 -1,561.85
2011-12 2,516.65 522.83 1,830.04 1,131.46 6,000.98 7,445.34 -1,444.36
2012-13 2,526.99 489.27 1,707.89 1,604.91 6,329.06 8,838.45 -2,509.39
2013-14 2,747.53 816.43 2,220.97 1,377.51 7,162.44 9,721.35 -2,558.91
Working Capital Analysis of HUL (Rs. In Crores)
10,000.00
8,000.00
Inventory
6,000.00 Sundry Debtors
4,000.00 Cash & Bank Balances

Loans and Advances
2,000.00
Gross Working Capital
0.00 Current Liabilities
Net Working Capital
-2,000.00
-4,000.00
Financial Ratios of HUL
Current Number of
Year Inventory Debtors Days In Return On
Ratio
Turnover Turnover Working Capital
Ratio Ratio Capital Employed(%)
2003-04 0.80 6.97 20.95 -6.56 45.08
2004-05 0.65 8.57 22.12 -40.83 67.66
2005-06 0.69 8.02 25.42 -36.37 65.89
2006-07 0.69 7.2 31.41 -42.05 138.72
2008-09 0.75 9.26 41.83 1.58 118.59
2009-10 0.57 8.99 29.24 -22.62 106.78
2010-11 0.79 7.02 24.34 -24.09 102.66
2011-12 0.81 8.79 27.27 -25.37 95.4
2012-13 0.72 10.21 34.13 -38.69 163.59
2013-14 0.74 10.2 33.96 -36.35 147.56
From the table above, we can see that the Current Ratio (CR) of HUL has moved in between
0.57 to 0.81, during the period of study. This is much below the ideal current ratio of 2:1. This
indicates that HUL has current liabilities much more than its current assets which led to an
earning of high rate of return. The company has been able to generate cash so quickly, and
customers paying upfront that the business have no problem raising the cash. Hence profitability
could not be linked to the net working capital. Instead, a negative working capital proves to be a
sign of managerial efficiency in their business with low inventory and accounts receivable
(which means they operate on an almost strictly cash basis). The company tries to attack the
growth in Working Capital sensibly, not by focusing on absolute value which in some previous
years was impacted by double-digit inflation, but by targeting days covers for inventories,
accounts receivable and accounts payable. HUL is a good example which proves that negative
Working capital doesn't always mean bad financial condition; it indicates that most of the day to
day activities are funded by customers rather than company’s own working capital.
Observations
After the analysis of trend of negative working capital and various components of profitability it
is clear that:
• FMCG companies are having trend to use negative working capital to minimize the cost of
borrowing for working capital.
• Whenever they are having trends of negative working capital, profitability is always
higher(because of lower cost of interest and borrowings).
• Nestle India as well as HUL are some of the leading FMCG companies in India, regularly using
negative working capital for their day to day operations.
• An important observation is, rather than negative impact of poor working capital (negative
working capital) FMCG companies are having greater advantages because of brand image and
lower operating cost for their product (because of strong influence of brands).
• In FMCG companies early cash realization and minimum chances for bad debts (due to lower
level of debtors) are the key areas responsible for higher profitability.
• Brand image of the products (intangible assets) enhances marketing efficiency and profitability
(higher demand for the product).
• Another important area of advantages is; in FMCG Company’s contribution of intangible assets
are more than 90% of the market capitalization that will provide them unique opportunity to
enhance market share of the product.
• Intangible assets such as brand, internal operation methodologies, strong supply chain network
and strong customer base etc. are the key areas responsible for lower requirement of working
capital
Recommendations
Negative working capital creates many financial gains but at the same time it has some adverse
impacts
 Lower or poor working capital (or negative working capital) creates artificial pressure on
a company to increase borrowings for day to day operations. Due to delayed payments to
the creditors, in some cases ranking of such companies are treated as poor, which will
affect cost of borrowings or capital (in the way of higher rate of interest).
 In case of expansion and modification of business, negative working capital creates
financial barriers (lower liquidity). It will create artificial hurdle for the growth of the
organization.
 Due to poor liquidity, investors behave with caution; it will create financial unrest among
the general investors. They are worried about their investment as well as future returns.
 At the time of business valuation, negative working capital creates hurdle for better
valuation because of chances of bankruptcy risk in a short time.
 Negative working capital position only works when the company is growing revenues
(such as General Motors that used it for several years until revenues began declining).
When the company’s revenues are declining the positive effect of a negative working
capital position reverses and it immediately starts needing annual working capital
investment during a time when the company can least afford .
The companies working on negative working capital should keep an eye on the above impacts
of negative working capital. If the companies can overcome the over shortcomings they can
employ the advantages of negative working capital.
Conclusion
Negative working capital indicates non-liquidity or less liquidity within the firm which is not
favorable at each and every stages of business. Companies operating in industry like FMCG are
able to manage negative working capital efficiently, creating shareholder value by way of higher
EPS and higher market capitalization. At the same time, companies with higher working capital
are having sufficient liquidity, are more successful because of liquidity and they can expand
business and grow up to maximum possible extent. However, a company with higher working
capital needs higher revenue to maintain their healthy operating ratio. A better credit
management system will help these companies to generate higher ROCE in the long run.
However, in each and every situation lower level of liquidity is not preferable; a proper tradeoff
between liquidity and working capital requirement is needed in the long run.
The End
References
1. Arora, A. (2013): “Negative Working Capital and its Impact on Profitability” The
Management Accountant, March 2013.
2. Banerjee, S. (2000): "Financial management". S.Chand and company, New Delhi .
3. Bhalla, V. (1997): "Financial management and policy", Anmol publications
Ist edition,New Delhi .
4. Bagchi, B. and Khamrui, B. (2012), “Relationship between working capital management
and profitability: A study of selected FMCG companies in India”, Business and
Economics Journal, Vol. 2012: BEJ-60
5. Bagchi, T, (2013), “Working Capital and Profitability—Establishing the Causality”,

