Everything Positive About Negative Working Capital:

A Conceptual Analysis of Indian FMC !ector

A PROJECT REPORT Submitted By

ARITRIKA PAUL
"#$ !e%ester& '(Co% )oll No(:*+,
In partial fulfill%ent for the a-ard of the degree .f 'AC$E/.) .F C.MME)CE Fro%

ST. XAVIERS COLLEGE 0AUTONOMUS 1

Affiliated to 2NI3E)!I#4 .F CA/C2##A 5678 2nder the supervision of Prof. Saptarshi Roy
1

Bonafide Certificate-

Certificate that this project report titled Everything Positive About Negative Working Capital A Conceptual Analysis of !ndian "#C$ %ector& is the bonafide record of independent project 'ork of #s( A)!*)!+A PA,- 'ho carried out the project under .y supervision during /anuary01234 to #arch01234 and sub.itted to the 5epart.ent of Co..erce0 %t(6avier7s College0 affiliated to the ,niversity of Calcutta0 in partial fulfill.ent for the a'ard of the 5egree in BAC8E-9)% 9" C9##E)CE(

Certified further0 that to the best of .y kno'ledge the 'ork reported herein does not for. part of any other project report or dissertation or thesis on the basis of 'hich a degree0 fello'ship or any a'ard 'as conferred on an earlier occasion on this or any other candidate(

%ignature of %upervisor

Acknowledgement
A Project depends on the contribution fro. a 'ide range of people for its success( ! 'ould like to take this opportunity to ackno'ledge the .any people 'ho have contributed a great deal of their ti.e and e:pertise to the develop.ent of this project( "irstly0 ! e:press .y sincere thanks to .y project guide0 Prof( %aptarshi )oy0 for getting .e started and for guiding .e through the project( Needless to say0 'ithout his kno'ledge0 guidance and e:perience this project 'ould not have gone so far(

%econdly0 ! a. thankful to .y !nstitution %t(6avier7s College for providing .e 'ith the dire and rare opportunity to undertake this responsibility of doing such a project( ! a. thankful to the principal and ;ice Principal of .y college(

!t 'as a very good learning e:perience and 'ould benefit .e in future(

Above all ! 'ant to thank $od for giving .e confidence and patience to successfully co.plete the project(

Abstract
Working capital is i.portant for s.ooth operation of day to day activities of a corporate( As 'orking capital is defined as current assets over current liabilities0 at the ti.e of deter.ination of 'orking capital0 <uality of current assets especially si=e of debtors and inventory are i.portant factors( %ignificance of 'orking capital also increases0 as it is directly associated to the li<uidity position of the corporate( 8o'ever0 in so.e cases0 current assets are lo'er as co.pared to current liabilities >kno'n as negative 'orking capital? then ho' can a fir. .anage the level of li<uidity( Negative 'orking capital arises in cash base business0 efficient utili=ation of resources and sound inventory .anage.ent etc0 'hich leads to .ini.u. stock of inventory etc(0 and the overall i.pact is lo'er level of current assets( 9n the other hand0 due to better contract and negotiations to the creditors and suppliers0 they are e:tending .ore liberal credit0 'hich enhances the level of current liabilities( %tudy of negative 'orking capital is i.portant to understand the efficiency of the corporate0 'hich enhances the earning capacity( Concurrently0 li<uidity is also significant fro. short ter. solvency point of vie'0 'hich does not e:ist in case of negative 'orking capital( +eeping these vie's in .ind0 this research article e:plains the conceptual background of the negative 'orking capital and ho' it affects profitability of the corporate( -eading "#C$ co.panies are taken as a case0 to analy=e the negative 'orking capital and its i.pact on the profitability and earning capacity of the fir.s( "inally0 it is found that co.panies in 'hich negative 'orking capital e:ist0 profitability is .ore and shareholders are getting .ore dividend and capital appreciation0 'hich .a:i.i=es the shareholders value in the long run(

Table of contents
4

Chapter No.

Title

Page No.

3 3(3 3(1 3(4 3(@ 1 1(3 1(1 1(4 4 4(3 4(1 4(4 @ @(3 @(1 A A(3 A(1 A(4 B B(3 B(1 B(4 C C(3 C(1 E F

Ackno'ledge.ent Abstract *able of Contents -ist of *ables -ist of "igures !ntroduction Working Capital Working Capital D -i<uidity Negative Working Capital Negative Working Capital Creation )esearch 9bjective D #ethodology 9bjective 9f %tudy )esearch .ethodology -i.itation !ndustry Profile 5efinition of "#C$ "#C$ !ndustry *op Players of the industry Negative Working Capital !ndian "#C$ Co.panies %hare holder ;alue creation -everaging supply 8industan ,nilever Co.ponents of Working Capital
Net Working Capital And #anagerial Efficiency

"inancial )atio Analysis Nestle !ndia Co.ponents of Working Capital

Net Working Capital And #anagerial Efficiency

"inancial )atio Analysis "indings D )eco..endations %pecific 9bservations )eco..endations Conclusion )eferences

4 @ A B B C C E F 33 31 31 31 34 3@ 3@ 3A 3B 3C 3E 3F 13 11 14 1B 1C 1E 1F 41 41 44 4@ 4A 4B

List of Tables and Figures

Table No.

Title
5

Page No.

