Description
working capital management in nutrient confectionery company pvt. Ltd. Chittoor
NUTRINE CONFECTIONEY COMPANY PRIVATE LIMITED
PROFILE Nutrine Confectionery company private limited was founded in 1952 by Sri. B.Venkatarama Reddy, a graduate from the National University during the chancellorship of Sri. Ravindranath Tagore a Nobel Laureate. Late Sri. B. Venkatrama Reddy, popularly known as B.V. Reddy had foresight about the needs and demands of confectionery in India and ventured to set up a factory when Parry confectionery was the market leader and Parry’s flag was flying high.
NCCPL has always believed in high levels of conservatism. The company was set up as small unit with a capital of Rs. 5 Lakhs to manufacture various types of candies. After the demise of Sri. V.Dwaraknath Reddy, who is presently the chairman of the Nutrine group of companies. Mr. Dwaraknath Reddy holds a master degree in Chemical engineering from Louisiana University, U.S.A. Before taking over the reins of the company, he gained considerable experience in the filed of confectionery production when he worked for certain confectionery units in U.S.A. He also had a short stint at Addisons under the leadership of Sri. Anantharama Krishnan. Nevertheless expertise gained by him in the
field of confectionery manufacture at Nutrine between 1956 and 1989, has helped to guide the company to its present position of market leader.
At present, Mr. V.Vikram Reddy, nephew of Sri. V.Dwarakanth Reddy, looks after the day to day management of the company Mr. Vikram Reddy holds a post graduate degree in management from U.S.A. He has been groomed under Mr. Dwaraknath Reddy since 1977 and is presently the Managing Director of the company. Mr. Vikram Reddy has the admirable support of other Directors, Mr. V. Madhusudhan Reddy and Mr. V.Dinesh Reddy.
Mr. K.Sivamohan Reddy, Executive Director, is in charge of operations and all the departments other than finance under this control.
The finance department is lead by Mr.S.Vasudevan, a chartered accountant, who is with the company since 25 years. He has jointed the company as Management trainee and has risen to the position of Executive Vice-President. He has the support of a good team of professionals and senior executives who are in the service of the
company since three decades.
The marketing team is headed by Mr.S.Gopal Krishnan, V.P. (Sales) and ably supported by Area Sales manager, zonal Sales Managers and other . Senior Vice-President (Production) Mr.
H.Ananthapadmanabhan, a graduate in Chemistry, possesses long experience in the production management and senior Vice-President (Research & Products), Mr. G.Lakshminarayanan again a chemistry graduate with a lot of exposure in the sugar industry, has been specializing in development of various products for Nutrine today.
Mr. S.R.Raju, a P.G. Diploma holder in Materials Management, is in charge of materials department and Mr. B.Giasuddin, a law graduate and a diploma holder in personnel management, is heading the personnel department.
NCCPL has around 1200 employees under its direct employment and over 50,000 families directly and indirectly growing with in the country. From a small unit manufacturing only candies, Nutrine has grown to be a multi-product, multi-market giant and has reached the position of single largest manufacturer of confectionery and toffees in India.
Nutrine has wide range of more than 50 varieties of candies, toffees, lozenges etc. Nutrine Mahalacto, Nutrine cookies, Honey fab, Assay, Chacolate Eclairs and Melters are the popular brands ofNutrine. Being the leader in the industry for more than a decade, nutrine has always endeavored to satisfy the customers changing wants and desires with its own emphasis on quality, range and cost effectiveness.
The company has centralized manufactured unit at Chittoor and also utilizes the services of job workers presently at Hyderabad and Surendra Nagar (Gujarat). NCCPL enjoys a high market share of 35 to 40 % in confectionery in the organized sector in India. The strength of Nutrine lies in its manufacturing capabilities and also to a large extent to its marketing skills. Nutrine’s product range is available through a net work of 35 depots and C & Fs, 2700 distributors and stockists and 150,000 dealers.
