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DETERMINANTS OF WORKING CAPITAL
MANAGEMENT ON FIRM’S
PROFITABILITY
CASE ON
AVA CHOLAYIL HEALTH CARE PVT LTD
Submitted by
ROHITH U J
Under the guidance of
Mr. Gireesh S Pathy
(Assist. Professor, BRIM)
In partial fulfillment of requirement for the award of
MASTER IN BUSINESS ADMINISTRATION
To
BHAVAN’S ROYAL INSTITUTE OF MANAGEMENT
(Approved by All India Council for Technical Education, AICTE, New Delhi.)
Thiruvankulam, Kochi – 682305
2016-2018
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DECLARATION
I ROHITH U J, hereby declare that this report on
“DETERMINANTS OF WORKING CAPITAL MANAGEMENT
ON FIRM’S PROFITABILITY A CASE ON AVA CHOLAYIL
HEALTH CARE PVT LTD” is a record of my project work done for
AVA CHOLAYIL HEALTH CARE PVT LIMITED, under the
supervision of Assist. Professor Gireesh S Pathy, Bhavan’s Royal
Institute of Management. I also declare that this project report is my
original work and that it has not previously formed the basis for award of
any degree.
Date: 27/06-2017 ROHITH U J
Place: Thiruvankulam
DEAN
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ACKNOWLEDGEMENT
My special acknowledgement and gratitude to AVA Cholayil Health
Care Pvt. Limited for granting me the permission to carry on my summer
project in their reputed organization. I wish to express my indebtedness
and gratitude to Mr. Rony Joseph, C.F.O finance and Mr. P.
Santhanakrishnan, General Manager- Accounts for giving me support
to do this summer project in AVA Cholayil Health Care Pvt. Limited.
I also express my sincere gratitude and thanks to Prof.
RAJAGOPALA NAIR, The DEAN and the faculty members at
Bhavan’s Royal Institute of Management for their able guidance and
support for the successful completion of my project.
I would also like to reserve a warm and special note of thanks to my
internal guide Assist. Professor Gireesh S Pathy whose wholehearted
support and guidance helped me to complete this project successfully.
Last but not least my gratitude is to the almighty for showering me with
abundant grace through the entire duration of this project. I believe that
the light that God has passed on to me shall be kept alight in all days to
come
ROHITH U J
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EXECUTIVE SUMMARY
This studytries to explore the impact of working capital management onprofitability
of AVA Cholayil Health Care Pvt. Limited one of the leading FMCG firm in India.
Working Capital can be defined as the amount when current asset is surpassing
current liabilities. The focus of this paper is to analyze how the company manages
its working capital on the basis of cash, inventory period, receivable period and
payable period management and how it influence the profitability ofan organization.
This project paper starts with the objective of the study and the methodology. The
project paper contains the analysis of three years data of AVA Cholayil Health Care
Pvt. Limited commencing from the year 2014-2016. Most of the researchers found
that degree of efficiency of administration of working capital largely determines the
success or failures of overall operations of an organization. The objective of this
report is to analyze the previous studies and relate them with this paper.
Afterwards description of the company including its history, products, mission,
vision, organization structure etc. is discussed in chapter 3. In the fiscal year 2015-
16 AVA Cholayil Health Care contributed more than 8.9 Crore as taxes to the
national Exchequer. WCM policy for AVA Cholayil Health Care is discussed
elaborately in the chapter 6 as well.
They follow aggressive WCM policy because of their higher utilization ofshortterm
financing. Inventory management performance is evaluated using inventory
conversion period. In the year 2014 it was approximately 56 days which is quite high
in compareto other years. AVA Cholayil Health Care Pvt. Limited time gap between
collecting money from the debtors is very satisfactory with an average period of 2
days. The organization tries to delay the accounts payable as much as possible. The
time taken byAVA Cholayil Health CarePvt. Limited to make payments to creditors
is around 75 days.
Analysis of the collected data is presented in chapter six. It contains descriptive,
correlation and t-test analysis of the variables with proper interpretation and it was
found that there is relationship between profitability and working capital
components. Correlation analysis shows that receivable period is negatively related
with profitability and other variables are positively related. Finally findings and
conclusion chapter includes a summary of the results found in the
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TABLE OF CONTENT
SL.No Chapter Title
Page
No.
1
2
3
4
5
6
7
1
1.1
1.2
1.3
1.4
1.5
1.6
INTRODUCTION
Statement of the problem
Objective of the study
Scopeof the study
Research Methodology
Limitation of the study
Chapter Scheme
9
10
11
11
12
14
14
8 2 INDUSTRY PROFILE 16
9 2.1 Overview 16
10 2.2 Consumer Products 18
11 2.3 Rural FMCG Market of India – Overview 20
12 2.4 Road Ahead 21
13 2.5 Reaching Out to Consumers 21
14 2.6 PEST Analysis of FMCG Industry 23
15 3 COMPANYPROFILE 24
16 3.1 Company Overview 24
17 3.2 History 24
18 3.3 About the Founder 25
19 3.4 Board of Directors 26
20 3.5 Company Vision 26
21 3.6 Company Mission 26
22 3.7 AVA Group 27
23 3.8 Products and Services Offering 27
24 3.9 Factories 30
25 3.10 Major Competitors 30
26 3.11 Office Timing 30
27 3.12 Leave Eligibility and Procedure 31
28 3.13 Travel Policy 31
29 3.14 Reimbursement Policy 31
30 3.15 Functions of head office AVA Cholayil
Health Care Pvt. Limited
32
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31 3.16 Departments in AVA Cholayil Health
Care Pvt. Limited
32
32 3.17 Financial Performance 32
33 4 LITERATURE REVIEW 36
34 4.1 Theoretical Concepts 36
35 4.2 Literature Review 48
36 5 RESEARCHDESIGN 51
37 6 DATA ANALYSIS AND
INTERPRETATION
54
38 6.1 Working Capital Management Policy in
AVA Cholayil Health Care Pvt. Limited
54
39 6.2 Data Analysis 64
40 7 FINDINGS AND SUGGESTIONS 69
41 7.1 Findings 69
42 7.2 Suggestions 71
43 7.3 Conclusion 72
44 7.4 Bibliography 73
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LIST OF TABLES
SL.No Table No Particulars Page No
1 1 Products under Medimix brand 28
2 2 Total Sales 32
3 3 Balance Sheet 34
4 4 Profit and Loss Statement 35
5 5 Selected Variables 51
6 6 Financing policy Ratio 55
7 7 Inventory Conversion Period 56
8 8 Accounts Receivable Period 57
9 9 Accounts Payable Period 58
10 10 Cash Conversion Cycle 61
11 11 Current Ratio 62
12 12 Quick Ratio 63
13 13 Descriptive Analysis 64
14 14 Correlation Analysis 66
15 15 Summary of Hypothesis Testing 68
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LIST OF FIGURES
SL.No Fig. No Particulars Page No
1 1 Rural FMCG market trend 21
2 2 Total Sales 33
3 3 Kinds of WC 40
4 4 Financing under Matching Approach 42
5 5 Conservative Approach 43
6 6 Aggressive Approach 43
7 7 Financing Policy 55
8 8 Inventory Days 56
9 9 Receivable Days 57
10 10 Accounts Payable Days 59
11 11 Cash flow cycle 60
12 12 Cash Conversion Cycle 61
13 13 Current Ratio 62
14 14 Quick Ratio 63
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CHAPTER-1
INTRODUCTION
The fast-moving consumer goods (FMCG) sector is an important contributor to
India’s GDP and it is the fourth largest sector of the Indian economy. Items in this
category are meant for frequent consumption and they usually yield a high return.
The Indian FMCG sector, which is the fourth biggest sector in the Indian economy,
has a market size of2 trillion with rural India contributing to one third ofthe sector’s
revenues. The Indian FMCG sector is highly fragmented, volume driven and
characterized by low margins. The sector has a strong MNC presence, well
established distribution network and high competition between organized and
unorganized players. The growth of the sectorhas been driven by both the rural and
urban segments. India is becoming one of the most attractive markets for foreign
FMCG players due to easy availability of imported raw materials and cheaper labor
costs.
Working capital management is an area which emphasize on the productive
utilization available funds created out of good cash flows, financial solvency and
growth strategies at the company. It represents the liquidity position of business
indicating the management of shortterm assets and liabilities. Basically net working
capital of a company is determined from the deviation of current assets and current
liabilities. When current assets are higher than current liabilities, that means the
company is capable enough to continue its operations and it also defines that the
company have sufficient funds to satisfy its short-term debt and upcoming
operational expenses. Working capital management of the AVA Cholayil Health
Care Pvt. Limited is satisfactory due to efficient management of inventory, debtors,
cash balances and working funds where the major elements of working capital were
inventory, debtors, cash balances and short term investments.
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1.1 Statement of the problem
With a population of over one billion, India is one of the largest economies in the
world in terms of purchasing power and increasing consumer spending, next to
China. The Indian FMCG industry, with an estimated market size of 2 trillion,
accounts for the fourth largest sector in India. In the last decade, the FMCG sector
has grown at an average of 11% a year; in the last five years, annual growth
accelerated at compounded rate of 17.3%. The sector is characterized by strong
presence of global businesses, intense competition between organized and
unorganized players, well established distribution network and low operational cost.
Availability of key raw materials, cheaper labor costs and presenceacross the entire
value chain gives India a competitive advantage. The success ofany business house
is in the effective utilization of resources which, in turn, is dependent upon the
effective circulation of working capital. The present economy has become
competitive and constrained by the financial imbalance, so it is very important for
any company to maintain sufficient level of working capital for smooth run.
Moreover the economy has faced many challenges like recession and inflation
during different phases of time but managing effective working capital helps to
overcome these challenges. However most of the time in financial decision making
management of working capital has been ignored because it is related with the
financing and investment in short time period. The requirement of working capital
is effected by the nature of the industry as well as the capacity of the firm. The
service industry demands less amount of working capital compared manufacturing
because in case of former ones they do not have to maintain inventory.
Manufacturing units have to keep a sufficient amount of working capital as it is
needed for day to day operations, and at the same time to meet the costs. The
companies that manage the working capital effectively will gain valuable investment
opportunity which adds further profits in its bag. After analyzing the effectiveness
of working capital management, its different components and their impact on
profitability will helps us to the state problem which shall be analyzed in this study.
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1.2 Objective of the study
The objective of preparing this report can be explained under two categories. They
are-
Broad Objective:
The objective of the study is to gain an insight into the concept of working capital
management, how working capital is managed at AVA Cholayil Health Care Pvt.
Limited and how it influences the overall performance of the company.
Specific Objective:
• To examine the relationship between inventory conversion period and profitability
of the FMCG firms.
• To investigate the relationship of Receivable collection period and profitability of
the FMCG firms.
• To investigate the relationship ofcreditors payment period with the profitability of
the FMCG firms.
1.3 Scope of the study
Keeping the magnitude of the work in mind the scope of the study has been
determined. It covers the outset, a description of the role played by the corporate in
improving financial strength of organization. The working capital management may
positively or negatively affect the profitability of the firm. The number of day’s
accounts payable was negatively correlated with a firm's profitability, whereas
number of days accounts receivables and cash conversion period exhibit a positive
relationship with corporate profitability. This study helps to ascertain the impact of
working capital management in the profitability of FMCG industry.
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1.4 Research methodology
1.4.1 Research approach
The present study is desk type research study that is it analyses the data
relating to working capital management of the AVA Cholayil Health Care Pvt.
Limited. The secondary sources of the data include annual reports and audited
financial statements. The data, which are presented in this report, have been taken
from secondary sources.
1.4.2 Sources of data
a) Primary data.
b) Secondary data.
a) Primary data: any information that is collected afresh for the first time
specifically for a study is called Primary data. The Primary data happen
to be original in characters. This is desk type research study using
secondary data but doubts clarification and policies of AVA Cholayil
Health Care Pvt. Limited and like which AVA Health Care Cholayil Pvt.
Limited cropped during the analysis of this were collected from officials
ofAVA Cholayil Health Care Pvt. Limited who are managing the working
capital of AVA Cholayil Health Care Pvt. Limited.
b) Secondary data: information which has already been collected by
somebodyelse or some other agency with definite purposeand which has
already been processed is called Secondary data. Such data are cheaper
and more quickly obtained than the primary data. Company records
annual reports of AVA Cholayil Health Care Pvt. Limited were the major
source of secondary data. Some previous work on working capital
management of AVA Cholayil Health Care Pvt. Limited are taken as
secondary data.
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1.4.3 Research Instrument:
For the present study component of cash conversion cycle (CCC)
have been taken as a measure of working capital and their impact has been checked
on Net Income (NI) which has been taken as a measure of profitability. For the
calculation of cash conversion cycle, inventory conversion period, debtor’s
collection period and creditor’s payment period of AVA Cholayil Health Care Pvt.
Limited are taken.
1.4.4 Research tool
Mathematical, statistical and operational research tools for analysis of
financial data related to working capital management were used in this study. Ratio
analysis, correlation analysis and multiple regression analysis were the major tools
used in the study.
a) Ratio analysis:Ratio analysis is one of the techniques of financial analysis
to evaluate financial condition and performance of business concern.
b) Descriptive analysis: Descriptive statistics are brief descriptive
coefficients that summarize a given data set, which can be either a
representation of the entire population or a sample of it. Descriptive
statistics are broken down into measures of central tendency and measures
of variability, or spread.
c) Correlationanalysis:Correlation is a statistical measure that indicates the
extent to which two or more variables fluctuate together. This study
contains Pearson correlation analysis to define the relationship between
firm’s profitability and Working Capital Management.
1.4.5 Research Period
This study was done during 5th June 2017 to 30th June 2017 and it covers
working capital management of AVA Cholayil Health Care Pvt. Limited for the
period of 2013-14 to 2015-16
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1.5 Limitation
The report faced some problems during its preparation, which has limited the
purpose of the report. The limitations are:
 To maintain the confidentiality of the information data availability is a
big issue.
 The internship has been made for one month duration but it is very
much difficult to set true practical experience with current world
circumstances in this short span of time.
 The analysis is purely mathematical in nature.
 The study is purely based on the data in the form of annual reports.
In spite of all these limitation I have tried to put the best effort as per as
possible.
1.6 Chapter Scheme
This project report is presented in seven chapters.
 The first chapter consists the study which includes statement of the problem,
objectives ofthe study, scopeofthe study, research methodology, limitations
of the study and chapter scheme.
 The second chapter is about the profile of FMCG industry which narrates
Indian FMCG sector, rural market and PEST analysis of FMCG industry.
 The third chapter gives an overview about the profile of AVA Cholayil
Health Care Pvt. Limited which provides history, about the founder, board
members, products offered and financial performance of the company.
 The fourth chapter contains theoretical background and literature review and
it gives an idea about the working capital management.
 The fifth chapter contains the research design used for the project report,
hypothesis for the test result and the model used for research study in the
project report.
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 The sixth chapter presents the data analysis and interpretation of data
collected for the study
 The seventh chapter lists the finding, suggestions and conclusion of the
research.
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CHAPTER- 2
INDUSTRY PROFILE
2.1 Overview
The Indian FMCG sector is the fourth largest in the economy and has a market size
of US$13.1 billion. Well-established distribution networks, as well as intense
competition between the organized and unorganized segments are the characteristics
of this sector. FMCG in India has a strong and competitive MNC presence across
the entire value chain. It has been predicted that the FMCG market will reach to US$
33.4 billion in 2015 from US $ billion 11.6 in 2003.16 Themiddle class and the rural
segments of the Indian population are the most promising market for FMCG, and
give brand makers the opportunity to convert them to branded products. Mostofthe
product categories like jams, toothpaste, skin care, shampoos, etc., in India, have
low per capita consumption as well as low penetration level, but the potential for
growth is huge. The Indian Economyis surging ahead by leaps and bounds, keeping
pace with rapid urbanization, increased literacy levels, and rising per capita income.
The big firms are growing bigger and small-time companies are catching up as well.
The personal care category has the largest number of brands, i.e., 21, inclusive of
Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HUL brands in the
21, aggregating INR 3,799 crore or 54% of the personal care category.
Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal
care category. ITC alone accounts for 60% volume market share and 70% by value
of all filter cigarettes in India.
The foods category in FMCG is gaining popularity with a swing of launches by
HUL, ITC, Godrej, and others. This category has 18 major brands, aggregating INR
4,637 crore. Nestle and Amul slug it out in the powders segment. The food category
has also seen innovations like softies in ice creams, chapattis by HUL, ready to eat
rice byHUL and pizzas byboth GCMMF and GodrejPillsbury. This category seems
to have faster development than the stagnating personal care category. Amul, India's
largest foods company, has a good presencein the food category with its ice-creams,
curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG
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brands, dominates the biscuits category and has launched a series of products at
various prices.
In the household care category (like mosquito repellents), Godrej and Reckitt are
two players. Goodnight from Godrej, is worth above INR 217 crore, followed by
Reckitt's Mortein at INR 149 crore. In the shampoo category, HUL's Clinic and
Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are
also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk.
India’s GDP unlike that of other emerging developing countries has a bigger
consumer percentage than investment. This is because India’s economic growth
model has not followed the traditional export growth model of the other countries in
Asia like China. This makes India more resilient to external shocks like the Lehman
crisis and provides a more domestic orientation to growth. India has oneofthe fastest
growing economics in the world and as the per capita income increase, consumer
companies in India are reaping outsized rewards. India has a competitive consumer
goods market with a number of domestic and international companies competing in
multiple markets and segments. Some of the companies like HLL which is a
subsidiary of the global consumer giant Unilever has becomean Indian company all
but in ownership. Fast Moving Consumer Goods (FMCG) companies are different
from Consumer Durables companies. FMGC companies are what is known as
Consumer Non-Discretionary Group of Companies. These Companies sell products
of everyday use and are recessionproofin the sensethat the products sold byFMCG
Manufacturers can’t be ignored even in times of economic recessions.
Fast Moving Consumer Goods Companies have been expanding rapidly in the
Indian market and are set to grow to the next level as India’s middle class grows
bigger and bigger and the existing middle class becomes richer. India’s FastMoving
Consumer Goods Stocks form a great defensive investment class. They not only
have “defensive” characteristics but also growth as well. India’s FMCG sector is
expected to grow by more than 100% in the next 5-6 years as more and more
consumers move from unorganized 51 part of the industry to the organized industry.
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2.2 Consumer Products –Products
2.2.1 Soaps
The product categories can be classified into three segments; premium (Lux, Dove),
popular (Nirma, Cinthol), and economy (Nirma Bath, Lifebuoy). The price
differential between the premium and economy segments is about 2X. The popular
and economy segments account for about 4/5ths of the entire market for soaps.
Penetration of toilet soaps is high at 88.6%. However per capita consumption levels
remain low India's per capita consumption of soap at 460 Gms per annum is lower
than that of Brazil at 1,100 Gms per annum.
Distribution network
Soaps are available in 5 m retail outlets in India, 3.75 m of which are in the rural
areas. Therefore availability of these products is not a problem. 75% of India's
population is in the rural areas; hence about 50% of the soaps are sold in the rural
markets.
Growth
Rural demand growth is expected to occur mainly with consumers moving up
towards premium products. But in the past, the proportion of premium soaps to
economy soaps has not changed much, in volume terms. This is because as some
consumers move up the value chain with increase in disposable incomes, some
consumers move down looking for cheaper substitutes as prices move up. This has
been the case especially, as growth in soap prices has generally outpaced overall
consumer inflation.
2.2.2 Detergents
The Indian fabric wash market consists of synthetic detergents (comprising bars,
powder and liquids) and oil-based laundry soaps. Although the per capita
consumption of detergents in India (2.7 kg pa) is comparable to some countries like
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Indonesia, China and Thailand (around 2 kg pa), it is lower than in others such as
Malaysia, Philippines (3.7 kg) and the USA (10 kg). The Indian detergent market is
expected to grow at 7-9% pa in volume terms. The synthetic detergent market can
be classified into premium (Surf, Ariel), mid-price (Rin, Wheel) and popular
segments (Nirma), which account for 15%, 40% and 45% of the total market,
respectively. The productcategory is fairly mature and is dominated bytwo players,
HUL and Nirma. Nirma created a revolution in the market by pioneering the concept
of low-cost detergents.
