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Training Supervisor : Submitted By

Mr. Sandeep Gupta ANTIMA TYAGI
Branch Manager 08511242107



With deep sense of pleasure and satisfaction I complete this project on “The Working
Capital Management” and take this opportunity to thank Mr. sandeep gupta, Branch
manager Dabur India Limited, whose inestimable support rendered it possible.

I also express my deep sense of gratitude to my guide Mr. R Venkatesan, Manager

Accounts, Dabur India Limited, under whose guidance I have been able to complete
this study.

I would like to place on record my sincere gratitude to my facilitator, Mr. D P Sur

Accounts, whose immense support helped me completing this project.

I also wish to thank all the Executives and the staff members of Dabur India Limited,
in particular Mr. Atul Bansal and Mr. Arun gupta, who were immensely co-operative
through out my tenure with them.

Last but not the least, I would like to thank my parents whose blessings, cooperation
and guidance inspired me to complete this task easily.



The management of current assets deals with determination, maintenance, control and
monitoring the level of all the individual current assets. Current assets are referred to
as assets, which can normally be converted into cash within one year therefore
investment in current assets should be just adequate no more no less” to the needs of
the business. Excessive investments in current assets should be avoided, because it
impairs firm’s profitability, as idle investment in current assets and are non-productive
and so they can earn nothing, on the other hand inadequate amount of working capital
can threaten solvency of the firm, if it fails to meet its current obligations.

Thus the working capital is a qualitative concept-

1. It indicates the liquidity position of the firm and

2. It suggests the extent to which working capital needs may be financed by

permanent source of fund. Current assets should be sufficiently in excess of
current liabilities to constitute a margin or buffer for maturing obligation
within the ordinary cycle of business.

The basic learning objective behind the study was-

• Computation of Working Capital Management

• Operating Cycle of the firm

• Financial plan estimated for 2009-2010 and projected for 2010-2011

• Working capital credit limits

• Ratio analysis

On the basis of above calculations following conclusions can be made-

• Dabur India ltd. has both long term as well as short term sources for current
asset financing. It implies that company follows matching principle for raising

• Right now company is following aggressive policy, which means that company
is maintaining lower ratio of current assets to fixed assets.

• Dabur India ltd has high collection period which shows that money has been
unnecessarily blocked with the debtors. So to overcome the above problems
following are the recommendations.

• Increase the proportion of current assets over fixed assets to come to proper
proportion of current assets and fixed assets as per the basic norms and

• Company should shift from aggressive policy to conservative current assets


• Company should reduce the holiday period else the company will have to pay
high carrying cost.

Table of content













I. Introduction


Dabur derives its name from Devanagri rendition of Daktar Burman.

In 1884, the Dabur was born in a small Calcutta pharmacy, where Dr. S.K. Burman
launches his mission of making health care products.

In 1896, with growing popularity of Dabur products, Dr. Burman expands his
operations by setting up a manufacturing plant for mass production of formulations.

In early 1900s, Dabur enters the specialized area of nature-based Ayurvedic

medicines, for which standardized drugs are not available in the market.

In 1919, the need to develop scientific processes and quality checks for mass
production of traditional Ayurvedic medicines leads to establishment of research

In 1920, Dabur expands further with new manufacturing units at Narendrapur and
Daburgram. The distribution of Dabur products spreads to other states like Bihar and
the North-East.

In 1936, Dabur becomes a full-fledged company - Dabur India (Dr. S. K. Burman)

Pvt. Ltd.

In 1972, Dabur's operations shift to Delhi. A new manufacturing plant is set up in

temporary premises in Faridabad, on the outskirts of Delhi.

In 1979, Commercial production starts in the new Sahibabad factory of Dabur, one
of the largest and best equipped production facilities for Ayurvedic medicines and
launch of full-fledged research operations in pioneering areas of health care with
establishment of the Dabur Research Foundation.

In 1986, Dabur becomes a Public Limited Company. Dabur India Ltd. comes into
being after reverse merger with Vidogum Limited.

In 1992, Dabur opens a new chapter of strategic partnerships with international

businesses. It enters into a joint venture with Agrolimen of Spain. This new venture
is to manufacture and market confectionery items in India.

In 1993, Dabur enters the specialised health care area of cancer treatment with its
oncology formulation plant at Baddi in Himachal Pradesh.

In 1994, Dabur India Ltd. raises its first public issue. Due to market confidence in the
Company, shares issued at a high premium are oversubscribed 21 times.

In 1995, In order to extend its global partnerships, Dabur enters into joint ventures
with Osem of Israel for food and Bongrain of France for cheese and other dairy

In 1996, For better operation and management, 3 separate divisions created according
to their product mix - Health Care Products Division, Family Products Division and
Dabur Ayurvedic Specialties Limited.

In 1997, Dabur enters full-scale in the nascent processed foods market with the
creation of the Foods Division and Project STARS (Strive to Achieve Record
Successes) is initiated to give a jump-start to the Company and accelerate its growth

In 1998, With changing demands of business and to inculcate a spirit of corporate

governance, the Burman family inducts professionals to manage the Company. For

the first time in the history of Dabur, a non-family professional CEO sits at the helm
of the Company.

In 2000, Dabur establishes its market leadership status with a turnover of Rs.1,000
crores. From a small beginning and upholding the values of its founder, Dabur now
enters the august league of large corporate businesses.

2005 - Dabur announces bonus after 12 years

Dabur India announced issue of 1:1 Bonus share to the shareholders of the company,
i.e. one share for every one share held. The Board also proposed an increase in the
authorized share capital of the company from existing Rs 50 crore to Rs 125 crore.

2009 - Dabur Red Toothpaste joins 'Billion Rupee Brands' club

Dabur Red Toothpaste becomes the Dabur's ninth Billion Rupee brand. Dabur Red
Toothpaste crosses the billion rupee turnover mark within five years of its launch.


Century Old Company

Established Brand
Ayurvedic/ herbal Product line
Leader in Herbal Digestives where the product has 90% of
the market share
Innovativeness in Promotions

Profitability is uneven across product line


Extend Vatika brand to new categories like Skin Care

and body wash segments

Launch several OTC brands

Southern India Market
Exploring new geographical areas- local as well global
Oral Care Segment
Launching new Products like Hair oils, Herbal and Gel

Toothpastes etc

Competition in the FMCG sector from well established
Other fields of medicine- Allopathic and Homeopathic
Markets where Herbal products are not recognised


Dabur India Limited has marked its presence with significant achievements and today
commands a market leadership status. Our story of success is based on dedication to
nature, corporate and process hygiene, dynamic leadership and commitment to our
partners and stakeholders. The results of our policies and initiatives speak for

 Leading consumer goods company in India with a turnover of Rs. 2834.11

Crore (FY09)

 3 major strategic business units (SBU) - Consumer Care Division (CCD),

Consumer Health Division (CHD) and International Business Division

 3 Subsidiary Group companies - Dabur International, Fem Care Pharma

and newu and 8 step down subsidiaries: Dabur Nepal Pvt Ltd (Nepal),
Dabur Egypt Ltd (Egypt), Asian Consumer Care (Bangladesh), Asian
Consumer Care (Pakistan), African Consumer Care (Nigeria), Naturelle
LLC (Ras Al Khaimah-UAE), Weikfield International (UAE) and Jaquline
Inc. (USA).

 17 ultra-modern manufacturing units spread around the globe

 Products marketed in over 60 countries

 Wide and deep market penetration with 50 C&F agents, more than 5000
distributors and over 2.8 million retail outlets all over India
Consumer Care Division (CCD) adresses consumer needs across the entire FMCG
spectrum through four distinct business portfolios of Personal Care, Health Care,
Home Care & Foods

 Master brands:

 Dabur - Ayurvedic healthcare products

 Vatika - Premium hair care

 Hajmola - Tasty digestives

 Réal - Fruit juices & beverages

 Fem - Fairness bleaches & skin care products

 9 Billion-Rupee brands: Dabur Amla, Dabur

Chyawanprash, Vatika, Réal, Dabur Red Toothpaste,
Dabur Lal Dant Manjan, Babool, Hajmola and Dabur

 Strategic positioning of Honey as food product, leading

to market leadership (over 75%) in branded honey

 Dabur Chyawanprash the largest selling Ayurvedic

medicine with over 65% market share.

 Vatika Shampoo has been the fastest selling shampoo

brand in India for three years in a row

 Hajmola tablets in command with 60% market share of

digestive tablets category. About 2.5 crore Hajmola
tablets are consumed in India every day

 Leader in herbal digestives with 90% market share

Consumer Health Division (CHD) offers a range of classical Ayurvedic
medicines and Ayurvedic OTC products that deliver the age-old benefits of Ayurveda
in modern ready-to-use formats

 Has more than 300 products sold through prescriptions as
well as over the counter

 Major categories in traditional formulations include:

- Asav Arishtas
- Ras Rasayanas
- Churnas
- Medicated Oils

 Proprietary Ayurvedic medicines developed by Dabur

- Nature Care Isabgol
- Madhuvaani
- Trifgol

 Division also works for promotion of Ayurveda through

organised community of traditional practitioners and
developing fresh batches of students
International Business Division (IBD) caters to the health and personal care needs of
customers across different international markets, spanning the Middle East, North &
West Africa, EU and the US with its brands Dabur & Vatika

 Growing at a CAGR of 33% in the last 6 years and contributes to about 20% of
total sales

 Leveraging the 'Natural' preference among local consumers to increase share in

perosnal care categories

 Focus markets:
- Egypt
- Nigeria
- Bangladesh
- Nepal
- US

 High level of localization of manufacturing and sales & marketing


The objective of appointment of Carrying and Forwarding Agents ('C&FA') is to

achieve improved service levels in despatches made, order processing, FMFO
issuance of stocks, transportation, efficient and proper maintenance of stocks and
sales return recording procedures. The outsourcing of the C&FA function ensures
smooth and efficient movement of products from the Company to its dealers,
stockists etc. There is a wide market penetration on the part of Dabur through 47
C&F agents, more than 5000 distributors and over 1.5 million retail outlets all
over India. The company under restructuring exercise has started focussing on
distribution network. The company has shifted to zonal setup for its sales and
marketing. The company is planning to shift to C&F agents system and has
appointed more than 50 such agents in the market. It has also connected its C&F
agents and its key distributors online for better management of its stock. The
company has also implemented ERP system to cover all its activities. The
company also started its interactive website during the year. It has plans of going
for B2B and B2C transactions


Good corporate governance and transparency in actions of the management is key

to a strong bond of trust with the Company’s stakeholders. Dabur understands the
importance of good governance and has constantly avoided an arbitrary decision-
making process. Our initiatives towards this end include:

 Professionalization of the board

 Lean and active Board(reduced from 16 to 10 members)

 Less number of promoters on the Board

 More professionals and independent Directors for better management

 Governed through Board committees for Audit, Remuneration, Shareholder

Grievances, Compensation and Nominations

Meets all Corporate Governance Code requirements of SEBI


ISO 9002

Dabur India Limited has been awarded the ISO 9002 certification after the
Quality Management Systems of the company were assessed in November
1995. The product areas assessed include Health care Products, Family and
Food Products, Bulk Drugs and Chemicals, Ayurvedic specialities and
Pharmaceutical products. This implies that for Dabur quality is an attitude that
has been translated into action. For the company quality is a culture and not a
stop gap arrangement and believe that quality is a corporate responsibility
towards its customers, employees and the environment in which it operates.
Sustaining consumer confidence for over a century is a true reflection of the
quality of the company’s products.


CRISIL, the leading rating agency in India, has been assigning top credit
ratings to Dabur India limited for its institutional borrowings. Recently,
CRISIL launched the Governance and Value Creation Rating (GVC) and
Dabur India Limited was one of the first companies to volunteer for getting
itself rated on GVC. Dabur has been assigned `Crisil GVC Level 2’ rating
which is the second highest rating on an 8-point scale. The rating indicates that
capability of the Company on wealth creation for all its stakeholders including
shareholders, employees, creditors, suppliers, dealers and society, while
adopting sound corporate governance practices is `high’. This takes into
account past track record as well as future expectations of wealth creation by
the company.

Some of the quotes of CRISIL :

(1) The rating reflects Dabur India’s strong wealth management practices,
high disclosure standards, and satisfactory track
record on creating value for its various stakeholders.
(2) The management’s long experience and good track record coupled with
Dabur India’s consistent performance in its existing businesses exemplify
its wealth management capabilities.
(3) Dabur India follows good disclosure standards in terms of its financial
performance and ownership pattern.