3 Current assets of 8ul 1 Net Working Capital of 8ul 4 !nventory0 )eceivable0 Payable 5ays allo'ed by 8ul @ Profitability *rends A "inancial )atios B Current assets of Nestle C Net Working Capital of Nestle E !nventory0 )eceivable0 Payable 5ays allo'ed by Nestle F Profitability *rends 32 "inancial )atios

11 14 1@ 1A 1E 1E 1F 42 43 41

Fig No. 3

Title
Current assets of 8ul

Page No. 11 14

1 Net Working Capital of 8ul 4 !nventory0 )eceivable0 Payable 5ays allo'ed by 8ul @ Profitability *rends A Current assets of Nestle B Net Working Capital of Nestle C !nventory0 )eceivable0 Payable 5ays allo'ed by Nestle E Profitability *rends

1@ 1A 1B 1F 42 43

1. INT !"#CTI!N 1.1 $orking Capital

Working Capital is a measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

GWorking capital0 also called net current assets0 is the e:cess of current assets over current liabilities( All organi=ations have to carry 'orking capital in one for. or the other( Working capital also gives investors an idea of the co.panyHs underlying operational efficiency( *he efficient .anage.ent of 'orking capital is i.portant fro.

the point of vie' of both li<uidity and profitability( Poor .anage.ent of 'orking capital .eans that funds are unnecessarily tied up in idle assets0 thereby reducing li<uidity and also reducing the ability to invest in productive assets such as plant and .achinery0 affecting the profitabilityG3( *he 'orking capital .anage.ent refers to .anage.ent of the 'orking capital0 or to be .ore precise the .anage.ent of current assets( "ig 3 Working Capital Cycle 9ut of the total B%E 122 co.panies0 14 have negative 'orking capital I their current liabilities or payables are higher than current assets or receivables( *his essentially .eans the co.panies do not have to deploy their o'n capital or borro' fro. banks to carry out their routine business activities( !t is actually very good to have negative 'orking capital because this entitles co.panies to earn relatively better returns on capital and e<uity( *his also sho's the operational efficiency of a co.pany( But just this 'ould not be enough( *he co.panies should also have good funda.entals( %uch co.panies are preferred by investors as they re'ard shareholders relatively better( *he B%E 122 co.panies have an average returns on capital and shareholders7 funds at about 12 per cent0 'hich is far less than the 41-4A per cent returns generated by co.panies 'ith negative 'orking capital( #ore i.portant0 the top ten co.panies 'ith negative 'orking capital have a dividend payout ratio of B1 per cent0 'hich is far greater than the average 1B per cent of the B%E 122 co.panies(

1.% $orking Capital &Li'uidit(

-i<uidity plays a significant role in the successful functioning of a business unit( -i<uidity refers to the ability of a concern to .eet its current obligation as and 'hen these beco.e due( *he short-ter. obligation is .et by reali=ing a.ounts fro. current0 floating or circulating assets( *he current assets should either be li<uid or near li<uidity( *hese should be convertible in to cash for paying obligations for short-ter. nature( Co.paring the. 'ith short-ter. liabilities 'ould assess the sufficient or insufficient current assets( !f current assets can pay-off current liabilities0 then the li<uidity position
8

'ill be satisfactory( 9n the other hand0 if current liabilities .ay not be easily .et out of current assets0 then li<uidity position 'ill not be satisfactory(

1.) Negati*e $orking Capital

Negative 'orking capital is a reverse situation as co.pared to nor.al 'orking capital( !t is a situation in 'hich current assets are lo'er as co.pared to current liabilities( A negative 'orking capital is an indication of .anagerial efficiency in a business 'ith lo' inventory and account receivables( *his happens because custo.er pays in advance and so <uickly0 the business enjoys cash transactionsJ products are delivered and sold to the custo.er before the co.pany even pays their suppliers and creditors( Negative Working capital doesnHt al'ays .ean bad financial conditionJ it indicates that .ost of the day to day activities are funded by custo.ers rather than co.pany7s o'n 'orking capital( %o.e latest e:a.ples are .ovie theaters -custo.ers are paying first and distributors are nor.ally paid later onJ %choolsK educational institutions- fees paid in advance by the students annually0 'hereas faculties are getting salary after one .onth( When an organi=ation uses supplier7s credit and custo.ersH advance to fulfill their day to day needs0 leading to a situation of lo'er or negative 'orking capital( Banks0 financial institutions0 distributors0 retailers 'ith cash business or advance pay.ent contract have negative 'orking capital( Nor.ally0 'hen 'e analy=e 'orking
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capital0 it al'ays refers to nor.al or positive 'orking capital >e:cess or current assets over current liabilities?( 8o'ever0 there are certain situations in 'hich 'orking capital is in negative for. >e:cess of current liabilities over current assets?( !n that situation0 ho' can a co.pany .anage li<uidity 'ith the negative 'orking capitalL !n .odern business0 the concept of negative 'orking capital is significant for the follo'ing reasons M !t indicates operational efficiency of a corporate( *hat .eans 'ithout or lo'ers current assets the fir. is .anaging day to day operations in an efficient .anner( Eventually0 it reduces cost of 'orking capital and .a:i.u. earnings for the shareholders0 'hich is the ulti.ate goal of the financial .anage.ent( M Concept of negative 'orking capital is i.portant to analy=e li<uidity position of corporate( When current assets are lo'er than current liabilities0 'hat about the li<uidity position of the corporate0 ho' are they discharging current obligations in the short period( *raditionally0 li<uidity ratios are the .easure.ent of li<uidity of a fir. 'ith the ideal standard of 1 3( Negative 'orking capital indicates lo'er cost of 'orking capital >another 'ay is higher profitability?0 but at the sa.e ti.e0 it indicates poor li<uidity >'orried situation for the creditors0 etc(? or 'e can say co.pany is overburdened 'ith current liabilities0 'hich is not good for any situation >specially in a period of recession0 etc?( M Another i.portant i.pact of negative 'orking capital is cash recovery or reali=ation situation( Negative 'orking capital indicates <uick reali=ation of cash recourses >conversion of debtors in to cash? or one can say 'orking capital cycle is shorter >for a days or .aybe less than that?( At the sa.e ti.e0 payable policy of the co.pany is to take longer ti.e for pay.ent against creditor( !t indicates significant variations in the credit policy to'ards supplier7s and custo.ers( *o analy=e0 e:plain and focus on all these situations0 a study of negative 'orking capital and its i.pact on li<uidity0 profit earning capacity and overall i.pact on shareholders7 value creation is i.portant in the conte.porary scenario(