The company has modernized its plant by importing sophisticated candy manufacturing machinery from Robert Bosch of Germany for making hygienic confectionery. The machines imported are the five or six machines of its kind in the world. The company also imported automatic weighing and packing machines. With the use of these machines, Nutrine is able to produce good quality confectionery with exacting standards.
With sustained support from the valued stockists, Nutrine is growing stronger in the market and retaining its no. 1 position. With the facilities available to be included in the coming years, Nutrine will emerge as one of the big-food giants in the country in the next few years.
The Govt. of A.P. has conferred “Best Management Award” on 1 st May, 2003 for the out standing performance in maintenance of the industrial relations and labour welfare
CONCEPTS OF WORKING CAPITAL
Finance is the life blood of every business activity without which the wheels of modern organization system cannot be greased. Working Capital management is one of the important facets of a firm’s overall financial management. It is concerned with the management of firm’s current accounts, which include current assets and current liabilities. Its objective is to put the current assets into optimal use by speeding up their flow to ensure that money does not stagnate any way in any form. The management of working capital is becoming increasingly important as firms realize that approximately half of the investments are in working capital. Working capital sphere, therefore, throws open a welcome challenge and an opportunity for the finance manager to play a key role
for effective planning, controlling, directing and utilizing the working funds in an enterprise.
CONCEPT OF WORKING CAPITAL
To understand the concept of working capital it is important to know the precise meaning of current assets and current liabilities. Current assets are those assets, which are used in the production and selling operations of the business and can be converted into cash with in a year. They comprise inventory, debtors, bills receivable, marketable securities, cash and bank balances. Current liabilities are those which are intended to be paid during the accounting period out of current assets or the income of the business. They include bank loans, loan other than bank, bills payable and sundry creditors. Two concepts of working capital now in vogue are found useful in the management of working capital viz., gross and net. The former concept concerns with the quantitative approach whilst the latter deals with qualitative approach.
GROSS WORKING CAPITAL CONCEPT
Working capital employed in business concern is equal to the total current assets employed. This is also known as circulating capital or operating capital as these assets rotate continuously as long as the firm
exists. The gross working capital concept focuses attention on two aspects of current assets management. They are (a) optimum investment in current assets and (b) financing of current assets. To quote westion and brigham, gross working capital refers to firm’s investment in short term assets such as cash, short term securities, accounts receivable and inventories. The supporters of this concept like field, baker and Mallot and Mead argued that the management is more concerned with total current assets as they constitute the total funds available for operating purpose.
NETWORKING CAPITAL CPAITAL CONCEPT
The qualitative concept examines working capital as excess of current assets over current liabilities. Working capital deficit exists if current liabilities exceed current assets. Similar views are express by Guthmann and Dougal and McMullen Accountants Hand Book also completely endorses the view. Gerstenberg supports it the following way:
“Any comprehensive discussion on the working capital includes the excess of current assets over current liabilities”.
Famous economists like Lincoln, Stevens and sailers fully endorsed this concept and expressed that it helps creditors and investors
judge the financial soundness of an enterprise. Another alternative definition of net working capital is that portion of firm’s current assets which is financed with long term funds. Net working capital, thus indicates the liquidity of the business whilst gross working capital with which the business has to operate.
NEED FOR WORKING CAPITAL
The need for working capital in a business undertaking cannot be over emphasized. The objective of financial decision making is to maximize the shareholders wealth. To achieve this it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend upon the magnitude of the sales among other things. A successful sales programme is in other words, necessary for earning profits by any business enterprise. However, sales do not convert into cash instantly. There is invariably a time lag between the sale of goods and the receipt of cash. There is, therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Sufficient working capital is thus, necessary to sustain sales activity.
FACTORS INFLUENCING WORKING CAPITAL
The business undertaking should plan its operations in such away that it should have neither too much nor too little working capital. The total working capital requirements are determined by a variety of factors which determine the quantum of working capital in a business undertaking are as follows.