• The project is aimed at evaluating the financial status of Dabur India Ltd and
then doing the comparative analysis with its competitors.

• Studying the working capital management at Dabur India Ltd. and estimating
the working capital requirements for 2007-2008 and then forecasting for 2008-

• To find out if there is any relationship between the working capital, sales and
current assets of DABUR INDIA LTD


Primary data

The data that are still needed after that search is completed will have to be developed
specifically for the research project and are known as primary data .

Types Primary data



Secondary data
The secondary data that are available are relatively quick and inexpensive to obtain,
especially now that computerized bibliographic search services and databases are
available. The various sources of the secondary data and how they can be obtained and
used are described ahead.

Most secondary data are generated by specialized firms and are sold to marketers to
help them deal with a category of problems. Nielsen’s television ratings, which
marketers use in making advertising decisions, is the best-known example. Many of
these services, broadly categorized as audits, commercial surveys, and panels, allow
some degree of customization and thus fall between secondary and primary data.
These sources are treated in detail ahead.

Types of Secondary data

• News paper

• Books

• Journals

• Fairs and conference

• Websites

Any data, which have been gathered earlier for some other purpose, are
secondary data in the hands of researcher. Those data collected first hand, either by the
researcher or by someone else, especially for the purpose of the study is known as
primary data. The data collected for this project has been taken from the secondary
source. Sources of secondary data are:-

• Internet
• Magazines
• Publications
• Newspapers
• Broachers

II.3 Descriptive research

This project is based on descriptive research. Descriptive research, also known as
statistical research, describes data and characteristics about the population or
phenomenon being studied. Descriptive research answers the questions who, what,
where, when and how...

Although the data description is factual, accurate and systematic, the research cannot
describe what caused a situation. Thus, Descriptive research cannot be used to create a
causal relationship, where one variable affects another. In other words, descriptive
research can be said to have a low requirement for internal validity.

The description is used for frequencies, averages and other statistical calculations.
Often the best approach, prior to writing descriptive research, is to conduct a survey
investigation. Qualitative research often has the aim of description and researchers
may follow-up with examinations of why the observations exist and what the
implications of the findings are.

In short descriptive research deals with everything that can be counted and studied.
But there are always restrictions to that. Your research must have an impact to the
lives of the people around you. For example, finding the most frequent disease that
affects the children of a town. The reader of the research will know what to do to
prevent that disease thus, more people will live a healthy life.


Dabur India Limited (DIL) is an ayurvedic and natural health care company. The
Company is engaged in manufacturing and marketing fast moving consumer goods
and Ayurvedic products. The Company operates its business through three business
units: consumer care division (CCD), international business division (IBD) and
consumer healthcare division (CHD). DIL has manufacturing facilities in eight States
of India. As of March 31, 2010, the Company also had manufacturing facilities in
eight countries: India, Bangladesh, Nepal, Dubai, Sarjah, Ras-Al-Khaima, Egypt and
Nigeria. Major markets of the Company include India, Middle East, Nepal,
Bangladesh, United States and United Kingdom. As of March 31, 2010, the
Company's brands included Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola,
FEM and Real. Its subsidiaries include Dabur Nepal Pvt Ltd, Dabur (UK) Ltd, H&B
Stores Ltd, Weikfield International (UAE) Ltd and Naturelle LLC. On April 1, 2009,
DIL completed the merger of Fem Care Pharma Ltd.


Vision 2010

After the successful implementation of the 4-year business plan from 2002 to 2006,
Dabur has launched another plan for 2010. The main objectives are:

• Doubling of the sales figure from 2006

• The new plan will focus on expansion, acquisition and innovation. Although
Dabur’s international business has done well — growing by almost 29 per cent
to Rs.292 crore in 2006-07, plans are to increase it by leaps and bounds.

• Growth will be achieved through international business, homecare, healthcare

and foods.

• Southern markets will remain as a focus area to increase its revenue share to 15
per cent.

With smoothly sailing through its previous plans, this vision seems possible. Time and
again, Dabur has made decisions that have led to its present position. However, if
Dabur could be more aggressive in its approach, it can rise to unprecedented levels.


This is our Company. We accept personal responsibility and accountability to meet
business needs.
Passion for Winning
We all are leaders in our area of responsibility, with a deep commitment to deliver
results. We are determined to be the best at doing what matters most.
People Development
People are our most important asset. We add value through result driven training and
we encourage & reward excellence.
Consumer Focus
We have superior understanding of consumer needs and develop products to fulfill
them better.
Team Work
We work together on the principle of mutual trust & transparency in a boundaryless
Continuous innovation in products & processes is the basis of our success.


1 Amla Hair Oil

2 Amla Lite
3 Baby Olive Oil
4 Back Aid
5 Binaca Toothpowder
6 Chyawanprash

7 Dabur Balm
8 Glucose D
9 Gulabri
10 Hajmola
11 Hajmola Candy
12 Hingoli
13 Honey
14 Itch Care

15 Jama Ghunti Honey

16 Lal Dantmanjan
17 Lal Oil

18 Nature Care
19 Pudin Hara
20 Pudin Hara G
21 Ring Ring
22 Sarbyna Strong
23 Sat Isabgol
24 Shilajit
25 Shankha Pushpi
26 Vatika
- Anti Dandruff Shampoo
- Hair oil
- Shampoo

Dabur’s Departments
1 IT(Information Technology)
2 HR(Human Resource)
3 Training
4 Projects
5 Finance
6 CSCC(Central Supply Chain Cell)
7 CPPD(Central Purchase and Procurement Department)
8 Divisions
9 DRF(Dabur Research Foundation)
10 Operations

11 Corporate Communication


 Speaking to Business Line, Mr. Sunil Duggal, Chief Executive Officer,

Dabur India, said: "The company's biggest growth areas in the current year
will be the personal and healthcare segments. Within the foods segment,
the strategy will be to consolidate existing products.''

 The company has projected turnover of Rs. 2834.11 Crore by 2009. Some of
the company's slow-moving brands would be either phased out or divested
progressively as part of its portfolio rationalization. The company proposes
to enter unexplored areas of haircare, and introduce the brand at lower
price points and in sachets. Another category Dabur intends to enter this
year is mass skin care.

 Dabur India's ad spends (both above-the-line and below-the-line) average

Rs 140 crore, and this figure could be ramped up by 10 per cent the
following year. They will move toward spending away from non-core to
core brands.

 Dabur India Ltd announced the "virtual demerger" of its FMCG business
from its pharmaceutical business. It has restructured its Rs 162.9-crore
pharma business into a separate business unit (SBU). The pharma
business would be led by the Pharma Management Committee headed by
Dr Anand Burman, Vice-Chairman, Dabur India.

 New Delhi Dabur India Ltd. has plans to launch an entire range of
Ayurvedic products in the domestic market soon. The company is also
focusing on exports of Ayurvedic products into new markets this year.

 Successful Implementation of Business Risk Management. “With the
Business Risk Management Framework, every employee will now be
formally responsible for identifying business risks that surround their
functions and make business risk management as part of their normal
working practice” said Mr. Rajan Varma, Chief Financial Officer, Dabur

 Dabur India, the fourth largest FMCG Company in the country, has forged
an alliance with FreeMarkets Services, a leading e-procurement consulting
company, for adopting the next level of sourcing practice – e-Sourcing, for
reducing costs, providing greater transparencies and optimizing
procurement efficiencies.

 “We will be fully online and conducting the first few set of reverse
auctions next month i.e. February. Our association with Free-Markets
would give us a head start in terms of market making as they have over
1,50,000 suppliers in their database that will be available to us. Also, Free
Markets would vet suppliers from scratch that would cut lead-time’’ added
Mr. Jude Magima.



Working Capital is the excess of Current Assets over Current Liabilities. It is also
called the net Current Assets. It is important from point of view of liquidity and
profitability. More precisely, management of Current Assets includes :
(1) Cash and Bank Balances

(2) Inventories
(3) Receivables (including Debtors & Bills)
(4) Marketable Securities.
Current Assets can be described as those Assets which can be converted into cash /
equivalent within a year and which are required to meet day to day operations.

Factors determining Working Capital Requirements :

(1) Basic Nature and Size of Business

The quantum of money required for the operations of the business enterprise more
or less depends upon its nature and size. Bigger the size more will be the
requirement. Similarly, the complex nature of the business demands for large
amount of working capital.
(2) Business Cycle Fluctuations
The working capital requirements has also been affected by the fluctuations in the
business environment. One of the essentials of any business activity is the element
of risk due to unforeseen future and uncertainty. The business should be well
equipped against such type of uncertainties.
(3) Seasonal Fluctuations
The liquidity of any business is necessary and can be used as a guard against
seasonal fluctuations. Howsoever, it should be remembered that it does not render
the undue blockage of the company’s funds. It might be possible that firm will be
in acute shortage of flowing funds during the peak season say for wollens in winter
and blockage of funds in the off season say wollens in summer. So, here comes the
importance of the management of the working capital.
(4) Market Competitiveness
Monopoly situations can be served as an excuse for working capital but in the
current scenario of intense competition highly managed working capital is
essential to take the advantage of any opportunity while serving as a guard against
the possible threats at the same time.
(5) Credit Policy
The credit policy of the company should be such as to comply all of three
mentioned criteria for the optimum results:

(a) Regarding credit extended by supplier of Raw Materials, Goods etc.
If the credit time allowed by the supplier is sufficient enough for the
company it can relax the operations of the firm as a feasible level and
also serve as a shoat term financing for the current assets.

(b) Similarly, credit extended to the customers determine the actual

requirement of the working capital funds needed by the company. If
the credit allowed by the company is for short period it would result in
the early realization of the funds which then be deployed in the other
potential areas of interest.
(c) Should take care of the monitoring of own credit policies in the
market and it should be in compliance with the prevailing credit
policies and trends in the ongoing market scenario so that there is the
societal acceptance of the company.
(6) Supply Conditions
Again to a large extent the determination of the working capital depends upon the
flow of trade in the actual encountered situations. Rigidity can be automatically
formed just by the insufficient availability of funds. The reason can be understood
on the pretext that matching the supply with the demand can only be the optimal
solution. It is better to stop production rather than to produce inventory.

Need for Adequate Working Capital :

A firm should maintained Optimum level of Working Capital. There should be neither
excessive Working Capital nor inadequate Working Capital.

Excessive Working Capital results in :

(1) Unnecessary accumulation of inventories resulting in wastes, thefts, damages etc.
(2) Delays in collection of receivables resulting in more liberal credit terms to
customers than warranted by the Market conditions.
(3) Adverse influence on the performance of the management.

If there is Inadequate Working Capital, then it means :
(1) Fixed Assets may not be optimally used.
(2) Firm’s growth may remain stagnant.
(3) Interruptions in Production schedule may occur ultimately resulting in lowering of
the profit of the firm.
(4) Firm may not be able to take benefit of the opportunity.
(5) Goodwill is affected if not meeting liabilities on time.

Therefore, an Optimum quantum of Working Capital should be maintained as it

provides :

(1) Solvency of the business : Optimum working capital helps in maintaining

solvency of the business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
(2) Goodwill : Sufficient working capital enables a business concern to make prompt
payments and thus, assist in building goodwill.
(3) Easy Loans : A concern having adequate working capital, high solvency and good
credit standing can arrange loans from banks and others on easy and favorable
(4) Cash Discounts : Adequate working capital also enable a concern to avail cash
discounts on the purchases and hence reduces the costs of procurement.
(5) Regular Supply of Raw material : Sufficient working capital ensures regular
supply of raw materials and uninterrupted production processes.
(6) Regular payment of salaries, wages and other day-to-day commitments : A
company which has ample working capital can make regular payment of salaries,
wages and day-to-day commitments which raises the morale of the employees &
increases their efficiencies.
(7) Exploitation of favorable market conditions : Only concerns with adequate
working capital can exploit favorable market conditions such as purchasing its
requirements in bulk when the prices are lower.
(8) Ability to face crisis : Optimum working capital enables a concern to face
business crisis whether it being financial, behavioral or cultural to certain extent or

depression periods in the ongoing business cycle as in these time maximum
pressure is on the working capital.
(9) Quick and regular return on the investments : Every individual invest money in
the company with a view to earn returns on his investments. Therefore it is an
obligation on the part of company to reward its investors from time to time & this
regular practice is being facilitated by adequate surplus in the hands of the
(10)High Morale : Optimality of working capital creates an environment of security,
confidence, high morale and overall efficiency of the business enterprises.