10

1.+ Creation of Negati*e $orking Capital

*here are .any 'ays to create negative 'orking capital( #ost i.portant .ethod is to .ini.i=e the si=e of current assets 'ith favorable contract and agree.ent to the suppliers and other parties >to delay pay.ents? and the sa.e ti.e0 try to .ini.i=e credit facilities or .a:i.i=e cash based business >collection of cash before the disburse.ent of actual pay.ents to the various parties?( When .a:i.u. custo.ers are paying in advance0 lo' or negative 'orking capital is created( Another 'ay to .ini.i=e the si=e of current assets is to adopt efficient collection .ethod or brand oriented collection policy( #any co.panies are trying to .ini.i=e their cash resources 'ith efficient utili=ation of funds( %o.e co.panies are effectively using E)P syste. involving trade partners in planning and .onitoring 'orking capital ite.s to reduce the level of 'orking capital( Efficient cash collection and inventory .anage.ent syste. provides an opportunity to run business 'ith the negative 'orking capital0 because .ost of the suppliers are granting 42 days credit in general( Co.panies 'ho are able to operate and .aintain 'ith negative 'orking capital0 have advantages to receive funds 'ithout cost as a for. of credit fro. their suppliers 'hich 'ill enhance )9! in a significant .anner( 8o'ever0 no availability of li<uid resources is not a good situation at any ti.e >especially in the stage of gro'th and boo.?(

11

%. esearch !b,ecti*e & -ethodolog( %.1!b,ecti*e of stud(

#uch has been 'ritten and studied about 'orking capital .anage.ent and profitability of the fir. in different industries but this research add so.e financial insight about this issue related to the specific co.panies in the "#C$ sector na.ely- 8,-0 Nestle(( %i.ilarly0 it benefits the top .anager and policy .akers of these selected co.panies regarding decision on opti.u. level of 'orking capital0 'ays of .anaging it and overall policies on 'orking capital .anage.ent( And also it gives clear understanding about the relation bet'een 'orking capital co.ponents and corporate profitability( Besides0 the study helps as a guideline for those 'ho conduct their study on si.ilar topic and it gives brief infor.ation for the shareholders0 prospective custo.ers and creditors of a fir. regarding profitability in relation to efficient 'orking capital .anage.ent and policy( "inally0 the study benefits the researcher to obtain ne' kno'ledge about the proble. under study and gives clear picture about the discipline called research(

%.% ./.A C0 -.T0!" A"!PT."

!n order to achieve the .ain research objectives <uantitative .ethods have been adopted( *he purpose of using such approach is to gather data that help the researcher to investigate cause-effect relationships( !n this particular case0 the effect is the co.pany7s profitability and the research is targeted at identifying significant causes0 i(e( deter.inants on profitability related to 'orking capital( A brief e:planation about the data collection and analysis .ethod adopted is given belo'( *o gather data on 'orking capital co.ponent and profitability0 it is apparent to use survey of structured docu.entary revie'( Accordingly0 to achieve its objective co.panies audited financial state.ent especially balance sheet and inco.e state.ent 'as revie'ed( Annual reports 'ere thoroughly seen for all the details and schedules detailing the various i.portant co.ponents such as assets0 liabilities0 sales0 profit etc(

12

9nce data 'ere found acceptable0 data entry and process 'as .ade using #icrosoft E6CE-( Analysis of data 'as undertaken 'ith the help of ratio calculations and plotting of graphs(

%.) LI-ITATI!N
*he study is carried on Working Capital #anage.ent of "#C$ sector only ( A detail study has been perfor.ed on 8industan ,nilever -td and Nestle !ndia -td( *his study is carried on the basis of the data available for the selected co.panies during the period 122E-1231( *he study is confined to understanding the relationship bet'een 'orking capital and profitability( 5ata of "N 1231of Nestle !ndia could not be obtained(>Press )elease-NestlO $urgaon0 /anuary 420 1234 NestlO !ndia -td has infor.ed B%E that a .eeting of the Board of 5irectors of the Co.pany 'ill be held on "ebruary 120 12340 inter alia0 to consider audited financial results of the Co.pany for the year ended 5ece.ber 430 1231 and the reco..endation of final dividend for the year 12310 if any( Conse<uently0 the Co.pany 'ill not be publishing the un-audited financial results for the fourth <uarter ended 5ece.ber 430 1231&?