1. General nature of the business-companies which sell a service and that too for immediate cash, require little working capital. But for a manufacturing firm which produces a product and sells it on credit basis, working capital required is high. 2. Production cycle if the production process is lengthy working capital required is more and vice-versa. 3. speed of operating cycle if the speed of operating cycle is slow working capital needed is high. 4. Credit terms if the company purchase raw materials on credit basis and sells finished goods on cash basis, working capital requirements will be low. 5. Growth and expansion – firms with larger growth prospects demand greater working capital. 6. Dividend policy – Firms pursuing a liberal dividend policy require more working capital.
7. Other factors (a) Production Policies (b) unpredictability in the availability of raw materials, (c) depreciation policies, (d) impact of business cycle (e) operating efficiency and (f) absence of coordination between production and distribution policies.
WORKING CAPITAL CYCLE AND ITS MANGEMENT – AN EXPLANATORY NOTE
The general factors as explained above that too those factors which are uncontrollable due to external reasons of nature, lead-time of manufacture and existence of market conditions would limit ones effort of meticulous management by the controllable constituents of Working Capital requiring judicious options of applicability should consume almost all the time for efficient management. In order to understand the management of working capital in all its faces, I deal with the constituents of Working Capital, its management, so also the financing forms available in the following paragraphs. For the purpose of analysis the following working capital cycle is framed the cycle shown below is a typical working capital cycle. Its changes in shape, reduction in length could be, where products are sold on cash, fully or partially, materials purchased on cash or credit, which have been dealt-with in the “Management” part of it in a narrative form.
Debtors
Sales
Cash
Finished goods
Raw Material
Work in progress
The working capital operating cycle normally confines to a year to year with reference to which various factors affecting working capital are evaluate. Working capital cycle is the period within which either Raw material converts itself to cash or commences with cash and ends with cash.
RAW – MATERIAL
The components of Raw- Material in a Working Capital cycle assumes very significant role. Generally, more than 50% of the years turnover are spent on raw-Materials. Undue accumulation of Raw material tells upon the profitability due to costs of its carrying.
The maintenance of optimum level of inventories of Raw-Materials maximizes with lower working capital requirement and shortage of Raw Materials lead to disruption in production, non-utilisation of capacities of production and consequent adverse impact on profitability (S ince larger internal generation from higher profitability directly leads to lesser cost on Working Capital). There have been scientific methods established not only for procurement but also for storing.
The whole of the manufacturing activity, be the purchase of rawmaterials and conversion of it into work-in-progress or into Finished goods would necessarily be for meeting the market demand, if accelerating the demand perse is taken as a separate exercise. If it is so, the level of finished goods should be such that it meets the demand in full and in time and at the same time does not await sale for an avoidable length of time. Any excess quantum of finished goods should be such that it meets the demand in full and in time and at the same time does not await sale for an avoidable length of time. Any excess quantum of finished goods on hand could be more disastrous from the point of view of working capital requirements or the ultimate operating cost simply because the finished goods at the distribution points, after suffering heavier does of duties and taxes are maintained higher than anything barely necessary would make the situation all the more worse.” Unlike
the raw-material, where, external factors of its availability, seasonality etc. would necessitate certain inevitable volume to be stored, in case of finished goods many factors to keep at optimum level would be controllable. There can be host of measures that could be taken for maintaining minimum quantity in the form of finished goods.
RECEIVABLES
The sale of the products against cash would be an ideal situation to eliminate a stage in the working capital cycle thus achieving the objective of drastic reduction in its length and the requirement of working capital. The existence of numerous competitors in the era of globalization and liberalized economy, such sales on cash could only be next to impossibility if growth of the organization is any aspiration. In the present complex market scenario one leads the other, in offering more value for money to their customers and extending credit has been one such major step. This encounters the organization with substantial blockage of working capital. Indiscriminate extension of credits in the name of growth could erase the entire profitability and as stated above non-extending of credit would keep the organization out of business. A great deal of planning and efficiency is warranted to keep receivables at the optimum level. I would choose to little elaborate on two measures in this regard.
