working capital

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working capital

  1. 1. ASUMMER TRAININGPROJECT REPORTONWORKING CAPITALBRITANNIA INDUSTRIES LIMITEDPANTNAGARProject report submitted in partial fulfillment of the requirementsfor Bachelor of Business Administration (2010-2013)SUPERVISOR BY: SUBMITTED BY:Ms Aastha Suji Nancy Devol(Lect. Dept. of mgmt) BBA (Vth sem)Roll No. 102278SARASWATI INSTITUTE OF TECHNOLOGY & TECHNOLOGYRudrapur (U.S.N)Uttrakhand
  2. 2. STUDENT DECLARATIONI hereby declare that the work presented in the report entitled “Working CapitalManagement: A study of Britannia Industries Limited, Pantnagar” was undertakenactually by me during Summer Training component for the partial fulfillment of therequirements for the Degree of “Bachelor of Business Administration” at the SaraswatiInstitute of Management & Technology Gadarpur. No part of this report has beensubmitted earlier and elsewhere for any other similar title. The information andfacilities used for this work have been duly acknowledged.PROJECT SUPERVISOR: STUDENT SIGNATURE:Ms Aastha suji Nancy DevolFaculty management BBA Vth semRollno. 102278HOD of management department :Mrs. Pooja jhori
  3. 3. ACKNOWLEDGEMENTI would like to thank first to the supreme power “God” for showering blessings on mefor learning attitude. I would also like to thank my parents, friends and well wisherswho contributed and encouraged me for the study.I honor the management of the SARASWATI INSTITUTE OF MANAGEMENT ANDTECHNOLOGY for establishing a professional institution which gave me an occasion forhigher studies. I express gratitude to Ms Aastha suji (my project guide) for guidanceduring the course of study.Mrs. Pooja johori, the head and all other faculty members of the Department of BusinessAdministration have extended the desired professional support for the study.Director (Management) encouraged me for the study. I express my grateful thanks to allof them. Britannia Industries Limited gave opportunity to me to conduct training underthem for my Summer Industrial Training Project. The employees and the staffsupported and helped me in every possible way in completion of the project. Thecompany personnel provided me the support material related to Working capitalmanagement, I honour their concern for my career.Nancy DevolBBA (Vth SEM)
  4. 4. PREFACEWorking capital management holds an important place in the theory of Finance. A largenumber of tools and techniques have been developed in the past to deal with thisimportant subject. To ensure optimal allocation of working capital management funds,more than eighty percent of finance is spent in dealing with day to day problems whichare part and parcel of working capital requirements of an enterprise. Efficient use ofworking capital has direct bearing on profitability of an enterprise. It augments theproductivity of the investment in the fixed assets. Basic survival of the firm may be atstake if adequate working capital is not available in time. It is essential to maintainconstant supply of working capital for healthy growth of an enterprise.Management of working capital assumes added significance in the context of small-scaleand medium-sized industries in our country. Most of them have weak financial base andlimited access to the institutional finance. Their risk capacity is also low. Workingcapital management deals with management of each of the firm’s current assets in sucha way that it maximizes the value of the firm.In any economy, the financial sector plays a major role in the mobilization andallocation of savings. In the changing economic environment, manufacturing industrieshave to be more competitive. They have to keep their cost in check so as an efficient useof working capital would release the funds locked in the current assets.It gives me great pleasure to present this report on the topic “Working CapitalManagement: A study of Britannia Industries Limited, Pantnagar. I have selected thistopic to enhance my knowledge about the relationship between current assets andcurrent liabilities.
  5. 5. CONTENTSChapter 1- Introduction Management team Milestones History of Biscuits Company Products Activities of the company Company performanceChapter 2- Britannia Industries Limited, Pantnagar Unit Establishment Objectives of the unit The products 5 S of BILChapter 3- Working capital management Definition The conceptual framework Sources of working capital Working capital financingObjectives of the studyResearch MethodologyChapter 4- Analysis of working capital Ratio analysis Calculation of ratios Findings Recommendations and ConclusionLimitations of the studyBibliographyAnnexure
  6. 6. INTRODUCTIONThe story of one of India’s favorite brands reads almost like a fairy tale. Once upon atime, in 1892 to be precise, a biscuit company was started in a non-descript house inCalcutta (now Kolkata) with an initial investment of Rs. 295. This company we all knowas Britannia today. As time moved on, the biscuit market continued to grow andBritannia grew alongwith it. In 1975, the Britannia biscuits company took over thedistribution of biscuits from Parry’s who till now distributed Britannia biscuits in India.In the subsequent public issue of 1978, Indian shareholding crossed 60%, firmlyestablishing the Indian-ness of the firm. The following year, Britannia Biscuits Companywas re-christened as Britannia Industries Limited (BIL). Four years later in 1983, itcrossed the Rs.100 crores revenue mark.On the operations front, the company was making equally dynamic strides. In 1992, itcelebrated its Platinum Jubilee. In 1997, the company unveiled its new corporateidentity – “Eat Healthy, Think Better” – and made its first foray into the dairy productsmarket. In 1999, the “Britannia Khao, World Cup Jaao” promotion further fortified theaffinity consumers had with ‘Brand Britannia’.Britannia strode into the 21st century as one of India’s biggest brands and the pre-eminent food brand of the country. It was equally recognized for its innovativeapproach to products and marketing: the Lagaan Match was voted India’s mostsuccessful promotional activity of the year 2001 while the delicious Britannia 50-50Maska-Chaska became India’s most successful product launch. In 2002, Britannia’s NewBusiness Division formed a joint venture with Fonterra, the world’s second largestDairy Company, and Britannia New zealand Foods Pvt. Ltd. was born. In recognition ofits vision and accelerating graph, Forbes Global rated Britannia ‘One amongst the Top200 Small Companies of the World’, and “The Economic Times” pegged Britannia asIndia’s 2nd Most Trusted Brand.Today, more than a century after those tentative first step, Britannia’s fairy tale is notonly going strong but blazing new standards, and that miniscule initial investment has
  7. 7. grown by leaps and bounds to crores of rupees in wealth for Britannia’s shareholders.The company’s offerings are spread across the spectrum with products ranging fromthe healthy and economical Tiger biscuits to the more lifestyle-oriented MilkmanCheese. Having succeeded in garnering the trust of almost one-third of India’s onebillion population and a strong management at the helm means Britannia will continueto dream big on its path of innovation and quality. And, millions of consumers willfavour the results happily ever after.
  8. 8. ORGANIZATIONRegistered office of Britannia Industries Limited is situated in West Bengal. Thiscompany is registered under Companies Act, 1956.Britannia Biscuits Company Limited was originally incorporated on 21st March 1918under Indian Companies Act under the name “The Britannia Biscuits Company Limited”under section 21 of Companies Act and approval of central government.The main aim of the Company is to make available good and improved quality biscuitsto each and every part of the country.The Company has got ISO 14001 certificate and it is ISO 22000 certified.The Company established Pantnagar branch on 1st April, 2005, mainly for productionwith a coverage area of approximately 20 acres. The control of management is throughBoard of Directors. The Company’s head and registered office and works places arelocated as follows: Registered and Head office: Britannia Industries Limited5/1A, Hungerford StreetKolkata 700 017 Works Places:Britannia Industries Limited33, Industrial AreaLawrence Road,Delhi- 110 035Britannia Industries LimitedPlot No.1, Sector- 1Integrated Industrial EstatePantnagar, Rudrapur- 263 153Britannia Industries Limited15, Taratola road,Kolkata – 700 088
  9. 9. BOARD OF DIRECTORSName DesignationMr. Nusli Neville Wadia ChairmanMs. Vinita Bali Managing DirectorMr. A.K. Hirjee DirectorDr. Ajai Puri DirectorMr. Avijit Deb DirectorMr. Jeh N Wadia DirectorMr. Keki Dadiseth DirectorMr. Nimesh N Kampani DirectorMr. Pratap Khanna DirectorMr. S.S. Kelkar Director
  10. 10. MANAGEMENT TEAMGautam Bannerjee General Manager - MaterialsAshok Kumar Gupta General Manager - Accounts & PlanningR K Agarwal General Manager - ManufacturingR S Subramaniam General Manager - Technology, Strategy,ProjectsAnuradha Narasimhan Category Director - Health & WellnessShalini Degan Category Director - Delight & LifestyleBalaji Reddipalli Head ReplenishmentR. Anand Business Operations DirectorJehangir Tankariwala General Manager - Human ResourcesVinod Menon Head of BNZFShridhar Panshikar National Sales ManagerPurnendu Roy Head of R&DP. Govindan Company Secretary & Head of LegalDr. K.N. Shashikanth Corporate Quality Assurance ManagerValiveti V Padmanabham Corporate Manager - Information Systems
  11. 11. MILESTONES1892 The Genesis – Britannia established with an investment of Rs.295in a small house in central Calcutta1910 Advent of electricity sees operation mechanized1921 Imported machinery introduced; Britannia becomes the firstcompany of that time to reach Rs.1.36 crore1939-44 Sales rise exponentially to Rs.16,27,202 in 1939. During 1944 salesramped up by more than eight times to reach Rs.1.36 crore1975 Britannia Biscuits company takes over biscuit distribution fromParry’s1978 Public issue – India shareholding crosses 60%1979 Re-christened Britannia Industries Ltd.(BIL)1983 Sales crossed Rs.100 crore1989 The executive office relocated to Bangalore1992 BIL celebrated its platinum jubilee and launched ‘Little Heart’1993 Wadia Group acquires stake in ABIL, UK and becomes an equalpartner with Group DANONE in BIL1994 Volume cross 1,00,000 tons of biscuits1997 Re-birth-new corporate identity ‘Eat Healthy, Think Better’ leadsto new mission. Making every third Indian a Britannia consumer,BIL enters the dairy product market1999 “Britannia Khao World Cup Jaao” a major success; profit up by37%.
