Market Report on Working Capital Management

in FMCG Sector
Introduction
Management of Working Capital is one of the most important functions of corporate management. Every
organization whether public or private, profit oriented or not, irrespective of its size and nature of business,
needs adequate amount of working capital. The efficient working capital management is most crucial factor
in maintaining survival, liquidity, solvency and profitability of the any business organization.

The FMCG sector is one of the major contributors in the development of any economy. It is the fourth largest
sector of Indian economy. The Indian FMCG market is expected to reach US$ 20.6 billion by 2020. Major
share of this comes from urban markets that account for 65 per cent of total revenues. In last decade average
of 11% annual growth is observed in FMCG sector. The compounded annual growth rate for FMCG is
expected to touch US$ 110.4 billion during 2012-2020. The pillars of growth for consumer durable market
are awareness, easy access and trends of lifestyle. In the perspective of business, policies and regulations
support both the existing players as well as new entrants in this sector.
Any firm requires two types of capital-fixed capital and working capital. The success of any business house
is in the effective utilization of resources which, in turn, is dependent upon the effective circulation of
working capital. At present the market has become very competitive and constrained by the financial
imbalance, so it is very important for any company to maintain sufficient level of working capital for smooth
run. Moreover, the economy has faced many challenges like recession and inflation during different phases
of time but managing effective working capital helps to overcome these challenges. The companies that
manage the working capital effectively will gain valuable investment opportunity which adds further profits
in its bag. For the study of trends in working capital management in the FMCG sector as a whole, the
following top companies from the FMCG sector have been selected.

Name HUL ITC Nestle Dabur Britannia

Traded as BSE:500696 BSE:500875 SIX: NESN BSE:500096 BSE:5000825

Founded 1933 1910 1866 1884 1892

Headquarters Mumbai Kolkata Switzerland Uttar Pradesh Bangalore

Key People Sanjiv Mehta Sanjiv Puri Paul Bulcke Anand Burman Nusli N Wadia

Net Income Rs.4490 crores Rs.10471 crores CHF 8.88 billion Rs.9913 millions Rs.843.69 crores
Working Capital Financing-mix
Working capital can be financed from the following sources:
Short term sources - Current Liabilities
Long term sources – Share capital, long term borrowings, retained earnings or reserves.

Working capital: Policy and Management

Firms generally adopt one of the following three types of policies, which describes the relationship between
the sales level and the level of current assets i.e.

Conservative working capital policy – Suggests that the entire estimated investments in current asset
should be finance from long term source and short term should be used only for emergency requirement.
So higher liquidity, less risk, involves relatively more cost of financing.

Aggressive working capital policy – Suggests that the entire estimated requirement of current asset
should be financed from short term sources and even a part of fixed asset investment be financed from short
term sources. So high risk, less costly and more profitable.

Moderate working capital policy – suggests that a balance between both the above policies is ideal for
working capital management.

Liquidity & Profitability – A risk return trade off

An important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. The
decision on how much working capital needs to be maintained involves a trade-off i.e., having a large net
working capital may reduce the liquidity-risk faced by the firm, but it can have a negative effect on the cash
flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of
working capital.
Objectives

The study aims at analysing the working capital management of FMCG (fast moving consumer
goods) Sector in India. The main objectives are:
 To study and analyse the management of working capital in the FMCG companies.
 To analyse the working capital trends in FMCG sector.
 To study the liquidity position of the FMCG companies
 To compare and analyse various components of working capital management such as receivables,
payables, inventory position.
 To identify the sources of short term financing essential for financing working capital
Working Capital Management

Net Working Capital(in Rs. millions)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

200000

150000

100000

50000

-50000
HUL BRITANNIA NESTLE ITC DABUR
2007 -9368.304 2450.301 -2255.138 45879.3 1042.066
2008 0 2047.954 -3511.127 45840.4 1365.945
2009 -4757.889 4233.467 -3625.699 53414.8 595.401
2010 -5935.4 2934.617 -4729.59 44370.1 1979.766
2011 3541.8 2481.9 -1771.8 45680.6 4734.8
2012 13448.3 -1231.7 3616.9 53368.4 5132.1
2013 -858.7 -2909.2 9545.4 72607.4 6940.2
2014 2486.3 -988.2 6082.2 94244.1 8331.7
2015 4807.3 2268.6 10038.8 122731.2 3132.9
2016 29000 3720.2 16462.9 168796.5 6259.5
2017 22090 9154.6 24446.8 177073.2 5774.4