13

8( Industry Profile ).1 F-C12 ".FINITI!N

Products 'hich have a <uick turnover0 and relatively lo' cost are kno'n as "ast #oving Consu.er $oods >"#C$?( "#C$ products are those that get replaced 'ithin a year( E:a.ples of "#C$ generally include a 'ide range of fre<uently purchased consu.er products such as toiletries0 soap0 cos.etics0 tooth cleaning products0 shaving products and detergents0 as 'ell as other non-durables such as glass'are0 bulbs0 batteries0 paper products0 and plastic goods( "#C$ .ay also include phar.aceuticals0 consu.er electronics0 packaged food products0 soft drinks0 tissue paper0 and chocolate bars(

Characteristics !f F-C1 Products

*hey are used at least once a .onth *hey are used directly by the end-consu.er *hey are non-durable *hey are sold in packaged for. *hey are branded
Indu t!y Se"ment

14

8(5FMC

Industry

*he "#C$ sector in !ndia is at present0 the fourth largest sector 'ith a total .arket si=e in e:cess of ,%5 34 billion as of 1231( *his sector is e:pected to gro' to a ,%5 44 billion industry by 123A and to a 'hooping ,%5 322 billion by the year 121A( *he !ndian econo.y e:perienced an econo.ic slo'do'n 'ith high inflation in fiscal year 1231( 8o'ever0 !ndia7s "#C$ !ndustry 'as resilient in face of slo'do'n 'ith gro'th in both sales and profitability( *he ever increasing .iddle class backed by rising per capita inco.e is driving the gro'th of the "#C$ sector in the country( #oreover the 'ide distribution net'ork built by erst'hile .ajor players ensures the high penetration of the "#C$ products in rural !ndia as 'ell0 'hich is ho.e to .ore than BAP of !ndian population( 8ence0 "#C$ is one of the sectors in the country 'hich has successfully .itigated the rural-urban divide( !n the second half of 12310 consu.er confidence re.ained strong in the !ndian .arket( !ndia 'as ranked first along 'ith !ndonesia in a consu.er confidence inde: published by Nielsen( 8o'ever0 inflation 'as hovering around the 32P .ark 'hich prevented the )eserve Bank of !ndia fro. initiating any cuts in bench.ark interest rate( *he perfor.ance of leading players in "#C$ sector 'as above par in the second half 'ith al.ost all of the. e:periencing double digit gro'ths( *heir stock prices also sa' a significant appreciation during the course of the year( *he outlook for !ndian "#C$ is positive because of gro'ing sales0 strong financials of leading players and ever increasing urbani=ation( )efor.s announced in second half of the year like opening of retail sector to foreign co.panies 'ill add further to the gro'th of the sector(

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4(4*op Players of "#C$ %ector

3( 8industan ,nilever -td( 1( !*C >!ndian *obacco Co.pany? 4( NestlO !ndia @( $C##" >A#,-? A( 5abur !ndia B( $odrej C( Cadbury !ndia E( Britannia !ndustries F( Procter D $a.ble 8ygiene and 8ealth Care 32( #arico !ndustries

"ig 1 -ogos of top "#C$ co.panies in !ndia

+.Negeti*e $orking Capital2 Indian F-C1 Companies

!n !ndia0 negative 'orking capital is e<ually popular at par 'ith the global co.panies
16

such asJ #c5onald7s and A.a=on(co.( !n !ndia0 8,- and NestlO are the "ast #oving Consu.er $oods >"#C$? co.panies0 having negative 'orking capital for .ore than the last ten years( No' the <uestion arises as to ho' they are .anaging day to day operations s.oothly 'ithout sufficient li<uidity( 8,- is one of the leading "#C$ co.panies having sound .arketing net'ork0 distribution channels and strong brands 'hich 'ill aid financial benefits over co.petitors( As other "#C$ co.panies such as0 Britannia0 !*C0 Colgate0 and 5abur0 etc( belong to si.ilar business seg.ent .ostly have positive 'orking capital >e:cept fe' years?(Conventionally0 the "#C$ Co.panies are fa.ous for negative 'orking capital due to efficient supply chain .anage.ent( *his industry has lo'er level of debtors0 'hich are usually financed by creditors or suppliersJ this situation offers the. so.e gains related to negative 'orking capital( Another situational gains for "#C$ industry is their turnover does not dependQupon their production >like other #fg( industry?0 it depends upon the capability to sales in the co.petitive .arket0 therefore .a:i.u. resources are utili=ed for .arketing and pro.otion of product rather than .anufacturing activities0 etc( >because .ost of their products are .anufactured by s.all co.panies under contract production agree.ent?( %i.ilarly develop.ent of %C#0 E)P and /!*0 etc( .ade effective .anage.ent of inventory and resources0 'hich 'ill significantly .ini.i=e the si=e of current assets( !n current assets nearly A2P part is in the for. of inventory0 but in "#C$ co.panies due to efficient supply chain .anage.ent and efficient inventory holding0 level of inventory co.es do'n to significant lo'er level as co.pared to other industry >such as .anufacturing?( %i.ilarly due to the cash base of business0 level of debtors are also lo'er 'hich significantly decreases the level of current assets another i.portant change in the nature of investors is0 rational thinking about invest.ent( No'adays strategic investors are also focusing on 'orking capital .anage.ent of a co.pany0 because it is directly associated to earning capacity of the fir.( A study of top !ndian co.panies having higher return on capital e.ployed sho's .any co.panies is having negative 'orking capital(

+.1/hare 0olders 3alue Creation

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%hareholders value creation is the ulti.ate agenda for every corporate( *here are t'o 'ays to create value for shareholders >3?8igher dividend as co.pared to other corporate( >1? 8igher value of shares in the open .arket >capital appreciation in the 'ay of higher .arket capitali=ation?( Both these can be obtained by the co.pany 'ith higher profitability or reduced cost of capital0 'hich 'ill enhance overall efficiency in the day to day operations 'ith the sound 'orking capital .anage.ent( 8,-0 Nestle and $odrej Consu.ers Products -td have )9CE in e:cess of @2P(*he success of this high return is associated 'ith the 'ay these co.panies have .anaged their 'orking capital .anage.ent cycles( Says Jigar Shah of broking firm KR Choksey: Companies operating in industries like FMCG and automobiles have been able to manage working apital effi iently and! thus! reate value for shareholders by way of high R"C#$