  12. 12. 2000 Forbes Global ranking - Britannia among Top 200 small companies2001 BIL ranked one of India’s biggest brands. No.1 food brand of thecountry2002 BIL launches joint venture with Fonterra, the world’s second largestdairy company Britannia New Zealand Foods Pvt. Ltd. is born.Economic Times ranks BIL India’s 2nd Most Trusted Brand - PureMagic - Winner of the World Star, Asia Star and India Star award forpackaging2003 ‘Treat Duet’- most successful launch of the year2004 Britannia accorded the status of being a ‘Super brand’, volumescross 3,00,000 tonne of biscuits. “Good Day” adds a new variant -Coconut - in its range2005 Re-birth of Tiger - ‘Swasth Khao, Tiger Ban Jao’ becomes thepopular chant! Britannia launched ‘Greetings’ range of premiumassorted gift packs. The new plant in Uttarakhand, commissionedahead of schedule. The launch of yet another exciting snackingoption – Britannia 50-50 Pepper Chakkar2007 Britannia industries formed a joint venture with the Khimji RamdasGroup and acquired a 70% beneficial stake in the Dubai-basedStrategic Foods International Co.LLC and 65.4% in the Oman-basedAl Sallan Food Industries Co. SAOG2008 Britannia launched iron fortified ‘Tiger biscuits, ‘Good Day ClassicCookies’, Low Fat Dahi and renovated ‘Marie Gold’2009 Britannia launched ActiMind- A first of its kind milk based healthdrink for kids ,which helps improve mental sharpness.2010 Britannia was presented the master brand 2010 Award by CMOCouncil in November 2010.2011 Bourbon received the most popular confectionery productpreferred by youth(biscuit)Award.
  13. 13. THE ORIGIN OF ‘EAT HEALTHY THINK BETTER’Britannia –the ‘biscuit’ leader with a history has withstood the tests of time. Part of thereason for its success has been its ability to resonate with the changes in consumerneeds - needs that have varied significantly across its 100+ year epoch. With consumerdemocracy reaching new levels, the one common thread to emerge in recent times hasbeen the shift in lifestyles and a corresponding awareness of health. People areincreasingly becoming conscious of dietary care and its correlation to wellness andmatching the new pace to their lives with improved nutritional and dietary habits. Thisnew awareness has seen consumers seeking foods that complement their lifestyleswhile offering convenience, variety and economy, over and above health and nutrition.Britannia saw the writing on the wall. It’s “Swasth Khao Tan Man Jagao” (Eat Healthy,Think Better) re-position directly addressed this new trend by promising the newgeneration a healthy and nutritious alternative – that was also delightful and tasty.Thus, the new logo was born, encapsulating the core essence of Britannia – healthy,nutritious, and optimistic – and combining it with a delightful product range to offervariety and choice to consumers.
  14. 14. HISTORY OF BISCUITSSweet or Salty, Soft or Crunchy, Simple or Exotic, Everybody loves munching on biscuits,but do they know how biscuits began? The history of biscuits can be traced back to arecipe created by the Roman chef Apicius, in which “a thick paste of fine wheat flour wasboiled and spread out on a plate. When it had dried and hardened it was cut up and thenfried until crisp, then served with honey and pepper.”The word ‘Biscuit’ is derived from the Latin words ‘Bis’ (meaning ‘twice’) and ‘Coctus’(meaning cooked or baked). The word ‘Biscotti’ is also the generic term for cookies inItalian. Back then, biscuits were unleavened, hard and thin wafers which, because oftheir low water content, were ideal food to store.As people started to explore the globe, biscuits became the ideal traveling food sincethey stayed fresh for long periods. The sea-faring age, thus, witnessed the boom ofbiscuits when these were sealed in airtight containers to last for months at a time. Hardtrack biscuits (earliest version of the biscotti and present-day crackers) were part of thestaple diet of English and American sailors for many centuries. In fact, the countrieswhich led this seafaring charge, such as, those in Western Europe, are the ones wherebiscuits are most popular even today. Biscotti is said to have been a favorite ofChristopher Columbus who discovered America!Making good biscuits are quite an art, and history bears testimony to that. During 17thand 18th centuries in Europe, baking was a carefully controlled profession, managedthrough a series of ‘guilds’ or professional associations. To become a baker, one had tocomplete years of apprenticeship – working through the ranks of apprentice,
  15. 15. journeyman, and finally master baker. Not only this, the amount and quality of biscuitsbaked were also carefully monitored.The English, Scotch and Dutch immigrants originally brought the first cookies to theUnited States and they were called teacakes. They were often flavoured with nothingmore than the finest butter, sometimes with the addition of a few drops of rose water.Cookies in America were also called by such names as “jumbles”, “plunkets” and “crybabies”.As technology improved during the Industrial Revolution in the 19th century, the priceof sugar and flour dropped. Chemical leavening agents, such as, baking soda, becameavailable and a profusion of cookie recipes occurred. This led to the development ofmanufactured cookies.Interestingly, as time has passed and despite more varieties becoming available, theessential ingredients of biscuits haven’t changed – like ‘soft’ wheat flour (which containsless protein than the flour used to bake bread) sugar, and fats, such as, butter and oil.Today, though they are known by different names the worldover, people agree on onething- nothing beats the biscuit.
  16. 16. COMPANY PRODUCTSLittle HeartsLittle Hearts was launched in 1993 and targeted the growing youth segment. Acompletely unique product, it was the first time biscuits were retailed in pouch packslike potato wafers. In 1997, the Direct Dil Se campaign encouraged youngsters toopenly express their feelings. And, in 2003, two variants called Little Hearts Chocolateand Little Hearts Sesame were rolled out with a campaign "Dil Sabka Actually SweetHai". With Little Hearts, Britannia has tasted the sweet taste of success.
  17. 17. Britannia Tiger BananaBritannia is committed to help secure every child’s right to growth and developmentthrough good food every day. Purposefully taking forward the credo of ‘Eat HealthyThink Better’, Britannia launched a new variant under its power brand Tiger. BritanniaTiger Banana packed with IRON ZOR and goodness of banana is accessible to all, beingavailable in convenient pack priced at Rs.2, Rs.4 and Rs.10.BRITANNIA GOOD DAYBritannia Good Day was launched in 1986 in two delectable avatars - Good Day Cashewand Butter. Over the years, new variants were introduced - Good Day Pista Badam in1989, Good Day Chocochips in 2000 and Good Day Coconut in 2004.
  18. 18. TIGERLaunched in 1997, Tiger became the largest brand in Britannias portfolio in the veryfirst year of its launch and continues to be so till today. Tiger has grown from strengthto strength and the re-invigoration in June 2005 has further helped bolster its growth inthe highly competitive glucose biscuit category.TREATBritannia launched Treat in 2002. Treat has a range of tasty delights for all kids withyummy creamy treasures within the biscuit shells. Britannia Treat offers a wide varietyof flavours, such as, the classic Bourbon & Elaichi, the Fruit Flavored Creams, such as,Orange, Pineapple, Mango, and Strawberry, the Jam Filled Centers under the Jim Jamrange, and the Duet Range (biscuits with two flavours of cream between three layers ofbiscuit) comprising Strawberry Vanilla and Duet Strawberry Chocolate.
  19. 19. MARIE GOLDBritannias oldest brand enjoys a heritage that spans the last 50 years - and goingstrong. In a market swamped with me-too products and where even the name Mariehas become generic, Britannia Marie Gold has maintained its stronghold. Today, theever-popular Marie Gold is synonymous with the Tea Time Biscuit. Its taste, crispinessand lightness make it a must for every tea break. It is the #1 brand in its category by along shot.NUTRICHOICEIn continuation of the promise of "Swasth Khao, Tan Man Jagao," Britannia introducedNutriChoice range of healthy biscuits in 1998. The brand is targeted towards overallhealth and wellness for adults.
  20. 20. The range has for long comprised of three popular variants, namely, NutriChoice ThinArrowroot, NutriChoice Cream Cracker and NutriChoice Digestive.MILK BIKISMilk Bikis, the favorite growth partner of kids, now brings greater value and delight toall with its new product and pack design. Recently re-launched in its existing Southernand Eastern markets, and extended across India, the new Milk Bikis is all set to addexcitement and appeal to ‘nutritious’ food. Whoever said that ‘good food’ needs to look‘dull and boring’, will just have to take a look at Milk Bikis. With a unique and attractivehoneycomb design and an enhanced product experience, the new biscuit prompts the‘kids will love it’ reaction amongst mothers’.