Growth
High consumer awareness and penetration levels will enable the market to grow at
an average 8-10% per annum with slightly higher growth in the rural areas. Higher
penetration stems from popularity oflow-cost detergents. Hence, besides increase in
per capita consumption, there is tremendous scopeformovement up the value chain.
HUL, Nirma and P&G are the major players in the market with 40%, 30% and 12%
share, respectively. While HUL dominates the premium segment, Nirma is the leader
in the popular segment.
2.2.3 Personal Care Products
The annual value of personal products business in India, including oral care, hair
cares and skin cares products, is currently estimated to be Rs 54.6 bn. Just five years
ago personalproducts were considered to be luxury items and attracted a high excise
duty of120% (exceptthe oral care category). Gradual taxation reforms in India since
1991 have lowered the excise duty rates to a reasonable 30%, making these products
more affordable. At the same time, rising income levels have led to rising aspirations
on the part on Indian consumers. These factors have been the catalysts in the
exponential growth rate in the personal product category over the past five years.
Personal care products are further divided into 6 categories:
 Oral care
 Hair care - oils
 Hair care - shampoos
 Skin care
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 Cosmetics
 Feminine Hygiene
2.3 Rural FMCG Market of India – Overview
The Rural FMCG Market ofIndia is onthe verge of registering substantial expansion
across the country. The Indian Rural FMCG market is mostly unorganized and it is
generally dominated by small time retailers. The organized FMCG market is only
confined to the urban areas of India. Rural India mostly depends on agriculture,
directly or indirectly for livelihood. Further, almost 70% of Indian population lives
in rural India in around 6,00,000 villages.
Rural India offers tremendous growth prospects forthe FMCG industry. Facilitation
ofbetter rural infrastructure like roads, telecommunication, electricity, supply chain,
and transportation would propel the growth of Rural FMCG Market of India.
Further, very low per capita consumption of FMCG products also provide
tremendous opportunity for the growth of Rural FMCG markets in India.
The FMCG sector, which offers tremendous growth prospects are Food and
beverage sector, health care and personal care. Presently, rural India accounts for
34% of total FMCG consumption, but it accounts for more than 40% consumption
in major FMCG categories like as personal care, hot beverages, and fabric care.
The government of India new road map for the development of Indian agricultural
sector will facilitate growth of rural FMCG industry. The Government of India's
latest decision to waive-off loan (Union Budget 2008- 2009) to the tune of ` 60,000
crores would help better crop production in India, which in turn would definitely
help the Indian Rural FMCG market grow to new heights.
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Fig-1: Rural FMCG market trend
2.4 Road Ahead
FMCG brands would need to focus on R&D and innovation as a means of growth.
Companies that continue to do well would be the ones that have a culture that
promotes using customer insights to create either the next generation of products or
in some cases, new product categories.
One area that we see global and local FMCG brands investing more in is health and
wellness. Health and wellness is a mega trend shaping consumer preferences and
shoppinghabits and FMCG brands are listening. Leading global and Indian food and
beverage brands have embraced this trend and are focused oncreating new emerging
brands in health and wellness.
According to the PwC-FICCIreportWinds of change, 2013: the wellness consumer,
nutrition foods, beverages and supplements comprise INR 145 billion to 150 billion
market in India, is growing at a CAGR of 10 to 12%.
2.5 Reaching Out to Consumers
The consumer reach is changing too. Paid advertising is being replaced by below the
line approaches which allow for direct contact with the public. Companies are also
9 10.4 12.3 12.1 14.8
18.92
29.4
100
2009 2010 2011 2012 2013 2015 2016 2025E
Rural FMCG market(US$ billion)
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beginning to use the emerging technologies to capture essential data and new
analytical models are developed to measure ROI.
It’s a move that is transforming brand relationships and customer experiences of
advertising across the sector. Digital marketing platforms are being used to make
sure products capturepeople’s imagination. As Chris Lowe, chief marketing officer
for Coca-Colasays, to be effective in today’s world. “Youhave to focus onthe basic
relationship with the consumer”. This kind of thinking means that blogs, social
media and other digital technologies are being used to market products in a whole
new way. The FMCG companies have to react very fast to survive, as there is no
room for complacency. Increasing brand awareness through social media is the key
strategy for any savvy FMCG firm.
These changes all make for a very exciting time in the FMCG/CPG industry and the
ideal time to get involved. With strong cashflows, higher return oncapital employed
and steady growth already clear to see, the prospects for the future look good.
FMCG segment is the fourth largest sector in the Indian economy. The market size
of FMCG in India is estimated to grow from US$30 billion in 2011 to US$74 billion
in 2018.
Food products are the leading segment, accounting for 43 percent of the overall
market. Personal care (22 percent) and fabrics care (12 percent) come next in terms
ofmarket share. Growing awareness, easier access and changing lifestyles have been
the key growth drivers for the sector.
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2.6 PEST Analysis of FMCG Industry
Political (incl. Legal) Economic Social Technological
Environmental regulations
and protection
Economic growth Income distribution
Government research
spending
Tax policies
Interest rates &
monetary policies
Demographics,
Population growth
rates, Age distribution
Industry focus on
technological effort
International trade
regulations and restrictions
Government
spending
Labor / social mobility
New inventions and
development
Contract enforcement law
Consumer protection
Unemployment
policy
Lifestyle changes
Rate of technology
transfer
Employment laws Taxation
Work/career and leisure
attitudes
Entrepreneurial spirit
Life cycle and speed of
technological
obsolescence
Government organization /
attitude
Exchange rates Education Energy use and costs
Competition regulation Inflation rates Fashion, hypes
(Changes in)
Information
Technology
Political Stability
Stage of the business
cycle
Health consciousness &
welfare, feelings on
safety
(Changes in) Internet
Safety regulations
Consumer
confidence
Living conditions
(Changes in) Mobile
Technology
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CHAPTER-3
COMPANY PROFILE
3.1 Company Overview
AVA Care is an illustration and esteemed Ayurvedic group from Kerala, which
has a deep history in providing holistic health care. AVA care has the pride of
manufacturing the largest selling branded ayurvedic soap ‘MEDIMIX’. Dr.
V.P Sidhan is the founder of the MEDIMIX which is manufactured using a
wholly developed process with manual equipment’s. The corporate office of
medimix is situated in Chennai.
The company has recently listed in the Limca Book of Records. It’s for 2015-
16 stood atINR 100 croreand it has a four percentmarket share in SouthIndia.
3.2 History
The origin of AVA Cholayil can be traced to the kitchen of Dr. V.P Sidhan, a
physician who worked in the Indian Railways and belonged to a family of
Ayurveda practitioners in Trissur, Kerala. He used oils which his ancestors had
used to treat skin diseases, to produce soap and launched Medimix in 1969.
He kept the process handmade a there was very little money to invest. The
Cholayil Group which he setup, split amicably by the turn ofthe century. AVA
Cholayil is headed by the founder’s son-in law Dr. Anoop and handles the
southern market, while the rest of the Indian market is handled by Dr. Sidhan’s
son V.S Pradeep. Both the groups share the Medimix brand, but Cholayil has
mechanized some parts of the production process.
Medimix was initially sold as skin-care soaps. Its transformation as a consumer
product began in early 1980s when Dr. A.V Anoop entered in the business.
After the brand’s transformation as an FMCG product they expanded by
adding more factories but retained the hand making process. The fact that
handmade soaps had nil excise duty compared to 12.36% for soaps
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manufactured using the mechanized process was amotivation (this benefit was
removed in 2005).
3.3 About the Founder
AVA products and services is promoted by Dr. A. V. Anoop, who is also the
managing director of AVA CHOLAYIL HEALTH CARE PVT. LTD. DR.
A.V Anoop is a well-known personality in the field of Ayurveda with over 29
years of experience in soaps, Pharmaceuticals. Cosmetics and food industry.
Dr. A.V Anoop is an industrialist, property Developer, film producer, social
worker, organizer and Amateur Drama Artist. His tremendous passion for
business expansion has led to formation of AVA products and services in
March 2007 with the idea to deal in FMCG and other health.
The focus of AVAPS is to provide products and services which benefit the
human kind with the knowledge and time-tested procedures assimilated from
the traditional system of Ayurveda, Naturopathy and Yoga which has been
followed from time immemorial.
The handmade soap Medimix classic, Medimix transparent, Medimix sandal
and Medimix Hand wash are being marketed by AVAPS in the southern states
of India namely Andhra Pradesh, Karnataka, Tamil Nadu and Kerala.
Discover freedom from pimples, body odor and skin infections, with the
goodness ofthe largest selling Ayurvedic soap, Dry skin soap and Acne soap.
A traditionally handmade soap, Ayurvedic soap, Dry skin soap and Acne soap
with a time tested and unique formulation that combines the goodness of 18
herbs, Medimix is clinically proven to act effectively on many kinds of skin
problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne.
Discover freedom from pimples, body odor and skin infections… with
goodness ofthe world’s largest selling Ayurvedic soap, Dry sin soap and acne
soap.
A traditionally handmade soap, Ayurvedic soap, Dry sin soap and Acne soap
with a time tested and unique formulation that combines the goodness of 18
herbs, Medimix is clinically proven to act effectively on many kinds of skin
problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne.
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3.4 Board of Directors
Dr. A.V.Anoop
Managing Director- AVA Cholayil Health Care Pvt. Limited
Mrs. Priya Anoop
Director, Specialist in culinary arts and development of recipes for Sanjeevanam
Restaurant.
Mr. Vivek Venugopal
Director (Business Development), having a Master’s in Business Administration
with varied Business interests and experience.
Mrs. Lanchana Vivek
Director, having post-graduation in M.sc Management from UK and Bachelor’s
degree in law. Her key focus is in developing Sanjeevanam Ayurvedic Treatment
Center and Restaurants, Compliance of all legal/ statutory related matter.
3.5 Company Vision
“CREATIVE SOLUTIONS ACTIONABLE RECCOMENDATION”
The challenges faced by today’s health care industry requires a global understanding
integrated with strong local knowledge. We want our clients invent tomorrow health
care providing fresh ideas, creative solutions and actionable recommendations. Our
success is due to the quality of our team in key locations around the world with this
global vision when local advantage and our selective partnership with companies
sharing our views.
3.6 Company Mission
“PROVIDING EMERGING IN SIGHT FOR TOMMOROW
HEALTH CARE”
Medimix is dedicated to excellence in international health care marketing research
and service. Our mission is to provide;
 Strategies precise and accurate information at or client finger tips with the
quickest turnaround time possible
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 Quality control by the client at every step to help you make complex business
decision in total confidence
 Market intelligence to give you a better understanding ofmarket opportunities
and help you to provide the best products and services around the globe.
3.7 AVA Group
 AVA Cholayil Health Care Pvt. Ltd - Manufacturers of Medimix soap and
hand wash
 AVA Products & Services – Marketers of Medimix soap and Hand wash
 AVA Properties Pvt. Ltd – Real estate business
 AVA Productions – Movie productions
 AVA Charitable Trust – Trust to help deserved
 Sanjeevanam – Vegetarian restaurant
 Kaythra
 Melam Masalas
 MAAC Power
3.8 Products and Services Offering
AVA Group is a diversified conglomerate with interests in Fast Moving Consumer
Goods (FMCG), Health Care, Real Estate and Entertainment. Over the last many
decades, the group has established itself as a leader in each of the sectors it operates
in. Products and Services offered by AVA group of company are:
3.8.1 Medimix
Launched in 1969, Medimix is the flagship brand of the AVA Group. The soap is
hand-made and has a unique 18 herbs Ayurvedic formulation. Over the years
Medimix has become one of the most recognized and trusted brands of India, in a
survey conducted by Economic Times in 2013, it was voted 13th on the list of
Personal Care brands and 56th on the list of ‘Most Trusted Brands of India’ .
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Medimix Products:
Product
1. Soaps  Medimix Classic Soap
 Medimix Sandal Soap
 Medimix Clear Glycerin- Deep Hydration
 Medimix Clear Glycerin- Oil Balance Soap
 Medimix Clear Glycerin- Natural Toning Soap
 Medimix Transparent Soap.
2. Hand Wash  Medimix Herbal Hand wash
 Medimix Sandal Hand wash
3. Face Wash  Medimix Clear Glycerin Face wash- Oil Balance
 Medimix Clear Glycerin Face wash- Natural
Toning
 Medimix Clear Glycerin Face wash- Deep
Hydration
Table-1: Products under Medimix brand
3.8.2 Melam
Brand Melam has been a house hold favorite for decades. Its recent takeover by the
diversified AVA group has added further strength to this brand and is sure to delight
the consumers. Over the years Melam has carved a respected name for itself owing
to its quality products and authentic recipes. AVA group has intensified these efforts
along with the setup of modern plant, strict QC norms and checks and bygoing deep
in to the roots of Kerala to get authentic and some possibly forgotten recipes.
3.8.3 Kaytra
Amibika Pillai the renowned hairstylist and makeup artist in the fashion industry
with her knowhow of the industry has joined hands with AVA group which has the
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ayurvedic expertise supported by full-fledged R & D team of AVA to market
products in haircare & skincare vertical under the brand name “Kaytra”.
Products under Kaytra:
 KAYTRA SHAMPOO FOR FRIZZY HAIR
 KAYTRA SHAMPOO FOR TREATED HAIR
 KAYTRA REVITALISING HAIR CREAM
 KAYTRA HAIR OIL
 KAYTRA HAIR PACK
3.8.4 Sanjeevanam
Sanjeevanam is a holistic health center where you will find a confluence of natural
solutions for all health issues. A complete health package of treatment, beauty, diet
and food have been specially formulated in the four divisions. Ayurvedic Therapy
center, Natural Beauty center, Vegetarian Restaurant and Natural store.
Good health is ensured naturally through proper Ayurvedic treatment, beautified
through our Beauty center, replenished through our restaurant and complemented by
our natural store. The Sanjeevanam concept has been born out of a wealth of
understanding natural living and healing using only natural solutions. The main idea
is to rejuvenate the body physically, mentally and spiritually for better living.
Sanjeevanam is yet another feather in the cap of AVA CARE group. Sanjeevanam
represents total health by integrating the principles of Ayurveda, Naturopathy and
Yoga. Sanjeevanam is ISO 9001:2008 certified and commenced operations in July
2004.
Health and intellect are the two blessings of life. Sanjeevanam seamlessly blends
conventional and modern Ayurvedic medicinal values based on the above
inspirational principle to provide a healthy body, mind and soul to mankind.
Sanjeevanam comprises of;
 Treatment centers.
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 Hair and face care units.
 Vegetarian restaurant.
 Health products counters.
3.9 Factories
 Thirumazhisai
 Madhavaram
 Pondicherry
 Bangalore
 Villupuram (Third partyunit)
 Thandalacherry (Water Plant)
3.10 Major Competitors
 Mysore sandal soap
 Hammam
 Dettol
 Margo
 Chandrika
 Manjal
 Pears
3.11 Office Timing
 9.30 AM to 5.30 PM with Lunch break for an hour (1.00 PM to 2.00 PM)
 Employees should be reporting to duty on or before 9.30 AM
 9.30 Am – 9.35 AM is considered as a grace period
 9.35 AM – 9.45 AM will be treated as late. Only 3 late is permissible per
month above which the casual leave (half day) eligibility may be deducted.
 9.45 AM – 10.30 AM will be treated as permission and only one permissible
per month above which casual day (half day) eligibility may deducted.
 Information regarding late/permission/leave to be passed on to the concerned
head pf the department and Time office/Front office.
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3.12 Leave Eligibility and Procedure
 Fornew joiner’s onecasual leave & onesick leave eligibility per month. After
completing one year, eligible for one earned leave per month additionally.
 All leave will be informed in advance and prior sanction is must for all from
their HOD in the leave card provided.
 Leave card will be provided on the date of joining by times office/front office
and the same should be submitted to times officer after obtaining the HOD’S
consent.
 In the case emergency leave the information should be passed to the HOD &
Time office/Front office.
3.13 Travel Policy
 Employees who are required to outstations for official duty shall be eligible
for travel expenses as appropriate to the employee grade more details of the
travel policy framed from time to time which will be provided at the time of
joining.
 Ticket booking is done by admin department for all officials’ travels which
should be duly authorized by the head of the department.
 The request for ticket booking must initiated well in advance
3.14 Reimbursement Policy
 Reimbursement such as conveyance, medical & telephone will be credited in
the reimbursement account opened with the Dhanalakshmi Bank.
 Reimbursement amount will be credited during the second week of the
subsequent month.
 The bill for the reimbursement must be submitted to Admin department by
15th march for the whole year.
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3.15 Functions of head office AVA Cholayil Health Care Pvt.
Limited
 Marketing and Sales
 Finance and Accounts
 Production, Operations and Purchase
 Information Technology
 Legal Administration
 HR
 Media
3.16 Departments in AVA Cholayil Health Care Pvt. Limited
 Purchase Department
 Production Department
 HR & Admin Department
 Finance & Accounts Department
 Marketing Department
 IT Department
 Legal Department
 Research Department
 Maintenance Department
 Development Department
3.17 Financial Performance
3.17.1 TotalSales
Year Total Sales ( INR in Lakhs)
2014 10324.59
2015 12622.96
2016 13521.45
Table:2 Total Sales
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Fig:2 Total Sales
3.17.2 Financial Statement
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Balance Sheet as at 31st March 2015
Particulars As at
31/03/2015
As at
31/03/2014
Rupees in Lakhs Rupees in Lakhs
1. EQUITY AND LIABILITIES
(1) Shareholder’s Funds
(a) Share Capital
(b) Reserves and Surplus
(2) Share application money pending allotment
(3) Non-Current Liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other long term liabilities
(d) Long term provisions
(4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
1. ASSETS
(1) Non-current assets
(a) Fixed assets
i. Tangible assets
ii. Intangible assets
iii. Capital work-in-progress
iv. Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (Net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and Cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total
1.00
2869.33
78.51
-
-
89.13
244.57
775.51
251.86
1122.40
5432.30
888.20
6.90
99.37
-
18.07
86.81
88.47
3.96
558.52
723.23
37.64
1627.22
104.17
1189.76
5432.30
1.00
1899.19
148.46
-
-
130.89
320.48
587.54
176.08
614.08
3877.72
887.42
8.37
64.02
-
15.57
60.78
346.43
2.12
237.35
811.75
6.58
797.20
135.56
504.56
3877.72
Table 3: Balance Sheet
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Profit and Loss statement for the year ended 31st March 2015
Particulars For the year ended
31/03/2015
For the year
ended
31/03/2014
Rupees in Lakhs Rupees in Lakhs
i. Revenue from operations (Gross)
Less: Excise Duty
Revenue from operations (Net)
ii. Other Income
iii. Total Revenue (i+ii)
iv. Expenses:
Cost of material consumed
Purchase of Stock-in-Trade
Changes in inventories of finished goods, work-
in-progress and stock in trade
Employee benefit expense
Financial costs
Depreciation and amortization expenses
Other expenses
Total Expenses
v. Profit before exceptional and extraordinary items
and tax (iii-iv)
vi. Exceptional Items
vii. Profit before extraordinary items and tax ( v-vi)
viii. Extra ordinary items
ix. Profit before tax (vii-viii)
x. Tax expenses:
(1) Current tax
(2) Deferred tax
xi. Profit/(Loss) from the period from continuing
operations
xii. Profit /(Loss) from discontinuing operations
xiii. Tax expenses of discontinuing operations
xiv. Profit / (Loss)from discontinuing operations ( xii-
xiii)
xv. Profit / ((Loss) for the period (xi + xiv)
xvi. Earning per equity share: (Rs)
(1) Basic
(2) Diluted
14659.40
2036.44
12622.96
218.15
12841.11
6267.60
236.33
(2.20)
1768.18
62.30
122.96
2931.49
11386.66
1454.45
-
1454.45
-
1454.45
495.00
(20.82)
980.26
-
-
-
980.26
9802.61
9802.61
11985.16
1660.58
10324.59
166.23
10490.82
5152.43
147.88
(12.96)
1856.47
71.30
80.09
2664.74
9959.96
530.85
258.87
789.72
-
789.72
261.78
(24.24)
552.18
-
-
-
552.18
5521.81
5521.81
Table:4 Profit and Loss Statement
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CHAPTER-4
LITERATURE REVIEW
4.1 Theoretical Concept
4.1.1 Working Capital
Working capital may be regarded as lifeblood of a business. It is defined as the
amount of money a company has on hand, or will have, in a given year. Working
capital is calculated by subtracting current liabilities from current assets. That is,
one takes the value of all debts and obligations for the current year and subtracts
that from the value of all cash and assets that might reasonably be converted into
cash in the current year. This is a good measure of the short and medium-term
financial health of a company, and may indicate by how much it can expand its
operations without resorting to borrowing or another capital raising tactic. Working
capital is also called operating assets or net current assets.