9(5/everaging on !upply Chain

18

"#C$ co.panies first sell their goods and later on pay their ra' .aterial suppliers( *his is possible only 'hen the co.panies are huge in si=e and account for the bulk of turnover for their suppliers( %trong brand loyalty of "#C$ %ector helps the. .aintain a lo' inventory as 'ell as generate speedy sales( !n such a situation0 they are al'ays in a position to ar.-t'ist the suppliers by taking .ore credit( *hus the products are sold to the custo.ers and the cash generated even before the co.pany pays its suppliers( *he additional cash generated can be utili=ed for other purposes( Nestle collects its .oney fro. custo.ers in just four days >average collection period?0 'hereas it pays in A1 days to its ra' .aterial suppliers( 8,-0 'hich had a net negative 'orking capital has been able to .aintain its creditor days at B@ as co.pared to receivable days at 3B( $odrej Consu.er Products >$CP-? is another co.pany 'ith negative 'orking capital .aintains creditor days at A40co.pared to average debtors of si: days only(

Says Sunil Sapre! vi e%president! finan e! Godre& Consumer 'rodu ts (GC')*:#ffe tive use of #R' systems! involving trade partners in planning and monitoring working
19

apital items! following win%win poli ies! effi ient operations at all levels enable GC') to manage working apital effi iently$ +t has given us an advantage of higher sales and better R"C#$ *he strong distribution and do.inant position in the "#C$ industry has .ade these co.panies to bargain 'ith the debtors and creditors to e:pand the pay.ent cycle in favor of the co.pany( *he "#C$ co.panies have been able to keep their creditors al.ost e<ual to debtors and inventory0 'hich have resulted in a lot of cash generation for these co.panies0 'hich is again invested in the business( *hese co.panies also .ake invest.ent in short-ter. papers and call .oney0 'hich allo's the. to earn good returns( *raditionally0 the "#C$ co.panies are kno'n for .aint #inin" ne"#ti$e
%&!'in" (#)it#* 'hich is leveraged on strong supply chain .anage.ent( %in(e t+i indu t!y #((&unt ,&! very negligible a.ount of debtors0 the 'hole trade is ,in#n(ed by (!edit&! ,!&m t+e production side and vendors and dealers fro. the supply side(

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8,- is !ndiaHs largest consu.er goods co.pany based in #u.bai0 #aharashtra( !t is o'ned by the British-5utch co.pany ,nilever 'hich controls A1P .ajority stake in 8,-( !ts products include foods0 beverages0 cleaning agents and personal care products( 8,- 'as for.ed in 3F44 as -ever Brothers !ndia -i.ited and ca.e into being in 3FAB as 8industan -ever -i.ited through a .erger of -ever Brothers0 8industan ;anaspati #fg( Co( -td( and ,nited *raders -td( !t is head<uartered in #u.bai0 !ndia and has e.ployee strength of over 3B0A22 e.ployees and contributes to indirect e.ploy.ent of over BA0222 people( *he co.pany 'as rena.ed in /une 122C as 8industan ,nilever -i.ited&( With over 4A brands spanning 12 distinct categories such as soaps0 detergents0 sha.poos0 skin care0 toothpastes0 deodorants0 cos.etics0 tea0 coffee0 packaged foods0 ice crea.0 and 'ater purifiers0 the Co.pany is a part of the everyday life of .illions of consu.ers across !ndia( !ts portfolio includes leading household brands such as -u:0 -ifebuoy0 %urf E:cel0 )in0 Wheel0 "air D -ovely0 Pond7s0 ;aseline0 -ak.O0 5ove0 Clinic Plus0 %un silk0 Pepsodent0 Closeup0 A:e0 Brooke Bond0 Bru0 +norr0 +issan0 +'ality Wall7s and Pureit(

21

4.1 C!-P!N.NT/ !F $! 5IN1 CAPITAL2

*he table belo' sho's the co.ponent-'ise analysis of the 'orking capital of 8,fro. 122C-2E to 1233-31( !t can be seen that inventory constituted a .ajor co.ponent of the gross 'orking capital for the period of study( Ne:t .ajor constituent is cash and bank balances 'hich .ake 1C(21P of the $WC( %o 'e can observe that the .ajor co.ponents of gross 'orking capital are inventory0 cash and bank balances and sundry debtors( *he si=e of the 'orking capital increased and decreased over the years as percentage of total assets due to changes in scale of operations(
Particulars In*entor( /undr( "ebtors %77897: %77:97< %77<917 %717911 %71191% A3. A. = of 1$C %77)88.+% %4:74%.;7 %%%;+1.77 %:8)88.77 %;;8)8.77 %+87)8.77+ +%.1)= +;+<).7; 4;74;.78 ;<1;8.77 <4+:<.77 :4;8+.77 87484.:%; 1%.7+= Cash 6ank 6alances %;%+%.1< 1:;+11.;8 %71%):.77 18:8%;.77 1<<;+).77 14:+4%.18 %8.7%= & Loans and !thers Ad*ances ;;<<%.;4 8;1:8.)% 4:<4).77 ;;)%%.77 ++;11.77 ;%;1).1<+ 17.;:= 1:4%.+8 1<87.+1 1<%<.77 )884.77 )8%1.77 %;+<.48; 7.+4= 1ross $orking Capital )+1<48.8< 48:;8:.78 44)<%:.77 ;)1;:<.77 :%4488.77 4:;);4.<8 177.77=