  21. 21. BREADTill 1958, there were no breads in the organized sector and bread consumption was ahabit typed by the British. Then, a mechanized bread unit was set up in Delhi with thename “Delbis” which produced sliced bread and packed it under the Britannia name.The Mumbai unit came up in 1963. And there again Britannia was the first brandedbread in the city.CakesBritannia entered the cake market in the year 1963 and is the top player in the market.Britannia Cakes range is divinely scrumptious and has both Bar Cakes and Cup Cakeswhich were launched in 2005. Bar Cakes are available in variants that include Fruit,Butter Sponge, Chocolate, Pineapple, Milk, Vanilla Chocolate and Orange.RUSKSBritannia launched its Rusks in the year 2005. In a Market full of unbranded players,Britannia rusks have stood head and shoulders above the rest in terms of sheer quality.They are made from the finest ingredients and baked with care as they are twice ascrisper as and tastier than ordinary rusks. The communication for this mouthwateringoffering is aptly “Enliven your spirits with Britannia rusks
  22. 22. ACTIVITIES OF THE COMPANYThe activities are schematically presented as follows:ACTIVITIESOFTHECOMPANYFINANCE &ITQUALITYASSURANCETECHNICALOPERATIONSALESMARKETINGRESEARCH &DEVELOPMENTEXPORTPRODUCTION
  23. 23. COMPANY PERFORMANCE (Financial Year 2010-11)
  24. 24. For the year ended 31st March, 2012, Company achieved a sales growth of 17.5% on anexpanded base arising from 27.5% growth in the previous year. Net profit of theCompany increased 77.5% to Rs. 1910 Mn compared to Rs. 1076 Mn in 2009-10.Operating margin increased by 307 basis points to 7.5%Exceptional items for the year include Rs.130.5 Mn towards amortization of VRS costs.Earning per share is Rs. 80, compared to Rs. 45.1 last year.
  25. 25. ACHIEVEMENTThe Economic Times and AC Nielsen have announced the most trusted brands rated byconsumers all over India and across categories. Britannia was in the India Top 10 list,ranked 9 across all categories and 2 in the food category. Last year, Britannia rank was 7and 2, respectively.
  26. 26. BRITANNIA UNIT PANTNAGARESTABLISHMENTBritannia Industries Limited was established at Pantnagar on 1st April 2005 in an area ofapproximately 20 acres mainly for the purpose of production of biscuits.Various departments of Britannia Industries Limited are interconnected to each otherand work together for the welfare of the Company as a whole. There is a well builtcommunication system inside the Company which helps in performing the works ontime and with full efficiency and effectiveness. The departments include Qualityassurance, Stores, Production, Purchase, Maintenance, Engineering, Packaging anddispatch, Personnel and training, Finance, Legal and Administrative security.There are four plants in operation in the Company unitFirst plant for Marie Gold which has a flexi line for Good day alsoSecond plant for Good DayThird one for 50-50 variants, pepper chakkar and Maska ChaskaFourth for Bourbon which has a flexi line for Orange cream alsoNew concept like 5S is also being implemented in the unit. The Company has beenawarded ISO 14001 certificate and is ISO 22000 certified.THE EVENTSBhumi poojan of Britannia Industries Limited at Pantnagar was organized on 1stApril 2004Machinery was set up on 21st March 2005Production trial was taken on 23rd March 2005
  27. 27. Actual production was started on 1st April 2005First dispatch of finished goods was done on 20th April 2005Biggest plant of the company is plant number two.Minimum and maximum production of biscuits of the company unit is 200 tonneper day 245.10 tonne per day, respectivelyControl of management is through Board of DirectorsThe bankers of the company are: State Bank of India Standard Chartered Bank ABN Aroma Bank City Bank The Hong Kong & Shanghai Banking Corporation Limited Bank of America HDFC Bank Limited ICICI Bank LimitedTHE DEPARTMENTSHuman resourceFinancePurchaseProductionMaintenanceQuality assurance
  28. 28. HEADS OF DEPARTMENTS OF THE COMPANYUnit Head : Mr. V.K. PruthiFinance : Mr. Rakesh TyagiHuman Resource : Mr. Mayank ShrivastavaProduction : Mr.Mahak Singh / Mr.Srinivasan Iyer/Ms.Gunjan ChawlaPurchase : Mr. Anil SharmaEngineering : Mr. Sajeev KhoshyQuality : Ms Vaishali PantOBJECTIVES OF THE UNITWorking in collaboration with the business partnersQuality products to customersContinuous training and retraining of the employees to create culture that valuequality and food safety as a core pillar of the businessInvesting in appropriate technologyControl the wastage and save time and effortsWork under the principles of 5 ‘S’THE PRODUCTSNot all the brands of Britannia are produced in this branch. Production of biscuits inBritannia Pantnagar is classified as follows:Plant IMarie GoldGood Day Pista BadamPlant IIGood Day CashewGood Day Butter
  29. 29. Plant III50-5050-50 Maska Chaska50-50 Pepper ChakkarPlant IVChocolate BourbonOrange treatMilk Bikis - Milk CreamUSAGE OF RAW MATERIALS AND STORAGEMany types of raw materials are used in Britannia Pantnagar for production of differenttypes of biscuits. Some of them are – wheat flour, sugar, butter, skimmed milk powder,cashew, salt, a different type of fats which includes different oils, sodium bicarbonate,ammonium bicarbonate, etc.Some of the materials which are used needs cold storage while some need normalstorage. So on the basis of the need, different raw materials are stored in differentstorage places. The materials in cold storage are stored at 5 degree Celsius while thematerials which need normal storage are stored at the normal temperature. The rawmaterials are classified as:Normal storage raw materialsSugarAmmoniaPalm oilSaltSkimmed milk powderWheat flourCocoa powderGMS powder
  30. 30. Cold storage raw materialButterCondensed milkEssencesCashewSWOT ANALYSISSTRENGTH (S)Goodwill of companySuperior quality and service to provide maximum benefits tocustomersThe family environment in the companyContinuous growthMarket share of the companyFully automation of the companyAll India coverageEconomical priceTax benefit to the companyFinancially, very strongDedicated work forceEffective well designed and developed production and marketingnetworkWEAKNESS (W)Wastage of the materialSmall board of Britannia at the entry gateUnit is situated far away from main plantLand is not properly utilizedSound and heat of machinery is high; It affects the efficiency ofworkersOPPORTUNITY (O)More efficient utilization of the raw materials
  31. 31. Minimization of wastageMore efficient use of land resourceHiring the workers on permanent basis to reduce the highly ad hoccontract laboursUse of the foreign technologies for efficient and wasteless utilization ofraw materialsTHREATS (T)New entrance in the businessAvailability of the other brandsTaste and preference of customersThreats of substitute productsRivalry among the competitors5 ‘S’ OF BRITANNIA INDUSTRIES LIMITEDSEIRI (Organization)It is sorting between wanted and unwanted things in a selected area, region or domain.SEITON (Neatness)It means a place for everything and everything in its place.SEISO (Cleanliness)It deals with the job of thoroughly cleaning the workplace.SEIKETSO (Standardization)It means standardization which is needed to maintain SEIRI, SEITON and SEISO. It leadsto use of visual management to avoid mistakes.SHITSUKE (Discipline)It means discipline which is called for strict adherence to a system from the presentunsystematic way.QUALITY AND FOOD SAFETY POLICY OF THE COMPANYThe purpose of this policy is to ensure that the company wins through quality in themarket place. This means that it must do everything to ensure consistent delivery ofquality products to the customers every time. Its commitment to quality and food safetyis reflected in every action and is non-negligible. That means:
  32. 32. all ingredients used in the factory always meet specified quality standards,all factories and depots maintain high standard of hygiene which ensures thatthe products are healthy and safe for consumption,the manufacturing products always ensure delivery of products consistent withproduct and pack specifications which are free from contamination, andthe supply chain practices enable delivery of fresh products to the customers.The company fulfills these objectives through:investing in appropriate technology and equipping its factories adequately,working to collaborate with its business partners to create ‘win-win’ businessoutcomes,developing process which enable consistent delivery of quality products to itscustomers, andcontinually training and retraining its employees and business partners to createa culture that values quality and food safety as the core pillars of business.Working capital management (WCM) is the process of planning and controlling the leveland mix of the current assets of the firm as well as financing these assets. These involvemanaging the relationship between a firms short-term assets and its short-termliabilities. The goal of working capital management is to ensure that the firm is able tocontinue its operations and that it has sufficient cash flow to satisfy both maturingshort-term debt and upcoming operational expenses.