In India, HUL and Nestle are among the top FMCG companies, who had negative working capital for most of
the last 10 years. So even with a lower or ideal level of liquidity, they are able to manage their operations
quite efficiently. Historically FMCG companies are famous for negative working capital driven by their
efficient supply chain management. This negative working capital is mainly due to lower level of debtors
which are financed by creditors or suppliers, leading to some short-term gains. Even though Britannia and
Dabur have similar working capital needs, surprisingly ITC’s net working capital is much more than its
competitors. This is because in recent years ITC has made huge investments in short term investments, and
at present has huge amount of ideal cash lying with it. By investing in liquid assets even though ITC has
managed to minimize its liquidity risk but had the investments been made for higher production, it could
have further increased its revenues and thereby profits.
Operating Cycle
10 years Operating Cycle
180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00
HUL Dabur Britannia Nestle ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

As we know higher the operating cycle more is the requirement of working capital, in the previous graph we
saw ITC’s working capital is the highest among its competitors and here we can see ITC’s operating cycle to
be the largest. Also, we can notice a similarity among the top FMCG companies that their operating cycle is
in the range of 80-95 days, except for Dabur who are realizing cash within 40-50 days.

Cash Conversion Cycle

10 YEARS Cash Conversion Cycle
150.00

100.00

50.00

0.00
HUL DABUR BRITANNIA NESTLE ITC

-50.00

-100.00

-150.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Mostly FMCG companies like HUL, ITC first sell their goods and later pay their raw material suppliers. It is
possible because of the huge turnover and thereby huge orders for the suppliers. Strong brand loyalty of
FMCG sector helps them maintain a low inventory as well as speedy sales as compared other sectors. Hence,
they are always in a position to negotiate with suppliers for more credit. The products are sold to the
customers and the cash generated even before the company pays its suppliers. The additional cash is then
utilized by the company on other purposes, thereby increasing efficiency as a whole. This is why from the
above graph we can see, that for HUL and ITC their cash conversion cycle is negative for most of the previous
10 years, whereas in-case of Dabur, Britannia and Nestle the cash conversion cycle is mostly positive because
of lower credit period offered by their suppliers and higher credit period offered by these companies to the
retailers.

Liquidity Management
Current Ratio

Current Ratio
4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00
HUL NESTLE ITC BRITANNIA DABUR

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Current ratio (current assets/current liabilities) which is an indicator of liquidity position shows that there is
a similarity among the top FMCG companies where they have tried to maintain a current ratio of 1-1.5, which
is less than the ideal current ratio of 2:1. Again we can see the current ratio of ITC is highest among its
competitors and in recent years have crossed the ideal margin of 2:1 to 3-3.5:1 because of high amount of
cash reserves and increase in short-term investments made by ITC.
Cash Ratio

Cash Ratio
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
HUL Nestle ITC Britannia Dabur

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cash ratio (cash and cash equivalents/current liabilities) gives a more accurate position of the liquidity of a
company, from the above chart we can notice that HUL and Dabur have a similar cash ratio whereas ITC and
Nestle driven by their huge cash reserves has a much higher and increasing cash ratio. Hence, we can infer
that at present ITC and Nestle has a lot of ideal cash which are lying unproductive but at the same time
helping in minimizing the liquidity risk whereas Britannia with lowest cash ratios has the highest amount of
liquidity risk among its competitors.

Inventory Management
Inventory Turnover Ratio

Inventory Turnover
14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00
Dabur Nestle Britannia HUL ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The inventory turnover ratio tells how many times the inventory gets sold and replaced, from the above
chart we can see that the inventory turnover ratio is quite similar in-case of Dabur, Nestle and HUL, roughly
around 6-times. Thus, the demand for products of these companies is quite similar with respect to their
sales. The inventory turnover ratio of Britannia is highest among its competitors and with an average value
of roughly 10times.

Days Inventory Outstanding

Days Inventory Outstanding

180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Dabur Nestle Britannia HUL ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Days Inventory outstanding tells us the number of days it takes from manufacturing a good to selling it to
the customer, we can see that the days inventory outstanding of Dabur, Nestle and HUL is quite similar due
to similarity in their product demand and thus similarity in their inventory turnover ratio. In-case of ITC and
Britannia we can see the opposite effect of inventory turnover ratio, as the inventory turnover was highest
in-case of HUL, its days inventory outstanding is lowest thus the inventory gets cleared at a faster rate. The
opposite effect happens in-case of ITC.

Receivables Management
Receivables Turnover Ratio

Accounts Receivables Turnover

120.00

100.00

80.00

60.00

40.00

20.00

0.00
Dabur Britannia HUL Nestle ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Receivables turnover ratio tells the number of times a company receives payments from its customers on
their credit sales, it also shows the efficiency of a company in managing its debtors. The graph shows a clear
similarity among Dabur, HUL and ITC with an approximate value of 20-25 times while in-case of Britannia
and Nestle the realisation of cash is done a lot more frequently. The receivable turnover ratio of Britannia
and Nestle is in-turn 4-5 times more than those of Dabur, HUL and ITC.