*able 3 Current assets of 8ul

"ig 3 Current asset co.postion of 8ul

4.% Net $orking Capital and -anagerial .fficienc(

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*he table belo' sho's that there 'as a shortage of 'orking capital in all the years fro. 122C to 1231( *he net 'orking capital has been continuously negative( !n any nor.al situation0 a negative net 'orking capital is a sign a co.pany facing bankruptcy or serious financial trouble( 33 >ear %77897: %77:97< %77<917 %717911 %71191% Current Assets 4@3FAC(CF ACEBCE(2C AA4F1E(22 B43BEF(22 E1AACC(22 Current Liabilities A3FA24(AB AEE4F4(AF BE3B23(22 CA2EF4(22 BC23F2(22 Net $orking

Capital -3CCA@A(CC -FC3A(A1 -31CBC4(22 -33F12@(22 3AA4EC(22

*able 1 Net Working Capital of 8ul

-i" 2. Net Working Capital of 8ul

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Particulars !nventory 5ays )eceivable 5ays Payable 5ays

122C-122E 122E@3(F@ 31(CC CE(1A 122F @@(34 3@(1E F3(3F

122F1232 @C(3B 31(3 FF(A1

12321233 4C(CF E(1B BE(1A

1233-1231 @4(@1 32(FB EE(1

*able 4 !nventory0 )eceivable0 Payable 5ays allo'ed by 8ul 0 "ig 4 !nventory0 )eceivable0 Payable 5ays allo'ed by 8ul But this is not the case 'ith 8,-( 8ere Negative Working Capital essentially .eans

that the co.pany is able to pre-sell its products and gets a decent Credit fro. its %uppliers 'hich help it to gro' its business 'ithout any Custo.er de.and for its products or a very strong brand

We can see the i.pact of negative 'orking capital on )9CE0EP%05P% over the period of ti.e( -o'er is the 'orking capital higher is the )9CE and thus there is an increasing trend in Earning per share
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*able @ Profitability *rends PA TIC#LA / $orking capital?sales !C.@=A .P/ "P/ %7789 %77: 918.++ 8: :.1% < %77:9 %77< 91%4.1< 178.4 11.+8 8.4 %77<9 %717 9<7.44 17).8 17.;< ;.4 %7179 %711 4:.%: :8.4 17.;: ;.4 %7119%71% 18.18 <;.: 1%.+4 8.4

"ig *rends

Profitability

,arish Manwani! Chairman ommented: -.e have delivered another /uarter of strong volume led growth with an improvement in margins$ 0he environment ontinues to be
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hallenging in terms of inflation and a general e onomi slowdown$ +n this onte1t! we are implementing our strategy with even greater rigor and managing our business dynami ally to remain ompetitive and ost effi ient$ .e ontinue to drive innovation and e1e ution to strengthen our ore business while leading market development in the emerging ategories

4.) FINANCIAL ATI! ANAL>/I/

)atio Near Current )atio 122C-2E 122E-2F 122F-32 1232-33 1233-31 2(E 2(FC 2(FC 3(2A 3(14 Ruick )atio 2(@A 2(A@ 2(BA 2(B4 2(E4 !nventory *urnover )atio C(12 F(1B E(FF C(F3 F(F4 Cash Conversion Cycle -1A(21 -32(EE -B2(2F EE(C1 FA(2B 5ebtors turnover ratio 43(@3 @3(E4 1F(F@ 1@(1E 1C(1C

*able A "inancial )atios "ro. the table above0 'e can see that the Current )atio >C)? of 8,- has .oved bet'een 2(BB 3 and 3(14 during the period of study( 9n an average it stands at 2(E2 3 for the entire period against the conventional 1 3( *he Ruick )atio >R)? of the co.pany has .oved bet'een 2(@A 3 and 2(E4 3 during the study period 'hich is .oderately good 'hen co.pared to the standard nor. of 3 3( *he !nventory *urnover )atio >!*)? of the co.pany has .oved bet'een C(12 3 and F(F4 3( *he Cash Conversion Cycle >CCC? of the co.pany has .oved bet'een -B2(2F and FA(2B( *he 5ebtors *urnover )atio of the co.pany has .oved bet'een 43(@3 to 1C(1C

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/e t*e Indi# 0td1 &ne t+e bi""e t )*#ye! in -2C3 e"ment1 i # ub idi#!y &, /e t*e S4A4 T+e (&m)#ny +# )!e en(e #(!& b!#n(+ &,,i(e #nd 6&*'#t#4 It +# # )!e en(e in mi*' 7 nut!iti&n1 be$e!#"e 1 )!e)#!ed di +e 7 (&&'in" #id 7 (+&(&*#te 7 (&n,e(ti&ne!y e"ment 4 T+e (&m)#ny i en"#"ed in t+e ,&&d bu ine 4 T+e ,&&d bu ine in(&!)&!#te )!&du(t "!&u) 1 u(+ # mi*' )!&du(t #nd nut!iti&n1 be$e!#"e 1 )!e)#!ed di +e #nd (&&'in" #id 1 (+&(&*#te #nd (&n,e(ti&ne!y4 )!e#d #(!& Indi# %it+ 7 m#nu,#(tu!in" ,#(i*itie #nd ,&u! t+e !e"i&n4 T+e ,&u! b!#n(+ &,,i(e in t+e (&unt!y +e*)

,#(i*it#te t+e #*e #nd m#!'etin" &, it )!&du(t 4 T+ey #!e in 5e*+i1 2umb#i1 C+enn#i

*he brands and products of the co.pany are focus of continuous innovation so that they .eet and e:ceed consu.ers7 e:pectations( *he co.pany seeks a clear-cut advantage over co.petitors7 products and to ensure its products are available 'herever0 'henever and ho'ever the custo.ers 'ant the.( Although profitability .ay be considered the governing factor of a business0 nevertheless the .anage.ent of 'orking capital can effectively bring to a halt0 or to its ulti.ate do'nfall0 'hat .ight other'ise be a successful and profitable co.pany(