Comparison between Current and Fixed Assets :

(1) Funds required for management of Current Assets are determined under Working
Capital techniques and for management of Fixed Assets are determined under
Capital Budgeting techniques.
(2) Current Assets generally referred to short term period say for one year while Fixed
Assets are concerned with longer tenures say more than one year.
(3) Time Value of money isn’t considered in calculating Working Capital
requirements while it is an important part of decision making in any material
Capital investment.
(4) Decisions regarding Current Assets affect the short term liquidity position of the
firm whereas decisions regarding Fixed Assets affect the long term profitability of
the firm.
(5) Lastly, Working Capital Decisions can be modified without much implications
whereas Capital budgeting decisions are irreversible.

In Working Capital Management, a Finance Manager is faced with a decision

involving some of the considerations as follows :
(1) What should be the total investment in Working Capital of the Firm ?
(2) What should be the level of individual Current Assets ?
(3) What should be the relative proportion of different sources to Finance the Working
Capital requirement ?

The extent to which the payments to these Current Liabilities are delayed, the Firm
gets the availability of funds for that period. So, a part of the funds required to
maintain Current Assets is provided by the Current Liabilities.


The Operating Cycle may be defined as the time duration starting from the
procurement of goods or raw materials and ending with Sales realization. The length
and nature of the Operating Cycle may differ from one Firm to another depending
upon the size and nature of the Firm.

What is required on the part of a firm is to make adjustments and arrangements so that
the uncertainty and non synchronization of these cash flows can be taken care of.

Operating Cycle of a Firm consists of the time required for :

(1) Procurement of Raw Materials and Services
(2) Conversion of Raw Materials into Work in Progress
(3) Conversion of Work in Progress into Finished Goods
(4) Sale of Finished Goods (Cash or Credit)
(5) Conversion of Receivables into Cash

Receivable conversion period
(RCP) Raw material storage
Conversion period (RMSCP)

Cash received from debtors ad paid to

Suppliers of
Raw materials Raw material
introduced into process

Finished Goods

Work in process

Sales of finished Finished goods

goods conversion
Period (FGCP)

For calculation of TOCP & NOC, various Conversion Periods may be calculated as
follows :

RMCP = Average Raw Material Stock * 365

Total Raw Material Consumption

WPCP = Average Work in Progress * 365

Total Cost of Production

FGCP = Average Finished Goods * 365

Total Cost of Goods Sold

RCP = Average Receivables * 365

Total Credit Sales

DP = Average Creditors * 365

Total Credit Purchases

Some Important Reminders :

(1) “Average” Value in Numerator is the average of the Opening & Closing balances.
However, if only Closing balance is given, it can be assumed to be average.
(2) No hard and fast rule of 365 days. We can also take 360 days a year.
(3) In calculation of RMCP, WPCP, FGCP, the denominator is calculated on cost
basis and the profit margin has to be excluded. The reason being that there is no
investment of funds in profits as such.

Approaches to Working Capital Requirements :

(1) Hedging Approach:

It is also known as Matching Approach. The Hedging Approach guides a firms debt
maturity financing decisions. The Hedging principle states that the financing maturity
should follow the cash flow characteristics of the assets being financed. For example,
an asset that is expected to provide cash flows over a period of say, 5 years, then it
should be financed with a debt having similar pattern of cash flow requirements. The
Hedging Approach involves matching the cash flows generating characteristics of an
asset with the maturity of the source of financing used to finance it.
The general rule is that the length of the finance should match with the life duration of
the assets. That is why the fixed assets are financed by long term sources only. So, the
permanent Working Capital needs are financed by long term sources. On the other
hand, the temporary Working Capital needs are financed by short term sources only.
In other words, the core or fixed working capital is financed by long term sources of
funds while the additional or fluctuating working capital needs are financed by the
short term sources.

(2) Conservative Approach:

Under Conservative Approach, the finance manager doesn’t undertake risk. As a

result, all the working capital needs are primarily financed by long term sources and
the use of short term sources may be restricted to unexpected and emergency situation
only. The Working Capital policy of a firm is called a Conservative policy when all or
most of the working capital needs are met by the long term sources and thus the firm
avoids the risk of insolvency.
In case, the firm has no temporary working capital need then the idle long term funds
can be invested in marketable securities. This will help the firm to earn some income.

(3) Aggressive Approach :

A working Capital policy is called an Aggressive policy if the firm decides to finance
a part of permanent working capital by short term sources. The Aggressive policy
seeks to minimize excess liquidity while meeting the short term requirements. The
firm may accept even greater risk of insolvency in order to save cost of long term
financing and thus in order to earn greater return.

Thus, the Hedging Approach suggests a low cost - high risk situation while the
Conservative Approach attempts at high cost - low risk situation. Neither the Hedging
Approach nor the Conservative Approach can be used by any firm in the strict sense.
Therefore, the financial manager should try to have a trade - off between the Hedging
& the Conservative approach.

Liquidity versus Profitability - A Risk-Return Trade off :

Having a large 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 use to determine the optimal amount of the working capital. The
risk return trade off involved in managing the firm’s working capital is a trade off
between the firm’s liquidity and its profitability.

The discussion regarding the financing pattern of current assets point out a conflict
between the short term and long term sources of finance. This conflict between the
two arises because of the fact that these sources have different costs of financing and
different risk associated with them. A Financial Manager should therefore strive for a
trade-off between the risk and return associated with the financing mix.

One way of achieving a trade-off is to find out, the average working capital required
(on the basis of maximum and minimum during the period). Then this average
working capital may be financed by long term sources and other requirements, if any,

arising from time to time may be met from short term sources. For example, a firm
may require a maximum and minimum working capital of Rs. 50000 and Rs. 30000
respectively during a particular year. The firm can have long term sources of Rs.
40000 (i.e. average of Rs. 50000 and Rs. 30000) and any additional requirements
above Rs. 40000 may be met out of short term sources as and when the need arises.


Credit facility provided by commercial banks to meet the working capital requirement
has been an important source of short term funds to business firms. In India, bank
credit has been the main institutional source of short term financing requirements. This
short term financing to business firm is regarded as self-liquidating in the sense that
the uses to which the borrowing firm is expected to put the funds are ordinarily
expected to generate cash flows adequate to repay the loan within a year. Further, the
bank’s motive to provide finance is to meet the seasonal demand. In India, banks may
give financial assistance in different shapes and forms. The usual form of bank credit
are as follows :

(1) Overdraft
It is the simplest form of bank credit. In this case, the borrowing firm is allowed to
withdraw more (up to a specified limit) over and above the balance in the current
account. The firm has to pay interest at a predetermined rate only for the period during
which the amount was withdrawn.

(2) Cash Credit

Under the Cash Credit, a loan limit is sanctioned by bank and the borrowing firm can
withdraw any amount at any time, within that limit. The interest is charged at a
specified rate on the amount withdrawn and for the relevant period.

(3) Bills Purchased and Bills Discounting

Commercial banks also provide short term credit by discounting the bill of exchange
emerging out of commercial transactions of sale and purchase. However, if the seller
wants the money before the maturity date of the bill, he can get the bill discounted by

the bank which will pay the amount of the bill to the seller after charging some

(4) Letter of Credit

A letter of credit is a guarantee provide by the buyer’s banker to the seller that in the
case of default or failure of the buyer, the bank shall make the payment to the seller.
So, in fact, the letter of credit becomes a security of the bill and any bank will have no
problem in discounting the bill.

(5) Working Capital Term Loans

Generally, the banks while granting working capital facility to a customer stipulates
that a margin of 25% would be required to be provide by the customers and hence the
bank borrowing remains only limited to 75% of the security offered. The working
Capital Term Loan is to be repaid in a phased manner varying between a period of two
to five years.

(6) Funded Interest Term Loans

Sometimes, a company is unable to pay the interest charges on its working capital cash
credit facility. Such accumulation of unserviced interest makes the cash credit account
irregular and in excess of the sanctioned limit. This unserviced accumulated interest
may transfer by the bank from cash credit account to Funded Interest Term Loan
(FITL). This will enable the firm to operate its cash credit account. The FITL is
considered seprately for repayment.


Traditionally, the bank credit has been an easily accessible source of meeting the
working capital needs of the borrowing firms. Convenience in getting the bank credit
has been an important factor for the growth of bank credit in fulfilling the requirement
of industries. However, it also resulted in distortion of allocation of bank resources in
favour of industry. Consequently, the bank credit has been subject to various rules,
regulations and controls. The reserve Bank of India has appointed different study
groups from time to time to suggest ways and means to make the bank credit as an

effective instrument of industrialization as well as to ensure equitable distribution of
bank resources namely :
(1) Dehejia Committee
(2) Tandon Committee
(3) Chore Committee
(4) Marathe Committee
(5) Nayak Committee


Ratio measures the relationship between two data expressed in mathematical terms in
some logical manner; Male-Female Ratio of the population of a country, Ratio of
students passed among those appeared in an examination a re the two examples.
Absolute comparison between two figures does not carry much sense. When spoken in
terms of ratio, it becomes much more penetrating and meaningful. Not for comparison
only, ratios convert the data in precise form for easy understanding. Ratios can be
expressed as proportion or percentage. The Ratio Analysis has emerged as a principal
technique for analysis of the Financial Statements.

Steps in Ratio Analysis : The Ratio Analysis requires two steps as follows :

(1). Calculation of a ratio and

(2). Comparing the ratio with some predetermined standard. The standard ratio may
be the past ratio of the same firm or industry’s average ratio or a projected ratio or the
ratio of the most successful firm in the industry. In interpreting the ratio of a particular
firm, the analyst could not reach any fruitful conclusion unless the calculated ratio is
compared with the standard one. The importance of a correct standard is obvious as
the conclusion is going to be based on the standard itself.

Types of comparisons : The ratios can be compared in three different ways :

(1). Cross Section Analysis : One way of comparing the ratio or ratios of a firm is to
compare them with the ratio or ratios of some other selected firm in the same industry
at the same point of time. The cross section analysis helps the analyst to find out as to
how particular firm has performed in relation to its competitors. It is easy to be
undertaken as most of the data is freely available in the financial statements of the

(2). Time Series Analysis : The analysis is called Time Series Analysis when the
performance of the firm is evaluated over a period of time. By comparing the present
performance of a firm with the performance of the same firm over last few years, an
assessment can be made about the trend and the direction of the progress of the firm.
The information generated by the Time Series Analysis can be of immense help to the
firm to make planning for future operations.

(3). Combined Analysis : If the Cross Section and Time Series Analyses, both are
combined together to study the behavior and pattern of the ratios, then meaningful and
comprehensive evaluation of the performance of the firm can definitely be made.

Pre requisite to Ratio Analysis :

(1). The dates of different financial statements from where data is taken must be same.

(2). If possible, only audited financial statements should be considered. Otherwise

there must be sufficient evidence that the data is correct.

(3). Accounting Policies followed by the different firms should be same otherwise the
results will get distorted.

(4). One ratio may not throw light on any area of performance of the firm. Therefore, a
group of ratios must be preferred. This will also be conductive to counter checks.

(5). Last, but not the least, the analyst must find out that the two figures being used to
calculate a ratio must be related to each other, otherwise, there is no purpose of
calculating a ratio.

Categorization of Ratios :

The ratios can be categorized under different names and different groups depending
upon the purpose they ought to be served. There is no hard and fast rule regarding this
matter. Therefore, it might be possible that a ratio serving a particular purpose in a
company falls under a separate category in comparison to another company or a ratio
of utmost importance for a company comes out to be a wastage for another.
Howsoever, with due respect to all the possible sayings, here the ratios are divided
under six sub-heads namely:

(1). Cash Position Ratios

(2). Short Term Solvency Ratios / Liquidity Ratios

(3). Long Term Solvency Ratios / Capital Structure Ratios

(4). Profitability Ratios

(5). Activity Ratios

(6). Capital Market Ratios


Cash position ratio show the cash reservoir of the business. Cash is the most liquid
asset; Cash reservoir is constituted of cash in hand and cash in bank (which can be
freely used for the day to day operations) and marketable securities (which can be
disposed of readily). Marketable Securities may also be part of trade investments,
which the business would not dispose of, although readily marketable. So, it is better
to take marketable securities from non-trade investment categories.