Days Sales Outstanding

Days Sales Outstanding

30.00

25.00

20.00

15.00

10.00

5.00

0.00
Dabur Britannia HUL Nestle ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The days sales outstanding clearly shows the efficiency on the part of Britannia and Nestle in collection of
cash from their customers, from the last 10 years trend it can be seen that these two companies collect their
dues within a span of 3 to 5 days which shows their efficiency in receivables management, whereas for HUL,
ITC and Dabur there are room for improvement in this regard. In-case of Dabur, it can be seen the collection
period in recent years has crossed 25 days due to fall in demand which is a cause of concern.

Creditors Management
Accounts Payables Turnover Ratio

Accounts Payables Turnover

25.00

20.00

15.00

10.00

5.00

0.00
Dabur Britannia HUL Nestle ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The creditors management shows the credit worthiness of a company, usually companies with high reputation and
huge orders get a favourable credit policy from their suppliers. The efficient handling of creditors by HUL, has resulted
in negative cash conversion cycle for HUL in most of the recent years, thus even before paying anything to their
suppliers, HUL receives payment from their customers. Due to the well build reputation of these top companies, they
get the leverage of paying less number of times to their suppliers in a year and thereby getting more credit period.
Other than Britannia, rest four companies have a similar payables turnover ratio during the last decade and changes
in account payables has been quite constant with changes in sales.

Account Payables Turnover Days

Accounts Payables Turnover Days

250.00

200.00

150.00

100.00

50.00

0.00
Dabur Britannia HUL Nestle ITC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

From the above graph we can see due to its favourable reputation in the market, HUL enjoys a healthy credit
period from its suppliers as compared to its competitors followed by Dabur and Nestle. From the graph, we
can see that in recent years the credit management of ITC has deteriorated in recent years, thereby
increasing its operating and cash conversion cycle. It can also be seen that Britannia is improving in its credit
management, but when compared with its competitors there is a lot of room for improvement. Managing
its creditors in a better way by negotiating will help Britannia to minimize its cash conversion cycle, and
hence working capital requirements.

Sources Short term financing

All the top 5 FMCG companies has projected in their annual reports that in-cases of emergency and urgent
requirement of cash they have resorted to short term financing thus following a conservative working capital
policy. Some of the sources have been accounts payables in the form of creditors, vendors, suppliers. Other
short-term sources included bank overdraft, miscellaneous short-term liabilities, short term debts, capital
leases for production purposes, current portion of a long-term debts.
FMCG Sector Working Capital Policy
Negative working capital of HUL and Nestle indicates low liquidity which is not favourable at each and every
stage of business. They are able to manage negative working capital efficiently, thereby managing operations
effectively. At the same time, companies such as ITC with higher working capital are having sufficient
liquidity, are more successful because of liquidity and thereby able to expand business. However, in each
and every situation lower level of liquidity is not preferable; a proper trade-off between liquidity and working
capital requirement is needed in the long run. From the above study of top 5 FMCG companies, we can say
that roughly the FMCG sector operates with an average current and cash ratio of 1.48 and 0.62 respectively.
Inventory Management is an important component of working capital management, efficient companies
ensure that their inventories don’t pile up and thus gets cleared out in due time, from the study we can see
that all the companies effectively handle their raw materials, work in progress and finished goods with an
average inventory turnover of 5.75 and takes approximately 71 days to manufacture and selling. After
managing the inventory, companies devise plans for collection of cash from sales. Usually in FMCG industry,
the credit period offered to customers is lower compared to other sectors due to a stable demand of
consumer goods. From the study it can be inferred that, FMCG companies roughly realises cash from their
customers within 11.19 days from selling, with an average receivables turnover of 50.66. We saw how ITC
and HUL have a superior credit management system because of which they are able to carry on their business
with a negative cash conversion cycle. Such well devised credit management system helps them to generate
higher return on capital employed in the long run. On an average FMCG companies get 84.60 days of credit
at the time of purchases from their suppliers with an average payables turnover ratio of 6.35. Operating
cycle indicates the number of days taken by companies from the start of manufacturing to the date of
collection of cash after sales. For any industry, the big companies play an important role in setting the
industry benchmark, from the study the average operating cycle was found out to be of 82 days
approximately. Thus, newly formed or small emerging companies should target this figure and try to
maintain lower operating cycle, as larger the working capital, larger the requirement of working capital. The
cash conversion cycle which also takes into account the credit period offered by suppliers at the time of
purchasing raw materials, is a reduced figure of the operating cycle. It tells us the number of days in between
the first payment made by the company to their suppliers and the first payment received by the company
from their customers. From the graphs, it can be noticed top companies manage their working capital well
which results in lower operating and cash conversion cycle, on an average it takes roughly 10.56 days in the
FMCG sector, from the date of first payment to the first date of cash collection.

References
 10 years Annual Report of HUL, ITC, Nestle, Dabur and Britannia.
 Bloomberg
 CMIE
 https://www.accountingtools.com/articles/2017/5/14/working-capital-policies
 https://efinancemanagement.com/working-capital-financing/working-capital-policy-relaxed-
restricted-and-moderate