A study of working capital is of major importance to internal and external analysis
because of its close relationship with the current day to day operations of a
business.
4.1.2 Conceptof working capital
There are two type of working capital, they are
a) Gross working capital
b) Net working capital
a) Gross working capital:
Gross Working Capital is the general conceptwhich determines the
working capital concept. Thus, the gross working capital is the capital
invested in total current assets of the business concern. Gross Working
Capital is simply called as the total current assets of the concern.
Gross working capital = Current Assets
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b) Net working capital:
Net Working Capital is the specific concept, which, considers both
current assets and current liability of the concern. Net Working Capital is the
excess of current assets over the current liability of the concern during a
particular period. If the current assets exceed the current liabilities it is said to
be positive working capital; it is reverse, it is said to be Negative working
capital.
Net working capital = Current asset – Current liabilities
4.1.3 The Need or Objective of Working Capital
Working Capital is an essential part ofthe business concern. Every business concern
must maintain certain amount of Working Capital for their day-to-day requirements
and meet the short-term obligations.
Working Capital is needed for the following purposes.
 Purchase of raw materials and spares:
The basic part of manufacturing process is, raw materials. It should purchase
frequently according to the needs of the business concern. Hence, every
business concern maintains certain amount as Working Capital to purchase
raw materials, components, spares, etc.
 Payment of wages and salary:
The next part of Working Capital is payment of wages and salaries to labor
and employees. Periodical payment facilities make employees perfect in their
work. So a business concern maintains adequate the amount of working
capital to make the payment of wages and salaries.
 Day-to-day expenses:
A business concern has to meet various expenditures regarding the operations
at daily basis like fuel, power, office expenses, etc.
 Provide credit obligations:
A business concernresponsible to provide credit facilities to the customerand
meet the short-term obligation. So the concern must provide adequate
Working Capital.
 Optimal return on current asset investment:
The return on the investment made in current assets should be more than the
weighted average cost of capital so as to ensure wealth maximization of the
owners. In other words, the rate of return earned due to investment in current
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assets should be more than the rate of interest or cost of capital used for
financing the current assets.
4.1.4 Adequacy, Inadequacy and Excessive Working Capital
Adequacy of working capital:
Working capital should be adequate for the following reasons:
 It protects a business from the adverse effect of shrinkage in the value of
current assets.
 Possible to pay the entire current obligation promptly and take advantage of
cash discount.
 Permits the carrying of inventories at a level that would enable a business to
serve satisfactorily the need of its customers.
 Enable a company to operate its business more efficiently because there is no
delay in obtaining material etc. because of credit difficulties.
Inadequacy of working capital:
 The credit worthiness of the company is likely to be put at risk becauseof the
lack of liquidity.
 The company may not be able to take advantage of profitability business
opportunity.
 The modernization of equipment and even routine repairs and maintenance
facilities may be difficult to administer.
 The company cannot afford to increase its cash sale and many have to restrict
its activities to credit sale only.
 The companycannot afford to increase its cashsales and many have to restrict
its activities to credit sales only.
Excessive working capital:
Excessive working capital rise to following problems.
High liquidity may reduce a company to undertaken greater production which
may not have a matching demand. It may find itself in an embracing position
unless its marketing policies are properly adjusted to boostup the market for its
good.
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 The company may invest heavily in its equipment which may be justified
by actual sales or production. This may provide a fertile ground for later
over- capitalization.
 The company may enjoy high liquidity and at the same time, suffer from
low profitability.
 The company may be tempted to overtrade and lose heavily.
 The companykeeps very big inventories and tip up its funds unnecessarily.
4.1.5 Kinds of Working Capital
Working capital can be classified into three important types on the basis of time.
a) Permanent Working Capital:
It is also known as Fixed Working Capital. It is the capital; the business
concernmust maintain certain amount ofcapital at minimum level at all times.
The level of Permanent Capital depends upon the nature of the business.
Permanent or Fixed Working Capital will not change irrespective of time or
volume of sales.
b) Temporary Working Capital:
It is also known as variable working capital. It is the amount of capital which
is required to meet the Seasonal demands and some special purposes. It can
be further classified into Seasonal Working Capital and Special Working
Capital. The capital required to meet the seasonal needs of the business
concern is called as Seasonal Working Capital. The capital required to meet
the special exigencies such as launching of extensive marketing campaigns
for conducting research, etc.
c) Semi Variable Working Capital:
Certain amount of Working Capital is in the field level up to a certain stage
and after that it will increase depending upon the change of sales or time.
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Fig:3 Kinds of WC
4.1.6 Factors Determining Working Capital:
Working Capital requirements depends upon various factors. There are no set of
rules or formula to determine the Working Capital needs of the business concern.
The following are the major factors which are determining the Working Capital
requirements.
 Nature of business:
Working Capital of the business concerns largely depend upon the nature of
the business. If the business concerns follow rigid credit policy and sell goods
only for cash, they can maintain lesser amount of Working Capital. A
transport company maintains lesser amount of Working Capital while a
construction company maintains larger amount of Working Capital.
 Production cycle:
Amount ofWorking Capital depends upon the length of the productioncycle.
If the productioncycle length is small, they need to maintain lesser amount of
Working Capital. If it is not, they have to maintain large amount of Working
Capital.
 Business cycle:
Business fluctuations lead to cyclical and seasonal changes in the business
condition and it will affect the requirements of the Working Capital. In the
booming conditions, the Working Capital requirement is larger and in the
depression condition, requirement of Working Capital will reduce. Better
business results lead to increase the Working Capital requirements.
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 Production policy:
It is also one of the factors which affects the Working Capital requirement of
the business concern. If the company maintains the continues production
policy, there is a need of regular Working Capital. If the productionpolicy of
the company depends upon the situation or conditions, Working Capital
requirement will depend upon the conditions laid down by the company.
 Credit policy:
Credit policy of sales and purchase also affect the Working Capital
requirements of the business concern. If the company maintains liberal credit
policy to collect the payments from its customers, they have to maintain more
Working Capital. If the company pays the dues on the last date it will create
the cash maintenance in hand and bank.
 Growth and expansion:
During the growth and expansion of the business concern, Working Capital
requirements are higher, because it needs some additional Working Capital
and incurs some extra expenses at the initial stages.
 Availability of raw materials:
Major part of the Working Capital requirements are largely depend on the
availability of raw materials. Raw materials are the basic components of the
production process. If the raw material is not readily available, it leads to
production stoppage. So, the concern must maintain adequate raw material;
for that purpose, they have to spend some amount of Working Capital. 8.
Earning capacity: If the business concern consists of high level of earning
capacity, they can generate more Working Capital, with the help of cashfrom
operation. Earning capacity is also one of the factors which determines the
Working Capital requirements of the business concern.
4.1.7 Approaches of Financing Working Capital
Determining the finance mix is an important part of working capital management.
Under this decision, the relationship among risk, return and liquidity are measured
and also which type of financing is suitable to meet the Working Capital
requirements of the business concern. There are three basic approaches for
determining an appropriate Working Capital finance mix.
a) Hedging or matching approach
b) Conservative approach
c) Aggressive approach
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a) Hedging or matching approach:
Hedging approach is also known as matching approach. Under this
approach, the business concern can adopt a financial plan which matches
the expected life of assets with the expected life of the sources of funds
raised to finance assets. When the business follows matching approach,
long-term finance shall be used to fixed assets and permanent current
assets and short-term financing to finance temporary or variable assets.
Fig:4 Financing under Matching Approach
b) Conservative Approach:
Under this approach, the entire estimated finance in current assets should
be financed from long-term sources and the short-term sources should be
used only for emergency requirements. This approach is called as “Low
Profit – Low Risk” concept.
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Fig:5 Conservative Approach
c) Aggressive Approach:
Under this approach, the entire estimated requirement of current assets
should be financed from short-term sources and even a part of fixed assets
financing be financed from short- term sources. This approach makes the
finance mix more risky, less costly and more profitable.
Fig:6 Aggressive Approach
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4.1.8 Sources of Working Capital
The two segments ofworking capital viz., regular orfixed or permanent and variable
are financed by the long-term and the short-term sources of funds respectively. The
main sources of long-term funds are shares, debentures, term- loans, retained
earnings etc.
The sources of short-term funds used for financing variable part of working capital
mainly include the following:
1. Loans from commercial banks
2. Public deposits
3. Trade credit
4. Factoring
5. Discounting bills of exchange
6. Bank overdraft and cash credit
7. Advances from customers
8. Accrual accounts
 Loans from Commercial Banks:
Small-scale enterprises can raise loans from the commercial banks with or without
security. This method of financing does not require any legal formality except that
of creating a mortgage on the assets. Loan can be paid in lump sum or in parts. The
short-term loans can also be obtained from banks on the personal security of the
directors of a country.
Such loans are known as clean advances. Bank finance is made available to small-
scale enterprises at concessional rate of interest. Hence, it is generally a cheaper
source of financing working capital requirements of enterprise. However, this
method of raising funds for working capital is a time-consuming process.
 Public Deposits:
Often companies find it easy and convenient to raise short- term funds by inviting
shareholders, employees and the general public to deposit their savings with the
company. It is a simple method of raising funds from public for which the company
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has only to advertise and inform the public that it is authorized by the Companies
Act 1956, to accept public deposits.
Public deposits can be invited by offering a higher rate of interest than the interest
allowed on bank deposits. However, the companies can raise funds through public
deposits subject to a maximum of 25% of their paid up capital and free reserves.
 Trade Credit:
Just as the companies sell goods oncredit, they also buy raw materials, components
and other goods on credit from their suppliers. Thus, outstanding amounts payable
to the suppliers i.e., trade creditors for credit purchases are regarded as sources of
finance. Generally, suppliers grant credit to their clients fora period of 3 to 6 months.
Thus, they provide, in a way, short- term finance to the purchasing company. As a
matter of fact, availability of this type of finance largely depends upon the volume
of business. More the volume of business more will be the availability of this type
of finance and vice versa.
 Factoring:
Factoring is a financial service designed to help firms in managing their bookdebts
and receivables in a better manner. The book debts and receivables are assigned to
a bank called the 'factor' and cashis realized in advancefrom the bank. Forrendering
these services, the fee or commission charged is usually a percentage of the value of
the book debts/receivables factored.
This is a method of raising short-term capital and known as 'factoring'. On the one
hand, it helps the supplier companies to secure finance against their bookdebts and
receivables, and on the other, it also helps in saving the effort of collecting the book
debts.
 Discounting Bills of Exchange:
When goods are sold on credit, bills of exchange are generally drawn for acceptance
by the buyers of goods. The bills are generally drawn for a period of 3 to 6 months.
In practice, the writer of the bill, instead of holding the bill till the date of maturity,
prefers to discount them with commercial banks on payment of a charge known as
discount.
The term 'discounting of bills' is used in case of time bills whereas the term,
'purchasing of bills' is used in respect of demand bills. The rate of discount to be
charged by the bank is prescribed by the Reserve Bank of India (RBI) from time to
time. It generally amounts to the interest for the period from the date of discounting
to the date of maturity of bills.
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If a bill is dishonored on maturity, the bank returns the dishonored bill to the
companywho then becomes liable to pay the amount to the bank. The costofraising
finance by this method is the amount of discount charged by the bank. This method
is widely used by companies for raising short-term finance.
 Bank Overdraft and Cash Credit:
Overdraft is a facility extended by the banks to their current account holders for a
short-period generally a week. A current accountholder is allowed to withdraw from
its current deposit account up to a certain limit over the balance with the bank. The
interest is charged only on the amount actually overdrawn. The overdraft facility is
also granted against securities.
Cash credit is an arrangement whereby the commercial banks allow borrowing
money up to a specified-limit known as 'cashcredit limit.' The cash credit facility is
allowed against the security. The cash credit limit can be revised from time to time
according to the value of securities. The money so drawn can be repaid as and when
possible.
The interest is charged on the actual amount drawn during the period rather on limit
sanctioned. The rate of interest charged onboth overdraft and cashcredit is relatively
higher than the rate of interest given on bank deposits.
 Advances from Customers:
One way of raising funds for short-term requirement is to demand for advance from
one's own customers. Examples of advances from the customers are advance paid at
the time of booking a car, a telephone connection, a flat, etc. This has become an
increasingly popular source of short-term finance among the small business
enterprises mainly due to two reasons.
 Accrual Accounts:
Generally, there is a certain amount of time gap between incomes is earned and is
actually received or expenditure becomes due and is actually paid. Salaries, wages
and taxes, for example, become due at the end of the month but are usually paid in
the first week of the next month. Thus, the outstanding salaries and wages as
expenses for a week help the enterprise in meeting their working capital
requirements. This source of raising funds does not involve any cost.
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4.1.9 Estimation of Working Capital
Working Capital requirement depends upon number of factors, which are already
discussed in the previous parts. Now the discussion is on how to calculate the
Working Capital needs of the business concern. It may also depend upon various
factors but some of the common methods are used to estimate the Working Capital.
 Estimation of components of working capital method:
Working capital consists of various current assets and current liabilities.
Hence, we have to estimate how much current assets as inventories required
and how much cash required to meet the short term obligations. Finance
Manager first estimates the assets and required Working Capital for a
particular period.
 Percent of sales method:
Based on the past experience between Sales and Working Capital
requirements, a ratio can be determined for estimating the Working Capital
requirement in future. It is the simple and tradition method to estimate the
Working Capital requirements. Under this method, first we have to find out
the sales to Working Capital ratio and based on that we have to estimate
Working Capital requirements. This method also expresses the relationship
between the Sales and Working Capital.
 Operating cycle:
Working Capital requirements depend upon the operating cycle of the
business. The operating cycle begins with the acquisition of raw material and
ends with the collection of receivables.
Operating cycle consists of the following important stages:
1. Raw Material and Storage Stage, (R)
2. Work in Process Stage, (W)
3. Finished Goods Stage, (F)
4. Debtors Collection Stage, (D)
5. Creditors Payment Period Stage, (C)
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4.2 Literature Review
Many authors have analysed working capital management fromdifferent perspective
in different economic arena, some of which are found very interesting and useful for
my present study. The crux of those literatures is mentioned below:
Nunn deal with strategic determinants ofworking capital on a productline basis and
examined why firms have different levels ofworking capital. He used factoranalysis
to test 166 variables against the working capital policies of over 1700 businesses or
product lines from 1971 to 1978. The study showed that small batch production,
order backlog, capital intensity and relative breadth of product line were positively
correlated to working capital. On the other hand, continuous process production,
capacity utilization and made to order products were negatively associated with
working capital levels. He also found that working capital divided by sales are
positively correlated to industry concentration. Gupta and Huefer, in the year 1972
examined the differences in financial ratio between industries and found that
differences exist between ratio means among industries. Frecka and Lee (1983),
focused an area of research on the issue of using regression analysis verses financial
ratios for analysis and prediction,
Filbeck and Krueger (2005) discover that significant differences exist between
industries in working capital measures across time. In addition, they discovered that
these measures for working capital change significantly within industries across
time. Maynard Rafuse, (1993) proposed that improvement of working capital by
delaying payment to creditors is an inefficient and ultimately damaging practice,
both to its practitioners and to the economy as a whole. Stock reduction strategies,
drawing on some of the techniques of “lean production” are far more effective, and
the article proposes that those seeking concentrated working capital reduction
strategies should focus on stock reduction. The author’s experience says that a good
proportionofthe finance managers will take the view that these arguments “are good
in theory, but not in the real world”. In the event, when cash flow pressures arise,
suppliers (and even customers)are invariably the first to feel the draught. Apart from
being ethically questionable, this reflects dangerous short-termism.
Deloof (2003) investigated the relationship between working capital management
and corporate profitability for a sample of 1,009 large Belgian non-financial firms
for the 1992-1996 periods. Theresult from analysis showed that there was a negative
correlation between profitability that was measured by gross operating income and
cash conversion cycle as well number of day’s accounts receivable and inventories.
He suggested that managers can increase corporate profitability by reducing the
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number of days of accounts receivable and inventories. Singh and Pandey (2008)
studied the impact of working capital components on profitability of Hindalco
Industries Limited in India for period from 1990 to 2007. Results of the study
showed that current ratio, liquid ratio, receivables turnover ratio and working capital
to total assets ratio had statistically significant impact on the profitability of Hindalco
Industries Limited. Lazaridis and Tryfonidis (2006) have investigated relationship
between working capital management and corporateprofitability of listed company
in the Athens Stock Exchange. They used a sample of 131 listed companies for
period of2001-2004 to examine this relationship. The result from regression analysis
indicated that there was a statistical significance between profitability, measured
through gross operating profit, and the cash conversion cycle. From those results,
they claimed that the managers could create value for shareholders by handling
correctly the cash conversion cycle and keeping each different component to an
optimum level. Ganesan, (2007), analyzed impact of working capital management
upon the performance of firms in Telecom industry. The variables used were, days
sales outstanding, number of days for payment to vendors, average days inventory
held, cash conversion efficiency, revenue to total assets, revenue to total sales, etc.
Findings reveal negative & insignificant relationship between profitability and daily
working capital requirement in the said industry. Amarjit Gill et.al (2010) explored
the relation between Working Capital Management and the firm’s profitability by
taking a sample of 88 American Manufacturing Companies which are listed on the
New York StockExchange for the period of 3 years from 2005 -2007 and found out
that there existed no statistically significance difference between Average Days of
Accounts Payable and Corporate Profitability. In some of the studies, positive
correlation exists between Average Days of Accounts Payable variable and the
firm’s profitability. This can be explicated with the fact that lagging payments to
suppliers ensures that the firm has some cash to buy more inventory for sale thus
escalating its sales level hence also enhancing its profits. (Huynh Phuong et.al,
2010). Tahir and Anuar in their paper did a literature review of the related papers
from 2008-2010 and found out that the firm’s Growth (in Sales) has significant and
positive influences on the firm’s profitability. They also mentioned that some of the
studies in literature showed that the ratio of fixed financial Assets to total Assets has
a negative relation with the Dependent Variable. Reheman et.al (2010) conducted a
study of working capital management policy of 204 firms from the manufacturing
sector in Pakistan for the period from 1998 till 2007. Their results showed that the
manufacturing firms in Pakistan follow a conservative working capital management
and that the firms need to improve their collection and payment policy.
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The review ofliterature highlights the relationship between profitability and working
capital management and how various components of cash conversion cycle are
affecting the profitability of the firms. All the previous studies also lay emphasis on
how important for a firm is to conduct working capital analysis. Although most of
the studies were carried in different environment across different countries but
majority of them suggested similar trends.
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CHAPTER- 5
RESEARCH DESIGN
This research is ex-post facto research. This approachevaluates the relationship
between variables which have been already occurred. Here variables were used to
test the relationship between the working capital management and the profitability.
I have used quantitative methods as financial data collected from the database was
analyzed.
VARIABLES CODE DESCRIPTION OF
VARIABLES
HYPOTHESIS EXPECTED
SIGNS
Net Income NI Measure of
profitability
Dependent
Variable
X1 RCP Receivable Collection
Period, time gap in the
collection of money
from the customers.
Higher gap in
collecting money
from customer
lower the profit
(-)
X2 APP Accounts Payable
Period, credit period
offered by the
supplier.
Higher the payable
day higher the
profit.
(+)
X3 ICP Inventory Conversion
Period, it represent
how a company
holding its inventory
Higher the
inventory day lower
the profitability.
(-)
X4 CCC Cash Conversion
Period, movement of
cash in terms of
operation.
Higher the CCC
lower the
profitability.
(-)
X5 SOF Size of the firm
determined by log of
total assets of the firm
Higher the size of
the firm higher the
profitability.
(+)
Table 5: Selected Variables
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HYPOTHESIS
Hypothesis 1
H0: There is no relationship between receivable period and profitability
H1: Receivable period and profitability are negatively related – higher the
receivable period lower the profitability.
Hypothesis 2
H0: There is no relationship between the inventories days and the profitability.