(1). Absolute Cash Ratio : The purpose of this ratio is to show how far cash reservoir
is sufficient to meet the current liabilities. Although Provisions do not represent

current liabilities, some provisions have the characteristics of current liabilities.
Examples are tax provision and proposed dividend. It is almost certain that some
liabilities will arise in the near future.

(2). Cash Interval Ratio : Interval Measure indicates the ability of the cash reservoir
to meet cash expenses. The businessman is interested to know how many days he can
run the business using his cash reservoir if there is no further cash inflow. Higher
reserve gives better protection against unforeseen events for which the business may
have to depend exclusively on its cash reservoir. Average daily cash expenditure is
determined by taking away depreciation and similar other non-cash expenditure from
the total expenses charged to the profit and loss account and dividing the total net
expenses by 365 days.

(3). Cash Position to Total Assets Ratio : This ratio is a measure of liquid layer of
the assets deployed by business. It has been discussed earlier that cash is the most
liquid business asset. How much cash is maintained by others who are in the same
business or how much was maintained in the business earlier may give some idea
about the ideal cash position to total assets ratio.


The Terms liquidity and short term solvency are used synonymously. Liquidity means
ability of the business to pay-off its short term liabilities. Inability to pay short term
liabilities affect the credibility of the business. It also lowers its credit rating. A
continuos default on the part of the business to pay-off its liability may even create
hindrance to its day to day operations.

(1). Current Ratio : Current Ratio is given by current assets as a ratio of current
liabilities. Higher the current ratio better is the liquidity position. The traditional belief
is that 2:1 current ratio is an indicator of good liquidity position. The Chore
Committee recommended that 1.33:1 current ratio should be attained by an enterprise
for a good liquidity position.

(2). Quick Ratio : Very often presence of slow moving inventories make some
portion of current assets illiquid even at a higher degree. Also there are current

liabilities like bank overdraft, cash credit and short term borrowings which are used as
a means of financing

current assets. So, these short term liabilities (if any) are excluded from current
liabilities while quantifying liquidity.

Thus, if quick ratio is more than current ratio, this is caused by

(a). Low proportion of non-liquid current assets (like inventory).
(b). Low proportion of quick liabilities.
If quick ratio is less than current ratio, this is due to
(a). High proportion of non-liquid current assets.
(b). High proportion of quick liabilities.
Quick Ratio is taken as ultimate test of liquidity.


Capital Structure of a business consists of long term funds, which are not repayable in
the short run and short term funds, which are repayable in the short run. Here the short
run can be taken as a period of one year or so. Long Term funds are :
(a). Shareholder’s Funds
(b). Loan Funds excluding cash credit, bank overdraft and other short term loans.

(1). Debt Equity Ratio : Debt Equity ratio is popularly used as Capital Structure
Ratio. It is also called Leverage Ratio. Debt means long term loan funds and Equity
means shareholder’s funds. It shows the long term solvency of the business. Higher
the debt fund used in the capital structure, greater is the risk. The risk is technically
called financial risk. Debt-equity ratio is also called leverage ratio. This lever operates
favourable if rate of interest is lower than return on capital employed.

(2). Proprietary ratio : Proprietary Ratio is calculated to judge the owner’s

contribution to total fund applications. This ratio indicates share of proprietary fund
against each rupee of investment. It can be calculated by dividing the Proprietor’s
funds from the Total Assets

(3). Capital Gearing Ratio : It gives the proportion of interest bearing fund to non-
interest bearing fund. It is different from debt-equity ratio. Preference Share capital is
fixed dividend bearing fund. Likewise, other long term and short term borrowed funds
carry fixed interest. Equity share capital and reserves and surplus do not carry fixed
dividend. The word “gear” is used to indicate the proportion of fixed interest /
dividend bearing fund. Higher the proportion of fixed interest / dividend bearing fund
to non interest / dividend bearing fund, higher is the gearing and as a consequence
commitment to pay fixed interest / dividend out of profit is higher. This ratio seems to
be better than the debt equity ratio as debt does not include all interest bearing fund.
Also equity includes redeemable preference shares which carry fixed dividend. There
are two further ways to highlight the respective positions via Financial Leverage and
Operating Leverage.


A business is run primarily for profit. So its performance has been measured in terms
of profit. Profitability ratios give some yardsticks to measure profit in relative terms,
either with reference to sales or assets or capital employed.

(1). Gross Profit Ratio : This ratio provides us the proportion of gross profit incurred
with respect to sales. Moreover the percentage of this ratio for any specified industry
remain more or less same as this profit takes into account the direct cost of production
which are in contrast to all the firms in the same industry.

(2). Net Profit Ratio : This ratio reflects the net profit earned by a firm after taking
into consideration all the cash and non cash expenditure for a specified period of time.
Generally this work as a yardstick to measure and compare the respective position of
the firms on the basis of the profitability.

(3). Return on Capital Employed : A popularly used measure of profitability based

on capital employed is Return on Capital Employed. It can be worked out by dividing
the net profit before interest and tax by average capital employed during the year.
Through this ratio, one is in a position to know the results reaping out from the
respective quantum of the capital employed.

(4). Return on Shareholder’s fund : This ratio reflects the proportion of profit which
is left out with the firm, after payment of interest, tax and preference dividend to the
shareholder’s fund. Shareholders want the maximum possible dividend while the
management wants to withhold with the entire lot of funds and earnings. Therefore, an
eye should be regularly kept on the prevailing proportion.

(5). Operating Ratio : This ratio is a good indicator of the operational efficiency of
the firm. It takes into account the operating cost which is sum total of Cost of goods
sold and Selling & Administration costs; and not the total cost. The ratio of this
operating cost with the net sales gives a fair view of the operational efficiency of the

(6). Operating Profit Ratio : This ratio takes into consideration operating profit
which is the difference between the sales figure and operating costs. This provides the
Firm, an idea about how efficiently and effectively, its resources are being used in the
respective areas over a specified period of time.


Activity Turnover Ratios generally indicate relationship between sales and assets and
these are indicators of efficiency of asset use. However, sometimes, turnover ratios are
expressed in relation to cost of goods sold. Current Liabilities are also often linked
with turnover or cost of goods sold.

(1).Working Capital Turnover Ratio : Working Capital Turnover Ratio can be

provided by dividing Sales from the average working capital employed by the firm
during a specified period of time. Thus, a relative status can be judged for the working
capital employed in order to achieve the respective sales figure. The higher the ratio,
the lower is the investment in the working capital and higher would be the

(2).Capital Turnover Ratio : Capital Turnover Ratio reflects the relationship of Sales
with the average capital employed by the firm. It can be helpful in determining the
excessive or inadequate amount of capital employed as far as sales are concerned. The
higher the ratio, the greater is the sales made per rupee of capital employed.

(3).Fixed Assets Turnover Ratio : Again the sales figure achieved by the respective
average fixed assets employed by the firm is being reflected by this ratio. The
contribution of fixed assets can be judged in respect of the sales figure achieved by the

(4).Total Assets Turnover Ratio : The proportion of quantum of Sales with respect to
average total assets i.e. sum of fixed and current assets is being called as Total Assets
turnover Ratio.

(5).Inventory Turnover Ratio : Inventory Turnover Ratio reflects the proportion of

total sales with the average inventory maintained by the firm during a specified time
period. Difference in the inventory ratios of the different industries may result from
the different characteristics of various industries. Since this ratio is a test of efficient
inventory management, the higher the ratio, the better it is.

(6).Debtors Turnover Ratio : Debtors turnover ratio is calculated to judge the credit
policy of the firm. Higher is the Debtor Turnover, lower is the credit period offered to
customers. It can be calculated by dividing annual net credit sales with the average

(7).Average Collection Period : This ratio provides the number of days in which the
debtors of the company are expected to be realized. In other words, a high receivable
turnover ratio or a low average collection period depicts highly liquid position on one
hand and a very restrictive credit policy on the other.

(8).Creditors Turnover Ratio : Like Debtors turnover ratio, this ratio indicates the
credit period enjoyed by the firm from its suppliers. Since trade credit is a popularly
used financing source of working capital, it is important to look at this ratio. It shows
the velocity of debt payment by a firm.

(9).Average Payment Period : This ratio reflects the period in which the company
ought to pay its creditors during a specified period of time. To the extent possible, a
firm should try to maintain the average payment period which is approximately equal
to the credit terms of the supplier.


Capital Market Ratios are used to reflect the market position of the company. It works
as a yardstick for the company to compare its various aspects with the prevailing
market trends, competitor’s share and also with its own previous performance.

(1). Earning Per Share : Earning Per Share can be calculated by dividing the net
profit after interest, tax and preference dividend with the number of equity shares. It
measures the profitability in terms of the total funds and explain the return as a
percentage of the funds.

(2). Earning Yield Ratio : This ratio reflects the proportion of the earnings of a
shareholder in respect of the prevailing market price. The Yield is defined as the rate
of return on the amount invested. It can be observed that Earning Yield is the inverse
of the Price Earning ratio.

(3). Price Earning Ratio : Price earning ratio can be obtained by dividing the market
price with the earning per share. The PE Ratio indicates the expectations of the equity
investors about the earnings of the firm. The investor’s expectations are reflected in
the market price of the share and therefore the PE Ratio gives an idea of investor’s
perception of the EPS.

(4). Dividend Pay-Out Ratio : This ratio provides the proportion of Dividend per
share with respect to Earning per share in the prevailing market trends. It refers to the
proportion of the Earning Per Share which has been distributed by the company as

(5). Dividend Yield Ratio : This ratio can be obtained by dividing the Dividend per
share with the prevailing market price per share for a specified period of time. Both
the Earning Yield and the Dividend Yield evaluate the profitability of the firm in
terms of the market price of the share and hence are useful measures from the point of
view of a prospective investor who is evaluating a share worth to take a buy or not to
buy decision.


Receivables are almost certain and inevitable to arise in the ordinary course of
business. They represent extension of credit and investment of funds and must be
carefully managed. Every firm must develop a credit policy that includes setting credit
standards, defining credit terms and employing methods for timely collection of
receivables. The Receivables (including the debtors and the bills) constitute a
significant portion of the working capital and is an important element of it. Since
credit sales assumes a sizeable proportion of total sales in any firm, the receivable
management becomes an area of attention. Higher credit sales at more liberal terms
will no doubt increase the profit of the firm, but simultaneously also increases the risk
of bad debts as well as results in more and more funds blocking in the receivables. The
term RM may be defined as collection of steps and procedure required to properly
weigh the costs and benefits attached with the credit policies. The RM consists of
matching the costs of increasing sales (particularly credit sales) with the benefits
arising out of increased sales with the objective of maximizing the return on
investment of the firm.


(1). Cost of Financing : The credit sales delays the time of sales realization and
therefore the time gap between the cost and the sales realization is extended. This
results in the blocking of the funds for a longer period. The firm on the other hand, has

to arrange funds to meets its own obligation at some explicit or implicit costs. This is
known as the cost of financing the Receivables.

(2). Administrative Costs : A firm will also be required to incur various costs in order
to maintain the record of credit customers both before the credit sales as well as after
the credit sales.

(3). Delinquency Costs : Over and above the normal administrative cost of
maintaining and collection of receivables, the firm may have to incur the additional
delinquency costs, if there is delay in payment by a customer; in the form of
reminders, phone calls, postage, legal notices etc. Moreover, there is always an
opportunity cost of the funds tied up in the receivables due to delay in the payment.

(4). Cost of Default by Customers : If there is a default by a customer and the

receivable becomes, partly or wholly, unrealizable, then this amount, known as bad
debt, also becomes a cost to the firms. This cost does not appear in the case of cash


(1). Increase in Sales : Almost all the firms are required to sell goods on credit, either
because of trade customs or other conditions. The sales can further be increased by
liberalizing the credit terms. This will attract more customers to the firm resulting in
higher sales and growth of the firm.

(2). Increase in Profits : Increase in sales will help the firm to easily recover the fixed
expenses & attaining the break even level, and increase the operating profit of the

(3). Extra Profits : Sometimes, the firms make the credit sales at a price which is
higher than the usual cash selling price. This brings an opportunity to the firm to make
extra profit over and above the normal profit.