  33. 33. DEFINITION OFWORKING CAPITAL“Working Capital is the amount of funds necessary to cover the cost of operating theenterprise.”-ShubinThe term working capital refers to the amount of capital which is readily available to anorganization. That is, working capital is the difference between resources in cash orreadily convertible into cash (current assets) and organizational commitments forwhich cash will soon be required (current liabilities).Current assets are resources which are in cash or will soon be converted into cash in"the ordinary course of business".Current liabilities are commitments which will soon require cash settlement in "theordinary course of business.Thus:WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIESCurrent Assets:Liquid assets (cash and bank deposits)InventoryDebtors and receivablesPrepaid expensesMarketable securities
  34. 34. Current Liabilities:Bank overdraftCreditors and payablesNotes payableAccrued expensesOther short term liabilitiesTHE CONCEPTUAL FRAMEWORKThe concept of working capital has been a matter of greater controversy among thefinancial wizards. Broadly speaking, different views on working capital can becategorized into two groups, viz.,Gross concept andNet conceptThese two concepts are not to be regarded as mutually exclusive. Each has its relevancein specific situation. Gross working capital deals with the problem of managingindividual current assets in day to day operations. Thus, gross concept is in nature of aquantitative definition that focuses attention on the level of current assets for givenactivity.The emphasis, however, shifts when we consider the net working concept. This is aqualitative definition which focuses attention on the character of the sources fromwhich the funds have been procured to support the portion of current liabilities.
  35. 35. INTRODUCTIONIt involves the relationship between a firms short-term assets and short-term liabilities.The goal of working capital management is to ensure that a firm is able to continue itsoperations and that it has sufficient ability to satisfy both maturing short-term debt andupcoming operational expenses. The management of working capital involves managinginventories, accounts receivable and payable, and cash.Working capital is represented by current assets. It constitutes a dominant segment ofinvestment, particularly in manufacturing enterprises. Management of working capitalassumes added significance in the context of small-scale and medium-sized industries inthe country. Most of them have weak financial base and limited access to theinstitutional finance. Their risk capacity is also low. Working capital management dealswith the management of each of the firm’s current assets in such a way that maximizesthe value of the firm.Shortage of funds for working capital as well as the uncontrolled over-expansion hascaused many business to fail, and in less severe cases has stunted their growth.Especially in small firms, working capital management may be the factor that decidessuccess or failure. In large firms, efficient working capital management can significantlyaffect the firm’s risk, returns and share price.Commercial banks are the major source of finance to the industry and commerce. Banksin India provide mainly short-term credit for financing working capital needs. Thevarious types of advances provided by them are:Loans,
  36. 36. cash credit, andoverdraft on running accounts.Borrower can draw funds up to the sanctioned credit. Limit interest is charged on thedaily outstanding amount.THE CONCEPTThere are two concepts of working capital:Balance sheet concept, andOperating cycle or Circular flow conceptBalance Sheet ConceptThere are two interpretations of working capital under the Balance sheet concept:Gross working capital, andNet working capitalGross working capital:The term “gross working capital”, refers to the firm’s investment in current assets.Current assets are the assets which can be converted into cash within an accountingyear and includes cash, short-term securities, debtors, bill receivable, and stock alsoreferred to as total current assets.Net working capital:The term net working capital can be defined in two ways:The most common definition of net working capital (NWC) is the differencebetween current assets and current liabilities.NWC is that portion of firm’s current assets which is financed with long-termfunds. Working capital management involves not only administration of firm’s
  37. 37. current assets, viz., cash and marketable securities, receivables and inventory –but also the finance needed to support current assets.Current assets of a typical manufacturing firm account for more than half of its totalassets. Firms invest in inventory, which consists of raw materials, work-in-progress andfinished goods.The cost of holding inventory includes not only storage cost or risk of obsolescence butalso the opportunity cost.Another current asset is accounts receivable. When one company sells goods to anothercompany or a government agency, it does not usually expect to be paid immediately.This trade credit builds up accounts receivable.Other important current assets are cash and marketable securities. Current assets maytypically vary from industry to industry. A company should monitor and controlinventory and receivables closely. In a typical fast growing company, investment in suchassets can go out of control. Too few current assets may result in frequent shortage andproblem in smooth operations of the firm, while excessive investment in current assetsgives sub-optimal return on investment.A firm may finance current assets through a variety of short-term loans. A typical smallcompany resorts to current assets financing through current liabilities alone. Thesefirms do not have access to long-term capital market. Some firms do get finance throughbanks and also from other private financers at a high interest rate.Short-term financial decision involves management of short-term assets and liabilities,and usually they are easily reversed. A finance manager responsible for short-termfinancial decisions does not have look far into the future.
  38. 38. Operating Cycle or Circular Flow ConceptThe circular flow concept of working capital is based upon this operating or workingcycle of a firm. The cycle starts with the purchase of raw materials and otherresources, and ends with the realization of cash from the sale of finished goods. Itinvolves purchase of raw materials and stores, its conversion into stock of finishedgoods through work-in-progress with progressive increment of labour and servicecosts, conversion again from cash to purchase of raw material and so on. The timeduration required to complete one cycle determines the requirements of workingcapital - longer the cycle, larger is the requirement of working capital.Thus, gross operating cycle of a firm is equal to the length of the inventories andreceivables conversion period.Gross operating cycle = RMCP + WIPCP + FGCP + RCPCashRawMaterialsWork inProcessFinishedGoodsDebtors
  39. 39. Where:RMCP = Raw material conversion periodWIPCP = Work-in-process conversion periodFGCP = Finished goods conversion periodRCP = Receivables conversion periodNet operating cycle period = Gross operating cycle period – Payable deferral periodNEED FOR WORKING CAPITALThe need for working capital to run day-to-day business activities cannot beoveremphasized. There is no business firm which does not require any amount ofworking capital.We know that the firm aims at maximizing the wealth of the shareholders. In itsendeavour to maximize shareholder’s wealth, the firm should earn sufficient returnfrom its operation. Earning a steady amount of profit requires successful salesactivity. The firm invests enough funds in current assets for the success of salesactivity. Current assets are needed because sales do not convert into cashinstantaneously. There is always an operating cycle involved in the conversion ofcash.THE PRESENCE OF GOOD WORKING CAPITAL YIELDS:solvency of the business,maintaining goodwill,easy loans,cash discount,
  40. 40. regular supply of raw materials,regular payment of salary, wages, other day-to-day expenses,exploitation of favorable market conditions, andability to face crisis.THE APPROACHESThe objective of working capital management is to maintain the optimum balance ofeach of the working capital components. This includes making sure that funds are heldas cash in bank deposits for as long as and in the largest amounts possible, therebymaximizing the interest earned. However, such cash may more appropriately be‘invested’ in other assets or in reducing other liabilities.Ratio analysis can be used to monitor overall trends in working capital and to identifyareas requiring closer management. The individual components of working capital canbe effectively managed by using various techniques and strategies.When considering these techniques and strategies, departments need to recognize thateach department has a unique mix of working capital components. The emphasis thatneeds to be placed on each component varies according to the department. For example,some departments have significant inventory levels; others have little if any inventory isrequired.Furthermore, working capital management is not an end in itself. It is an integral part ofthe departments overall management. The needs of efficient working capitalmanagement must be considered in relation to other aspects of the departmentsfinancial and non-financial performance.
  41. 41. APPLICATIONSWorking capital is the money used to make goods and attract sales. The less workingcapital used to attract sales, the higher is likely to be the return on investment. Workingcapital management is about the commercial and financial aspects of inventory, credit,purchasing, marketing, royalty and investment policy. The higher the profit margin, thelower is likely to be the level of working capital tied up in creating and selling titles. Thefaster that we create and sell the books, the higher is likely to be the return oninvestment.MANAGEMENT OF WORKING CAPITALWorking capital management involves the problem of decision-making regardinginvestment in various current assets with an objective of maintaining the liquidity offunds of the firm to meet its obligations promptly and efficiently. The basic goal ofworking capital management is to manage the current assets and current liabilities of afirm in such a way that a satisfactory level of working capital is maintained, it is neitherinadequate nor excessive.The management of working capital is studied under the following three heads:Management of cash balanceManagement of receivablesManagement of inventory
  42. 42. Management of Cash Balance:Cash is one of the current assets of a business. It is needed at all times to keep. Businessconcern should always keep sufficient cash for meeting its obligations. Any shortage ofcash will hamper the operations of a concern and any excess of it will be unproductive.Cash not only includes hard cash but also includes which can be easily converted intocash within no time. Tools for cash control:cash budget,inflow or outflow of cash, andratio Analysis.Management of receivables:‘Receivables result from credit sales’. A concern is required to allow credit sales in orderto expand its sales volume. It is not always possible to sell goods on cash basis only.Sometimes, other concerns in that line might have established a practice of selling goodson credit basis. Under these circumstances, it is not possible to avoid credit sale withoutadversely affecting sale.Tools for receivable control:deciding acceptable level of risk,terms of credit sale, andcredit collection policy.