Journal of Accounting and Management (JAM) Vol. 3, Issue -2, 2013.
6. Ghosh S K and Maji S G (2003), “Utilization of Current Assets and Operating
Profitability: An Empirical Study on Cement and Tea Industries in India”, Indian
Journal of Accounting, IAA, pp. 81–91, Ujjain, December.
7. Khan and Jain(2004): "Financial Management", Tata Mcgraw Hill publishing company,
New Delhi 4th edition .
8. Panigrahi A.K. and Sharma, A, “ Working Capital Management and Firms’
Performance: An Analysis of selected Indian Cement Companies”, Asian Journal of
Research in Business Economics and Management , published by Asian Research
Consortium, Issue – 8, Volume – III, Sept. - 2013, Page 115 – 130. Available at SSRN:
http://ssrn.com/abstract=2342085.
9. Panigrahi A.K., “Relationship between Inventory Management and Profitability – An
Empirical Analysis of Indian Cement Companies”, Asia Pacific Journal of Marketing
and Management Review, published by Indian Research Journals, Issue – 7, Volume – II,
July-2013,Page 107 – 120. Available at SSRN: http://ssrn.com/abstract=2342455.
10. Panigrahi A.K., “Cash Conversion Cycle and Firms’ Profitability – A Study of Cement
Manufacturing Companies of India”, International Journal of Current Research,
published by IJCR, Issue – 6, Volume – V, June - 2013, Page 1484 – 1488.
Available at SSRN: http://ssrn.com/abstract=2342460.
11. Panigrahi A.K., “Negative Working Capital and Profitability – An Empirical Analysis of
Indian Cement Companies”, International Journal of Research in Commerce and
Management, published by IJRCM, Issue – 6, Volume – IV, June - 2013, Page 41 –
45. Available at SSRN: http://ssrn.com/abstract=2342457.
12. Panigrahi, Ashok Kumar, Liquidity Management of Indian Cement Companies – a
Comparative Study (December 3, 2013). IOSR Journal of Business and Management
(IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 14, Issue 5 (Nov. - Dec.
2013), PP 49-61 www.iosrjournals.org. Available at SSRN:
http://ssrn.com/abstract=2362751
13. Panigrahi A.K., “Impact of Working Capital Management on Profitability: A Case Study
of ACC Ltd.”, Asian Journal of Management, published by A and V Publications, Issue –
4, Volume – III, Oct. - Dec. 2012, Page 210 – 218. Available at SSRN:
http://ssrn.com/abstract=2342485.
14. Paul Artika, “Everything Positive About Negative Working Capital – A Conceptual
Analysis of Indian FMCG Sector”.
15. Rustagi, R. (2000): "Financial Management, theory, concept and problems", second
edition pp860 Galgotia Publishing Company, New Delhi (2000).
16. Raheman A and Nasr M (2007), “Working Capital Management and Profitability: Case
of Pakistani Firms”, International Review of Business Research, Vol. 3, No. 2, pp. 275–
296.
17. Sur, D. (1997): “Working capital management in Colgate Palmolive (India) Ltd. -A case
study", The Management Accountant, November.
18. Singh, P. 2012, “Negative Working Capital and Indian Corporates – A Conceptual
Analysis” The Chartered Accountant, Dec. 2012.
19. Singh, P. (2005): “Liquidity Management & Working Capital In Indian Farmers
Fertilizer Cooperative Limited” in Research Bulletin Vol. XXVI No.2 JULY, published by
Institute of Cost and Works Accountant of India, (ICWAI) Kolkata, pp78-88.
20. Vijay Kumar, A. & Venkatachalam, A. (1996): “Responsiveness of working capital
Management–A case study of Tamilnadu Sugar Corporation “-Finance India Vol. X No
3, page 647-655.
************************************************************************
View publication stats

Working Capital Management of Indian FMCG Companie

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Working Capital Management of Indian FMCG Companie

Uploaded by

Copyright:

Available Formats

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Working Capital Management of Indian FMCG Companies: A Conceptual

Research · December 2014

The user has requested enhancement of the downloaded file.

Working Capital Management of Indian FMCG

Key Words: Working Capital, Profitability, Liquidity,

Negative Working Capital: Indian FMCG Companies

Share Holders Value Creation

(1)Higher dividend as compared to other corporate.

Leveraging on Supply Chain

Profile of Nestle India Limited

Profile of Hindustan Uniliver Limited (HUL)

Working Capital Analysis of Nestle India Ltd.

Components of Working Capital of Nestle India Ltd. (Rs. In Crores)

1000 Cash & Bank Balances

500 Loans and Advances

0 Gross Working Capital (Current

Financial Ratios of Nestle India Ltd.

Working Capital Analysis of Hindustan Uniliver Limited (HUL)

Components of Working Capital of HUL (Rs. In Crores)

4,000.00 Cash & Bank Balances

Financial Ratios of HUL

5. Bagchi, T, (2013), “Working Capital and Profitability—Establishing the Causality”,

View publication stats

You might also like