Firms offer credit to customer for a number of reasons, but the ultimate objective is to
generate sales that would not have occurred otherwise. The costs associated with
offering credit are twofold: Firstly, granting credit exposes the firm to the possibility
that the customer will default. Secondly, the foregone interest between the time of
sales and the sales realization. This cost can however be partially or wholly set off by
charging customers interest cost for buying goods on credit. In fact, in cases where
the firm can charge higher interest rate from the customer, such interest income
becomes a profit instead of a cost to the firm.

The trade-off on receivables can be applied to find out whether to liberalize the credit
terms or not. When a firm adopts more liberal credit policies, the sales increase
resulting in higher profits. However, the chances of bad debts will also increase and
there will be a decrease in liquidity of the firm. On the other hand, a stringent credit
policy reduces the profitability but increases the liquidity of the firm. The opposite
forces of profitability and liquidity have an inverse relationship. Thus, a firm should
try to frame its credit policy in such a way as to attain the best possible combination of
profitability and liquidity.

Therefore, the receivables management must be attempted by adopting a systematic

approach and considering the following aspects of the receivable management :
(1). The Credit Policy.
(2). The Credit Evaluation.
(3). The Credit Control.


A firm makes significant investment by extending credit to its customers and thus
requires a suitable and effective credit policy to control the level of total investment in
the receivables. The basic decision to be made regarding receivables is to decide how
much credit to be extended to a customer and on what terms. This is what is known as
credit policy. The credit policy may be defined as the set of parameters and principles
that govern the extension of credit to the customers. This requires the determination of
the credit standard i.e. the conditions that the customer must meet before being granted
credit, and the credit terms i.e. the terms and conditions on which the credit is
extended to the customers.

(1). Credit Standards : When a firm sells on credit, it takes a risk about the paying
capacity of the customers. Therefore, the problem is to balance the benefits of
additional sales against the cost of increasing bad debts. Effect of the credit standard
on the sales volume, total bad debts of the firm and on the total collection costs are
worth noting. The credit standard will help setting the level which must be satisfied by
a customer before being selected for making credit sales. However, even after
selecting the customers, all of them need not necessarily be offered the same terms and

(2). Credit Terms : The credit terms refer to the set of stipulations under which the
credit is extended to the customers. The credit terms specify how the credit will be
offered, including the length of the period for which the credit will be offered, the
interest rate on the credit and the cost of default. The credit terms may relate to the
following :

Credit Period : It refers to the length of the time over which the customers are
allowed to delay the payment. There is no hard and fast rule regarding the credit
period and it may differ from one market to another. Customary practices are
important factor in deciding the credit period.

Discount Terms : The customers are generally offered cash discount to induce
them to make prompt payments. Different discount rates are offered for different

periods e.g. 5% discount if payment made within 10 days; 3% discount if payment
made within 20 days etc.

When a firm offers a cash discount, its intention is to accelerate the flow of cash into
the firm to improve its cash position. The length of cash discount affects the collection
period. Some customers, who were not paying promptly, may be tempted to avail the
discount and may pay earlier. This will result in shortening of the average collection

However, there is always a cost of cash discount. If a firm has an average collection
period of 40 days, and in order to reduce the average collection period, it offers a cash
discount of 3% if payment is made in 10 days. A customer having a balance of Rs.100,
who was paying in 40 days, now avails the discount of 3% and pays Rs.97 on the 10th

So, firm will be having Rs.97 for a period of 30 days (40-10), and the cost is Rs.3. The
annual cost of this discount can be calculated as follows :

Annual financing cost = Rs. 3 * 365 * 100 = 37.6%

Rs. 97 30

So, the annual cost of offering cash discount is 37.6%. This may be compared with the
cost of financing from other sources to decide whether to offer discount to customers
or not. The annual financing cost may be ascertained as follows :

Annual financing cost = % Discount * 365 * 100

100-% Discount Credit Period - Discount Period

Increase in discount rate will tantamount to reducing the ultimate selling price
resulting in increase in sales. Increasing the collection period results in increasing the
amount of receivables and hence the higher cost of receivables. Therefore, any change
in the discount terms should be evaluated in terms of costs and benefits of such

change. The competition requires that the credit terms should match the credit terms of
other firms.


The receivables are generally considered a relatively low risk asset. Under normal
circumstances, the total bad debts losses a firm will experience can be forecast with
reasonable accuracy, especially if the firm sells to a large number of customers and
does not change its credit policies. These normal losses can be considered purely a
cost of extending credit.

Credit Evaluation involves determination of the type of the customers who are going
to qualify for the trade credit. Several costs are associated with extending credit to less
credit-worthy customers. When more time is spent investigating the less credit-worthy
customers, the cost of credit investigation increases. As the customer’s credit rating
declines, the chance that the amount will not be paid on time increases. Collection
costs also increase as the quality of the customer declines.

There are three basic factor of credit worthiness of a customer. First, the character i.e.
the willingness and the practice of the customer to honor his obligations by paying as
agreed. Second, the capacity i.e. the financial ability of the customer to pay as agreed,
and third, the collateral i.e. the security offered by the customer against the credit.
Evaluation of credit worthiness of a customer is a two step procedure (1). collection of
information, and (2). analysis of information.

(1). Collection of Information :

In order to make better decisions, the firm may collect information from various
sources on the prospective credit customers. Some of the sources are listed below :
(a). Bank Reference
(b). Credit Agency Report
(c). Published Information
(d). Credit Scoring
Information collection is often costly and therefore, the firms also weigh the benefits
of gathering information against its costs.

(2). Analysis of Information :

The five well known C’s of credit : Character, Capacity, Capital, Collateral and
Conditions provide a framework for the evaluation of a customer. These
characteristics can throw light on the credit worthiness or default-risk of the customer.
The difficulty arises in case of those customer who are marginally credit worthy. In
such a situation, the financial manager must attempt to balance the potential
profitability against the potential loss from the default.


Since the credit has been extended to a customer as per the credit policy, the next
important step in the management of receivables is the control of these receivables. In
this reference, the efforts may be required in the following directions :

(1). The Collection Procedure :

Once a firm decides to extend credit and defines the terms of credit sales; it must
develop a policy for dealing with delinquent or slow paying customers. There is a
cost of both : Delinquent customers create bad debts and other costs associated
with repossession of goods, whereas the slow paying customer cause more cash
being tied up in receivables and the increased interest costs. A strict collection
policy can affect the goodwill and damage the growth prospects of the sales. If a

firm has a lenient credit policy, the customers with a natural tendency towards
slow payments, may become even slower to settle his accounts. Overly aggressive
collection policy may offend good customers who inadvertently have failed to pay
in time. One possible way of ensuring early payments from customers may be to
charge interest on over due balances. But this penal interest and the rate thereof
must be agreed in advance and better written in sales document. Thus, the
objective of collection procedure and policies should be to speed up the slow
paying customer and reduce the incidence of bad debts.

(2). Monitoring of Receivables :

In order to control the level of receivables, the firm should apply regular
checks and there should be a continuous monitoring system. For the purpose,
number of measures are available as follows :

(a). A common method to monitor the receivables is the collection period or

number of day’s outstanding receivables. The average collection period may be
found by dividing the average receivables by the amount of credit sales per day
Average collection period = Average Receivables
Credit Sales per day

(b). Another technique available for monitoring the receivables is known as

Aging Schedule. The quality of the receivables of a firm can be measured by
looking at the age of receivables. The older the receivable, the lower is the
quality and higher or greater the likelihood of a default.

(3). Lines of Credit :

Another control measure for receivables management is the line of credit
which refers to the maximum amount a particular customer may have as due to
the firm at any time. However, if a new order is going to increase the
indebtedness of a customer beyond his line of credit, then the case must be
taken for an approval for a temporary increase in the line of credit.

(4). Accounting Ratios :
Accounting information may be of good help in order to control the
receivables. Though, several ratios may be calculated in this regard, two
accounting ratios, in particular may be calculated to find out the changing
patterns of receivables. These are (a). Receivables Turnover Ratio, and (b).
Average Collection Period.


Factoring may be defined as the relationship between the seller of goods and a
financial firm, the factor, whereby the latter purchases the receivables of the former
and also administer the receivables of the former. Factoring involves sale of
receivables of a firm to another firm under an already existing agreement between the
firm and the factor. So, the factoring is a tool to release the working capital tied up in
credit extended to the customers, for more profitable uses and thereby relieving the
management from sales collection chores so that they can concentrate on other
important activities. There are two types of Factoring : (1). Non-recourse factoring
(Full Factoring) where factor firm purchases the receivables from the selling firm and
(2). Recourse Factoring (Pure Factoring) where factor firm does only collection work
of receivables & thus does not bear any risk of default by the receivable.


The Inventory absorbs a major part of Working Capital funds; the key of efficient
working capital management lies in inventory management. Inventories are assets of
the firm and require investment and hence involve the commitment of firm’s
resources. If the inventories are too big, they become a strain on the resources,
however if they are too small, the firm may loose the sales. Therefore, the firm must
have an optimum level of inventories. Managing the level of inventories is like
maintaining the level of water in a bath tub with an open drain. The water is flowing
out continuously. If water is let in too slowly, the tub is soon empty. If water is let in

too fast, the tub over flows. Like the water in the tub, the particular item in the
inventory keeps changing, but level may remain the same.


(1). RAW MATERIAL : This consists of basic materials that have been committed to
the production in a manufacturing concern. The purposes of maintaining raw material
inventory is to uncouple the purchase function from the production so that delays in
the shipment of raw material do not cause production delays. Carrying extra inventory
means tying up money in the resources. When money is converted into inventories, it
leads to additional costs in the form of storage, security, supervision, insurance,
obsolescence etc. in addition to loss of an opportunity to earn a return on money.

(2). WORK IN PROGRESS : This Category includes those materials, which have
been committed to the production process but have not been completed. The more
complex and lengthy production process the larger will be the investment in the work
in process inventory. Work in Progress refers to the raw materials engaged in various
phases of production schedule. The degree of completion may be varying for different
units. The value of Work in Progress includes the raw material costs, the direct wages
and expenses already incurred and the overheads, if any. So, the Work in Progress
inventory consists of partially produced / completed goods.

(3). FINISHED GOODS : These are the goods which are either being purchased by
the firm or are being produced or processed in the firm. These are completed products
awaiting sales. The purpose of finished goods inventory is to uncouple the production
and the sale function so that it is not necessary to produce the goods before the sales
can occur and therefore sales can be made directly out of inventory. It is necessary to
decide on the safety stock of finished goods to be carried to meet the fluctuations in
the demand as well as other uncertainties that are present in the nature of business.


We have seen that the purpose of carrying inventory is to uncouple the operations of
the firm i.e. to make each function of the firm independent of other functions so that
delays in one area do not affect the production and sales activities. Any firm will like
hold higher levels of inventory. This will enable the firm to be more flexible in
supplying to the customers and will find ease in its production schedule. Given the
benefits of holding inventories and costs of stock-outs, a firm will be tempted to hold
maximum possible inventories. But this is costly too, because the funds blocked in
inventory always have an opportunity costs. Thus, the objective of inventory
management is to determine the optimal level of inventory i.e. the level at which the
interest of all the departments are taken care of. The motives for holding inventory
may be enumerated as follows :

(1). Transactionary Motive :

Every firm has to maintain some level of inventory to meet the day to day
requirements of sales, production process, customer demand etc. This motive makes
the firm to keep the inventory of finished goods as well as raw materials.

(2). Precautionary Motive :

A firm should keep some inventory for unforeseen circumstances also. For example
the fresh supply of the raw material may not reach the factory due to strike by the
transporters or due to natural calamities in a particular area. There may be labor
problem in the factory and the production process may halt. So, the firm must have
inventory of raw materials as well as finished goods for meeting such emergencies.

(3). Speculative Motive :

The firm may be tempted to keep some inventory in order to capitalize an opportunity
to make profit e.g. sufficient level of inventory may help the firm to earn extra profit
in case of expected shortage in the market.


(1). Carrying Costs :

This is the cost incurred in keeping or maintaining an inventory of one unit of raw
material or work in progress or finished goods. Two costs associated with it are: (a).
Cost of storage: This means and includes the cost of storing one unit of raw material
by the firm. This cost may be in relation to rent of space occupied by stock, the cost of
people employed for safety of stock, cost of infrastructure required e.g. air
conditioning etc. cost of insurance, cost of pilferage, warehousing costs, handling
costs etc. (b). Cost of financing: This costs includes the costs of funds invested in the
inventories. The funds used in the purchase / production of the inventories have an
opportunity costs i.e. the income which could have been earned by investing these
funds elsewhere. It may be noted that the, total carrying cost is entirely variable and
rise in the direct proportion to the level of the inventories carried. The total carrying
cost move in the same direction as the annual average inventory.