  43. 43. Management of Inventory:Inventory means the stock of the product and the components of the product that is rawmaterials, w-i-p, finished goods and spares. Inventory holds the prime position amongthe current assets. About 60% of the current assets are represented by inventory.Thus, large part of working capital is invested in inventories. The management ofinventory is, therefore, necessary to avoid heavy losses due to leakage, theft andwastage because neglecting the management of inventories may jeopardize the long-run profitability of the concern, and the concern may fall ultimately. Inventorymanagement will minimize these costs.Tools for Inventories control:classification and identification of inventories,adequate storage facilities,record of inventories,standardization and simplification of inventories,use the appropriate method of inventory control e.g., - JIT, HML, EOQ, FSNetc., andintelligent and experienced person.
  44. 44. SOURCES OF WORKING CAPITALLong term sources (Permanent or Fixed)Short term sources (Temporary)Permanent or Fixed Temporary orVariablePERMANENT OR FIXED SOURCESPermanent or fixed working capital is theminimum amount which is required to ensureeffective utilization of fixed facilities and formaintaining the circulation of currentassets. There is a minimum level ofcurrent assets which is continuouslyrequired by the enterprise to carryout its business operations.Characteristics of permanent working capital are:SharesDebenturesPublic depositsPloughing back ofprofitsLoans fromfinancialinstitutionsCommercial bankIndigenous bankersTrade creditorsInstallments creditAdvancesAccount receivableAccrued expensesCommercial papers
  45. 45. It is classified on the basis of the time period,Its size increases with the growth of business operations, andIt constantly changes from one asset to another and continues to remainin the business process.Some of the sources of permanent working capital are given below:Shares: Issue of shares is the most important source for raising thepermanent or long-term capital. A company can issue various types ofshares as equity shares, preference share and differed shares. According tothe Companies Act, 1956, a public company cannot issue differed shares. Asfar as possible, a company should raise the maximum amount of permanentcapital by the issue of shares.Debentures: A debenture is an instrument issued by the companyacknowledging its debt to its holder. It is also an important method ofraising long-term or permanent working capital. The debenture holders arethe creditors of the company. A fixed rate of interest is paid on debenture.The interest on debenture is a charge against profit and loss account.Public deposits: Public deposits are the fixed deposits accepted by a businessenterprise directly from the public. This source of raising short-term andmedium-term finance was very popular in the absence of banking facilitiesearlier. Time period involved 6 months to 1 year. But now-a-days evenlong-term deposits for 5 to 7 years are accepted by the business houses.Public deposits as a source of finance have a large number of advantages,such as, very simple and convenient source of finance, taxation benefit,trading on equity, no need of securities and an inexpensive source offinance.Ploughing back of profit: Ploughing back of profit means the re-investment byconcern of its surplus earnings in its business. It is an internal source of
  46. 46. finance and most suitable for an established firm for its expansion,modernization and replacement, etc.Loans from financial institutions: Financial Institutions, such as, Commercialbanks, Life Insurance Corporation, Industrial Finance Corporation of Indiaetc. also provide short-term and long-term loans. This source of finance ismore suitable to meet the medium of working capital. Interest is chargedon such loans at a fixed rate and the amount of the loan is to be repaid byway of installments in a number of years.TEMPORARY OR VARIABLE SOURCESTemporary working capital is the amount of working capital which is required to meetthe seasonal demand and some special exigencies.Characteristics of Temporary Working Capital:
  47. 47. It is not always gainfully employed, though it may change from one asset to anotherasset, as permanent capital does. It is particularly suited to business of a seasonal orcyclical nature.Some of the sources of temporary working capital are given below:Commercial Banks: Commercial banks are the most important source of short-termcapital. Different forms in which the bank normally provides loans and advances are asfollows:Loans: When a bank advances in lump-sum against some security, it is called aloan. Commercial banks generally provide short-term loans of upto one year formeeting working capital requirement.Overdraft: Overdraft means an agreement with a bank by which a currentaccount holder is allowed to withdraw more than the balance to his credit up to acertain limit. The interest is charged on daily overdrawn balances. There is adifference between cash credit and overdraft.Indigenous Bankers: Private money lenders and other country bankers used tobe the only source of finance, prior to the establishment of commercialbanks. They charged a very high rate of interest but now-a-days with thedevelopment of commercial banks, they have lost their monopoly. But eventoday some houses have to depend upon indigenous bankers for obtainingloans to fulfill their requirement.Trade Creditors: Trade credit refers to the credit extended by the suppliers of goods inthe normal course of business. The trade credit arrangement of a firm with its suppliersis an important source of short-term finance. The main advantages of trade credit as asource of short term finance includes:
  48. 48. It is an easy and convenient method of finance,It is flexible as the credit increases with the growth of the firm,andIt is informal and spontaneous source of finance.Installment Credit: This is another method by which the assets are purchased and thepossession of goods is taken immediately but the payment is made in installments overa pre-determined period of time. Generally, interest is charged on the unpaid price or itmay be adjusted in the price. But in any case, it provides funds for some time and isused as a source of short-term working capital by many business houses which havedifficult fund position.Advances: Some business houses get advances from their customers andagents against orders, and this source is a short-term source of finance forthem. It is a cheap source of finance and in order to minimize theirinvestment in working capital, some firms having long production cycle,especially the firms manufacturing industrial products prefer to takeadvances from their customers.Account Receivable: Another method of raising short-term finance is throughaccounts receivable credit offered by commercial banks and other factors.Accrued Expenses: Accrued expenses are the expenses which have incurred but not yetpaid. These simply represent a liability that a firm has to pay for the services alreadyreceived by it. The most important item of accruals is wages and salaries, interest andtaxes.Commercial Papers: Commercial papers represent unsecured promissory notes issuedby the firm to raise short-term funds. It is an important money market instrument inadvance countries like U.S.A. In India, the Reserve Bank of India introduced commercial
  49. 49. papers in the Indian money market on the recommendation of the working group onMoney Market (Vaughal Committee).FACTORS DETERMINING WORKING CAPITAL REQUIREMENTNature or Character of businessSize of Business / Scale of OperationProduction policyManufacturing process / Length of production cycleSeasonal variationsWorking capital cycleRate of stock turnoverCredit policyBusiness cycleRate of growth of businessEarning capacity and dividend policyPrice level changesOther factorsMEASURES TO IMPROVE WORKING CAPITAL MANAGEMENTThe essence of effective working capital management is proper cash flow forecasting.This should take into account the impact of unforeseen events, market cycles, loss of a
  50. 50. prime customer and actions by competitors. The effect of unforeseen demands ofworking capital should be factored in.It pays to have contingency plans to tide over unexpected events. While market-leaderscan manage uncertainty better, even other companies must have risk-managementprocedures. These must be based on objective and realistic view of the role of workingcapital.Addressing the issue of working capital on a corporate-wide basis has certainadvantages. Cash generated at one location can well be utilized at another. For this tohappen, information access, efficient banking channels, good linkages betweenproduction and billing, internal systems to move cash and good treasury practicesshould be in place.An innovative approach, combining operational and financial skills and an all-encompassing view of the company’s operations will help in identifying andimplementing strategies that generate short-term cash. This can be achieved by havingthe right set of executives who are responsible for setting targets and performancelevels.Effective dispute management procedures in relation to customers will go a long way infreeing up cash otherwise locked in due to disputes. It will also improve customerservice and free up time for legitimate activities like sales, order entry and cashcollection. Overall efficiency will increase due to reduced operating costs.Collaborating with customers instead of being focused only on own operations will alsoyield good results. If feasible, helping them to plan their inventory requirementsefficiently to match the production with their consumption will help reduce inventorylevels. This can be done with suppliers also.
  51. 51. WORKING CAPITAL FINANCING POLICYThere are three types of policies of working capital financing:Hedging financing policyConservative financing policyAggressive financing policyHedging financing policy:This requires that financing of each asset would be offset with a financing instrument ofapproximately the same maturity. Short-term or seasonal variations in current assetswould be financed with short-term debt. The fixed assets and the permanentcomponent of current assets would be financed with long-term debt or equity. And, thefirm can adopt a financial plan which matches the expected life of source of funds raisedto finance assets.Conservative financing policy:A firm can adopt a conservative approach in financing its current and fixed assets. Afinancial policy of the firm is said to be conservative when it depends more on long-term funds for financing needs. Under a conservative plan, the firm finances itspermanent assets and also a part of temporary current assets, with long-term financing.Aggressive financing policy:A firm may be aggressive in financing its assets. An aggressive policy is said to befollowed by the firm when it uses more short-term financing than warranted bymatching plan. Under an aggressive policy, the firm finances a part of permanentcurrent assets with short-term sources of finance.