H2: The inventory days are negatively related to the profitability – higher the
inventories day lower the profitability.
Hypothesis 3
H0: There is no relationship between the payable days and the profitability.
H3: The payable days are positively related to the profitability – higher the payable
days higher the profitability.
Hypothesis 4
H0: There is no relationship between the cashconversion cycle and the
profitability.
H4: Cash conversion cycle (CCC) is negatively related to the firm’s profitability –
higher the CCC lowers the profitability.
Hypothesis 5
H0: There is no relationship between the size of the firm and the profitability.
H5: There is a positive relationship between the size of the firm and the
profitability.
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MODEL
The model is developed on the basic components of Working Capital Management.
As my selected topic is to analyze the impact of Working Capital Management on
profitability, receivable, payable and inventory periods are the basic and core
measures. Net income was considered as the benchmark of profitability as it is the
amount after all kind of deduction. Cash Conversion Cycle was taken to get a better
idea about the relationship between determinants of working capital management
and profitability. Finally size of a firm may influence profitability. As it is a
manufacturing firm and has higher assets, logarithm of total assets was considered
as size of the firm.
NI = ƒ [Receivable days(X1), Payable Days(X2), Inventory Days(X3), Cash
Conversion Cycle(X4), Size of the firm(X5)]
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CHAPTER-6
DATA ANALYSIS AND INTERPRETATION
6.1 Working Capital Management Policy in AVA Cholayil Health
Care Pvt. Limited
In simple terms working capital can be defined as current assets minus current
liabilities. When a company is unable to manage its current liability through its
current assets liquidity problem arises. This can threaten the future existence of the
company. On the other hand when there are excess cash, a company should invest
in short term securities to enhance the wealth of the shareholders. Working capital
policy can be mainly classified in three categories. They are defensive policy,
aggressive policy and conservative policy. If the firm can forecast accurately its
level and pattern of sales, inventory procurement time, inventory usage rates, level
and pattern of production, productioncycle time, split between cash sales and credit
sales, collection period, and other factors which impinge on working capital
components, the investment in current assets can be defined uniquely. In case of
uncertainty, the outlay on current assets would consist of a basic component meant
to meet normal requirements and a safety component meant to cope with unusual
demands and requirements. The safety component depends on how conservative or
aggressive is the current asset policy of the firm. If the firm pursues very
conservative policy it would carry a high level of current assets in relation to sale.
On the basis of previous discussionit can be referred that AVA Cholayil Health Care
Pvt. Limited follows an aggressive working capital policy. This company finances
their working capital through short term debt. In an aggressive working capital
policy the whole amount of current assets are financed by short-term debt. Somepart
of the non-current assets also will be finance by short term debt. This policy will
push the finance department to be proactive in the management of working capital
always, as they need to sell stocks fast and collect receivables on a timely manner.
In order to, settle the short term debts on time. As AVA Cholayil Health Care Pvt.
Limited has higher sales or growth aggressive working capital policy suits them the
most. The way of determining the nature of working capital policy is illustrated
below:
Financing Policy= Current Liabilities/ Total Asset
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Year Current Liabilities Total Assets Financing Policy
Ratio
2014 169818000 721510000 0.437
2015 239434000 543230000 0.441
2016 278138000 387772000 0.385
Table:6 Financing policy Ratio
Fig:7 Financing Policy
InAVA Cholayil Health Care Pvt. Limited the ratio ofcurrent liabilities to total asset
is high which means major portion of their current liabilities are used to finance their
total asset.
6.1.1 Inventory Management
Inventory Period is an efficiency ratio that shows how quickly a company uses up
its supply of goods over a given time frame. While inventory period is shortening in
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some industries, such as grocery stores, than in others, such as department stores,
comparatively lengthening inventory period means that a company has poorsales or
too muchinventory. It is computed bydividing inventories bythe company's average
daily cost of goods sold.
Inventory Period= Inventories/ COGS * 365
Table:7 Inventory Conversion Period
Fig:8 Inventory Days
Interpretation:
From the above analysis we can see that the inventory conversion period was
highest in the FY 2013-14. After that there is a decline in the inventory conversion
period which is a sign of increase in performance of the products.
Inventory COGS ICP
Year Amount Year Amount Year Days
2014 81175000 2014 528735000 2014 56.0372871
2015 72323000 2015 650173000 2015 40.60134
2016 74097000 2016 642429000 2016 42.0986677
0
10
20
30
40
50
60
2013-14 2014-15 2015-16
Inventory Days
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6.1.2 Accounts Receivable Days
Number of Days Accounts Receivable is the length of time required to collect cash
receipts. It is also called "Days of Sales Outstanding". Lesser the time of Accounts
Receivable that means more efficient CCC. AR is a very important module of WCM
that fulfills its term to efficiency. Accounts Receivable is calculated by dividing the
receivables by the net sale per day.
Accounts Receivable Period= Receivables/ Net Sales * 365
Table:8 Accounts Receivable Period
Fig:9 Receivable Days
Interpretation:
TradeReceivables NetSales RCP
Year Amount Year Amount Year Days
2014 658000 2014 1032459000 2014 0.23261941
2015 3764000 2015 1262296000 2015 1.08838181
2016 3425000 2016 1352145000 2016 0.92454951
0
0.2
0.4
0.6
0.8
1
1.2
2013-14 2014-15 2015-16
Receivable Days
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The above figure shows that accounts receivable period of AVA Cholayil
Health Care Pvt. Limited is in between 0 to 2 days which is really satisfactory. It
means they collect money from their customers within a very short period of time.
This indicates their efficiency in cash conversion cycle.
6.1.3 Accounts Payable Period
Accounts Payable is very important component of WCM. It is the length of time
for which the firm is able to delay payment on the purchase of raw materials to its
suppliers. The longer the period of AP, company has better opportunity to finance
on other things. It helps the company to reduce costs bynot taking loans for other
expenses. Accounts Payable Period is calculated by dividing trade payables by the
company's costof goods sold per day.
Accounts Payable Period= Trade Payables/ COGS *365
Table:9 Accounts Payable Period
Trade Payable COGS APP
Year Amount Year Amount Year Days
2014 658000 2014 528735000 2014 40.5594674
2015 3764000 2015 650173000 2015 43.5362819
2016 3425000 2016 642429000 2016 74.7454894
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Fig:10 Accounts Payable Days
Interpretation:
We know that higher the payment period the better. In comparison with AVA
Cholayil Health Care Pvt. Limited’s receivable period they hold a higher payable
periods. Though payable days were lower in 2013-14, early payment in later years
has its advantage suchas good reputation among creditors. In orderto ensure highest
possible amount of cash in hand payable period were increased to 74.745 and above
in the year 2015-16.
6.1.4 Cash Conversion Cycle
A cash conversion cycle (or jut cash cycle) is the amount of time it takes for a
company, business or organization to receive payment for its products after it has
paid for its materials or inventory. Calculate cash conversion cycle by adding
inventory costs overacertain time to accounts receivable costs overthatsame period
and then subtracting accounts payable cost over that period.
CCC mainly helps to figure out how cash is moving throughout the company in
terms of duration. When CCC shortens that means the company has more cash for
other usages suchas investing on equipment orinnovating manufacturing and selling
process. On the other hand, when CCC lengthens, cash tied up in firm's operation
activities where there is little chance for other investment.
In the below figure the cash conversion cycle of a FMCG firm is illustrated:
0
10
20
30
40
50
60
70
80
2013-14 2014-15 2015-16
Payable Days
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Fig:11 Cash flow cycle
Operating Cycle is the interval between the order of inventory stock and the date
when cash is collected from receivables. And CCC begins when the company pays
cash to suppliers for the materials purchased and ends when cash is collected from
customers for credit sales.
In general,
CCC = Operating Cycle - Accounts Payable Period
Or
CCC = (Inventory Period + Accounts Receivable Period) - Accounts Payable
Period
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Year ICP RCP APP CCC
2014 56.037 0.233 40.559 15.711
2015 40.601 1.088 43.536 -1.847
2016 42.098 0.924 74.745 -31.723
Table:10 Cash Conversion Cycle
Fig:12 Cash Conversion Cycle
Interpretation:
In the abovefigure, it shows CCC ofAVA Cholayil Health Care Pvt. Limited
for 2013-2014 is positive. But in the following years the CCC of AVA Cholayil
Health CarePvt. Limited is keep ondecreasing. It comes to negative in the year 2015
and 2016. That basically means they are getting paid by their customers long before
they pay their suppliers. Essentially this is an interest free way to finance their
operations by borrowing from their suppliers.
The lower the cash cycle the better it looks for a company’s finances, so a negative
cash cycle is very desirable. A negative cash cycle is one in which firm don’t pay
for their inventory or materials until after the firm has sold the final product
associated with them. It means the firm using their working capital as efficiently as
possible and have available cash for other things.
-40
-30
-20
-10
0
10
20
2013-14 2014-15 2015-16
Cash Conversion Cycle
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6.1.5 Cash Management
One of the techniques of assessing working capital management is measuring the
performance of cash management. The finance manager must maintain adequate
liquidity so that the firm can pay off its obligations. In order to test the liquidity of a
firm one of the best techniques that can be used is the liquidity ratios.
 Current ratio
The liquidity and efficiency ratio that evaluates an organization’s capability in
paying off its short-term debts using the current assets is called current ratio.
Current Ratio = Current Asset / Current Liability
Year Current Assets Current Liabilities Current Ratio
2014 249300000 169818000 1.468
2015 424054000 239434000 1.771
2016 243974000 278138000 0.877
Table:11 Current Ratio
Fig:13 Current Ratio
1.468
1.771
0.877
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2013-14 2014-15 2015-16
CURRENT RATIO
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Interpretation:
The current ratio is fluctuating over the years. The rate is between 0.8 and 1.7
which indicates a sound liquidity position of the company.
 Quick Ratio
Quick ratio measures how efficiently the company can pay off its short term
financial liabilities. It is a better measure than current ratio as it deducts less liquid
assets such as inventory.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Sl. No F.Y Quick Assets Current Liabilities Quick Ratio
1. 2013-14 168119820 169818000 0.99
2. 2014-15 351728546 239434000 1.469
3. 2015-16 169664180 278138000 0.61
Table:12 Quick Ratio
Fig:14 Quick Ratio
0.99
1.469
0.61
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2013-14 2014-15 2015-16
QUICK RATIO
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Interpretation:
From the above chart a fluctuating quick ratio of that AVA Cholayil Pvt.
Limited can be observed over the years. But it is considered that a quick ratio of 1:1
is satisfactory. So it can be said that AVA Cholayil Pvt. Limited is not performing
very well in managing its cash. In the FY 2014-15 it increased to 1.469 but again
decreases to 0.61 in the FY 2015-16. This should be taken care by the management
of the organization soon.
6.2 Data Analysis
6.2.1 Descriptive Analysis
Descriptive statistics are brief descriptive coefficients that summarize a given data
set, which can be either a representation of the entire population or a sample of it.
Descriptive statistics are broken down into measures of central tendency and
measures of variability, or spread. Measures of central tendency include the mean,
median and mode, while measures of variability include the standard deviation or
variance, the minimum and maximum variables, and the kurtosis and skewness.
Mean is to measure central tendency which is the average value ofa data setwhereas
standard deviation to measure dispersion of the studied sample in which it is the
average difference between observed values and the mean.
Count Mean Std.
Deviation
Min. Max.
ICP 3 46.24533333 8.512802378 40.601 56.037
RCP 3 0.748333333 0.453762419 0.233 1.088
APP 3 52.94666667 18.9365027 40.559 74.745
CCC 3 -5.953 23.9820874 -31.723 15.711
Size of the
Firm
3 8.727267516 0.134998447 8.588576447 8.858242355
Table:13 Descriptive Analysis
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Interpretation:
Above table shows the descriptive statistics of the variables used in the study. It
embodies number of observation, mean, standard deviation, minimum and
maximum of the variables used.
The organization receives payment from the customers at an average of 0.7483 and
the standard deviation of the receivable day is 0.4537 which means less than one
day. It is a positive indicator for the organization. It shows that the receivable days
of the organization is positively influencing its profitability.
The maximum value for payable days is of 74.745 days which is very significant.
The average payable days is of 52.946 days indicate approximate 2 months credit
period. It is also positively influencing the profitability of the firm.
The mean value of inventory days is of 46.2453 days which is quite high. The firm
take an average of more than 1month to convert inventory to cash. It can affect the
profitability of the firm negatively.
The average value of cash conversion cycle is -5.953 and the minimum value is -
31.723. The reason behind negative CCC is the significant difference between
receivable and payable periods.
6.2.2 Correlation Analysis
Correlation analysis is a method of statistical evaluation used to study the strength
of a relationship between two, numerically measured, continuous variables. This
particular type of analysis is useful when a researcher wants to establish if there are
possible connections between variables.
If correlation is found between two variables it means that when there is a systematic
change in one variable, there is also a systematic change in the other; the variables
alter together over a certain period of time. If there is correlation found, depending
upon the numerical values measured, this can be either positive or negative.
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 Positive correlation exists if one variable increases simultaneously with the
other, i.e. the high numerical values of one variable relate to the high
numerical values of the other.
 Negative correlation exists if one variable decreases when the other increases,
i.e. the high numerical values of one variable relate to the low numerical
values of the other.
Pearson’s product-momentcoefficient is the measurement of correlation and ranges
(depending onthe correlation) between +1 and -1. +1 indicates the strongestpositive
correlation possible, and -1 indicates the strongest negative correlation possible.
Therefore the closer the coefficient to either of these numbers the stronger the
correlation of the data it represents. On this scale 0 indicates no correlation, hence
values closer to zero highlight weaker/poorer correlation than those closer to +1/-1.
The correlation coefficients are interpreted in this report as per the following scale:
 0 to 0.2 Very weak, negligible
 0.2 to 0.4 Weak, low
 0.4 to 0.7 Moderate
 0.7 to 0.9 Strong, high, marked
 0.9 to 1.0 Very strong, very high
Table: 14 Correlation Analysis
ICP RCP APP CCC Size of the firm
Mean 46.24533333 0.748333333 52.9466667 -5.953 8.727267516
Variance 72.46780433 0.205900333 358.591134 575.140516 0.018224581
Observations 3 3 3 3 3
Pearson Correlation -0.948223346 0.973772901 0.1898828 -0.468094891 0.633041583
P(T<=t) two-tail 0.024480111 0.024480064 0.0244801 0.024480086 0.02448007
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Interpretation:
The result shows a negative relationship between net income and inventory days
which is -0.9482. It indicate that higher the inventory conversion period lower the
profitability ofthe firm. Correlation coefficient of inventory conversion period is 0.9
which shows a very strong relationship. The p value is 0.02 which is less than the
level of significance. It shows that there is a significant relationship between the net
income and inventory days.
The coefficient for the receivable day is 0.973 which indicate very strong positive
correlation with profitability. The receivable days of the organization takes an
average of less than 1 day for receiving payments. It increases the profitability ofthe
firm. There is a significant relationship between the profitability and receivable days
with a p value of 0.024.
The correlation result between accounts payable period and net income indicate with
positive coefficient of 0.189 which shows very weak relationship. The result for
correlation between the accounts payable days and profitability is positive even
though accounts payable days of the organization making only slight changes in the
profitability.
Cash Conversion Cycle of the organization shows a negative relationship which is
significant. The correlation coefficient of CCC is -0.468 which is moderate.
The relation between size of the firm and profitability is moderately correlated with
a coefficient of 0.633. The level of significance is 0.02 which shows a significant
relationship between size of the firm and the profitability. When the size of the firm
increases it affect the profitability of the firm positively with a moderate correlation.
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HYPOTHESIS TESTING
Hypothesis Result
H01: There is no relationship between receivable period and the
profitability.
Rejected
H02: There is no relationship between the inventories days and
the profitability.
Rejected
H03: There is no relationship between the payable days and the
profitability.
Rejected
H04: There is no relationship between the cash conversion cycle
and the profitability.
Rejected
H05: There is no relationship between the size of the firm and
the profitability.
Rejected
Table:15 Summary of Hypothesis Testing
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CHAPTER 7
FINDINGS AND SUGGESTIONS
7.1 Findings of the Study
A firm must have adequate working capital, i.e.; as much is needed the firm. Itshould
neither be excessive nor inadequate. Both situation are dangerous. Excessive
working capital means the firm has idle funds which earn no profits for the firm.
Inadequate working capital means the firm does nothave sufficient funds forrunning
its operations. It will be interesting to understand the relationship between the
determinants of working capital and profitability of the firm. The basic objective of
working capital management is to manage firms current assets and current liabilities
in such a way that the satisfactory level of working capital is maintained, i.e.; neither
inadequate nor excessive.
After conducting the report through various analysis and evaluation of influence of
Working Capital Management on AVA Cholayil Health Care Pvt. Limited
Profitability, many findings have been found; it includes both positive and negative
findings. From the study, it is shown that there is a significant relationship between
profitability and the determinants of working capital management. The performance
of the company should not be judged only on the basis of profitability measured in
terms of return on sales and investment. This performance has a direct link with the
fluctuation of working capital ofthe firm. Thus, management should also emphasize
the growth and efficiency of investment in working capital along with the effective
management of fixed capital over time.
The major findings after detailed analysis of AVA Cholayil Health Care Pvt. Limited
profitability by using determinants of working capital management model are as
follows
a) AVA Cholayil Health Care Pvt. Limited follows an aggressive working
capital policy. The firm utilizes their estimated requirement of current assets
which are financed from short-term sources and even a part of fixed assets
be financed from short- term sources. This approachmakes the finance mix
more risky, less costly and more profitable. As AVA Cholayil Health Care
Pvt. Limited has higher sales or growth aggressive working capital policy
suits them the most.
70 | P a g e
b) AVA Cholayil Health Care Pvt. Limited maintain an effective fund collection
system of account receivable which is excellent over the years. It takes an
average of 1 day for collection of receivables from the debtors. It helps to
increase the profitability of the firm. Low processing time for collection of
receivables from the debtors makes high profitable to the firm. It has a very
strong positive relationship between the profitability of the firm.
c) Accounts Payable Period of the organization have a positive and significant
relation with the profitability of the firm. AVA Cholayil Health Care Pvt.
Limited maintain an average of 52 days for the payment to their creditors.
Higher the payment period higher will be the profit. Even though the firm
have a positive correlation between the profitability and accounts payable
period which is very weak. It indicate that the payable period making only a
slight positive changes to the profit. Even though in the year 2016 payable
period of the firm comes to 74 days which is almost double from the pastyears
2014 and 2015. It is a good sign that the organization has a good reputation
among creditors. It helps to increase the payable period in the future. The
longer the period of accounts payable period, the organization has better
opportunity to finance onother things. It helps the organization to reducecosts
by not taking loans for other expenses.
d) The inventory conversion period of AVA Cholayil Health Care Pvt. Limited
is too high hitting a maximum of 56 days in the year 2014. The firm try to
decreasethe inventory conversion period in the recent years but still it is high.
Since it cannot convert inventory into sales quickly enough, its inventory
increases resulting in decreased quick ratio. From the study it shows that there
is a very strong negative and significant relation among the profitability and
inventory conversion period. Inventory conversion period of the organization
is pulling back the profit of the firm. Raw material and Work-in-Progress are
the main inventories making a negative impact on profitability. In certain
cases the organization have to purchase raw material and stock them in
advance which is advisable to the firm. But inventories under work-in-
progress pulling back the profit of the firm. Higher the inventory conversion
period lower will be the profit.
e) The firms Cash Conversion Cycle is negative which is very desirable. A firm
with negative cash conversion cycle one in which firm don’t pay for their
inventory or materials until after the firm has sold the final productassociated
with them. It means the firm using their working capital as efficiently as
possible and have available cash for other things. After analyzing the
71 | P a g e
correlation between the profitability and cash conversion cycle it shows a
negative relationship which is significant. Cash conversion cycle shows a
negative correlation becauseof high inventory period which makes the profit
lower. But the cash conversion cycle have only moderate impact on
profitability. It is just because receivable days have high positive correlation.