1. LAYING DOWN CREDIT POLICY
The organization specifying applicability of general credit policy i.e., the period of credit extendable as a thumb rule would fall short of its effort in controlling receivables. The credit policy requires to be more selective and should bear, the growth, recoverability, the product strength, distribution network etc., in its upper most mind. The variation in credit policy could also customer based. As we would observe there would be two sets of organizations, one looking for a lower margin with high growth through a liberal credit policy, the other one, higher margin with reasonable growth through a conservative credit policy. The credit policy should not lay-down the period of credit but also a well through out procedures for extending credit in order to prevent or minimize the debts going bad. A systematic evaluation of customers credibility, financial strength and their usefulness to the organization in terms of quantum of sale etc. would fetch desired results. The credit policy should specify the level of management authorized to extend general credit and instead of decentralizing the power of extending any further dispensation such decisions could be taken by fairly senior personnel, few in number. Depending upon the market conditions the policy could also specify incentives for early payments like cash discounts, so also interest on delayed payments.
2. MONITORING RECEIVABLES
Monitoring receivables are as important, if not more, as laying down a credit policy. It has to be constant and continuous in order to bring down the level of receivables to an optimum level in conformity with the laid down credit policy of the organization. When we talk of monitoring receivables two ready indicators are remembered. The collection period and the age of the book debts.
a. Collection Period The collection period would be in terms of number of days average credit sales. Such a calculation area-wise, marketing personnel wise at frequent intervals would provide information for selective credit control. An application of incentive for faster collection in certain selective areas also would render possible, the collection faster.
b. Aging of Book Debts The collection efforts could be intensified on greater analysis of receivables from the point of view of the number of days it is outstanding. Higher the number of days, the debt is outstanding, the probability of it becoming doubtful of recovery is higher. Earlier detection ofsuch outstanding from customers would facilitate taking hard decisions of
stoppage of further sales, in order minimize bad debts. Collection of book debts just as per the credit policy would enable the organization to achieve planned profitability.
FINANCING THE WORKING CAPITAL NEEDS
Financing working capital needs of a business enterprise is yet another key area wherein the finance manager can play an active role. He can employ different sources in financing of current assets. There exists three distinct sources in financing of current assets. There exists three distinct sources of financing current assets.
I.
Long Term Financing : It consists equity and preference shares retained earnings debentures and borrowed funds from financial institutions.
II.
Short Term Financing : It includes short term bank loans, commercial papers, and factoring bills receivables.
III.
Spontaneous Financing : It acts as an instantaneous source which includes trade credit and accruals. Every firm tries its best for the maximum use of the spontaneous sources which are cost free.
In financing current assets the choice is exclusively between short term and long term sources since the spontaneous sources were exploited on routine lines. The finance manager has to decide the extent of long term and short term sources to finance his concerns working capital requirements depending upon the conditions under which the company operates, the type of product it manufactures, its earning power, the interest charges on different sources of funds and their availability. The short sources of funds involve less cost and have more flexibility but more risky than the long term source of funds. Therefore, the firm should use both the sources intelligently to finance its current assets. Financing current assets through a right source assumes a greater significance in the management of working capital
DATA COLLECTION
Personal interview were held with key personnel of finance department.
Secondary data from published annual reports for 6 years (1998 – 2003) and few other relevant data were availed from Nutrine.
RESEARCH TOOLS
1. Operating Cycle Method • Raw Material Conversion Period • Work-in-Process Conversion Period • Finished goods Conversion Period • Receivables Conversion Period
2. Statement of changes in working capital 3. Trend Analysis • Capital trend • Sales trend • PBT trend
4. Ratio Analysis • Liquidity Ratios • Activity Ratios • Assets Trunover Ratios
RESEARCH METHODOLOGY OBJECTIVES OF THE STUDY
1. To analyse the existing working capital of the Nutrine company. 2. To study the components of current assets and measure its impact on the working capital 3. To suggest possible solutions for better management of working capital in Nutrine.