  52. 52. PRINCIPLES OF WORKING CAPITAL MANAGEMENTPrinciple of Risk Variation: Risk here refers to the inability of a firm to meet itsobligations when they become due for payment. Large investment in current assets withless dependence on short term borrowings increases liquidity reduces risk and therebydecreases the opportunity for gain or loss. On the other hand, less investment in currentassets with greater dependence on short-term borrowings increases risk, reducesliquidity and increases profitability. In other words, there is a definite inverserelationship between the degree of risk and profitability.Principle of Cost of Capital: The various sources of raising working capitalfinance have different cost of capital and the degree of risk involved.Generally, higher the risk lower is the cost and lower the risk higher the cost.A sound working capital management should always try to achieve a properbalance between these two.Principle of Equity Position: This principle is concerned with planning thetotal investment in current assets. According to this principle, the amount ofworking a capital invested in each component should be adequately justifiedby a firm’s equity position. Every rupee invested in the current assets shouldcontribute to the net worth of the firm.Principles of Working CapitalManagementPrinciple of Cost ofCapitalPrinciple of EquityPositionPrinciple of Maturityof PaymentPrinciple of RiskVariation
  53. 53. Principle of Maturity of Payment: This principle is concerned with planningthe sources of finance for working capital. According to this principle, a firmshould make every effort to relate maturities of payment to its flow ofinternally generated funds.FORECAST/ ESTIMATE OF WORKING CAPITAL REQUIREMENT“Working capital is the life blood and controlling nerve centre of a business.” Nobusiness can successfully run without an adequate amount of working capital. To avoidthe shortage of working capital at once, an estimate of working capital requirementshould be made in advance. For a manufacturing organization, the following factorshave to be taken into consideration while calculating an estimate of working capital:Factors Requiring Consideration While Estimating Working CapitalTotal costs incurred on material, wages and overheadsThe length of time for which raw materials are to remain in stores before they areissued for productionThe length of sales cycle during which finished goods are to be kept waiting forsalesThe length of the production cycle or work in process, i.e., the time taken forconversion of raw materials into finished goodsThe average period of credit allowed to customers.The amount of cash required to pay day-to-day expenses of the businessThe average amount of cash required to make advance payments, if anyThe average credit period expected to be allowed by suppliersTime-lag in the payment of wages and other expenses
  54. 54. ANALYSIS OF WORKING CAPITALThere are three techniques to analyze the working capital:Schedule of changes in working capitalRatio analysisFund flow statementSchedule of Changes in Working CapitalThe working capital of a business concern is subject to change due to several businesstransactions. Working capital represents excess of current assets over current liabilities.The Schedule of Changes in Working Capital presents a detailed and analytical picture ofchanges in current assets and current liabilities during two balance sheet dates.Ratio AnalysisRatio is one of the methods of analyzing financial statement. Ratio analysis measuresthe profitability, efficiency and financial soundness of the business.According to Myers, ratio analysis is a “study of relationship among the various financialfactors in a business”.Fund Flow StatementFund flow statement is the technique of analyzing and interpreting the financialstatement of a business concern. It is a technical device designed to analyze the changesin the financial or working capital position of a business enterprise between two dates.The fund flow statement is a statement, depicting change in working capital. It is alsotermed as a ‘Statement of Source and Application of Funds’, ‘Statement of Change inFinancial Position’, or ‘Statement of Changes in Working Capital’.
  55. 55. TECHNIQUES OF FORECASTING WORKING CAPITALThese include:Operating cycle method,Forecasting of current assets and current liabilities,Cash forecasting method,Projected balance sheet method,Profit and loss adjustment method.Operating cycle method:Operating cycle is the time duration when one cycle of business operations iscompleted. Business operations involve a number of stages from purchase of rawmaterials till conversion of receivables into cash.Forecasting of current assets and current liabilities:This is the traditional method of forecasting the working capital requirements. Workingcapital is the excess of current assets over current liabilities. Its requirement can easilybe forecasted by making the estimate of the amount of each component of currentassets and current liabilities. The procedure for estimating the component is as under:Stock of Raw-materials - The average amount of such stock of raw-materialswould depend upon the quantity of raw-materials required for productionduring a particular period as well as upon the average time taken in obtainingfresh delivery.Stock of Work-in-Progress - Raw-materials, wages, overheads are included in thecost of work-in-progress. In order to determine the stock of work-in-progress,the time-period for which the inputs will be in the process of production will bedetermined.Finished Goods Stock - Finished goods are not immediately sold. These are to bekept in godowns or warehouses for a certain period. This is an important factorin determining the amount to be locked up in finished goods stock. On the basisof year’s production, the amount of finished goods for the storage period may becalculated.
  56. 56. Sundry Debtors - The amount of capital locked up in sundry debtors can becomputed on the basis of credit sales, period of credit allowed / time lag incollecting the payments.Cash and Bank Balances - These are estimated on the basis of past experience.Sundry Creditors - This is estimated on the basis of credit purchases and the timelag in payments to creditors / credit period allowed by suppliers of raw-materials.Outstanding Expenses - These are ascertained having considered the time lag inpayment of various types of expenses.Cash Forecasting Method:This method is very much related to cash budgeting and it attempts to estimate the cashsurplus and deficiency. Every operating cycle starts with a cash outflow and afterpassing through various channels, it ultimately ends with an inflow of cash. A statementof month, cash forecast is prepared which includes cash inflow and outflow for variousmethods. The difference between the total cash flow will indicate surplus or deficiencyfor which necessary adjustment can be planned in advance.Cash turnover = No. of days in operating periodDuration of cash cycle in daysProjected Balance Sheet Method:Under this method, various items of assets and liabilities (both long-term as well asshort-term) are estimated for the future period. On the basis of these assets andliabilities, a projected balance sheet is prepared, and then working capital estimate ismade by deducting current liabilities from the current assets.Profit and Loss Adjustment Method:According to this method, estimated profit is calculated first on the basis of transactionslikely to take place in future. Working capital magnitude is ascertained by makingnecessary adjustments for cash inflow and outflow in the estimated profit.
  57. 57. OBJECTIVES OF STUDYThe objectives of this summer training project is to acquire capability for movingforward in corporate world, to gain knowledge and experience and know how to workin the corporate organizational environment.Primary ObjectiveTo analyze how ‘Working Capital Management’ is practiced in Britannia IndustriesLimited- Pantnagar unit.Secondary ObjectivesTo know the method of managing the working capital requirement oforganizationTo know about industrial environmentTo know the techniques of working capital management in the businessTo know whether the company under study is open to adopt new methods andtechniques to manage their financial resources betterTo know whether they are satisfied with the changes or notTo know the liquidity position of the firmTo search new methods and configuration of dataThe purpose of the methodology is to describe the processes involved in the researchwork. This includes the overall research design and the data collection method, etc.Research Methodology refers to various sequential steps (alongwith a rationale of eachsuch step) to be adopted by a researcher in studying a problem with certain object orobjectives in view. It would be appropriate to mention that research projects are notsusceptible to any one complete and inflexible sequence of steps, and type of problemsto be studied will determine the particular steps to be taken and their order too.
  58. 58. SOURCES OF DATA COLLECTIONData were collected by using both primary and secondary methods. In case primarymethod of data collection, personal interviews were held using questionnaire, and incase of secondary data collection, the Annual Report for the year 2010-11and othercorporate magazines of Britannia Industries Limited, were used.Primary DataPrimary data were collected afresh and for the first time and thus happen to be originalin character.Secondary DataSecondary data means data that are already available, i.e., they refer to the data whichhave already been collected and analyzed by someone else. The sources are:Books.Annual Reports,Magazines, andInternet.
  59. 59. WORKING CAPITAL ANALYSISBRITANNIA INDUSTRIES LIMITED, PANTNAGAR UNITThe analysis of working capital can be conducted through a number of devices, such as: Ratio analysis Fund flow analysis BudgetingFor the present study, Ratio analysis has been applied.RATIO ANALYSISA ratio is a simple arithmetical expression of relationship of one number to another. Thetechnique of ratio analysis is employed for measuring short-term liquidity or workingcapital position of the firm. The following ratios are calculated for this purpose: Current ratio Quick ratio Absolute liquid ratio Inventory turnover Receivables turnover Payable turnover ratio Working capital turnover ratio Working capital leverage Ratio of current liabilities to tangible net worthAnalysis of short-term financial position of Britannia Industries Limited is done throughthe data obtained from the balance sheet of Britannia Industries Limited for thefinancial year 2008-09, 2009-10 and 2010-11
  60. 60. CALCULATION OF RATIOCurrent Ratio:CURRENT RATIO = CURRENT ASSETSCURRENT LIABILITES(Rs. in crores)Year 2008-2009 2009-2010 2010-2011Current Assets 81.29 83.12 136.57Current Liabilities 27.42 20.58 33.48Current Ratio 2.96:1 4.03:1 4.08:1Interpretation:As we know, the ideal current ratio for any firm is 2:1. If we see the current ratio of thecompany, for last three years it has increased from 2009 to 2011. The current ratio ofcompany is more than the ideal ratio. This depicts that company’s liquidity position issound. Its current assets are more than its current liabilities.Quick Ratio:QUICK RATIO = QUICK ASSETSCURRENT LIABILITESYear 2008-2009 2009-2010 2010-2011Quick Assets 44.14 47.43 61.55Current Liabilities 27.42 20.58 33.48Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1Interpretation:A quick ratio is an indication that the firm is liquid and has the ability to meet its currentliabilities in time. The ideal quick ratio is 1:1. Company’s quick ratio is more than idealratio. This shows company has no liquidity problem.