If the firm reduces its inventory conversion period there will be a positive
impact on cash conversion cycle. Even though the efficiency of finance
department of the organization try to keep on decreasing cash conversion
cycle to negative.
f) Size of the firm also make an impact of profitability of the organization. As
sales increases the size of the firm also increases. It has a positive relationship
with profitability.
g) Current Ratio of the organization is fluctuating over the years. Even though
the organization have sound liquidity position, the current ratio of the
organization reduces from 1.771 to 0.877. If the current ratio decreases the
firm capability to paying off its short term debt also decreases which affect
the organizations credit worthiness.
h) A fluctuating quick ratio of AVA Cholayil Health Care Pvt. Limited can be
observed over the years. But it is considered that a quick ratio of 1:1 is
satisfactory. So it can be said that AVA Cholayil Health Care Pvt. Limited is
not performing very well in managing its cash. In the FY 2014-15 it increased
to 1.469 but again decreases to 0.61 in the FY 2015-16. This should be taken
care by the management of the organization soon.
i) Net Sale ofAVA Cholayil Health Care Pvt. Limited is increasing in the recent
years.
j) The effective management of working capital like other areas of management
require a clear statement of goals to pursue and responsibilities to be allotted.
7.2 Suggestions
The working capital management is very important for maintaining financial
position of any firm which further signifies the success ofthe firm in all dimensions.
It can be apprehended from the study that, especially in the context of FMCG sector
it plays a significant role for managing the profitability of the firm. It is important
for the firm to preserve an adequate level of working capital because inadequate
level of working capital impairs profitability. Profitability of the business may be
dependent on many factors together with the working capital management of a
A study on working capital management  ava cholayil health care pvt. ltd
A study on working capital management  ava cholayil health care pvt. ltd
A study on working capital management  ava cholayil health care pvt. ltd
A study on working capital management  ava cholayil health care pvt. ltd

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A study on working capital management ava cholayil health care pvt. ltd

  • 1. 1 | P a g e DETERMINANTS OF WORKING CAPITAL MANAGEMENT ON FIRM’S PROFITABILITY CASE ON AVA CHOLAYIL HEALTH CARE PVT LTD Submitted by ROHITH U J Under the guidance of Mr. Gireesh S Pathy (Assist. Professor, BRIM) In partial fulfillment of requirement for the award of MASTER IN BUSINESS ADMINISTRATION To BHAVAN’S ROYAL INSTITUTE OF MANAGEMENT (Approved by All India Council for Technical Education, AICTE, New Delhi.) Thiruvankulam, Kochi – 682305 2016-2018
  • 2. 2 | P a g e DECLARATION I ROHITH U J, hereby declare that this report on “DETERMINANTS OF WORKING CAPITAL MANAGEMENT ON FIRM’S PROFITABILITY A CASE ON AVA CHOLAYIL HEALTH CARE PVT LTD” is a record of my project work done for AVA CHOLAYIL HEALTH CARE PVT LIMITED, under the supervision of Assist. Professor Gireesh S Pathy, Bhavan’s Royal Institute of Management. I also declare that this project report is my original work and that it has not previously formed the basis for award of any degree. Date: 27/06-2017 ROHITH U J Place: Thiruvankulam DEAN
  • 3. 3 | P a g e ACKNOWLEDGEMENT My special acknowledgement and gratitude to AVA Cholayil Health Care Pvt. Limited for granting me the permission to carry on my summer project in their reputed organization. I wish to express my indebtedness and gratitude to Mr. Rony Joseph, C.F.O finance and Mr. P. Santhanakrishnan, General Manager- Accounts for giving me support to do this summer project in AVA Cholayil Health Care Pvt. Limited. I also express my sincere gratitude and thanks to Prof. RAJAGOPALA NAIR, The DEAN and the faculty members at Bhavan’s Royal Institute of Management for their able guidance and support for the successful completion of my project. I would also like to reserve a warm and special note of thanks to my internal guide Assist. Professor Gireesh S Pathy whose wholehearted support and guidance helped me to complete this project successfully. Last but not least my gratitude is to the almighty for showering me with abundant grace through the entire duration of this project. I believe that the light that God has passed on to me shall be kept alight in all days to come ROHITH U J
  • 4. 4 | P a g e EXECUTIVE SUMMARY This studytries to explore the impact of working capital management onprofitability of AVA Cholayil Health Care Pvt. Limited one of the leading FMCG firm in India. Working Capital can be defined as the amount when current asset is surpassing current liabilities. The focus of this paper is to analyze how the company manages its working capital on the basis of cash, inventory period, receivable period and payable period management and how it influence the profitability ofan organization. This project paper starts with the objective of the study and the methodology. The project paper contains the analysis of three years data of AVA Cholayil Health Care Pvt. Limited commencing from the year 2014-2016. Most of the researchers found that degree of efficiency of administration of working capital largely determines the success or failures of overall operations of an organization. The objective of this report is to analyze the previous studies and relate them with this paper. Afterwards description of the company including its history, products, mission, vision, organization structure etc. is discussed in chapter 3. In the fiscal year 2015- 16 AVA Cholayil Health Care contributed more than 8.9 Crore as taxes to the national Exchequer. WCM policy for AVA Cholayil Health Care is discussed elaborately in the chapter 6 as well. They follow aggressive WCM policy because of their higher utilization ofshortterm financing. Inventory management performance is evaluated using inventory conversion period. In the year 2014 it was approximately 56 days which is quite high in compareto other years. AVA Cholayil Health Care Pvt. Limited time gap between collecting money from the debtors is very satisfactory with an average period of 2 days. The organization tries to delay the accounts payable as much as possible. The time taken byAVA Cholayil Health CarePvt. Limited to make payments to creditors is around 75 days. Analysis of the collected data is presented in chapter six. It contains descriptive, correlation and t-test analysis of the variables with proper interpretation and it was found that there is relationship between profitability and working capital components. Correlation analysis shows that receivable period is negatively related with profitability and other variables are positively related. Finally findings and conclusion chapter includes a summary of the results found in the
  • 5. 5 | P a g e TABLE OF CONTENT SL.No Chapter Title Page No. 1 2 3 4 5 6 7 1 1.1 1.2 1.3 1.4 1.5 1.6 INTRODUCTION Statement of the problem Objective of the study Scopeof the study Research Methodology Limitation of the study Chapter Scheme 9 10 11 11 12 14 14 8 2 INDUSTRY PROFILE 16 9 2.1 Overview 16 10 2.2 Consumer Products 18 11 2.3 Rural FMCG Market of India – Overview 20 12 2.4 Road Ahead 21 13 2.5 Reaching Out to Consumers 21 14 2.6 PEST Analysis of FMCG Industry 23 15 3 COMPANYPROFILE 24 16 3.1 Company Overview 24 17 3.2 History 24 18 3.3 About the Founder 25 19 3.4 Board of Directors 26 20 3.5 Company Vision 26 21 3.6 Company Mission 26 22 3.7 AVA Group 27 23 3.8 Products and Services Offering 27 24 3.9 Factories 30 25 3.10 Major Competitors 30 26 3.11 Office Timing 30 27 3.12 Leave Eligibility and Procedure 31 28 3.13 Travel Policy 31 29 3.14 Reimbursement Policy 31 30 3.15 Functions of head office AVA Cholayil Health Care Pvt. Limited 32
  • 6. 6 | P a g e 31 3.16 Departments in AVA Cholayil Health Care Pvt. Limited 32 32 3.17 Financial Performance 32 33 4 LITERATURE REVIEW 36 34 4.1 Theoretical Concepts 36 35 4.2 Literature Review 48 36 5 RESEARCHDESIGN 51 37 6 DATA ANALYSIS AND INTERPRETATION 54 38 6.1 Working Capital Management Policy in AVA Cholayil Health Care Pvt. Limited 54 39 6.2 Data Analysis 64 40 7 FINDINGS AND SUGGESTIONS 69 41 7.1 Findings 69 42 7.2 Suggestions 71 43 7.3 Conclusion 72 44 7.4 Bibliography 73
  • 7. 7 | P a g e LIST OF TABLES SL.No Table No Particulars Page No 1 1 Products under Medimix brand 28 2 2 Total Sales 32 3 3 Balance Sheet 34 4 4 Profit and Loss Statement 35 5 5 Selected Variables 51 6 6 Financing policy Ratio 55 7 7 Inventory Conversion Period 56 8 8 Accounts Receivable Period 57 9 9 Accounts Payable Period 58 10 10 Cash Conversion Cycle 61 11 11 Current Ratio 62 12 12 Quick Ratio 63 13 13 Descriptive Analysis 64 14 14 Correlation Analysis 66 15 15 Summary of Hypothesis Testing 68
  • 8. 8 | P a g e LIST OF FIGURES SL.No Fig. No Particulars Page No 1 1 Rural FMCG market trend 21 2 2 Total Sales 33 3 3 Kinds of WC 40 4 4 Financing under Matching Approach 42 5 5 Conservative Approach 43 6 6 Aggressive Approach 43 7 7 Financing Policy 55 8 8 Inventory Days 56 9 9 Receivable Days 57 10 10 Accounts Payable Days 59 11 11 Cash flow cycle 60 12 12 Cash Conversion Cycle 61 13 13 Current Ratio 62 14 14 Quick Ratio 63
  • 9. 9 | P a g e CHAPTER-1 INTRODUCTION The fast-moving consumer goods (FMCG) sector is an important contributor to India’s GDP and it is the fourth largest sector of the Indian economy. Items in this category are meant for frequent consumption and they usually yield a high return. The Indian FMCG sector, which is the fourth biggest sector in the Indian economy, has a market size of2 trillion with rural India contributing to one third ofthe sector’s revenues. The Indian FMCG sector is highly fragmented, volume driven and characterized by low margins. The sector has a strong MNC presence, well established distribution network and high competition between organized and unorganized players. The growth of the sectorhas been driven by both the rural and urban segments. India is becoming one of the most attractive markets for foreign FMCG players due to easy availability of imported raw materials and cheaper labor costs. Working capital management is an area which emphasize on the productive utilization available funds created out of good cash flows, financial solvency and growth strategies at the company. It represents the liquidity position of business indicating the management of shortterm assets and liabilities. Basically net working capital of a company is determined from the deviation of current assets and current liabilities. When current assets are higher than current liabilities, that means the company is capable enough to continue its operations and it also defines that the company have sufficient funds to satisfy its short-term debt and upcoming operational expenses. Working capital management of the AVA Cholayil Health Care Pvt. Limited is satisfactory due to efficient management of inventory, debtors, cash balances and working funds where the major elements of working capital were inventory, debtors, cash balances and short term investments.
  • 10. 10 | P a g e 1.1 Statement of the problem With a population of over one billion, India is one of the largest economies in the world in terms of purchasing power and increasing consumer spending, next to China. The Indian FMCG industry, with an estimated market size of 2 trillion, accounts for the fourth largest sector in India. In the last decade, the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated at compounded rate of 17.3%. The sector is characterized by strong presence of global businesses, intense competition between organized and unorganized players, well established distribution network and low operational cost. Availability of key raw materials, cheaper labor costs and presenceacross the entire value chain gives India a competitive advantage. The success ofany business house is in the effective utilization of resources which, in turn, is dependent upon the effective circulation of working capital. The present economy has become competitive and constrained by the financial imbalance, so it is very important for any company to maintain sufficient level of working capital for smooth run. Moreover the economy has faced many challenges like recession and inflation during different phases of time but managing effective working capital helps to overcome these challenges. However most of the time in financial decision making management of working capital has been ignored because it is related with the financing and investment in short time period. The requirement of working capital is effected by the nature of the industry as well as the capacity of the firm. The service industry demands less amount of working capital compared manufacturing because in case of former ones they do not have to maintain inventory. Manufacturing units have to keep a sufficient amount of working capital as it is needed for day to day operations, and at the same time to meet the costs. The companies that manage the working capital effectively will gain valuable investment opportunity which adds further profits in its bag. After analyzing the effectiveness of working capital management, its different components and their impact on profitability will helps us to the state problem which shall be analyzed in this study.
  • 11. 11 | P a g e 1.2 Objective of the study The objective of preparing this report can be explained under two categories. They are- Broad Objective: The objective of the study is to gain an insight into the concept of working capital management, how working capital is managed at AVA Cholayil Health Care Pvt. Limited and how it influences the overall performance of the company. Specific Objective: • To examine the relationship between inventory conversion period and profitability of the FMCG firms. • To investigate the relationship of Receivable collection period and profitability of the FMCG firms. • To investigate the relationship ofcreditors payment period with the profitability of the FMCG firms. 1.3 Scope of the study Keeping the magnitude of the work in mind the scope of the study has been determined. It covers the outset, a description of the role played by the corporate in improving financial strength of organization. The working capital management may positively or negatively affect the profitability of the firm. The number of day’s accounts payable was negatively correlated with a firm's profitability, whereas number of days accounts receivables and cash conversion period exhibit a positive relationship with corporate profitability. This study helps to ascertain the impact of working capital management in the profitability of FMCG industry.
  • 12. 12 | P a g e 1.4 Research methodology 1.4.1 Research approach The present study is desk type research study that is it analyses the data relating to working capital management of the AVA Cholayil Health Care Pvt. Limited. The secondary sources of the data include annual reports and audited financial statements. The data, which are presented in this report, have been taken from secondary sources. 1.4.2 Sources of data a) Primary data. b) Secondary data. a) Primary data: any information that is collected afresh for the first time specifically for a study is called Primary data. The Primary data happen to be original in characters. This is desk type research study using secondary data but doubts clarification and policies of AVA Cholayil Health Care Pvt. Limited and like which AVA Health Care Cholayil Pvt. Limited cropped during the analysis of this were collected from officials ofAVA Cholayil Health Care Pvt. Limited who are managing the working capital of AVA Cholayil Health Care Pvt. Limited. b) Secondary data: information which has already been collected by somebodyelse or some other agency with definite purposeand which has already been processed is called Secondary data. Such data are cheaper and more quickly obtained than the primary data. Company records annual reports of AVA Cholayil Health Care Pvt. Limited were the major source of secondary data. Some previous work on working capital management of AVA Cholayil Health Care Pvt. Limited are taken as secondary data.
  • 13. 13 | P a g e 1.4.3 Research Instrument: For the present study component of cash conversion cycle (CCC) have been taken as a measure of working capital and their impact has been checked on Net Income (NI) which has been taken as a measure of profitability. For the calculation of cash conversion cycle, inventory conversion period, debtor’s collection period and creditor’s payment period of AVA Cholayil Health Care Pvt. Limited are taken. 1.4.4 Research tool Mathematical, statistical and operational research tools for analysis of financial data related to working capital management were used in this study. Ratio analysis, correlation analysis and multiple regression analysis were the major tools used in the study. a) Ratio analysis:Ratio analysis is one of the techniques of financial analysis to evaluate financial condition and performance of business concern. b) Descriptive analysis: Descriptive statistics are brief descriptive coefficients that summarize a given data set, which can be either a representation of the entire population or a sample of it. Descriptive statistics are broken down into measures of central tendency and measures of variability, or spread. c) Correlationanalysis:Correlation is a statistical measure that indicates the extent to which two or more variables fluctuate together. This study contains Pearson correlation analysis to define the relationship between firm’s profitability and Working Capital Management. 1.4.5 Research Period This study was done during 5th June 2017 to 30th June 2017 and it covers working capital management of AVA Cholayil Health Care Pvt. Limited for the period of 2013-14 to 2015-16
  • 14. 14 | P a g e 1.5 Limitation The report faced some problems during its preparation, which has limited the purpose of the report. The limitations are:  To maintain the confidentiality of the information data availability is a big issue.  The internship has been made for one month duration but it is very much difficult to set true practical experience with current world circumstances in this short span of time.  The analysis is purely mathematical in nature.  The study is purely based on the data in the form of annual reports. In spite of all these limitation I have tried to put the best effort as per as possible. 1.6 Chapter Scheme This project report is presented in seven chapters.  The first chapter consists the study which includes statement of the problem, objectives ofthe study, scopeofthe study, research methodology, limitations of the study and chapter scheme.  The second chapter is about the profile of FMCG industry which narrates Indian FMCG sector, rural market and PEST analysis of FMCG industry.  The third chapter gives an overview about the profile of AVA Cholayil Health Care Pvt. Limited which provides history, about the founder, board members, products offered and financial performance of the company.  The fourth chapter contains theoretical background and literature review and it gives an idea about the working capital management.  The fifth chapter contains the research design used for the project report, hypothesis for the test result and the model used for research study in the project report.
  • 15. 15 | P a g e  The sixth chapter presents the data analysis and interpretation of data collected for the study  The seventh chapter lists the finding, suggestions and conclusion of the research.
  • 16. 16 | P a g e CHAPTER- 2 INDUSTRY PROFILE 2.1 Overview The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1 billion. Well-established distribution networks, as well as intense competition between the organized and unorganized segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003.16 Themiddle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products. Mostofthe product categories like jams, toothpaste, skin care, shampoos, etc., in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge. The Indian Economyis surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income. The big firms are growing bigger and small-time companies are catching up as well. The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HUL brands in the 21, aggregating INR 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. The foods category in FMCG is gaining popularity with a swing of launches by HUL, ITC, Godrej, and others. This category has 18 major brands, aggregating INR 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, chapattis by HUL, ready to eat rice byHUL and pizzas byboth GCMMF and GodrejPillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India's largest foods company, has a good presencein the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG
  • 17. 17 | P a g e brands, dominates the biscuits category and has launched a series of products at various prices. In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodnight from Godrej, is worth above INR 217 crore, followed by Reckitt's Mortein at INR 149 crore. In the shampoo category, HUL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. India’s GDP unlike that of other emerging developing countries has a bigger consumer percentage than investment. This is because India’s economic growth model has not followed the traditional export growth model of the other countries in Asia like China. This makes India more resilient to external shocks like the Lehman crisis and provides a more domestic orientation to growth. India has oneofthe fastest growing economics in the world and as the per capita income increase, consumer companies in India are reaping outsized rewards. India has a competitive consumer goods market with a number of domestic and international companies competing in multiple markets and segments. Some of the companies like HLL which is a subsidiary of the global consumer giant Unilever has becomean Indian company all but in ownership. Fast Moving Consumer Goods (FMCG) companies are different from Consumer Durables companies. FMGC companies are what is known as Consumer Non-Discretionary Group of Companies. These Companies sell products of everyday use and are recessionproofin the sensethat the products sold byFMCG Manufacturers can’t be ignored even in times of economic recessions. Fast Moving Consumer Goods Companies have been expanding rapidly in the Indian market and are set to grow to the next level as India’s middle class grows bigger and bigger and the existing middle class becomes richer. India’s FastMoving Consumer Goods Stocks form a great defensive investment class. They not only have “defensive” characteristics but also growth as well. India’s FMCG sector is expected to grow by more than 100% in the next 5-6 years as more and more consumers move from unorganized 51 part of the industry to the organized industry.