(2). Cost of Ordering :

The cost of ordering includes the cost of acquisition of inventories. It is the cost of
preparation and execution of an order, including cost of paper work and
communicating with the supplier. The total annual cost of ordering is equal to the cost
per order multiplied by number of orders placed in a year. The number of orders
determines the average inventory being held by the firm. The carrying costs and the
costs of ordering are the opposite forces and collectively they determine the level of
inventories in any firm.

(3). Cost of stock-outs :

A stock-out is a situation when the firm is not having units of an item in store but there
is a demand for that either from the customers or the production department. The stock
out refers to the demand for an item whose inventory level has already reduced to zero
or insufficient level. There is always a cost of stock outs in the sense that the firm
faces a situation of lost sales or back orders. Stock-outs are quite often expensive.

So, the trade off on inventory is fairly clear. On the one hand, having too high an
investment in inventory results in large carrying costs which, will drag down the value
of the firm. On the other hand, having too small an inventory either result in lost sales
or higher ordering costs. On this basis, the whole theory of inventory management can
be summarized as follows :

(1). Maintaining sufficient stock of raw material to continuous supply for

uninterrupted production schedule.
(2). Maintaining sufficient stock of finished goods for smooth sales operations.
(3). Minimizing the total annual cost of maintaining inventories.


ABC Analysis :
ABC Analysis is a basic analytical management tool, which enables top management
to place the effort where the results will be greatest. This technique, popularly known
as Always Better Control or Alphabetical Approach, has universal application in many
areas of human endeavor. The ABC analysis is based on the propositions that (i).
Managerial time and efforts are scare and limited and (ii). Some items of inventory are
more important then others. In material management, this technique has been applied
in areas needing selective control, such as inventory, criticality of item, obsolete
stocks, purchasing orders, receipt of materials, inspection, store-keeping, and
verification of bills.

Under ABC analysis, the different items may be placed in different groups as follows :

(1). Different items are given priority on the basis of total value of annual
consumption. Item with highest value is given top priority and so on. The annual
consumption value of all the items, already arranged in the priority order, are then
shown in cumulative terms for each and every item.

(2). Thereafter, the running cumulative totals of annual value of consumption are
expressed as a percentage of total value of consumption.

(3). These cumulative percentage of consumption values are divided into three
categories i.e. A, B and C. Usually, group A is consisting of items having cumulative
percentage value of 60% to 70%, group B is consisting of next 20% to 25% and the
remaining items are placed in the group C.


The Economic Order Quantity (EOQ) model attempts to determine the orders size that
will minimize the total inventory costs. It assumes that total inventory costs is the sum
total of inventory carrying costs and inventory ordering costs. The EOQ model as a
technique of inventory management defines three parameters for any inventory item.

(1). Minimum level of inventory of that item depending upon the usage rate of that
item, time lag in procuring that item and unforeseen circumstances, if any.

(2). The reorder level of that item, at which next order for that item must be placed to
avoid any chance of a stock out, and

(3). The re-order quantity for which each order must be placed.

The exact quantity of an item to be purchased at one time, i.e. how much to buy, is one
of the fundamental problems faced by the Purchase Manager. If the materials are
purchased in bulk quantities the inventory carrying cost will go up, consequently there
may be chances of over stocking. On the other hand, if the materials are purchased on
small quantities the ordering cost will go up. Consequently the buyer fail to get
additional benefit from the supplier such as discount, credit benefit etc. It is therefore,
necessary to strike a balance between these two extremes and maintain optimum level
of investment in inventory. The Purchase Manager has also to decide as to when

should procure the desired material. The EOQ model is based on the following
assumptions :

(a). The total usage of a particular item for a given period (usually a year) is known
with certainty and the usage rate is even through out the period.

(b). That there is no time gap between placing an order and getting its supply.

(c). The cost per order of an item is constant and the cost of carrying inventory is also
fixed and is given as a percentage of average value of inventory, and lastly;

(d). That there are only two costs associated with the inventory, and these are the costs
of ordering and costs of carrying of the inventory.

Given the above assumption, the EOQ model may be presented as follows :

1/ 2

EOQ = [(2AO)/C]

Where EOQ = Economic quantity per order

A = Total annual requirement for the item
O = Ordering Cost per order of that item
C = Carrying cost per unit per annum.

Assuming that inventory is allowed to fall to zero and then is immediately replenished,
the average inventory becomes EOQ / 2.

However, the EOQ model suffers from various shortcomings, particularly the
unrealistic assumptions.

(1). The total usage of an item during a particular period is difficult to be known with
certainty. In most of the cases the actual demand of an item during the year is

(2). The assumption of no time gap between placing an order and getting its supply is
also not realistic. The supply of an item may not immediately reach the firm as soon as
the inventory level reaches zero and the order is placed.

(3). Another shortcoming of the EOQ model is that the quantity given by the EOQ
model may be hypothetical. For example, the order can not be placed for fractional
units say 150.45 units. Quite often, the orders are placed in a particular multiple size,
e.g. in multiple of dozens, or 10’s or 100’s.

(4). The EOQ model also assumes that the ordering cost is fixed and is not a function
of the size of the order. This is unlikely to be true when there are economies of scale
or quantity discounts associated with larger orders.

(5). The carrying cost may also vary substantially as the size of the inventory rises
because of economies of scale or the storage efficiency. If it is so, then the EOQ model
may not give the desired results.


The re-order level is the level of inventory at which the fresh order for that item must
be placed to procure fresh supply. The re-order level depends on: (a). The length of
time between placing an order and receiving the supply, and (b). The usage rate of the
item. The re-order level can be determined as follows :

R = M + T.U

Where R = Re-order Level

M = Minimum level of inventory
T = Time gap / delivery time, and
U = Usage rate


Safety stock is the minimum level of inventory desired for an item given the expected
usage rate and the expected time to receive an order. If any order is placed when the
inventory reaches 150 units instead of 100 units, the additional 50 units constitute the
safety stock. The firm expects to have 50 units in stock when the new order arrives.
The safety stock protects the firm from slow deliveries, stock outs and unanticipated
demand to a large extent.

The minimum level or the safety level of an item is maintained by the variability in
demand for the item and the risk, the firm is willing to take of stock-outs. Usually, the
smaller the safety level the greater will be the risk of stock-outs. A firm can reduce the
costs and risk of stock-outs by increasing the safety level. If the stock movement is
highly predictable then there is very less chance of a stock-out. However, if the stock
inflows and outflows are highly unpredictable, then it becomes necessary to carry
additional safety stock to prevent unexpected stock-outs.


Cash Management refers to the management of cash balance and the bank balance and
also includes the short term deposits. The cash is obviously the most important current
asset, as it is the most liquid and can be used to make the immediate payments.
Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or
force it to sell its other assets immediately. On the other hand, extreme liquidity may
take the firm to make uneconomic investments. This underlines the significance of the
cash management. A financial manager is required to manage the cash flows (both
inflows and outflows) arising out of the operations of the firm. Cash management does
not end here and the financial manager may also be required to identify the sources
from where cash may be procured on a short term basis or the outlets where excess
cash may be invested for a short term.

Cash management is an important and integral part of working capital management.

While there is need to have certain amount of cash in order to have the ability to settle
transactions promptly on the due dates, keeping more cash than what is required would
mean loss of opportunities to earn a return.


(1) Transaction motive : Business firms as well as individuals keep cash because
they require it for meeting demand for cash flow arising out of day to day transactions.
The necessity of keeping a minimum cash balance to meet payment obligations arising
out of expected transactions, is known as transactions motive for holding cash.

(2) Precautionary motive : The precautionary motive for holding cash is based on the
need to maintain sufficient cash to act as a cushion or buffer against unexpected
events. Therefore, a firm should maintain larger cash balance than required for day to
day transactions in order to avoid any unforeseen situation arising because of
insufficient cash.

(3) Speculative motive : Cash may be held for speculative purposes in order to take
advantage of potential profit making situations. Some cash balance may be kept to
take advantage of these windfalls e.g. an opportunity to purchase raw materials at a
heavy discount, if paid in cash. The speculative motive provides a firm with sufficient
liquidity to take advantage of unexpected profitable opportunities that may suddenly
appear (and just as suddenly disappear if not capitalized immediately).

(4) Compensation motive : In order to avail the convenience of the current account,
the minimum cash balance must be maintained by the firm and this provides the
compensation motive for holding cash.


The cash management strategies are generally built around two goals: (a). To provide
cash needed to meet the obligations, and (b). To minimize the idle cash held by the
firm. The primary objective of cash management is to ensure the cash outflows as and
when required. Investment in the idle cash balance must be reduced to a minimum.
The funds locked up in cash balance is a dead investment and has no earnings. The
finance manager has to ensure that the minimum cash balance being maintained by the
firm is not affecting the payment schedule and meeting all disbursement needs. Cash
being a sensitive asset, has to be regulated according to needs. Any deficits or
inadequacies should be rectified and any excess amount should be gainfully invested.


(1). Cash Cycle : The term cash cycle refers to the length of the time between the
payment for the purchase of raw material and the receipt of sales revenue. So, the cash
cycle refers to the time that elapses from the point when the firm makes an outlay for
purchase raw materials to the point when cash is collected from the sale of finished
goods produced using that raw material. Different patterns of cash cycles and cash
flows may be there depending upon the nature of the business.

(2). Cash Inflows and Cash Outflows : Every firm has to maintain cash balance
because its expected inflows and outflows are not always synchronized. The timing of
the cash inflows will not always match with the timing of the outflows. Therefore, a
cash balance is required to fill up the gap arising out of difference in timings and
quantum of inflows and outflows.

(3). Cost of Cash Balance : There is always an opportunity cost of maintaining

excessive cash balance. If a firm is maintaining excess cash then it is missing the
opportunities of investing these funds in a profitable way. Similarly, if the firm is
maintaining inadequate cash balance than it may be required to arrange funds and
there will always be a cost (may be more than normal cost) of raising fund.

(4). Other considerations : In addition to the above factors, there may be some other
considerations also affecting the need for cash balance. There may be several
subjective considerations such as uncertainties of a particular trade, staff requirements
etc. which will have a bearing on determining the cash balance by a firm.


For each period, the expected inflows are put against the expected outflows to find out
if there is going to be any surplus or deficiency in a particular period. Surplus, if any,
during a particular period may be carried forward to the next period or steps may be
taken to make short term investments of this surplus. Deficiencies, if any must be
arranged for within the same period from some short term sources of finance such as
bank credit etc. Cash budget is an effective tool of cash management and it may help
the management in the following ways :

(a). Identification of the period of cash storage so that the financial manager may plan
well in advance about arranging the funds at an appropriate time.

(b). Identification of cash surplus position and duration for which surplus would be
available so that alternative investment of this excess liquidity may be considered in

(c). Better coordination of the timing of cash inflows and outflows in order to avoid
chances of shortages or surplus of cash etc.


The financial manager should take appropriate steps for preventing any unexpected
deviation in both the inflows as well as the outflows. These include decisions that
answer the following questions: (i). What can be done to speed up cash collections and
slow down or better control cash outflows? (ii). What should be the composition of the
marketable securities portfolio?


A firm may open collection centers (banks) in different parts of the country to save the
postal delays. This is known as concentration banking. Under the lock box system, the
customers mail their payments to a post office box near their workplace. The firm
arranges with a local bank or some other agency to collect the payments and credit to
the firm’s account as quickly as possible.

A financial manager should try to slow down the payments as much as possible.
However, care must be taken that the goodwill and credit rating of the firm is not
affected. The discount offered by creditors for prompt payment must be evaluated
properly in terms of costs and benefits of the discounts. There may not be a balance in
the bank account when a cheque is issued but there must be sufficient balance when
the cheque is expected to be presented for payment. For example, if tax is to be
deposited within 7 days of the expiry of a month, then tax must be paid only on the 7 th
day and not before.


When a firm receives or makes payments in the form of cheques etc., there is usually a
time gap between the time the cheque is written and when it is cleared. This time gap
is known as float. The float for paying firm refers to the time that elapses between the
point when it issues a cheque and the time at which the funds underlying the cheque
are actually debited in the bank account. Float has three components :

(i). Mail Time :

It is the time between the issue of a cheque and its receipt by the payee.