  61. 61. Absolute Liquid Ratio:ABSOLUTE LIQUID RATIO = ABSOLUTE LIBLITIESCURRENT LIABILITESABSOLUTE LIQUID ASSETS = CASH AND BANK BALANCESYear 2008-2009 2009-2010 2010-2011Absolute Liquid Assets 4.69 1.79 5.06Current Liabilities 27.42 20.58 33.48Absolute Liquid Ratio 17 : 1 09 : 1 15 : 1Interpretation:This ratio shows that the company carries a small amount of cash. But there isnothing to be worried about the lack of cash because company has reserve, borrowingpower and long term investment. In India, firms have credit limits sanctioned frombanks and can easily draw cash.Inventory Turnover Ratio:INVENTORY TURNOVER RATIO = COST OF GOOD SOLDAVERAGE INVENTORYYear 2008-2009 2009-20010 2010-2011Cost of Goods sold 110.6 103.2 96.8Average Stock 73.59 36.42 55.35Inventory Turnover Ratio 1.5 times 2.8 times 1.75 timesInterpretation:This ratios shows how rapidly the inventory turns into receivable through sales. In2009, the company had a high inventory turnover ratio but in 2011 it reduced to 1.75times. This shows that the company’s inventory management technique is less efficientas compared to last year.
  62. 62. Inventory Conversion Period:INVENTORY CONVERSION PERIOD = 365 (net working days)INVENTORY TURNOVER RATIOYear 2008-2009 2009-2010 2010-2011Days 365 365 365Inventory Turnover Ratio 1.5 2.8 1.8Inventory Conversion Period 243 days 130 days 202 daysInterpretation:Inventory conversion period shows that how many days’ inventories take to convertfrom raw material to finished goods. If the company’s inventory conversion period isdecreasing, this shows the efficiency of management to convert the inventory into case.Debtors Turnover Ratio:DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)AVERAGE DEBTORSYear 2008-2009 2009-2010 2010-2011Sales 166.0 151.5 169.5Average Debtors 17.33 18.19 22.50Debtor Turnover Ratio(times)9.6 8.3 7.5Interpretation:This ratio indicates the speed with which debtors get converted or turn over into sales.The higher the value or turnover into sales, the higher the value of debtors turnover, themore efficient is the management of credit. But in the company, the debtors turnoverratio is decreasing year by year. This shows that company does not utilize its debtors’efficiency. Now its credit policy has become liberal as compared to previous years.
  63. 63. Average Collection Period:Average Collection Period = 365 (Net Working Days)Debtors Turnover RatioYear 2008-2009 2009-2010 2010-2011Days 365 365 365Debtor Turnover Ratio 9.6 8.3 7.5Average Collection Period 38 days 44 days 49 daysInterpretation:The average collection period measures the quality of debtors and helps in analyzingthe efficiency of collection efforts. It also helps to analyse the credit policy adopted bycompany. If the firm’s average collection period increases year by year, it shows that thefirm has liberal credit policy. These changes in policy are due to competitor’s creditpolicy.Working Capital Turnover Ratio:Working Capital Turnover Ratio = Cost of SalesNet Working CapitalYear 2008-2009 2009-2010 2010-2011Sales 166.0 151.5 169.5Networking Capital 53.87 62.52 103.09Working Capital Turnover 3.08 2.4 1.64Interpretation:This ratio indicates how much net working capital required for sales. In 2010, thereciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company
  64. 64. requires 60 paisa as working capital. Thus, this ratio is helpful to forecast the workingcapital requirement on the basis of sale.INVENTORIES:Year 2008-2009 2009-2010 2010-2011Inventories 37.15 35.69 75.01Interpretation:Inventories are a major part of current assets. If any company wants to manage itsworking capital efficiency, it has to manage its inventories efficiently. The companyshould try to reduce the inventory up to 10% or 20% of its current assets.CASH AND BANK BALANCE:Year 2008-2009 2009-2010 2010-2011Cash Bank Balance 4.69 1.79 5.05Interpretation:Cash is the basic input or component of working capital. Cash is needed to keep thebusiness running on a continuous basis. So, the organization should have sufficient cashto meet various requirements. The above table indicates that in 2008, the cash is 4.69crores but in 2009, it has decreased to 1.79. The result of this was that it disturbed thefirm’s manufacturing operations. In 2010, it increased up to approximately 5.1%. So in2010, the company had no problem in meeting its requirements as compared to 2009.
  65. 65. DEBTORS:Year 2007-2009 2009-2010 2010-2011Debtors 17.33 19.05 25.94Interpretation:Debtors constitute a substantial portion of total current assets. In BIL, it constitutes onethird of current assets. The above table depicts that there is an increase in debtors. Itrepresents an extension of credit to customers. The reason for increasing credit iscompetition and company’s liberal credit policy.CURRENT ASSETS:Year 2008-2009 2009-2010 2010-2011Current Assets 81.29 83.15 136.57Interpretation:This table shows that there is 64% increase in current assets in 2010-2011. Thisincrease is because there is approximately 50% increase in inventories. Increase incurrent assets shows the liquidity soundness of company.CURRENT LIABILITIES:Year 2008-2009 2009-2010 2010-2011Current Liability 27.42 20.58 33.48Interpretation:Current liabilities shows company short-term debts payable to outsiders. In 2010-2011,the current liabilities of the company increased. But still increase in current assets ismore than its current liabilities.
  66. 66. NET WOKRING CAPITAL: CURRENT ASSETS – CURRENT LIABILITIESYear 2008-2009 2009-2010 2010-2011Net Working Capital 53.87 62.53 103.09Interpretation:Working capital is required to finance day-to-day operations of a firm. There should bean optimum level of working capital. It should neither be too less or nor too excess. Inthe company, there is an increase in the working capital. The increase in working capitalis because the company expanded its business.FINDINGSThe Working Capital of Britannia in the FY 2010-2011 has increased in comparison tothe previous year 2009-2010 by Rs. 57.91 Mn.The reasons for this are:As most of sale is done from the head office , so the requirement of cash is not toomuchReduction in packing material has increased due to increases in productionwhich shows increase in the value of inventoryDispatching of goods on time has reduced the amount of finished goodsinventory, which is a good indication of maintaining inventory. Debtors havedecreased due to subsequent realization
  67. 67. Prepaid miscellaneous expenses were reduced as no additional expenses wereincurredCurrent assets have increased by 45.51% due to maintaining high inventory inengineering, store and raw materialThe production of Pantnagar unit was 245.10 MT on 04.03.11After introduction of Ferrari project the company was able to maintain its qualityand reduce wastage.The company also follows ISO 140001 certified to maintain the quality.RECOMMENDATIONSManagement of Britannia ensures the efficient use of various resources andincreases the productivity of the enterpriseKeeping and maintaining good working conditions to ensure fair wages forworkers’ security of employmentMaintaining good relations with suppliers to get maximum raw materials andcapital so that the organization can continue dealing in future wellThe organization structure must be flattered for the quicken decision makingwhich will result in higher profitabilityComplaint and replace the defective product in time, otherwise it will tarnish theimage of the company among the retailers
  68. 68. To ensure the proper quality of raw materials before placing an order to thevendor terms and conditions of penalties should be given to the vendors if theysupply defective materialThe company can diversify itself by undertaking the manufacturing of variousdifferent products apart from manufacturing biscuits at the Pantnagar branchStorage capacity of the company should be increased by properly utilizing thewaste land of the companyCONCLUSIONThis report is based on the financial analysis. The main object of doing this studyis to analyze the conditions of the organization. The tools of finance are used tofind out the soundness of the company.It can be concluded that in the fiercely competitive FMCG market with regionalplayers striking so hard at BIL’s market share, the company has not made anycompromise with quality systems and practices in spite of feeling the pinch in itsprofitability not only due to competition but also because of the seasonality andunpredictability in the availability and price of one of its major raw material –Maida.