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;.1C!-P!N.NT/ !F $! 5IN1 CAPITAL2

*he table belo' sho's the co.ponent-'ise analysis of the 'orking capital of Nestle !ndia -td( fro. the year 1224-2@ to 1233-31( !t can be easily noted that !nventory constitutes the .ajor co.ponent of the 'orking capital 'hich on an average accounts to around B2P( %i.ilarly0 %undry debtors constitute about C(CAP on an average for all the years( Besides0 Cash DBank Balances0 Advances and loans contribute 34(21P and 13(FBP respectively to the $ross Working Capital( 8ence the .ajor co.ponents of 'orking capital are !nventory0 %undry 5ebtors0 5eposits and Advances( *he si=e of the 'orking capital increased and decreased over the years as percentage of total assets due to changes in scale of operations( Particulars !nventory %undry debtors 122E 122F 1232 1233 @1134C(CA A;E)A$E P of $WC ACP BP *able B Current assets of Nestle
@2313A4(22 @4@F33C(22 @FEC4CF(22 ACAFA3B(22 @CCC2@3(1A
A4@F23(22 @AAF44(22 B@EB4(22 B41EA@(22

Cash Bank balances

40CC0B2@ 3F4BEF4(22 3AAAEB4(22 1AA1F3A(22 123A114(BC

D -oans0 Advances
3@A4EE4(22 314CAEF(22 34E2@EC(22 3A3@@31(22 34FBAF1(CA

$ross Working capital

B4CEA@3(22 CFCFA41(22 EABAAF1(22 32@AFBFC(22

E4@AE@2(A2

3CP

12P

322P

"ig A Current asset co.postion of Nestle

;.% Net $orking Capital and -anagerial .fficienc(

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Working capital .anage.ent as a financial strategy has its effects on li<uidity as 'ell as profitability of the fir.( *he table belo' sho's that there 'as a shortage of 'orking capital in all the years fro. 1224 to 1233( *he net 'orking capital has been continuously negative( *his trend is generally considered to be a sign of bankruptcy facing the co.pany or so.eti.es a serious financial trouble( Near Current Assets Current Liabilities Net $orking Capital -43FF3A1 -4EB233F -ABAE1A@ -B14B4CE :

%77: B4CEA@3 %77< CFCFA41 %717 EABAAF1 %711 32@AFBFC %71% : *ableC Net Working Capital of Nestle

FACCBF4 33E4FBA3 3@114E@B 3BBFB2CA :

"igure B Net Working Capital of Nestle But the sa.e is not true for Nestle !ndia -td( *he co.pany has been able to generate cash so <uickly0 and custo.ers paying upfront that the business have no proble. raising the cash( 8ence profitability could not be linked to the net 'orking capital( !nstead0 a negative 'orking capital proves to be a sign of .anagerial efficiency in their business
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'ith lo' inventory and accounts receivable >'hich .eans they operate on an al.ost strictly cash basis?( *he co.pany tries to attack the gro'th in Working Capital sensibly0 not by focusing on absolute value 'hich in so.e previous years 'as i.pacted by double-digit inflation0 but by targeting days covers for inventories0 accounts receivable and accounts payable( *able E !nventory0 )eceivable0 Payable 5ays allo'ed by Nestle Particulars ecei*able "a(s In*entor( "a(s Pa(able "a(s %77: @(2@ 4@(34 A@(3F %77< 4(E@ 41(B4 A1(3E %717 4(BA 42(CB A1(3 %711 @(1A 43(3B AC(FF

"ig C !nventory0 )eceivable0 Payable 5ays allo'ed by Nestle

Nestle !ndia -td is a good e:a.ple 'hich proves that negative Working capital doesnHt al'ays .ean bad financial conditionJ it indicates that .ost of the day to day activities are funded by custo.ers rather than co.pany7s o'n 'orking capital( *he data and figure belo' also sho's the perfor.ance and profitability of Nestle in ter.s of its return on capital e.ployed0 earnings per share and dividend per share( *here has been a continuous gro'th in the share prices over the past F-32 years and

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hence the perfor.ance has been e:pectedly good( *hus0 'orking capital cannot be considered as the sole and correct indicator of the co.pany7s perfor.ance *able F Profitability *rends PA TIC#LA / %77:
>ear $orking ratio ratio

%77<

%717
In*entor( -32(11 Turno*er

%711

%71%

Current -33(4B Li'uidit( -F(14

Capital?/ales !C.@=A %77: .P/ %77< %717 "P/ %711 1231

Cash -F(34 : 5ebtors con*ersion turnover ratio

3A3(C
2(BC 2(BC2 2(B1 2(@1 : 2(1F AA(4F 2(1@ @1(A 2(1C 2(1@ :

3@F(C BC(F@ @E(A

31E(3 2(AF E@(F3 2(AF 2(AF@E(A 2(B2 :

B2(@C C(cle -@(AE FF(C4 -B(1@ -A(FF @E(A -3@(2C :

:
EC(4C F4(BE : FE(11 E4(E4 :

"ig E Profitability *rends

;.) Financial atios Anal(sis

*able 32 "inancial )atios

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!t appears fro. *able that the Current )atio >C)? of Nestle !ndia -i.ited has .oved bet'een 2(BC 3 and 2(@1 3 during the period of study( !t reveals that the li<uidity of Nestle as .easured by the current ratio is relatively very lo'( *he Ruick )atio >-)? of the co.pany has .oved bet'een 2(1F 3 and 2(1@ 3 during the study period0 'hich is .oderately bad0 'hen co.pared to the standard nor. of 3 3 Cash conversion cycle >CCC? is again not strongly correlated >2(33? 'ith the profitability and thus fails to e:plain the perfor.ance of the business to a great e:tent( Also0 the CCC is seen to be .ostly negative for the co.pany basically because the no( of day7s accounts payable e:ceeds the no( of day7s accounts receivable( !nventory turnover ratio >!*)? .oves on an average of 2(AE during the co.plete period of @ years( Also !*) sho's a .ediu. correlation 'ith the profitability of the co.pany( 5ebtor7s turnover ratio .oves fro. EC(4C to E4(E4 during the period of study(