  • 18. 18 | P a g e 2.2 Consumer Products –Products 2.2.1 Soaps The product categories can be classified into three segments; premium (Lux, Dove), popular (Nirma, Cinthol), and economy (Nirma Bath, Lifebuoy). The price differential between the premium and economy segments is about 2X. The popular and economy segments account for about 4/5ths of the entire market for soaps. Penetration of toilet soaps is high at 88.6%. However per capita consumption levels remain low India's per capita consumption of soap at 460 Gms per annum is lower than that of Brazil at 1,100 Gms per annum. Distribution network Soaps are available in 5 m retail outlets in India, 3.75 m of which are in the rural areas. Therefore availability of these products is not a problem. 75% of India's population is in the rural areas; hence about 50% of the soaps are sold in the rural markets. Growth Rural demand growth is expected to occur mainly with consumers moving up towards premium products. But in the past, the proportion of premium soaps to economy soaps has not changed much, in volume terms. This is because as some consumers move up the value chain with increase in disposable incomes, some consumers move down looking for cheaper substitutes as prices move up. This has been the case especially, as growth in soap prices has generally outpaced overall consumer inflation. 2.2.2 Detergents The Indian fabric wash market consists of synthetic detergents (comprising bars, powder and liquids) and oil-based laundry soaps. Although the per capita consumption of detergents in India (2.7 kg pa) is comparable to some countries like
  • 19. 19 | P a g e Indonesia, China and Thailand (around 2 kg pa), it is lower than in others such as Malaysia, Philippines (3.7 kg) and the USA (10 kg). The Indian detergent market is expected to grow at 7-9% pa in volume terms. The synthetic detergent market can be classified into premium (Surf, Ariel), mid-price (Rin, Wheel) and popular segments (Nirma), which account for 15%, 40% and 45% of the total market, respectively. The productcategory is fairly mature and is dominated bytwo players, HUL and Nirma. Nirma created a revolution in the market by pioneering the concept of low-cost detergents. Growth High consumer awareness and penetration levels will enable the market to grow at an average 8-10% per annum with slightly higher growth in the rural areas. Higher penetration stems from popularity oflow-cost detergents. Hence, besides increase in per capita consumption, there is tremendous scopeformovement up the value chain. HUL, Nirma and P&G are the major players in the market with 40%, 30% and 12% share, respectively. While HUL dominates the premium segment, Nirma is the leader in the popular segment. 2.2.3 Personal Care Products The annual value of personal products business in India, including oral care, hair cares and skin cares products, is currently estimated to be Rs 54.6 bn. Just five years ago personalproducts were considered to be luxury items and attracted a high excise duty of120% (exceptthe oral care category). Gradual taxation reforms in India since 1991 have lowered the excise duty rates to a reasonable 30%, making these products more affordable. At the same time, rising income levels have led to rising aspirations on the part on Indian consumers. These factors have been the catalysts in the exponential growth rate in the personal product category over the past five years. Personal care products are further divided into 6 categories:  Oral care  Hair care - oils  Hair care - shampoos  Skin care
  • 20. 20 | P a g e  Cosmetics  Feminine Hygiene 2.3 Rural FMCG Market of India – Overview The Rural FMCG Market ofIndia is onthe verge of registering substantial expansion across the country. The Indian Rural FMCG market is mostly unorganized and it is generally dominated by small time retailers. The organized FMCG market is only confined to the urban areas of India. Rural India mostly depends on agriculture, directly or indirectly for livelihood. Further, almost 70% of Indian population lives in rural India in around 6,00,000 villages. Rural India offers tremendous growth prospects forthe FMCG industry. Facilitation ofbetter rural infrastructure like roads, telecommunication, electricity, supply chain, and transportation would propel the growth of Rural FMCG Market of India. Further, very low per capita consumption of FMCG products also provide tremendous opportunity for the growth of Rural FMCG markets in India. The FMCG sector, which offers tremendous growth prospects are Food and beverage sector, health care and personal care. Presently, rural India accounts for 34% of total FMCG consumption, but it accounts for more than 40% consumption in major FMCG categories like as personal care, hot beverages, and fabric care. The government of India new road map for the development of Indian agricultural sector will facilitate growth of rural FMCG industry. The Government of India's latest decision to waive-off loan (Union Budget 2008- 2009) to the tune of ` 60,000 crores would help better crop production in India, which in turn would definitely help the Indian Rural FMCG market grow to new heights.
  • 21. 21 | P a g e Fig-1: Rural FMCG market trend 2.4 Road Ahead FMCG brands would need to focus on R&D and innovation as a means of growth. Companies that continue to do well would be the ones that have a culture that promotes using customer insights to create either the next generation of products or in some cases, new product categories. One area that we see global and local FMCG brands investing more in is health and wellness. Health and wellness is a mega trend shaping consumer preferences and shoppinghabits and FMCG brands are listening. Leading global and Indian food and beverage brands have embraced this trend and are focused oncreating new emerging brands in health and wellness. According to the PwC-FICCIreportWinds of change, 2013: the wellness consumer, nutrition foods, beverages and supplements comprise INR 145 billion to 150 billion market in India, is growing at a CAGR of 10 to 12%. 2.5 Reaching Out to Consumers The consumer reach is changing too. Paid advertising is being replaced by below the line approaches which allow for direct contact with the public. Companies are also 9 10.4 12.3 12.1 14.8 18.92 29.4 100 2009 2010 2011 2012 2013 2015 2016 2025E Rural FMCG market(US$ billion)
  • 22. 22 | P a g e beginning to use the emerging technologies to capture essential data and new analytical models are developed to measure ROI. It’s a move that is transforming brand relationships and customer experiences of advertising across the sector. Digital marketing platforms are being used to make sure products capturepeople’s imagination. As Chris Lowe, chief marketing officer for Coca-Colasays, to be effective in today’s world. “Youhave to focus onthe basic relationship with the consumer”. This kind of thinking means that blogs, social media and other digital technologies are being used to market products in a whole new way. The FMCG companies have to react very fast to survive, as there is no room for complacency. Increasing brand awareness through social media is the key strategy for any savvy FMCG firm. These changes all make for a very exciting time in the FMCG/CPG industry and the ideal time to get involved. With strong cashflows, higher return oncapital employed and steady growth already clear to see, the prospects for the future look good. FMCG segment is the fourth largest sector in the Indian economy. The market size of FMCG in India is estimated to grow from US$30 billion in 2011 to US$74 billion in 2018. Food products are the leading segment, accounting for 43 percent of the overall market. Personal care (22 percent) and fabrics care (12 percent) come next in terms ofmarket share. Growing awareness, easier access and changing lifestyles have been the key growth drivers for the sector.
  • 23. 23 | P a g e 2.6 PEST Analysis of FMCG Industry Political (incl. Legal) Economic Social Technological Environmental regulations and protection Economic growth Income distribution Government research spending Tax policies Interest rates & monetary policies Demographics, Population growth rates, Age distribution Industry focus on technological effort International trade regulations and restrictions Government spending Labor / social mobility New inventions and development Contract enforcement law Consumer protection Unemployment policy Lifestyle changes Rate of technology transfer Employment laws Taxation Work/career and leisure attitudes Entrepreneurial spirit Life cycle and speed of technological obsolescence Government organization / attitude Exchange rates Education Energy use and costs Competition regulation Inflation rates Fashion, hypes (Changes in) Information Technology Political Stability Stage of the business cycle Health consciousness & welfare, feelings on safety (Changes in) Internet Safety regulations Consumer confidence Living conditions (Changes in) Mobile Technology
  • 24. 24 | P a g e CHAPTER-3 COMPANY PROFILE 3.1 Company Overview AVA Care is an illustration and esteemed Ayurvedic group from Kerala, which has a deep history in providing holistic health care. AVA care has the pride of manufacturing the largest selling branded ayurvedic soap ‘MEDIMIX’. Dr. V.P Sidhan is the founder of the MEDIMIX which is manufactured using a wholly developed process with manual equipment’s. The corporate office of medimix is situated in Chennai. The company has recently listed in the Limca Book of Records. It’s for 2015- 16 stood atINR 100 croreand it has a four percentmarket share in SouthIndia. 3.2 History The origin of AVA Cholayil can be traced to the kitchen of Dr. V.P Sidhan, a physician who worked in the Indian Railways and belonged to a family of Ayurveda practitioners in Trissur, Kerala. He used oils which his ancestors had used to treat skin diseases, to produce soap and launched Medimix in 1969. He kept the process handmade a there was very little money to invest. The Cholayil Group which he setup, split amicably by the turn ofthe century. AVA Cholayil is headed by the founder’s son-in law Dr. Anoop and handles the southern market, while the rest of the Indian market is handled by Dr. Sidhan’s son V.S Pradeep. Both the groups share the Medimix brand, but Cholayil has mechanized some parts of the production process. Medimix was initially sold as skin-care soaps. Its transformation as a consumer product began in early 1980s when Dr. A.V Anoop entered in the business. After the brand’s transformation as an FMCG product they expanded by adding more factories but retained the hand making process. The fact that handmade soaps had nil excise duty compared to 12.36% for soaps
  • 25. 25 | P a g e manufactured using the mechanized process was amotivation (this benefit was removed in 2005). 3.3 About the Founder AVA products and services is promoted by Dr. A. V. Anoop, who is also the managing director of AVA CHOLAYIL HEALTH CARE PVT. LTD. DR. A.V Anoop is a well-known personality in the field of Ayurveda with over 29 years of experience in soaps, Pharmaceuticals. Cosmetics and food industry. Dr. A.V Anoop is an industrialist, property Developer, film producer, social worker, organizer and Amateur Drama Artist. His tremendous passion for business expansion has led to formation of AVA products and services in March 2007 with the idea to deal in FMCG and other health. The focus of AVAPS is to provide products and services which benefit the human kind with the knowledge and time-tested procedures assimilated from the traditional system of Ayurveda, Naturopathy and Yoga which has been followed from time immemorial. The handmade soap Medimix classic, Medimix transparent, Medimix sandal and Medimix Hand wash are being marketed by AVAPS in the southern states of India namely Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. Discover freedom from pimples, body odor and skin infections, with the goodness ofthe largest selling Ayurvedic soap, Dry skin soap and Acne soap. A traditionally handmade soap, Ayurvedic soap, Dry skin soap and Acne soap with a time tested and unique formulation that combines the goodness of 18 herbs, Medimix is clinically proven to act effectively on many kinds of skin problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne. Discover freedom from pimples, body odor and skin infections… with goodness ofthe world’s largest selling Ayurvedic soap, Dry sin soap and acne soap. A traditionally handmade soap, Ayurvedic soap, Dry sin soap and Acne soap with a time tested and unique formulation that combines the goodness of 18 herbs, Medimix is clinically proven to act effectively on many kinds of skin problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne.
  • 26. 26 | P a g e 3.4 Board of Directors Dr. A.V.Anoop Managing Director- AVA Cholayil Health Care Pvt. Limited Mrs. Priya Anoop Director, Specialist in culinary arts and development of recipes for Sanjeevanam Restaurant. Mr. Vivek Venugopal Director (Business Development), having a Master’s in Business Administration with varied Business interests and experience. Mrs. Lanchana Vivek Director, having post-graduation in M.sc Management from UK and Bachelor’s degree in law. Her key focus is in developing Sanjeevanam Ayurvedic Treatment Center and Restaurants, Compliance of all legal/ statutory related matter. 3.5 Company Vision “CREATIVE SOLUTIONS ACTIONABLE RECCOMENDATION” The challenges faced by today’s health care industry requires a global understanding integrated with strong local knowledge. We want our clients invent tomorrow health care providing fresh ideas, creative solutions and actionable recommendations. Our success is due to the quality of our team in key locations around the world with this global vision when local advantage and our selective partnership with companies sharing our views. 3.6 Company Mission “PROVIDING EMERGING IN SIGHT FOR TOMMOROW HEALTH CARE” Medimix is dedicated to excellence in international health care marketing research and service. Our mission is to provide;  Strategies precise and accurate information at or client finger tips with the quickest turnaround time possible
  • 27. 27 | P a g e  Quality control by the client at every step to help you make complex business decision in total confidence  Market intelligence to give you a better understanding ofmarket opportunities and help you to provide the best products and services around the globe. 3.7 AVA Group  AVA Cholayil Health Care Pvt. Ltd - Manufacturers of Medimix soap and hand wash  AVA Products & Services – Marketers of Medimix soap and Hand wash  AVA Properties Pvt. Ltd – Real estate business  AVA Productions – Movie productions  AVA Charitable Trust – Trust to help deserved  Sanjeevanam – Vegetarian restaurant  Kaythra  Melam Masalas  MAAC Power 3.8 Products and Services Offering AVA Group is a diversified conglomerate with interests in Fast Moving Consumer Goods (FMCG), Health Care, Real Estate and Entertainment. Over the last many decades, the group has established itself as a leader in each of the sectors it operates in. Products and Services offered by AVA group of company are: 3.8.1 Medimix Launched in 1969, Medimix is the flagship brand of the AVA Group. The soap is hand-made and has a unique 18 herbs Ayurvedic formulation. Over the years Medimix has become one of the most recognized and trusted brands of India, in a survey conducted by Economic Times in 2013, it was voted 13th on the list of Personal Care brands and 56th on the list of ‘Most Trusted Brands of India’ .
  • 28. 28 | P a g e Medimix Products: Product 1. Soaps  Medimix Classic Soap  Medimix Sandal Soap  Medimix Clear Glycerin- Deep Hydration  Medimix Clear Glycerin- Oil Balance Soap  Medimix Clear Glycerin- Natural Toning Soap  Medimix Transparent Soap. 2. Hand Wash  Medimix Herbal Hand wash  Medimix Sandal Hand wash 3. Face Wash  Medimix Clear Glycerin Face wash- Oil Balance  Medimix Clear Glycerin Face wash- Natural Toning  Medimix Clear Glycerin Face wash- Deep Hydration Table-1: Products under Medimix brand 3.8.2 Melam Brand Melam has been a house hold favorite for decades. Its recent takeover by the diversified AVA group has added further strength to this brand and is sure to delight the consumers. Over the years Melam has carved a respected name for itself owing to its quality products and authentic recipes. AVA group has intensified these efforts along with the setup of modern plant, strict QC norms and checks and bygoing deep in to the roots of Kerala to get authentic and some possibly forgotten recipes. 3.8.3 Kaytra Amibika Pillai the renowned hairstylist and makeup artist in the fashion industry with her knowhow of the industry has joined hands with AVA group which has the
  • 29. 29 | P a g e ayurvedic expertise supported by full-fledged R & D team of AVA to market products in haircare & skincare vertical under the brand name “Kaytra”. Products under Kaytra:  KAYTRA SHAMPOO FOR FRIZZY HAIR  KAYTRA SHAMPOO FOR TREATED HAIR  KAYTRA REVITALISING HAIR CREAM  KAYTRA HAIR OIL  KAYTRA HAIR PACK 3.8.4 Sanjeevanam Sanjeevanam is a holistic health center where you will find a confluence of natural solutions for all health issues. A complete health package of treatment, beauty, diet and food have been specially formulated in the four divisions. Ayurvedic Therapy center, Natural Beauty center, Vegetarian Restaurant and Natural store. Good health is ensured naturally through proper Ayurvedic treatment, beautified through our Beauty center, replenished through our restaurant and complemented by our natural store. The Sanjeevanam concept has been born out of a wealth of understanding natural living and healing using only natural solutions. The main idea is to rejuvenate the body physically, mentally and spiritually for better living. Sanjeevanam is yet another feather in the cap of AVA CARE group. Sanjeevanam represents total health by integrating the principles of Ayurveda, Naturopathy and Yoga. Sanjeevanam is ISO 9001:2008 certified and commenced operations in July 2004. Health and intellect are the two blessings of life. Sanjeevanam seamlessly blends conventional and modern Ayurvedic medicinal values based on the above inspirational principle to provide a healthy body, mind and soul to mankind. Sanjeevanam comprises of;  Treatment centers.
  • 30. 30 | P a g e  Hair and face care units.  Vegetarian restaurant.  Health products counters. 3.9 Factories  Thirumazhisai  Madhavaram  Pondicherry  Bangalore  Villupuram (Third partyunit)  Thandalacherry (Water Plant) 3.10 Major Competitors  Mysore sandal soap  Hammam  Dettol  Margo  Chandrika  Manjal  Pears 3.11 Office Timing  9.30 AM to 5.30 PM with Lunch break for an hour (1.00 PM to 2.00 PM)  Employees should be reporting to duty on or before 9.30 AM  9.30 Am – 9.35 AM is considered as a grace period  9.35 AM – 9.45 AM will be treated as late. Only 3 late is permissible per month above which the casual leave (half day) eligibility may be deducted.  9.45 AM – 10.30 AM will be treated as permission and only one permissible per month above which casual day (half day) eligibility may deducted.  Information regarding late/permission/leave to be passed on to the concerned head pf the department and Time office/Front office.
  • 31. 31 | P a g e 3.12 Leave Eligibility and Procedure  Fornew joiner’s onecasual leave & onesick leave eligibility per month. After completing one year, eligible for one earned leave per month additionally.  All leave will be informed in advance and prior sanction is must for all from their HOD in the leave card provided.  Leave card will be provided on the date of joining by times office/front office and the same should be submitted to times officer after obtaining the HOD’S consent.  In the case emergency leave the information should be passed to the HOD & Time office/Front office. 3.13 Travel Policy  Employees who are required to outstations for official duty shall be eligible for travel expenses as appropriate to the employee grade more details of the travel policy framed from time to time which will be provided at the time of joining.  Ticket booking is done by admin department for all officials’ travels which should be duly authorized by the head of the department.  The request for ticket booking must initiated well in advance 3.14 Reimbursement Policy  Reimbursement such as conveyance, medical & telephone will be credited in the reimbursement account opened with the Dhanalakshmi Bank.  Reimbursement amount will be credited during the second week of the subsequent month.  The bill for the reimbursement must be submitted to Admin department by 15th march for the whole year.
  • 32. 32 | P a g e 3.15 Functions of head office AVA Cholayil Health Care Pvt. Limited  Marketing and Sales  Finance and Accounts  Production, Operations and Purchase  Information Technology  Legal Administration  HR  Media 3.16 Departments in AVA Cholayil Health Care Pvt. Limited  Purchase Department  Production Department  HR & Admin Department  Finance & Accounts Department  Marketing Department  IT Department  Legal Department  Research Department  Maintenance Department  Development Department 3.17 Financial Performance 3.17.1 TotalSales Year Total Sales ( INR in Lakhs) 2014 10324.59 2015 12622.96 2016 13521.45 Table:2 Total Sales
  • 33. 33 | P a g e Fig:2 Total Sales 3.17.2 Financial Statement
  • 34. 34 | P a g e Balance Sheet as at 31st March 2015 Particulars As at 31/03/2015 As at 31/03/2014 Rupees in Lakhs Rupees in Lakhs 1. EQUITY AND LIABILITIES (1) Shareholder’s Funds (a) Share Capital (b) Reserves and Surplus (2) Share application money pending allotment (3) Non-Current Liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other long term liabilities (d) Long term provisions (4) Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions Total 1. ASSETS (1) Non-current assets (a) Fixed assets i. Tangible assets ii. Intangible assets iii. Capital work-in-progress iv. Intangible assets under development (b) Non-current investments (c) Deferred tax assets (Net) (d) Long term loans and advances (e) Other non-current assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and Cash equivalents (e) Short-term loans and advances (f) Other current assets Total 1.00 2869.33 78.51 - - 89.13 244.57 775.51 251.86 1122.40 5432.30 888.20 6.90 99.37 - 18.07 86.81 88.47 3.96 558.52 723.23 37.64 1627.22 104.17 1189.76 5432.30 1.00 1899.19 148.46 - - 130.89 320.48 587.54 176.08 614.08 3877.72 887.42 8.37 64.02 - 15.57 60.78 346.43 2.12 237.35 811.75 6.58 797.20 135.56 504.56 3877.72 Table 3: Balance Sheet
  • 35. 35 | P a g e Profit and Loss statement for the year ended 31st March 2015 Particulars For the year ended 31/03/2015 For the year ended 31/03/2014 Rupees in Lakhs Rupees in Lakhs i. Revenue from operations (Gross) Less: Excise Duty Revenue from operations (Net) ii. Other Income iii. Total Revenue (i+ii) iv. Expenses: Cost of material consumed Purchase of Stock-in-Trade Changes in inventories of finished goods, work- in-progress and stock in trade Employee benefit expense Financial costs Depreciation and amortization expenses Other expenses Total Expenses v. Profit before exceptional and extraordinary items and tax (iii-iv) vi. Exceptional Items vii. Profit before extraordinary items and tax ( v-vi) viii. Extra ordinary items ix. Profit before tax (vii-viii) x. Tax expenses: (1) Current tax (2) Deferred tax xi. Profit/(Loss) from the period from continuing operations xii. Profit /(Loss) from discontinuing operations xiii. Tax expenses of discontinuing operations xiv. Profit / (Loss)from discontinuing operations ( xii- xiii) xv. Profit / ((Loss) for the period (xi + xiv) xvi. Earning per equity share: (Rs) (1) Basic (2) Diluted 14659.40 2036.44 12622.96 218.15 12841.11 6267.60 236.33 (2.20) 1768.18 62.30 122.96 2931.49 11386.66 1454.45 - 1454.45 - 1454.45 495.00 (20.82) 980.26 - - - 980.26 9802.61 9802.61 11985.16 1660.58 10324.59 166.23 10490.82 5152.43 147.88 (12.96) 1856.47 71.30 80.09 2664.74 9959.96 530.85 258.87 789.72 - 789.72 261.78 (24.24) 552.18 - - - 552.18 5521.81 5521.81 Table:4 Profit and Loss Statement
  • 36. 36 | P a g e CHAPTER-4 LITERATURE REVIEW 4.1 Theoretical Concept 4.1.1 Working Capital Working capital may be regarded as lifeblood of a business. It is defined as the amount of money a company has on hand, or will have, in a given year. Working capital is calculated by subtracting current liabilities from current assets. That is, one takes the value of all debts and obligations for the current year and subtracts that from the value of all cash and assets that might reasonably be converted into cash in the current year. This is a good measure of the short and medium-term financial health of a company, and may indicate by how much it can expand its operations without resorting to borrowing or another capital raising tactic. Working capital is also called operating assets or net current assets. A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day to day operations of a business. 4.1.2 Conceptof working capital There are two type of working capital, they are a) Gross working capital b) Net working capital a) Gross working capital: Gross Working Capital is the general conceptwhich determines the working capital concept. Thus, the gross working capital is the capital invested in total current assets of the business concern. Gross Working Capital is simply called as the total current assets of the concern. Gross working capital = Current Assets
  • 37. 37 | P a g e b) Net working capital: Net Working Capital is the specific concept, which, considers both current assets and current liability of the concern. Net Working Capital is the excess of current assets over the current liability of the concern during a particular period. If the current assets exceed the current liabilities it is said to be positive working capital; it is reverse, it is said to be Negative working capital. Net working capital = Current asset – Current liabilities 4.1.3 The Need or Objective of Working Capital Working Capital is an essential part ofthe business concern. Every business concern must maintain certain amount of Working Capital for their day-to-day requirements and meet the short-term obligations. Working Capital is needed for the following purposes.  Purchase of raw materials and spares: The basic part of manufacturing process is, raw materials. It should purchase frequently according to the needs of the business concern. Hence, every business concern maintains certain amount as Working Capital to purchase raw materials, components, spares, etc.  Payment of wages and salary: The next part of Working Capital is payment of wages and salaries to labor and employees. Periodical payment facilities make employees perfect in their work. So a business concern maintains adequate the amount of working capital to make the payment of wages and salaries.  Day-to-day expenses: A business concern has to meet various expenditures regarding the operations at daily basis like fuel, power, office expenses, etc.  Provide credit obligations: A business concernresponsible to provide credit facilities to the customerand meet the short-term obligation. So the concern must provide adequate Working Capital.  Optimal return on current asset investment: The return on the investment made in current assets should be more than the weighted average cost of capital so as to ensure wealth maximization of the owners. In other words, the rate of return earned due to investment in current
  • 38. 38 | P a g e assets should be more than the rate of interest or cost of capital used for financing the current assets. 4.1.4 Adequacy, Inadequacy and Excessive Working Capital Adequacy of working capital: Working capital should be adequate for the following reasons:  It protects a business from the adverse effect of shrinkage in the value of current assets.  Possible to pay the entire current obligation promptly and take advantage of cash discount.  Permits the carrying of inventories at a level that would enable a business to serve satisfactorily the need of its customers.  Enable a company to operate its business more efficiently because there is no delay in obtaining material etc. because of credit difficulties. Inadequacy of working capital:  The credit worthiness of the company is likely to be put at risk becauseof the lack of liquidity.  The company may not be able to take advantage of profitability business opportunity.  The modernization of equipment and even routine repairs and maintenance facilities may be difficult to administer.  The company cannot afford to increase its cash sale and many have to restrict its activities to credit sale only.  The companycannot afford to increase its cashsales and many have to restrict its activities to credit sales only. Excessive working capital: Excessive working capital rise to following problems. High liquidity may reduce a company to undertaken greater production which may not have a matching demand. It may find itself in an embracing position unless its marketing policies are properly adjusted to boostup the market for its good.