(ii). Processing Time :

It is the time between the cheque received by the payee and the deposit of the cheque
in the bank account of the payee, and

(iii). Collection Time :

It is the amount of time for transferring funds, through banking system, from the
payer’s account to that of the payee. In India, this collection time is generally three
days, including the day of depositing a cheque.

Float reduction can yield considerable benefits in terms of usable funds that are
released for firm’s use and returns produced on such freed up balances. When the firm
makes the payments, it receives the benefits of the payment float i.e. it gets to use the
money for the period between when the cheque is written and when it clears. When the
firm receives a cheque as payment for goods and services, it is at the receiving end of
the processing float and cannot use the funds until the cheques clears. The difference
between the two is the net float i.e. the net benefit or costs to the firm on account of
the float.

The amount of cheques issued but not presented is known as payment float. The
amount of cheques deposited in the banks, but not yet cleared, is known as the receipt

float. The difference between the payment float and the receipt float is known as the
net float. Float management helps avoiding stagnation of funds.


The cash and marketable securities are in fact two sides of the same coin. The two are
closely related and therefore, the cash management should take care of the investment
in marketable securities. The marketable securities are the short term money market
instruments that can easily be converted into cash. The firm can hold a minimum level
of cash and can procure additional cash as and when required from the sales of the
marketable securities. The cash balance earns no explicit returns and therefore, any
cash balance in excess of minimum cash balance may be invested in the marketable
securities, and the latter earns some return as well as provide opportunities to be
converted easily with virtually no loss of time. Some of the factors determining the
selection of marketable securities are as follows :

(1). Maturity : The length of time for which the excess cash is expected to be
available should be matched with the maturity of the marketable securities. If the firm
invests money for a period longer than the period of the cash availability, then the firm
will be running risk of not getting cash when required, though it may be getting higher
returns on these securities. In order to avoid any chance of financial distress, the firm
should invest excess cash only for a period slightly shorter than the excess cash
availability period.

(2). Liquidity and Marketability : Liquidity refers to the ability to transform a

security into cash. Should an unforeseen event require that a significant amount of
cash be immediately available, then a sizeable portion of the portfolio might have been
sold. The marketable securities, though by nature, are all marketable, still care must be
taken that the selected investment must be easily, speedily and conveniently
marketable. The marketability is an important consideration as sometimes, the cash
realization may be required before the maturity date. The marketability feature also
includes the time gap required for sale of securities and the transaction costs of sale.
The liquidity varies from one type of securities to another. Greater liquidity implies

faster speed at which securities can be converted into cash. The speed of convertibility
into cash will ensure, first, the prompt cash and second, realization at current market

(3). The Default risk : The risk associated with a loss in value of amount (principal)
invested in marketable securities is probably the most important aspects of the
selection process. The primary motive while selecting a marketable security is that the
firm should be able to get back the cash when needed. The firm should select only
those securities which have on risk of default of interest or the principal recovery. The
financial manager should be ready to sacrifice even the higher returns.

(4). Yield : Another selection criterion for marketable securities is the yield that is
available on different assets. This criterion involves an evaluation of the risks and
benefits inherent in different securities. If a given risk is assumed, such as lack of
liquidity, a higher yield may be expected on the less liquid investments.


There are many types of marketable securities available in the financial market. These
are all money market instruments and are liquid and can be used by a firm for its better
management of excess cash. Some of these are :

(a). Bank Deposits : All the commercial banks are offering short term deposits
schemes at varying rate of interest depending upon the deposit period. A firm having
excess cash can make a deposit for even a short period of few days only. These
deposits provide full safety, facility of pre-mature retirement and a comfortable return.

(b). Inter-corporate Deposits : A firm having excess cash can maker a deposit with
other firms also. When a company makes a deposit with another company, such
deposit is known as inter-corporate deposit. These deposits are usually for a period of
three months to one year. Higher rate of interest is an important characteristic of these

deposits. However, these are generally unsecured and the lack of safety is the main
deficiency of this type of short term investment.

(c). Bill Discounting : A firm having excess cash can also discount the bills of other
firms in the same way as the commercial banks do. On the bill maturity date, the firm
will get the money. However, bill discounting as the marketable securities is subject to
2 constraints: (i). The safety of this investment depends upon the credit rating of the
acceptor of the bill, and (ii). Usually, the pre-mature retirement of the bill is not

(d). Treasury Bills : The treasury bills or T-Bills are the bills issued by the Reserve
Bank of India for different maturity periods. These bills are highly safe investment and
are easily marketable. These treasury bills usually have a very low level of yield and
that too in the form of different purchase price and selling price as there is no interest
payable on these bills.



STORES AND SPARES : There is a wholesome figure of stores and spares

consumed which is being charged to the Profit and loss account under “Manufacturing
and Operating Expenses” head. As per the reasons offered, being an insignificant part
of the total cost of production, it is directly charged as an operating expense.
Therefore, in compliance of the policy of Dabur India Ltd., stores and spares are
assumed as the direct manufacturing and operating expense rather being treated as a
part of Raw Materials. Moreover, the details regarding the opening and closing stock
of stores and spares are not available.


is a policy of charging all the administrative expenses as well as selling expenses
under one common head of “Administrative and Selling Expenses”. Though selling
expenses form a part of “Cost of Goods Sold” rather than “Cost of Production” but
still they are being treated as a constituent of “Cost of Production” as no further
bifurcation is done among them. It is very difficult to locate the exact nature of
expenses under the respective head which justify the treatment of the same.

EXCISE DUTY : Theoritical Concept of Finance calls for treating “Excise Duty” as a
part of “Cost of Goods Sold” but Liability of Dabur India Limited regarding the same
arises as soon as the production takes place. Excise Duty, is a duty levid on the
manufacturing of the goods regardless of the fact that those goods have been sold or
not. Thus, being an expense purely related to production; “Excise Duty” is treated as a
part of Cost of Production rather than the Cost of Goods Sold.

CREDITORS : Here, the basis of calculation of Sundry Creditors is in conformation

with the requirements asked by RBI before granting the specified limit / Loan for the
purpose of working capital. Creditors under Current Liabilities are further divided

under trade creditors (creditors for purchases) and other creditors (creditors for
expenses). These Creditors for purchases include Creditors for Goods and Amount due
to SSI Units. In addition, Unsecured Short Term Loans i.e. (Book Overdraft of
Current Account with Banks and Commercial Papers) also form a part of these
creditors for purchases, as per the requirement of RBI. So, it is the sum total of all the
above mentioned four.

PROVISIONS : Though Provisions, are submerged with current Liabilities under

“Current Liabilities and Provisions” head, they are kept apart while calculating the
figure of Current Liabilities during the calculation of working capital. Moreover,
Provisions are not the true expenses i.e. they don’t result in the cash outflow but are
only the appropriation of profit or surplus left with the company after meeting all its
cash and non cash expenditure. So, they are not treated as a part of mandatory short
term liability of the company.

DEPRICIATION : As per the company policy, depreciation on the fixed assets is

provided on the written down value at the rates specified in schedule XIV of the
Companies Act, 1956.

PURCHASES AND SALES : There is neither segregation of Sales into credit sales
and cash sales nor Purchases into credit purchases and cash purchases. The justifying
reason provided is that the amount of cash sales and cash purchases are very
insignificant, so they are not shown separately but form a part of total sales and total
purchases respectively. Thus, in the absence of information and immaterial nature of
cash sales and cash purchases; Total sales is treated as total credit sales and Total
purchases is treated as total credit purchases. The important thing to be noted over
here is that the quantum of total credit sales and total credit purchase is same as that of
total sales and total purchases respectively.


Yearly Results
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Sales Turnover 1,369.68 1,778.02 2,083.40 2,417.91 2,874.60
Other Income 5.35 16.51 27.91 21.32 15.11
Total Income 1,375.03 1,794.53 2,111.31 2,439.23 2,889.71
Total Expenses 1,135.97 1,477.41 1,706.16 1,973.47 2,325.17
Operating Profit 233.71 300.61 377.24 444.44 549.43
Profit On Sale Of Assets -- -- -- -- --
Profit On Sale Of Investments -- -- -- -- --
Gain/Loss On Foreign Exchange -- -- -- -- --
VRS Adjustment -- -- -- -- --
Other Extraordinary -- -- -- -- --
Total Extraordinary Income/Expenses 0.51 -- -- -- --
Tax On Extraordinary Items -- -- -- -- --
Net Extra Ordinary -- -- -- -- --
Gross Profit 239.06 317.12 405.15 465.76 564.54
Interest 5.66 4.43 8.55 13.34 5.60
PBDT 233.91 312.69 396.60 452.42 558.76
Depreciation 19.05 28.47 31.42 27.42 31.91
Depreciation On Revaluation Of -- -- -- -- --
PBT 214.86 284.22 365.18 425.00 526.85
Tax 25.78 32.14 48.41 51.44 93.70
Net Profit 189.08 252.08 316.77 373.56 433.15
Prior Years Income/Expenses -- -- -0.86 -- -0.18
Depreciation for Previous Years -- -- -- -- --
Written Back/ Provided
Dividend -- -- -- -- --
Dividend Tax -- -- -- -- --
Dividend (%) -- -- -- -- --
Earnings Per Share 3.30 2.92 3.67 4.32 4.98
Book Value -- -- -- -- --
Equity 57.33 86.29 86.40 86.51 86.90
Reserves 390.54 316.90 441.92 651.69 662.48
Face Value 1.00 1.00 1.00 1.00 1.00


Mar '06 Mar Mar Mar Mar '10
'07 '08 '09
Face Value 1.00 1.00 1.00 1.00 1.00
Dividend Per Share 2.50 1.75 1.50 1.75 2.00
Operating Profit Per Share (Rs) 4.20 3.53 4.51 5.10 6.19
Net Operating Profit Per Share (Rs) 23.47 20.22 24.23 27.84 32.93
Free Reserves Per Share (Rs) 5.21 2.80 4.33 6.84 -0.03
Bonus in Equity Capital 81.74 87.58 87.46 87.35 86.96
Operating Profit Margin(%) 17.90 17.45 18.60 18.33 18.80
Profit Before Interest And Tax Margin(%) 16.47 16.16 17.29 17.11 17.49
Gross Profit Margin(%) 17.74 17.49 17.37 17.19 17.69
Cash Profit Margin(%) 15.45 15.67 16.16 15.97 16.29
Adjusted Cash Margin(%) 15.63 15.51 16.16 15.97 16.29
Net Profit Margin(%) 14.04 14.41 15.06 15.44 14.99
Adjusted Net Profit Margin(%) 13.90 13.88 15.06 15.44 14.99
Return On Capital Employed(%) 46.69 66.07 67.51 47.98 61.98
Return On Net Worth(%) 42.22 62.52 61.58 51.20 58.03
Adjusted Return on Net Worth(%) 45.10 63.32 59.99 48.65 58.03
Return on Assets Excluding 23.86 4.44 5.95 8.43 8.61
Return on Assets Including 23.86 4.44 5.95 8.43 8.61
Return on Long Term Funds(%) 48.02 68.63 68.93 55.29 61.98
Current Ratio 0.82 0.97 0.91 1.19 1.04
Quick Ratio 0.52 0.63 0.58 0.99 0.70
Debt Equity Ratio 0.05 0.05 0.03 0.19 0.15
Long Term Debt Equity Ratio 0.02 0.01 0.01 0.03 0.15
Interest Cover 70.12 140.6 46.79 38.34 95.11
Total Debt to Owners Fund 0.05 0.05 0.03 0.19 0.15
Financial Charges Coverage Ratio 42.26 69.48 36.56 31.26 101.82
Financial Charges Coverage Ratio 38.09 64.33 32.87 28.99 85.09
Post Tax
Inventory Turnover Ratio 11.65 11.11 12.52 10.94 9.65
Debtors Turnover Ratio 35.30 39.70 25.94 22.63 23.53
Investments Turnover Ratio 14.44 13.44 12.52 10.94 9.65
Fixed Assets Turnover Ratio 7.30 8.51 4.67 4.84 4.16
Total Assets Turnover Ratio 2.94 4.30 3.98 2.81 3.32

Asset Turnover Ratio 4.24 4.50 4.67 4.84 4.16
Average Raw Material Holding 48.08 40.91 45.68 45.18 --
Average Finished Goods Held 23.07 22.21 20.13 21.28 --
Number of Days In Working Capital -10.28 3.82 -5.80 41.32 4.26
Material Cost Composition 42.97 45.86 49.05 52.80 48.79
Imported Composition of Raw 0.72 1.22 0.97 1.06 1.22
Materials Consumed
Selling Distribution Cost Composition 23.52 23.11 16.12 14.89 --
Expenses as Composition of Total 1.97 3.96 4.49 4.56 4.33
Dividend Payout Ratio Net Profit 60.49 55.24 47.86 47.41 46.86
Dividend Payout Ratio Cash Profit 53.85 49.63 43.54 43.74 43.13
Earning Retention Ratio 38.89 42.64 50.87 50.11 53.14
Cash Earning Retention Ratio 45.66 48.66 55.41 54.16 56.87
AdjustedCash Flow Times 0.10 0.07 0.05 0.36 0.23

Cash Management
The company maintains bank accounts at all depots towns. Cheques/drafts received
from customers in nearby places are sent for local clearing to initially collect funds in
these bank accounts. This has reduced the average collection period (as compared to
the time it would take if customer cheques were first received at head-office and then
sent for out-station clearing) thereby increasing the velocity of cash inflows. Funds
thus collected at the depot towns are each day transferred to the company’s head-
office (or corporate) bank account. The company has a ‘sweeping arrangement’ with
the bank at head-office by which any funds transferred from the depot towns are
automatically applied towards settling the company’s cash credit loan from the bank
and reducing its debit balance. These steps have resulted in reducing and
controlling the cost of interest to the company.