8.1/pecific !bser*ations
After the analysis of trend of negative 'orking capital and various co.ponents of profitability it is clear that M "#C$ co.panies are having trend to use negative 'orking capital to .ini.i=e the cost of borro'ing for 'orking capital( M Whenever they are having trends of negative 'orking capital0 profitability is al'ays higher>because of lo'er cost of interest and borro'ings?( M 8,- and Nestle are the t'o leading "#C$ co.panies in !ndia0 regularly using negative 'orking capital for their day to day operations( M An i.portant observation is0 rather than negative i.pact of poor 'orking capital >negative 'orking capital? "#C$ co.panies are having greater advantages because of brand i.age and lo'er operating cost for their product >because of strong influence of brands?(
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M !n "#C$ co.panies early cash reali=ation and .ini.u. chances for bad debts >due to lo'er level of debtors? are the key areas responsible for higher profitability( M Brand i.age of the products >intangible assets? enhances .arketing efficiency and profitability >higher de.and for the product?( M Another i.portant area of advantages isJ in "#C$ Co.pany7s contribution of intangible assets are .ore than F2P of the .arket capitali=ation that 'ill provide the. uni<ue opportunity to enhance .arket share of the product( M !ntangible assets such as brand0 internal operation .ethodologies0 strong supply chain net'ork and strong custo.er base etc( are the key areas responsible for lo'er re<uire.ent of 'orking capital

8.% ecommendations
Negative 'orking capital creates .any financial gains but at the sa.e ti.e it has so.e adverse i.pacts -o'er or poor 'orking capital >or negative 'orking capital? creates artificial pressure on a co.pany to increase borro'ings for day to day operations( 5ue to delayed pay.ents to the creditors0 in so.e cases ranking of such co.panies are treated as poor0 'hich 'ill affect cost of borro'ings or capital >in the 'ay of higher rate of interest?( !n case of e:pansion and .odification of business0 negative 'orking capital creates financial barriers >lo'er li<uidity?( !t 'ill create artificial hurdle for the gro'th of the organi=ation(

33

5ue to poor li<uidity0 investors behave 'ith cautionJ it 'ill create financial unrest a.ong the general investors( *hey are 'orried about their invest.ent as 'ell as future returns(

At the ti.e of business valuation0 negative 'orking capital creates hurdle for better valuation because of chances of bankruptcy risk in a short ti.e( Negative 'orking capital position only 'orks 'hen the co.pany is gro'ing revenues >such as $eneral #otors that used it for several years until revenues began declining?( When the co.pany7s revenues are declining the positive effect of a negative 'orking capital position reverses and it i..ediately starts needing annual 'orking capital invest.ent during a ti.e 'hen the co.pany can least afford (

*he co.panies 'orking on negative 'orking capital should keep an eye on the above i.pacts of negative 'orking capital( !f the co.panies can overco.e the over shortco.ings they can e.ploy the advantages of negative 'orking capital(

:. Conclusion
Negative 'orking capital indicates non-li<uidity or less li<uidity 'ithin the fir. 'hich is not favorable at each and every stages of business( Co.panies operating in industry like "#C$ are able to .anage negative 'orking capital efficiently0 creating shareholder value by 'ay of higher EP% and higher .arket capitali=ation( At the sa.e ti.e0 co.panies 'ith higher 'orking capital are having sufficient li<uidity0 are .ore successful because of li<uidity and they can e:pand business and gro' up to .a:i.u. possible e:tent( 8o'ever0 a co.pany 'ith higher 'orking capital needs higher revenue to .aintain their healthy operating ratio( A better credit .anage.ent syste. 'ill help these co.panies to generate higher )9CE in the long run >8,- is the live e:a.ple?( 8o'ever0 in each and every situation lo'er level of li<uidity is not preferableJ a proper tradeoff bet'een li<uidity and 'orking capital re<uire.ent is needed in the long run(
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<. eferences
$eb Pages
3( '''(hul(co(in 1( http KK'''(blurtit(co.K<ACA@2E(ht.l 4( http KK'''(investopedia(co.K @( http KK'''(pro<uest(co(ukKen-,+K A( '''(google(co. B( http KK'''(nestle(inKinvestorsKstockandfinancialsKannualreports

esearch Papers

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3( 5r( *(%atyanarayana Chary0 )a.anadh +asturi and 5r( +( %a.path +u.ar)elationship bet'een 'orking capital and profitability - A %tatistical Approach0 1233 1( #uluale. #ekonnen- *he i.pact of 'orking capital .anage.nt on fir.s7 profitability0 1233 4( Wajahat Ali and %yed 8a..ad ,l 8assan- )elationship bet'een the Profitability and 'orking Capital policy of %'edish Co.panies0 1232 @( -ingesiya N( and Nalini(%- Working capital .anage.ent and "ir.7s perfor.ance an analysis od %ri -ankan #anufacturing co.panies A( 9W9-AB!0 %unday Ajao and A-,0 Chituru Nkechinyere- E""EC*!;E W9)+!N$ CAP!*A- #ANA$E#EN* AN5 P)9"!*AB!-!*N A %tudy of %elected Ruoted #anufacturing Co.panies in Nigeria- 1231

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