1. OPERATING CYCLE METHOD
The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivable. It may be divided into 4 stages. • Purchase of Raw materials Stage • Work-in-Process Stage • Finished goods inventory Stage • Debtors Collection Stage
The firm beings with the purchase of raw materials which are paid after a delay which represents the accounts payable period. The firm converts the raw materials into finished goods and then sells the same.
The time lay between the purchase of raw materials and the sale of finished goods is the inventory period the elapses between the data of the sales and the data of collection of receivable is the accounts payable.
The duration of the operating cycle is equal to the sum of the duration of each of these stages less the credit period allowed by the suppliers of the firm. In symbols. O=R+W+F+D+C Where, O = Duration of operating cycle R = Raw material storage period W = Work in process period F = Finished goods storage period D = Debtors collection period L = Creditors collection period
The time the elapses between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle. It can be represented as follows.
2. STATEMENT OF CHANGES IN WORKING CAPITAL
The technique helps to analyse changes in working capital components between tow dates. The comparison of current assets and current liabilities are shown in the table at the beginning and end of the specific period. By this statement we can know the difference of individual components in CA & CL for the two years respectively.
By this technique we can know the increase or decrease of working capital for a specific year.
3. TREND ANALYSIS
Trend analysis gives a picture of performance of the company over a period of years, By the trend analysis we can know whether the company is in profit or in loss a) Capital Trend It gives the picture of whether the company increase their capital or decreasing its capital over the period of study. b) Sales Trend Sales trend gives picture whether the company sales are increasing or decreasing by this we can known when the company sales decreased and increased. c) PBT Trend
Profit before tax trend can tells the profits earn by the company before tax is in E, increasing trend or decreasing.
RATIO ANALYSIS
Over several years scientific tools have been evolved for determining optimum level of working capital online assessment of each of the components of current assets for selective application of management control. Undisputedly the ratio analysis occupies place of prime importance. Ratios are compiled and studied for profitabilities, assessment of financial position sufficiency of working capital stradagies perused by the organization short term and long term solvency liquidity etc. I would deal with some of the predominant ratios more relevantly applicable in working capital management studies.
LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations as they become due. Liquidity ratios measure ate ability of the firm to meet its current obligations. In fact, analysis of liquidity needs the preparation of cash budgets and cash and funds flow statements, but liquidity ratios by establishing a relationship between cash and other current assets to current obligations provide a quick measure of liquidity.
A firm should ensure that it odes not suffer from lack of liquidity, and also that it does not have excess liquidity. The failure of a company to need its obligations due to lack of sufficient liquidity will result in poor credit worthless lack of creditors confidence, or even in legal resulting in the closure of the company a very high degree of liquidity is also bad, idle assets earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity.
The most common ratios which indicate the extent of liquidity or lack of it are. 1. Current Ratio 2. Quick Ratio (or) Liquid Ratio 3. Cash Ratio 4. Net Working Capital Ratios
1. CURRENT RATIO
The current ratio is a measure of the firms short-term solvency. It indicates the availability of current assets in rupees for every one rupee of current liabilities. A ratio of greater than one means that the firm has more current assets then current claims against them
Formula Current Ratio = Current Assets -------------------Current Liabilities
2. QUICK (OR) LIQUID RATIO
Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. Although quick ratio is a more penetrating test of liquidity than the current ratio, yet it should be used cautiously. A quick ratio of 1 to 1or more does not necessarily imply sound liquidity position. It should be remembered that all debtors may not be liquid, and cash may be immediately needed to pay operating expenses. It should also be noted that inventories are not absolutely nonliquid.