Graph of Earnig and dividend per share of Dabur India ltd.


Dabur India Limited is a leading Ayurvedic and Allopathic Pharmaceutical Company,

which produces around 500 products of Health Care, Family Products, Ayurvedic and
Allopathic Medicines along with various Asavas and Arishta.
In the purchase process for Dabur Products, the major categories are Allopathic Raw
materials, which consists of Chemical, Drugs, Colours etc. Ayurvedic Products like
Herbs, Dry Fruits, etc. and the third and main category is Packing Materials which
plays a major role and maximum cost contribute in total cost of the product. Purchase
Department of Dabur India Limited is involved for the purchasing of various materials
which are required for the formulation and packing of a particular product.
The inventory control operation in Dabur India Limited starts from the stage of
assessment of its requirement of a particular item. First of all the calculation of an
item depends upon the sales forecast of the product. When it is decided that so much
quantity of the product will be produced to meet out the requirement/demand of the
consumers, then we calculate the number of items and their volume in regard to
packing materials from the production point of view.
Vital items are those, which may cause havoc and may amount to stoppage of work in
the Organization if they are not available at the time they are required.
However, the Organization may take a reasonable risk in case of those items, which
are classed as essential. These items can be sufficiently stocked to ensure a regular

flow but care should be taken that if sufficient stocks of Essential items are not
available then it may affect the efficiency of the Organization.
Desirable items are those, which can be easily bought from the market as and when,
required by the Organization.



The need of working capital of Dabur India Limited is increasing day by day this show
company gearing up to meet new challenges and competitions.

As the company is continuously going on improving its old products and launching its
new products like REAL JUICES, VATIKA SHAMPOO etc. so therefore in these
circumstance the working capital requirement is continuously increasing on.

The major raw material for Dabur India Ltd. constitutes the following (a) sugar
(b) chemicals (c) Oils (d) Herbs (e) Mellasses. The major part of raw materials used
by the healthcare products and family products. Healthcare and Family product
division constitutes almost 72% of the total sales of the Dabur. Since both divisions
involves herbal powder oils and Ayurvedic so there is a constant need of Sugar,
Mellasses and Oils herbs by the company.

There was 100% increase in Work in Process inventory from the year 95-96 to 96-97.
The main reason for this can be attributed to poor material handling system on the
production floor. If the materials can quickly reach the production points the need to
store components and partially finished materials at different process on the sheep
floor can be greatly reduced and there by release money, that is other wise tied in
semi-finished goods. The poor handling of materials leads to increase in the cost of
work in progress inventory. Also cycle time the production process involved in the
system had risen due to certain bottlenecks in the production process.

In DABUR India Ltd. the proportion of finished goods inventory to total inventory
was estimated 53% in 08-09, 55% in 09-10.
Thus for effective inventory management a stringent control of assts being produced
for the purpose of sale in the normal course of business operation.

There are two important aspects of inventory management Viz. Pricing of raw
materials and Valuation of inventories. Several methods can be used for pricing of raw
materials. These can be broadly classified as
First In First Out (FIFO)
Last In First Out (LIFO)
Weighted Average Cost Method
Standard Cost Method
Current Price Method
However DABUR INDIA LTD. make use of FIFO methods for pricing its raw
materials. This means that the order in which materials are received in the stores is the
order in which materials issued from the stores. Thus the materials which is issued
first is priced on the basis of cost of materials received earliest.
This helps in consistent pricing of oldest materials which are issued first but it is very
complicated method and proves a bottle neck in the stores accounting as it complicates
the over all procedure. Different components of raw materials for the company are
purchased from different sources, as there are wide range of suppliers for both sugar &
malesses and vegetable oils. This helps the company in purchasing raw materials at the
best possible price available in the market and the control its over all cost of producing
goods. The company has an effective database system which helps in providing timely
and accurate information regarding the demands and use of raw materials and cost
incurred there upon.

This method is also known as selective method of inventory control. It takes the
following points into consideration.
Different inventory levels
Order Quantities
Value of material, and
Extent and closeness of the control to be exercised.

It is generally felt in an organization that most inventories have much higher annual
usage value as compared to other items. This necessitates the study of the value of

materials to be used before deciding upon the extent and closeness of control to be
exercised. According to this method of inventory control, inventory items are
classified into three classes - A, B & C.
If we conduct an analysis of annual consumption of any organization, we can easily
come to realize that 75% of total annual consumption value accounts for hardly 10%
of the total number of items. These few vital as well as costly items are categorized
‘A’ class item. Similarly a large number of less costly items (70% of the total number
of items) accounts for about only 10% of the total amount of consumption value, such
items are regarded ‘C’ class items. Thirdly, the items that lie between ‘A’ class and
‘C’ class items are ‘B’ class items. This ‘B’ class item accounts for rest 20% of the
total annual consumption.
‘X’ items are those inventory value are high. While ‘Z’ items are those whose
inventory value is low. Obviously ‘Y’ items are those, which falls between these two
Therefore XYZ analysis is helpful in taking stock of those items which are classed as
items of highest value, moderate value and low value. Therefore, XYZ and ABC
classification are used in organization. Control of items could be done according to
their categories such as AX, BY and CZ.


On the basis of data and information available, we arrived at certain conclusions and
suggestions that reflect the working (positive and negative)of Dabur India Limited.

(1) The company has a raw material holding period of more than two months. For the
years 2009, 2008 and 2007 the raw material holding period was respectively. The
reason being that the production being increasing continuously every year.

It is suggested to the company to reduce its raw materials stock to the minimum level
which don’t affect its daily operations. This would help the company of having more
of funds in hand which could be invested else where. It would also reduce the interest
burden on loans taken from banks and other financial Institutions.

(2) The Stock in Process holding period was for the year 2010 while it was for 2009,
2008 and 2007 respectively.The company should try to maintain either the same level
of stock-in-processor reduce it further but it should not be increased.

(3) It is found that Finished Goods holding period has gone down for the year 2009 as
compared to 2008. Though aim of increasing the sales would increase the finished
goods (for easy availability of goods to the customers) but still it is recommended to
the company to further bring down the finished goods holding duration by reducing
the finished goods stock.

(4) This implies that the company should try to bring down its debtors collection
period without affecting its sales. This can be done by strictly following its credit
policy and making changes in it (if required) for the better flow of funds.

(5) Since the credit period given by the suppliers is free from any interest charge so
the company can try to improve its relationship with the supplier so that they
willingly agree to increase the payment period. Also, the company should try to
keep an eye and adopt the credit terms what competitors are following.

(6) The data available for the previous years show that the working capital
requirementsare rising continuously every year. One of the reasons for this
increase is the increase in product line and capacity of Dabur India Limited.
Secondly, with the increase in the production every year the inventory are also
expected to increase with respect to total current assets so the requirements for the
working capital increases. Thirdly, with the increase in sales, the amount of sundry
debtors is also expected to increase. It accounts for 45% approximately of the total
current assets. Fourthly, the amount of the creditors is reducing which implies
requirements of more working capital. Finally, during the process some wastages
are due to strict quality control so there is high working capital requirements.

Dabur management is going to reduce the existing ten grades to six or seven. In
DABUR, employees under the designation of area manager & district manager have
similar job description. Therefore, DABUR is planning to merge these two
An increment in salary structure has been proposed because DABUR INDIA
LTD, at present, is not paying at par with the other top 5 FMCG COMPANIES.
DABUR is heading towards adopting a totally professionalised culture.
Integrated information technology system will soon be introduced, where all the
working will be done through wide area network (WAN)
Stated for launch are some baby care & women health care products.
The most important, the 90% stake DABUR INDIA held in finance is being bought
over by the Burman’s. As the Burman’s already hold a 10% stake, DABUR
FINANCE will become their private company.

Working capital management is concerned with the problem that arise in attempting to
manage the current assets, current liabilities & the interrelationship between them.
Their operational goal is to manage the current asset &current liabilities in such a way
that a satisfactory level of working capital is maintained. The term working capital
refers to net (i.e.) CA-CL with reference to the management of working capital net
working capital represent that part of the current assets which are financial with long
term fund of the term inventory refers to assets which will be sold in future in the
normal course of business operation. The assets which the firm stores as inventory in
anticipation of need are raw material, work-in progress/ semi-finished & finished
Cash management is one of the key areas of working capital management. These are 4
motives of holding cash;

(1) Transaction motive
(2) Precautionary motive
(3) Speculative motive
(4) Compensating motive

The basic objective of cash management are to reconcile 2 mutually contradictory &
conflicting task to meet the payment schedule & to minimize funds committed to cash
balances. Receivables defined as debt owned to the firm by us to mere arising from
sale of goods as services in the ordinary course of business. The need for working
capital arises from the operating cycle of the firm. The operating cycle refers to the
length of time to convert the non-current asset into cash.

BALANCE SHEET as at 31st March 2010

As at 31st March 2010

Shareholders' Funds

Capital 8,690
Reserves & Surplus 66,248 74,938
Loan Funds:
Secured Loans 2,427
Unsecured Loans 8,570
Deferred Tax Liability (Net) EB
Total 87,130

Fixed Assets :
Gross Block 68,723
Less : Depreciation 23,628
Net Block 45,095
Capital work in Progess 2,331
(including capital advances)
Current Assets, Loans and Advances:
Inventories 29,844
Sundry Debtors 13,048
Cash & Bank Balances 16,391
Loans & Advances 32,512
Less: Current Liabilities and Provisions EA
Liabilities 43,206
Provisions 44,010
Net Current Assets
Miscellaneous Expenditure IA
(To the extent not written off or adjusted)
Notes to Accounts
Total 87,130

PROFIT & LOSS ACCOUNT for the year ended March 31st 2010

INCOME : for the year ended March 31st
Sales Less Returns
2 288045
Less: Excise Duty 2358
Net Sales 285687
Other Income 3284
Total Income 288971
Cost of Materials 137393
Manufacturing Expenses 7618
Payments to and provisions for Employees 21234
Selling and Administrative expenses 65706
Financial Expenses 560
Miscellaneous Expenditure Written off 566
Depreciation 3191
Total Expenditure 236268
Balance being Operating Net Profit before Taxation 52703
Provision for Taxation Current 8966
Deferred 404
Fringe Benefit 0
Net Profit After Taxation 43333
Balance Brought Forward 42894
Provision for Taxation of earlier years written back (2)
Provision for Taxation of earlier years 21
Interim Dividend 6498
Proposed Final Dividend 10862
Corporate Tax on Interim Dividend 1104
Corporate Tax on Proposed Dividend 1846
Transferred to Capital Reserve 207
Transferred to General Reserve 13000
Balance carried over to Balance sheet 52691



 www.dabur.com
 www.moneycontrol.com
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I.M. Pandey
Robert N. Anthony
S.N Maheshwari -Management Accounting And Financial Control
M.C.Kuchhal -Introduction To Financial Management
William G.Droms- Finance And Accounting For Non- Financial Managers