  • 39. 39 | P a g e  The company may invest heavily in its equipment which may be justified by actual sales or production. This may provide a fertile ground for later over- capitalization.  The company may enjoy high liquidity and at the same time, suffer from low profitability.  The company may be tempted to overtrade and lose heavily.  The companykeeps very big inventories and tip up its funds unnecessarily. 4.1.5 Kinds of Working Capital Working capital can be classified into three important types on the basis of time. a) Permanent Working Capital: It is also known as Fixed Working Capital. It is the capital; the business concernmust maintain certain amount ofcapital at minimum level at all times. The level of Permanent Capital depends upon the nature of the business. Permanent or Fixed Working Capital will not change irrespective of time or volume of sales. b) Temporary Working Capital: It is also known as variable working capital. It is the amount of capital which is required to meet the Seasonal demands and some special purposes. It can be further classified into Seasonal Working Capital and Special Working Capital. The capital required to meet the seasonal needs of the business concern is called as Seasonal Working Capital. The capital required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research, etc. c) Semi Variable Working Capital: Certain amount of Working Capital is in the field level up to a certain stage and after that it will increase depending upon the change of sales or time.
  • 40. 40 | P a g e Fig:3 Kinds of WC 4.1.6 Factors Determining Working Capital: Working Capital requirements depends upon various factors. There are no set of rules or formula to determine the Working Capital needs of the business concern. The following are the major factors which are determining the Working Capital requirements.  Nature of business: Working Capital of the business concerns largely depend upon the nature of the business. If the business concerns follow rigid credit policy and sell goods only for cash, they can maintain lesser amount of Working Capital. A transport company maintains lesser amount of Working Capital while a construction company maintains larger amount of Working Capital.  Production cycle: Amount ofWorking Capital depends upon the length of the productioncycle. If the productioncycle length is small, they need to maintain lesser amount of Working Capital. If it is not, they have to maintain large amount of Working Capital.  Business cycle: Business fluctuations lead to cyclical and seasonal changes in the business condition and it will affect the requirements of the Working Capital. In the booming conditions, the Working Capital requirement is larger and in the depression condition, requirement of Working Capital will reduce. Better business results lead to increase the Working Capital requirements.
  • 41. 41 | P a g e  Production policy: It is also one of the factors which affects the Working Capital requirement of the business concern. If the company maintains the continues production policy, there is a need of regular Working Capital. If the productionpolicy of the company depends upon the situation or conditions, Working Capital requirement will depend upon the conditions laid down by the company.  Credit policy: Credit policy of sales and purchase also affect the Working Capital requirements of the business concern. If the company maintains liberal credit policy to collect the payments from its customers, they have to maintain more Working Capital. If the company pays the dues on the last date it will create the cash maintenance in hand and bank.  Growth and expansion: During the growth and expansion of the business concern, Working Capital requirements are higher, because it needs some additional Working Capital and incurs some extra expenses at the initial stages.  Availability of raw materials: Major part of the Working Capital requirements are largely depend on the availability of raw materials. Raw materials are the basic components of the production process. If the raw material is not readily available, it leads to production stoppage. So, the concern must maintain adequate raw material; for that purpose, they have to spend some amount of Working Capital. 8. Earning capacity: If the business concern consists of high level of earning capacity, they can generate more Working Capital, with the help of cashfrom operation. Earning capacity is also one of the factors which determines the Working Capital requirements of the business concern. 4.1.7 Approaches of Financing Working Capital Determining the finance mix is an important part of working capital management. Under this decision, the relationship among risk, return and liquidity are measured and also which type of financing is suitable to meet the Working Capital requirements of the business concern. There are three basic approaches for determining an appropriate Working Capital finance mix. a) Hedging or matching approach b) Conservative approach c) Aggressive approach
  • 42. 42 | P a g e a) Hedging or matching approach: Hedging approach is also known as matching approach. Under this approach, the business concern can adopt a financial plan which matches the expected life of assets with the expected life of the sources of funds raised to finance assets. When the business follows matching approach, long-term finance shall be used to fixed assets and permanent current assets and short-term financing to finance temporary or variable assets. Fig:4 Financing under Matching Approach b) Conservative Approach: Under this approach, the entire estimated finance in current assets should be financed from long-term sources and the short-term sources should be used only for emergency requirements. This approach is called as “Low Profit – Low Risk” concept.
  • 43. 43 | P a g e Fig:5 Conservative Approach c) Aggressive Approach: Under this approach, the entire estimated requirement of current assets should be financed from short-term sources and even a part of fixed assets financing be financed from short- term sources. This approach makes the finance mix more risky, less costly and more profitable. Fig:6 Aggressive Approach
  • 44. 44 | P a g e 4.1.8 Sources of Working Capital The two segments ofworking capital viz., regular orfixed or permanent and variable are financed by the long-term and the short-term sources of funds respectively. The main sources of long-term funds are shares, debentures, term- loans, retained earnings etc. The sources of short-term funds used for financing variable part of working capital mainly include the following: 1. Loans from commercial banks 2. Public deposits 3. Trade credit 4. Factoring 5. Discounting bills of exchange 6. Bank overdraft and cash credit 7. Advances from customers 8. Accrual accounts  Loans from Commercial Banks: Small-scale enterprises can raise loans from the commercial banks with or without security. This method of financing does not require any legal formality except that of creating a mortgage on the assets. Loan can be paid in lump sum or in parts. The short-term loans can also be obtained from banks on the personal security of the directors of a country. Such loans are known as clean advances. Bank finance is made available to small- scale enterprises at concessional rate of interest. Hence, it is generally a cheaper source of financing working capital requirements of enterprise. However, this method of raising funds for working capital is a time-consuming process.  Public Deposits: Often companies find it easy and convenient to raise short- term funds by inviting shareholders, employees and the general public to deposit their savings with the company. It is a simple method of raising funds from public for which the company
  • 45. 45 | P a g e has only to advertise and inform the public that it is authorized by the Companies Act 1956, to accept public deposits. Public deposits can be invited by offering a higher rate of interest than the interest allowed on bank deposits. However, the companies can raise funds through public deposits subject to a maximum of 25% of their paid up capital and free reserves.  Trade Credit: Just as the companies sell goods oncredit, they also buy raw materials, components and other goods on credit from their suppliers. Thus, outstanding amounts payable to the suppliers i.e., trade creditors for credit purchases are regarded as sources of finance. Generally, suppliers grant credit to their clients fora period of 3 to 6 months. Thus, they provide, in a way, short- term finance to the purchasing company. As a matter of fact, availability of this type of finance largely depends upon the volume of business. More the volume of business more will be the availability of this type of finance and vice versa.  Factoring: Factoring is a financial service designed to help firms in managing their bookdebts and receivables in a better manner. The book debts and receivables are assigned to a bank called the 'factor' and cashis realized in advancefrom the bank. Forrendering these services, the fee or commission charged is usually a percentage of the value of the book debts/receivables factored. This is a method of raising short-term capital and known as 'factoring'. On the one hand, it helps the supplier companies to secure finance against their bookdebts and receivables, and on the other, it also helps in saving the effort of collecting the book debts.  Discounting Bills of Exchange: When goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. The bills are generally drawn for a period of 3 to 6 months. In practice, the writer of the bill, instead of holding the bill till the date of maturity, prefers to discount them with commercial banks on payment of a charge known as discount. The term 'discounting of bills' is used in case of time bills whereas the term, 'purchasing of bills' is used in respect of demand bills. The rate of discount to be charged by the bank is prescribed by the Reserve Bank of India (RBI) from time to time. It generally amounts to the interest for the period from the date of discounting to the date of maturity of bills.
  • 46. 46 | P a g e If a bill is dishonored on maturity, the bank returns the dishonored bill to the companywho then becomes liable to pay the amount to the bank. The costofraising finance by this method is the amount of discount charged by the bank. This method is widely used by companies for raising short-term finance.  Bank Overdraft and Cash Credit: Overdraft is a facility extended by the banks to their current account holders for a short-period generally a week. A current accountholder is allowed to withdraw from its current deposit account up to a certain limit over the balance with the bank. The interest is charged only on the amount actually overdrawn. The overdraft facility is also granted against securities. Cash credit is an arrangement whereby the commercial banks allow borrowing money up to a specified-limit known as 'cashcredit limit.' The cash credit facility is allowed against the security. The cash credit limit can be revised from time to time according to the value of securities. The money so drawn can be repaid as and when possible. The interest is charged on the actual amount drawn during the period rather on limit sanctioned. The rate of interest charged onboth overdraft and cashcredit is relatively higher than the rate of interest given on bank deposits.  Advances from Customers: One way of raising funds for short-term requirement is to demand for advance from one's own customers. Examples of advances from the customers are advance paid at the time of booking a car, a telephone connection, a flat, etc. This has become an increasingly popular source of short-term finance among the small business enterprises mainly due to two reasons.  Accrual Accounts: Generally, there is a certain amount of time gap between incomes is earned and is actually received or expenditure becomes due and is actually paid. Salaries, wages and taxes, for example, become due at the end of the month but are usually paid in the first week of the next month. Thus, the outstanding salaries and wages as expenses for a week help the enterprise in meeting their working capital requirements. This source of raising funds does not involve any cost.
  • 47. 47 | P a g e 4.1.9 Estimation of Working Capital Working Capital requirement depends upon number of factors, which are already discussed in the previous parts. Now the discussion is on how to calculate the Working Capital needs of the business concern. It may also depend upon various factors but some of the common methods are used to estimate the Working Capital.  Estimation of components of working capital method: Working capital consists of various current assets and current liabilities. Hence, we have to estimate how much current assets as inventories required and how much cash required to meet the short term obligations. Finance Manager first estimates the assets and required Working Capital for a particular period.  Percent of sales method: Based on the past experience between Sales and Working Capital requirements, a ratio can be determined for estimating the Working Capital requirement in future. It is the simple and tradition method to estimate the Working Capital requirements. Under this method, first we have to find out the sales to Working Capital ratio and based on that we have to estimate Working Capital requirements. This method also expresses the relationship between the Sales and Working Capital.  Operating cycle: Working Capital requirements depend upon the operating cycle of the business. The operating cycle begins with the acquisition of raw material and ends with the collection of receivables. Operating cycle consists of the following important stages: 1. Raw Material and Storage Stage, (R) 2. Work in Process Stage, (W) 3. Finished Goods Stage, (F) 4. Debtors Collection Stage, (D) 5. Creditors Payment Period Stage, (C)
  • 48. 48 | P a g e 4.2 Literature Review Many authors have analysed working capital management fromdifferent perspective in different economic arena, some of which are found very interesting and useful for my present study. The crux of those literatures is mentioned below: Nunn deal with strategic determinants ofworking capital on a productline basis and examined why firms have different levels ofworking capital. He used factoranalysis to test 166 variables against the working capital policies of over 1700 businesses or product lines from 1971 to 1978. The study showed that small batch production, order backlog, capital intensity and relative breadth of product line were positively correlated to working capital. On the other hand, continuous process production, capacity utilization and made to order products were negatively associated with working capital levels. He also found that working capital divided by sales are positively correlated to industry concentration. Gupta and Huefer, in the year 1972 examined the differences in financial ratio between industries and found that differences exist between ratio means among industries. Frecka and Lee (1983), focused an area of research on the issue of using regression analysis verses financial ratios for analysis and prediction, Filbeck and Krueger (2005) discover that significant differences exist between industries in working capital measures across time. In addition, they discovered that these measures for working capital change significantly within industries across time. Maynard Rafuse, (1993) proposed that improvement of working capital by delaying payment to creditors is an inefficient and ultimately damaging practice, both to its practitioners and to the economy as a whole. Stock reduction strategies, drawing on some of the techniques of “lean production” are far more effective, and the article proposes that those seeking concentrated working capital reduction strategies should focus on stock reduction. The author’s experience says that a good proportionofthe finance managers will take the view that these arguments “are good in theory, but not in the real world”. In the event, when cash flow pressures arise, suppliers (and even customers)are invariably the first to feel the draught. Apart from being ethically questionable, this reflects dangerous short-termism. Deloof (2003) investigated the relationship between working capital management and corporate profitability for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 periods. Theresult from analysis showed that there was a negative correlation between profitability that was measured by gross operating income and cash conversion cycle as well number of day’s accounts receivable and inventories. He suggested that managers can increase corporate profitability by reducing the
  • 49. 49 | P a g e number of days of accounts receivable and inventories. Singh and Pandey (2008) studied the impact of working capital components on profitability of Hindalco Industries Limited in India for period from 1990 to 2007. Results of the study showed that current ratio, liquid ratio, receivables turnover ratio and working capital to total assets ratio had statistically significant impact on the profitability of Hindalco Industries Limited. Lazaridis and Tryfonidis (2006) have investigated relationship between working capital management and corporateprofitability of listed company in the Athens Stock Exchange. They used a sample of 131 listed companies for period of2001-2004 to examine this relationship. The result from regression analysis indicated that there was a statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. From those results, they claimed that the managers could create value for shareholders by handling correctly the cash conversion cycle and keeping each different component to an optimum level. Ganesan, (2007), analyzed impact of working capital management upon the performance of firms in Telecom industry. The variables used were, days sales outstanding, number of days for payment to vendors, average days inventory held, cash conversion efficiency, revenue to total assets, revenue to total sales, etc. Findings reveal negative & insignificant relationship between profitability and daily working capital requirement in the said industry. Amarjit Gill et.al (2010) explored the relation between Working Capital Management and the firm’s profitability by taking a sample of 88 American Manufacturing Companies which are listed on the New York StockExchange for the period of 3 years from 2005 -2007 and found out that there existed no statistically significance difference between Average Days of Accounts Payable and Corporate Profitability. In some of the studies, positive correlation exists between Average Days of Accounts Payable variable and the firm’s profitability. This can be explicated with the fact that lagging payments to suppliers ensures that the firm has some cash to buy more inventory for sale thus escalating its sales level hence also enhancing its profits. (Huynh Phuong et.al, 2010). Tahir and Anuar in their paper did a literature review of the related papers from 2008-2010 and found out that the firm’s Growth (in Sales) has significant and positive influences on the firm’s profitability. They also mentioned that some of the studies in literature showed that the ratio of fixed financial Assets to total Assets has a negative relation with the Dependent Variable. Reheman et.al (2010) conducted a study of working capital management policy of 204 firms from the manufacturing sector in Pakistan for the period from 1998 till 2007. Their results showed that the manufacturing firms in Pakistan follow a conservative working capital management and that the firms need to improve their collection and payment policy.
  • 50. 50 | P a g e The review ofliterature highlights the relationship between profitability and working capital management and how various components of cash conversion cycle are affecting the profitability of the firms. All the previous studies also lay emphasis on how important for a firm is to conduct working capital analysis. Although most of the studies were carried in different environment across different countries but majority of them suggested similar trends.
  • 51. 51 | P a g e CHAPTER- 5 RESEARCH DESIGN This research is ex-post facto research. This approachevaluates the relationship between variables which have been already occurred. Here variables were used to test the relationship between the working capital management and the profitability. I have used quantitative methods as financial data collected from the database was analyzed. VARIABLES CODE DESCRIPTION OF VARIABLES HYPOTHESIS EXPECTED SIGNS Net Income NI Measure of profitability Dependent Variable X1 RCP Receivable Collection Period, time gap in the collection of money from the customers. Higher gap in collecting money from customer lower the profit (-) X2 APP Accounts Payable Period, credit period offered by the supplier. Higher the payable day higher the profit. (+) X3 ICP Inventory Conversion Period, it represent how a company holding its inventory Higher the inventory day lower the profitability. (-) X4 CCC Cash Conversion Period, movement of cash in terms of operation. Higher the CCC lower the profitability. (-) X5 SOF Size of the firm determined by log of total assets of the firm Higher the size of the firm higher the profitability. (+) Table 5: Selected Variables
  • 52. 52 | P a g e HYPOTHESIS Hypothesis 1 H0: There is no relationship between receivable period and profitability H1: Receivable period and profitability are negatively related – higher the receivable period lower the profitability. Hypothesis 2 H0: There is no relationship between the inventories days and the profitability. H2: The inventory days are negatively related to the profitability – higher the inventories day lower the profitability. Hypothesis 3 H0: There is no relationship between the payable days and the profitability. H3: The payable days are positively related to the profitability – higher the payable days higher the profitability. Hypothesis 4 H0: There is no relationship between the cashconversion cycle and the profitability. H4: Cash conversion cycle (CCC) is negatively related to the firm’s profitability – higher the CCC lowers the profitability. Hypothesis 5 H0: There is no relationship between the size of the firm and the profitability. H5: There is a positive relationship between the size of the firm and the profitability.