  69. 69. The company is doing well in terms of its marketing approach and the financialstatements of the company seem to be healthy as of nowLIMITATIONSThe time period for the project was very less for understanding the topic indetail.The performance ratios of one company cannot always be compared with theperformance of the other firms.Price level change affects the validity of comparisons of ratios computed fordifferent time periods.Comparisons are also difficult due to differences of the terms like gross profit,operating profit and net profit, etc.The interpretations of ratios require great caution and expertise as it misleadingin some cases.The scope of study is very wide. A large sample would have provided moreconfidence in the findings but due to cost and time constraint the sample sizewas kept small.Most of the business units in India do not have confidence that the informationshared by them with the people will not be misused. So this makes theemployees reluctant to share information with them. Reluctance is more ifinformation pertains to financial position and business operations.BIBLIOGRAPHYFor this study information from the following sources have been used:Education and knowledge within industryBOOKS
  70. 70.  Goel D K, Rajesh Goel, Shelley Goel: Management Accounting andFinancial Management Garg P K: Financial Analysis Bhalla V K: Working Capital Management Pandey I M, Shashi K. Gupta: Financial ManagementWEBSITES www.google.com www.wikipedia.com www.iifl.com www.britannia.comAnnual Reports of FY 2009-2010, FY 2010-2011 and FY 2011-12 of BritanniaIndustries Limited
  71. 71. Britannia Annual Report 2008-09BALANCE SHEETRs. ’000As at Schedule 31 March 2009 31 March 2008SOURCES OF FUNDSShareholders’ fundsShare capital A 238,902 238,902Reserves and surplus B 8,006,510 7,319,2018,245,412 7,558,103Loan funds CSecured 21,972 19,372Unsecured 229,651 1,041,603251,623 1,060,975Deferred tax liability, net T(4) 99,421 –8,596,456 8,619,078APPLICATION OF FUNDSFixed assets DGross block 5,115,047 4,531,829Less: Accumulated depreciationand amortisation 2,336,654 2,121,939Net block 2,778,393 2,409,890Capital work-in-progress and advances 60,203 96,9172,838,596 2,506,807Investments E 4,230,969 3,808,300Deferred tax asset, net – 23,759Current assets, loans and advancesInventories F 2,536,331 3,015,309Sundry debtors G 496,143 463,255Cash and bank balances H 407,978 437,664Other current assets I 137,085 131,930Loans and advances J 1,815,878 1,476,4905,393,415 5,524,648Less: Current liabilities and provisionsLiabilities K 2,658,062 2,470,177Provisions L 1,474,836 1,006,5174,132,898 3,476,694Net current assets 1,260,517 2,047,954Miscellaneous expenditure(to the extent not writtenoff or adjusted) M 266,374 232,2588,596,456 8,619,078Significant accounting policies and notes to accounts TPROFIT AND LOSS ACCOUNT (2008-2009)Rs. ’000For the year ended Schedule 31 March 2009 31 March 2008
  72. 72. INCOMEGross sales 31,428,919 26,169,773Less: Excise duty 306,778 328,728Net sales 31,122,141 25,841,045Other income N 398,948 322,40031,521,089 26,163,445EXPENDITURECost of materials O 19,103,947 15,546,196Staff cost P 960,172 905,267Expenses Q 8,430,867 7,079,052Depreciation and amortisation D 334,560 290,832Financial expenses R 160,071 97,32128,989,617 23,918,668Profit before taxation and exceptional items 2,531,472 2,244,777Exceptional items (Profit)/Loss S 206,295 (77,822)Profit before taxation 2,325,177 2,322,599Income tax expense- Current income tax 343,799 356,025- Fringe benefit tax 52,973 66,652- Wealth tax 1,224 1,224- Deferred income tax, net 123,180 (11,333)Profit after taxation 1,804,001 1,910,031Profit brought forward 600,000 600,000Profit available for appropriation 2,404,001 2,510,031AppropriationsTransfer to general reserve 190,000 1,406,926Interim dividend 955,607 –Proposed dividend – 430,023Tax on Interim / Proposed dividend 162,405 73,082Profit carried forward 1,095,989 600,0002,404,001 2,510,031Basic earnings per share (Rs.) 75.51 79.95Diluted earnings per share (Rs.) 75.51 79.95Significant accounting policies and notes to accounts T
  73. 73. Britannia Annual Report 2009-10BALANCE SHEETRs. ’000As at Schedule 31 March 2010 31 March 2009SOURCES OF FUNDSShareholders’ fundsShare capital A 238,902 238,902Reserves and surplus B 3,723,620 8,006,5103,962,522 8,245,412Loan funds CSecured 4,081,019 21,972Unsecured 215,149 229,6514,296,168 251,623Deferred tax liability, net T (4) – 99,4218,258,690 8,596,456APPLICATION OF FUNDSFixed assets DGross block 5,478,331 5,115,047Less: Accumulated depreciation and amortisation 2,663,323 2,336,654Net block 2,815,008 2,778,393Capital work-in-progress and advances 116,393 60,2032,931,401 2,838,596Investments E 4,906, 3894,230,969Deferred tax asset, net T (4) 65,805 –Current assets, loans and advancesInventories F 2,683,435 2,536,331Sundry debtors G 394,868 496,143Cash and bank balances H 233,607 407,978Other current assets I 144,649 137,085Loans and advances J 1,753,611 1,815,8785,210,170 5,393,415Less: Current liabilities and provisionsLiabilities K 3,204,872 2,658,062Provisions L 1,650,203 1,474,8364,855,075 4,132,898Net current assets 355,095 1,260,517Miscellaneous expenditure(to the extent not written off or adjusted) M – 266,3748,258,690 8,596,456Significant accounting policies and notes to accounts T
  74. 74. PROFIT AND LOSS ACCOUNT(2009-2010)Rs. ’000For the year ended Schedule 31 March 2010 31 March 2009INCOMEGross sales 34,245,793 31,428,919Less: Excise duty 231,765 306,778Net sales 34,014,028 31,122,141Other income N 561,157 398,94834,575,185 31,521,089EXPENDITURECost of materials O 21,689,064 19,103,947Staff cost P 995,201 960,172Expenses Q 9,696,961 8,430,867Depreciation and amortisation D 375,434 334,560Financial expenses R 82,059 160,07132,838,719 28,989,617Profit before taxation and exceptional items 1,736,466 2,531,472Exceptional items (Profit)/Loss S 528,695 206,295Profit before taxation 1,207,771 2,325,177Income tax expense- Current income tax 220,490 343,799- Minimum alternative tax credit (13,827) –- Fringe benefit tax – 52,973- Wealth tax 1,224 1,224- Deferred income tax, net (165,226) 123,180Profit after taxation 1,165,110 1,804,001Profit brought forward 1,095,989 600,000Profit available for appropriation 2,261,099 2,404,001AppropriationsTransfer to general reserve 117,000 190,000Proposed dividend 597,254 –Interim dividend– 955,607Tax on Interim / Proposed dividend 99,196 162,405Profit carried forward 1,447,649 1,095,9892,261,099 2,404,001Basic earnings per share of nominal value of Rs. 10 each[Refer Note 23 of Schedule T] (Rs.) 48.77 75.51Diluted earnings per share of nominal value of Rs. 10 each[Refer Note 23 of Schedule T] (Rs.) 48.75 75.51Significant accounting policies and notes to accounts T
  75. 75. Britannia Annual Report 2010-11BALANCE SHEETRs. ’000As at Schedule 31 March 2011 31 March 2010SOURCES OF FUNDSShareholders’ fundsShare capital A 238,902 238,902Reserves and surplus B 4,274,147 3,723,6204,513,049 3,962,522Loan funds CSecured loans 4,077,620 4,081,019Unsecured loans 236,839 215,1494,314,459 4,296,168Deferred tax liability, net S (4) 62,373 –8,889,881 8,258,690APPLICATION OF FUNDSFixed assets DGross block 5,935,647 5,478,331Less: Accumulated depreciation and amortisation (2,898,601) (2,663,323)3,037,046 2,815,008Capital work-in-progress 116,901 99,6783,153,947 2,914,686Investments E 5,449,993 4,906,389Deferred tax asset, net S (4) – 65,805Current assets, loans and advancesInventories F 3,112,005 2,683,435Sundry debtors G 572,651 394,868Cash and bank balances H 287,465 233,804Other current asset I 121,199 121,199Loans and advances J 2,161,160 1,955,7746,254,480 5,389,080Less: Current liabilities and provisionsCurrent liabilities K 3,775,205 3,108,953Provisions L 2,193,334 1,908,3175,968,539 5,017,270Net current assets 285,941 371,8108,889,881 8,258,690
  76. 76. Britannia Annual Report 2010-11PROFIT AND LOSS ACCOUNTRs’000For the year ended Schedule 31 March 2011 31 March 2010INCOMEGross sales 42,459,805 34,266,411Less: Excise duty (322,689) (231,765)Net sales 42,137,116 34,034,646Other income M 588,235 508,31642,725,351 34,542,962EXPENDITURECost of materials N 27,643,404 21,636,223Staff cost O 1,199,292 1,057,522Other operating expenses P 11,054,597 9,717,579Depreciation and amortisation D & S (12) 445,860 375,434Financial expenses Q 400,783 82,05940,743,936 32,868,817Profit before taxation and exceptional items 1,981,415 1,674,145Exceptional items (profit) / loss R – 466,374Profit before taxation 1,981,415 1,207,771Income tax expense- Current income tax 415,183 220,490- Minimum alternative tax credit – (13,827)- Minimum alternative tax for earlier years (139,125) –- Income tax for earlier years 123,454 –- Wealth tax 812 1,224- Deferred tax charge / (credit) 128,178 (165,226)Profit after taxation 1,452,913 1,165,110Profit brought forward 1,447,649 1,095,989Profit available for appropriation 2,900,562 2,261,099AppropriationsTransfer to general reserve 145,291 117,000Proposed dividend 776,430 597,254Tax on proposed dividend 125,956 99,196Profit carried forward 1,852,885 1,447,6492,900,562 2,261,099Earnings per share [Refer to note 22 of schedule S]:- Basic [nominal value of ` 2/- each] 12.16 9.75- Diluted [nominal value of ` 2/- each] 12.16 9.75Weighted average number of equity shares used in computingearnings per share:- Basic 119,450,815 119,450,815- Diluted 119,512,374 119,486,755Significant accounting policies and notes to accounts S

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