  • 53. 53 | P a g e MODEL The model is developed on the basic components of Working Capital Management. As my selected topic is to analyze the impact of Working Capital Management on profitability, receivable, payable and inventory periods are the basic and core measures. Net income was considered as the benchmark of profitability as it is the amount after all kind of deduction. Cash Conversion Cycle was taken to get a better idea about the relationship between determinants of working capital management and profitability. Finally size of a firm may influence profitability. As it is a manufacturing firm and has higher assets, logarithm of total assets was considered as size of the firm. NI = ƒ [Receivable days(X1), Payable Days(X2), Inventory Days(X3), Cash Conversion Cycle(X4), Size of the firm(X5)]
  • 54. 54 | P a g e CHAPTER-6 DATA ANALYSIS AND INTERPRETATION 6.1 Working Capital Management Policy in AVA Cholayil Health Care Pvt. Limited In simple terms working capital can be defined as current assets minus current liabilities. When a company is unable to manage its current liability through its current assets liquidity problem arises. This can threaten the future existence of the company. On the other hand when there are excess cash, a company should invest in short term securities to enhance the wealth of the shareholders. Working capital policy can be mainly classified in three categories. They are defensive policy, aggressive policy and conservative policy. If the firm can forecast accurately its level and pattern of sales, inventory procurement time, inventory usage rates, level and pattern of production, productioncycle time, split between cash sales and credit sales, collection period, and other factors which impinge on working capital components, the investment in current assets can be defined uniquely. In case of uncertainty, the outlay on current assets would consist of a basic component meant to meet normal requirements and a safety component meant to cope with unusual demands and requirements. The safety component depends on how conservative or aggressive is the current asset policy of the firm. If the firm pursues very conservative policy it would carry a high level of current assets in relation to sale. On the basis of previous discussionit can be referred that AVA Cholayil Health Care Pvt. Limited follows an aggressive working capital policy. This company finances their working capital through short term debt. In an aggressive working capital policy the whole amount of current assets are financed by short-term debt. Somepart of the non-current assets also will be finance by short term debt. This policy will push the finance department to be proactive in the management of working capital always, as they need to sell stocks fast and collect receivables on a timely manner. In order to, settle the short term debts on time. As AVA Cholayil Health Care Pvt. Limited has higher sales or growth aggressive working capital policy suits them the most. The way of determining the nature of working capital policy is illustrated below: Financing Policy= Current Liabilities/ Total Asset
  • 55. 55 | P a g e Year Current Liabilities Total Assets Financing Policy Ratio 2014 169818000 721510000 0.437 2015 239434000 543230000 0.441 2016 278138000 387772000 0.385 Table:6 Financing policy Ratio Fig:7 Financing Policy InAVA Cholayil Health Care Pvt. Limited the ratio ofcurrent liabilities to total asset is high which means major portion of their current liabilities are used to finance their total asset. 6.1.1 Inventory Management Inventory Period is an efficiency ratio that shows how quickly a company uses up its supply of goods over a given time frame. While inventory period is shortening in
  • 56. 56 | P a g e some industries, such as grocery stores, than in others, such as department stores, comparatively lengthening inventory period means that a company has poorsales or too muchinventory. It is computed bydividing inventories bythe company's average daily cost of goods sold. Inventory Period= Inventories/ COGS * 365 Table:7 Inventory Conversion Period Fig:8 Inventory Days Interpretation: From the above analysis we can see that the inventory conversion period was highest in the FY 2013-14. After that there is a decline in the inventory conversion period which is a sign of increase in performance of the products. Inventory COGS ICP Year Amount Year Amount Year Days 2014 81175000 2014 528735000 2014 56.0372871 2015 72323000 2015 650173000 2015 40.60134 2016 74097000 2016 642429000 2016 42.0986677 0 10 20 30 40 50 60 2013-14 2014-15 2015-16 Inventory Days
  • 57. 57 | P a g e 6.1.2 Accounts Receivable Days Number of Days Accounts Receivable is the length of time required to collect cash receipts. It is also called "Days of Sales Outstanding". Lesser the time of Accounts Receivable that means more efficient CCC. AR is a very important module of WCM that fulfills its term to efficiency. Accounts Receivable is calculated by dividing the receivables by the net sale per day. Accounts Receivable Period= Receivables/ Net Sales * 365 Table:8 Accounts Receivable Period Fig:9 Receivable Days Interpretation: TradeReceivables NetSales RCP Year Amount Year Amount Year Days 2014 658000 2014 1032459000 2014 0.23261941 2015 3764000 2015 1262296000 2015 1.08838181 2016 3425000 2016 1352145000 2016 0.92454951 0 0.2 0.4 0.6 0.8 1 1.2 2013-14 2014-15 2015-16 Receivable Days
  • 58. 58 | P a g e The above figure shows that accounts receivable period of AVA Cholayil Health Care Pvt. Limited is in between 0 to 2 days which is really satisfactory. It means they collect money from their customers within a very short period of time. This indicates their efficiency in cash conversion cycle. 6.1.3 Accounts Payable Period Accounts Payable is very important component of WCM. It is the length of time for which the firm is able to delay payment on the purchase of raw materials to its suppliers. The longer the period of AP, company has better opportunity to finance on other things. It helps the company to reduce costs bynot taking loans for other expenses. Accounts Payable Period is calculated by dividing trade payables by the company's costof goods sold per day. Accounts Payable Period= Trade Payables/ COGS *365 Table:9 Accounts Payable Period Trade Payable COGS APP Year Amount Year Amount Year Days 2014 658000 2014 528735000 2014 40.5594674 2015 3764000 2015 650173000 2015 43.5362819 2016 3425000 2016 642429000 2016 74.7454894
  • 59. 59 | P a g e Fig:10 Accounts Payable Days Interpretation: We know that higher the payment period the better. In comparison with AVA Cholayil Health Care Pvt. Limited’s receivable period they hold a higher payable periods. Though payable days were lower in 2013-14, early payment in later years has its advantage suchas good reputation among creditors. In orderto ensure highest possible amount of cash in hand payable period were increased to 74.745 and above in the year 2015-16. 6.1.4 Cash Conversion Cycle A cash conversion cycle (or jut cash cycle) is the amount of time it takes for a company, business or organization to receive payment for its products after it has paid for its materials or inventory. Calculate cash conversion cycle by adding inventory costs overacertain time to accounts receivable costs overthatsame period and then subtracting accounts payable cost over that period. CCC mainly helps to figure out how cash is moving throughout the company in terms of duration. When CCC shortens that means the company has more cash for other usages suchas investing on equipment orinnovating manufacturing and selling process. On the other hand, when CCC lengthens, cash tied up in firm's operation activities where there is little chance for other investment. In the below figure the cash conversion cycle of a FMCG firm is illustrated: 0 10 20 30 40 50 60 70 80 2013-14 2014-15 2015-16 Payable Days
  • 60. 60 | P a g e Fig:11 Cash flow cycle Operating Cycle is the interval between the order of inventory stock and the date when cash is collected from receivables. And CCC begins when the company pays cash to suppliers for the materials purchased and ends when cash is collected from customers for credit sales. In general, CCC = Operating Cycle - Accounts Payable Period Or CCC = (Inventory Period + Accounts Receivable Period) - Accounts Payable Period
  • 61. 61 | P a g e Year ICP RCP APP CCC 2014 56.037 0.233 40.559 15.711 2015 40.601 1.088 43.536 -1.847 2016 42.098 0.924 74.745 -31.723 Table:10 Cash Conversion Cycle Fig:12 Cash Conversion Cycle Interpretation: In the abovefigure, it shows CCC ofAVA Cholayil Health Care Pvt. Limited for 2013-2014 is positive. But in the following years the CCC of AVA Cholayil Health CarePvt. Limited is keep ondecreasing. It comes to negative in the year 2015 and 2016. That basically means they are getting paid by their customers long before they pay their suppliers. Essentially this is an interest free way to finance their operations by borrowing from their suppliers. The lower the cash cycle the better it looks for a company’s finances, so a negative cash cycle is very desirable. A negative cash cycle is one in which firm don’t pay for their inventory or materials until after the firm has sold the final product associated with them. It means the firm using their working capital as efficiently as possible and have available cash for other things. -40 -30 -20 -10 0 10 20 2013-14 2014-15 2015-16 Cash Conversion Cycle
  • 62. 62 | P a g e 6.1.5 Cash Management One of the techniques of assessing working capital management is measuring the performance of cash management. The finance manager must maintain adequate liquidity so that the firm can pay off its obligations. In order to test the liquidity of a firm one of the best techniques that can be used is the liquidity ratios.  Current ratio The liquidity and efficiency ratio that evaluates an organization’s capability in paying off its short-term debts using the current assets is called current ratio. Current Ratio = Current Asset / Current Liability Year Current Assets Current Liabilities Current Ratio 2014 249300000 169818000 1.468 2015 424054000 239434000 1.771 2016 243974000 278138000 0.877 Table:11 Current Ratio Fig:13 Current Ratio 1.468 1.771 0.877 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 2013-14 2014-15 2015-16 CURRENT RATIO
  • 63. 63 | P a g e Interpretation: The current ratio is fluctuating over the years. The rate is between 0.8 and 1.7 which indicates a sound liquidity position of the company.  Quick Ratio Quick ratio measures how efficiently the company can pay off its short term financial liabilities. It is a better measure than current ratio as it deducts less liquid assets such as inventory. Quick Ratio = (Current Assets – Inventory) / Current Liabilities Sl. No F.Y Quick Assets Current Liabilities Quick Ratio 1. 2013-14 168119820 169818000 0.99 2. 2014-15 351728546 239434000 1.469 3. 2015-16 169664180 278138000 0.61 Table:12 Quick Ratio Fig:14 Quick Ratio 0.99 1.469 0.61 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 2013-14 2014-15 2015-16 QUICK RATIO
  • 64. 64 | P a g e Interpretation: From the above chart a fluctuating quick ratio of that AVA Cholayil Pvt. Limited can be observed over the years. But it is considered that a quick ratio of 1:1 is satisfactory. So it can be said that AVA Cholayil Pvt. Limited is not performing very well in managing its cash. In the FY 2014-15 it increased to 1.469 but again decreases to 0.61 in the FY 2015-16. This should be taken care by the management of the organization soon. 6.2 Data Analysis 6.2.1 Descriptive Analysis Descriptive statistics are brief descriptive coefficients that summarize a given data set, which can be either a representation of the entire population or a sample of it. Descriptive statistics are broken down into measures of central tendency and measures of variability, or spread. Measures of central tendency include the mean, median and mode, while measures of variability include the standard deviation or variance, the minimum and maximum variables, and the kurtosis and skewness. Mean is to measure central tendency which is the average value ofa data setwhereas standard deviation to measure dispersion of the studied sample in which it is the average difference between observed values and the mean. Count Mean Std. Deviation Min. Max. ICP 3 46.24533333 8.512802378 40.601 56.037 RCP 3 0.748333333 0.453762419 0.233 1.088 APP 3 52.94666667 18.9365027 40.559 74.745 CCC 3 -5.953 23.9820874 -31.723 15.711 Size of the Firm 3 8.727267516 0.134998447 8.588576447 8.858242355 Table:13 Descriptive Analysis
  • 65. 65 | P a g e Interpretation: Above table shows the descriptive statistics of the variables used in the study. It embodies number of observation, mean, standard deviation, minimum and maximum of the variables used. The organization receives payment from the customers at an average of 0.7483 and the standard deviation of the receivable day is 0.4537 which means less than one day. It is a positive indicator for the organization. It shows that the receivable days of the organization is positively influencing its profitability. The maximum value for payable days is of 74.745 days which is very significant. The average payable days is of 52.946 days indicate approximate 2 months credit period. It is also positively influencing the profitability of the firm. The mean value of inventory days is of 46.2453 days which is quite high. The firm take an average of more than 1month to convert inventory to cash. It can affect the profitability of the firm negatively. The average value of cash conversion cycle is -5.953 and the minimum value is - 31.723. The reason behind negative CCC is the significant difference between receivable and payable periods. 6.2.2 Correlation Analysis Correlation analysis is a method of statistical evaluation used to study the strength of a relationship between two, numerically measured, continuous variables. This particular type of analysis is useful when a researcher wants to establish if there are possible connections between variables. If correlation is found between two variables it means that when there is a systematic change in one variable, there is also a systematic change in the other; the variables alter together over a certain period of time. If there is correlation found, depending upon the numerical values measured, this can be either positive or negative.
  • 66. 66 | P a g e  Positive correlation exists if one variable increases simultaneously with the other, i.e. the high numerical values of one variable relate to the high numerical values of the other.  Negative correlation exists if one variable decreases when the other increases, i.e. the high numerical values of one variable relate to the low numerical values of the other. Pearson’s product-momentcoefficient is the measurement of correlation and ranges (depending onthe correlation) between +1 and -1. +1 indicates the strongestpositive correlation possible, and -1 indicates the strongest negative correlation possible. Therefore the closer the coefficient to either of these numbers the stronger the correlation of the data it represents. On this scale 0 indicates no correlation, hence values closer to zero highlight weaker/poorer correlation than those closer to +1/-1. The correlation coefficients are interpreted in this report as per the following scale:  0 to 0.2 Very weak, negligible  0.2 to 0.4 Weak, low  0.4 to 0.7 Moderate  0.7 to 0.9 Strong, high, marked  0.9 to 1.0 Very strong, very high Table: 14 Correlation Analysis ICP RCP APP CCC Size of the firm Mean 46.24533333 0.748333333 52.9466667 -5.953 8.727267516 Variance 72.46780433 0.205900333 358.591134 575.140516 0.018224581 Observations 3 3 3 3 3 Pearson Correlation -0.948223346 0.973772901 0.1898828 -0.468094891 0.633041583 P(T<=t) two-tail 0.024480111 0.024480064 0.0244801 0.024480086 0.02448007
  • 67. 67 | P a g e Interpretation: The result shows a negative relationship between net income and inventory days which is -0.9482. It indicate that higher the inventory conversion period lower the profitability ofthe firm. Correlation coefficient of inventory conversion period is 0.9 which shows a very strong relationship. The p value is 0.02 which is less than the level of significance. It shows that there is a significant relationship between the net income and inventory days. The coefficient for the receivable day is 0.973 which indicate very strong positive correlation with profitability. The receivable days of the organization takes an average of less than 1 day for receiving payments. It increases the profitability ofthe firm. There is a significant relationship between the profitability and receivable days with a p value of 0.024. The correlation result between accounts payable period and net income indicate with positive coefficient of 0.189 which shows very weak relationship. The result for correlation between the accounts payable days and profitability is positive even though accounts payable days of the organization making only slight changes in the profitability. Cash Conversion Cycle of the organization shows a negative relationship which is significant. The correlation coefficient of CCC is -0.468 which is moderate. The relation between size of the firm and profitability is moderately correlated with a coefficient of 0.633. The level of significance is 0.02 which shows a significant relationship between size of the firm and the profitability. When the size of the firm increases it affect the profitability of the firm positively with a moderate correlation.
  • 68. 68 | P a g e HYPOTHESIS TESTING Hypothesis Result H01: There is no relationship between receivable period and the profitability. Rejected H02: There is no relationship between the inventories days and the profitability. Rejected H03: There is no relationship between the payable days and the profitability. Rejected H04: There is no relationship between the cash conversion cycle and the profitability. Rejected H05: There is no relationship between the size of the firm and the profitability. Rejected Table:15 Summary of Hypothesis Testing
  • 69. 69 | P a g e CHAPTER 7 FINDINGS AND SUGGESTIONS 7.1 Findings of the Study A firm must have adequate working capital, i.e.; as much is needed the firm. Itshould neither be excessive nor inadequate. Both situation are dangerous. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the firm does nothave sufficient funds forrunning its operations. It will be interesting to understand the relationship between the determinants of working capital and profitability of the firm. The basic objective of working capital management is to manage firms current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e.; neither inadequate nor excessive. After conducting the report through various analysis and evaluation of influence of Working Capital Management on AVA Cholayil Health Care Pvt. Limited Profitability, many findings have been found; it includes both positive and negative findings. From the study, it is shown that there is a significant relationship between profitability and the determinants of working capital management. The performance of the company should not be judged only on the basis of profitability measured in terms of return on sales and investment. This performance has a direct link with the fluctuation of working capital ofthe firm. Thus, management should also emphasize the growth and efficiency of investment in working capital along with the effective management of fixed capital over time. The major findings after detailed analysis of AVA Cholayil Health Care Pvt. Limited profitability by using determinants of working capital management model are as follows a) AVA Cholayil Health Care Pvt. Limited follows an aggressive working capital policy. The firm utilizes their estimated requirement of current assets which are financed from short-term sources and even a part of fixed assets be financed from short- term sources. This approachmakes the finance mix more risky, less costly and more profitable. As AVA Cholayil Health Care Pvt. Limited has higher sales or growth aggressive working capital policy suits them the most.
  • 70. 70 | P a g e b) AVA Cholayil Health Care Pvt. Limited maintain an effective fund collection system of account receivable which is excellent over the years. It takes an average of 1 day for collection of receivables from the debtors. It helps to increase the profitability of the firm. Low processing time for collection of receivables from the debtors makes high profitable to the firm. It has a very strong positive relationship between the profitability of the firm. c) Accounts Payable Period of the organization have a positive and significant relation with the profitability of the firm. AVA Cholayil Health Care Pvt. Limited maintain an average of 52 days for the payment to their creditors. Higher the payment period higher will be the profit. Even though the firm have a positive correlation between the profitability and accounts payable period which is very weak. It indicate that the payable period making only a slight positive changes to the profit. Even though in the year 2016 payable period of the firm comes to 74 days which is almost double from the pastyears 2014 and 2015. It is a good sign that the organization has a good reputation among creditors. It helps to increase the payable period in the future. The longer the period of accounts payable period, the organization has better opportunity to finance onother things. It helps the organization to reducecosts by not taking loans for other expenses. d) The inventory conversion period of AVA Cholayil Health Care Pvt. Limited is too high hitting a maximum of 56 days in the year 2014. The firm try to decreasethe inventory conversion period in the recent years but still it is high. Since it cannot convert inventory into sales quickly enough, its inventory increases resulting in decreased quick ratio. From the study it shows that there is a very strong negative and significant relation among the profitability and inventory conversion period. Inventory conversion period of the organization is pulling back the profit of the firm. Raw material and Work-in-Progress are the main inventories making a negative impact on profitability. In certain cases the organization have to purchase raw material and stock them in advance which is advisable to the firm. But inventories under work-in- progress pulling back the profit of the firm. Higher the inventory conversion period lower will be the profit. e) The firms Cash Conversion Cycle is negative which is very desirable. A firm with negative cash conversion cycle one in which firm don’t pay for their inventory or materials until after the firm has sold the final productassociated with them. It means the firm using their working capital as efficiently as possible and have available cash for other things. After analyzing the
  • 71. 71 | P a g e correlation between the profitability and cash conversion cycle it shows a negative relationship which is significant. Cash conversion cycle shows a negative correlation becauseof high inventory period which makes the profit lower. But the cash conversion cycle have only moderate impact on profitability. It is just because receivable days have high positive correlation. If the firm reduces its inventory conversion period there will be a positive impact on cash conversion cycle. Even though the efficiency of finance department of the organization try to keep on decreasing cash conversion cycle to negative. f) Size of the firm also make an impact of profitability of the organization. As sales increases the size of the firm also increases. It has a positive relationship with profitability. g) Current Ratio of the organization is fluctuating over the years. Even though the organization have sound liquidity position, the current ratio of the organization reduces from 1.771 to 0.877. If the current ratio decreases the firm capability to paying off its short term debt also decreases which affect the organizations credit worthiness. h) A fluctuating quick ratio of AVA Cholayil Health Care Pvt. Limited can be observed over the years. But it is considered that a quick ratio of 1:1 is satisfactory. So it can be said that AVA Cholayil Health Care Pvt. Limited is not performing very well in managing its cash. In the FY 2014-15 it increased to 1.469 but again decreases to 0.61 in the FY 2015-16. This should be taken care by the management of the organization soon. i) Net Sale ofAVA Cholayil Health Care Pvt. Limited is increasing in the recent years. j) The effective management of working capital like other areas of management require a clear statement of goals to pursue and responsibilities to be allotted. 7.2 Suggestions The working capital management is very important for maintaining financial position of any firm which further signifies the success ofthe firm in all dimensions. It can be apprehended from the study that, especially in the context of FMCG sector it plays a significant role for managing the profitability of the firm. It is important for the firm to preserve an adequate level of working capital because inadequate level of working capital impairs profitability. Profitability of the business may be dependent on many factors together with the working capital management of a