To a measure extent, inventories are available meet current obligations. Thus, a company with a high value of quick ratio can suffer from the shortage of funds it has slow-paying, doubtful and long duration outstanding debtors. On the other hand, a company with a low value of quick ratio may really be prospering and paying its current obligation in time if it has been turning over its inventories efficiently. Nevertheless the quick ratio remains an important index of the firms liquidity. Quick Ratio = Liquid Assets ----------------------Current Liabilities
3. CASH RATIO
Since cash is the most liquid asset, a financial analyst may examine cash ratio and its equivalent to current assets. If the company carries a small amount of cash, there is nothing to be worried about the lack of cash if the company has resume following panel. Formula = Cash Balance -----------------------Current Assets
4. NET WORKING CAPITAL RATIO
The difference between current assets and current liabilities excluding short-term bank borrowing is called net working capital (NWC) or Net current assets (NCA). NWC is sometimes used as a measure of firms liquidity. It is considered that, between two firms, the having the layer NWC has the greater ability to meet its current obligations. This is not necessary so, the measures of liquidity is a relationship, rather than the difference between current assets and current liabilities, NWC is however, measures the firms potential reservoir of funds. It can be related to net assets of capital employer. NWC = Net working capital (NWC) ----------------------------------Net Assets (NA)
ACTIVITY RATIOS
Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the layer the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm managers and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets general reflects that assets are managed well. Several ability ratios can be calculated to judge the effectiveness of asset utilization The activity ratio are as follows
1. INVENTORY TURNOVER RATIO
This ratio indicates the no. of times the any stock of finished goods is turnover or sold during a year. It also indicates whether there is our stocking or under stoking of finished goods. There is no fixed norm for inventory turnover, which depends greatly on the nature of the industry and on the sales policies followed by the firm. A low inventory turnover reflects dull business. This may cause blockage of working capital in the
form of inventory, which means inefficient use of working capital in the form of inventory, which means inefficient use of working capital finance, where as relatively high inventory turnover ratio indicates increased no. of items the available working capital is turned over resulting in better profitability.
Formula Inventory Turnover Ratio = Sales ----------------Inventory
2. DEBTORS TURNOVER RATIO This ratio matches net credit sales of a firm to trade debtors there by indicating the ratio of which cash is generated by turnover of receivables or debtors. Since debtors constitute a major element of current assets, the credit and collection policies of the business must be under continuous watch. Through there is no rule of thumb in this respect, a low debtors turnover ratio indicates inefficiency of the firm to collect the payments from its clients, but at the same time higher debtor
turnover
any indicate
ineffective
utilization
of
market
opportunities at time.
Cash Balance Debtors Turnover Ratio = -------------------- (or) Current Assets
Credit Sales ----------------Any Debtors
3. AVG COLLECTION PERIOD
The avg collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the any collection period, the better the quality of debtors, since collection period implies the prompt payments of debtors. They any no. of days for which debtors remain outstanding is called the any collection period (ACP) and can be computed as follows. Sales X 360 ------------Inventory
4. CREDITORS TURNOVER RATIO
This ratio matches net payables of a firms to tread creditors there by indicating the rate at which payments are made to creditors. Again here, there is no rule of thumb. If a organization delays in paying to its creditors, it generates the cheapest means of short term finance. However such undue delay in payments may give wrong signals to the creditors
about he liquidity of an organization. This may result in with deawal or disconfirmation of some creditors from supplying raw materials to the organization or they might supply at higher prices. Formula for creditors turnover ratio Purchases ----------------Creditors (or) Credit Purchase -------------------Any Creditors
5. AVG PAYMENT PERIOD
The avg payment period represents the avt no. of days taken by the firm to pay its creditors. It is calculated by Purchases X 360 ------------Creditors
6. WORKING CAPITAL TURNOVER RATIO
It would be useful for an organization to relate net current assets to sales for the reasons of fixing a norm and comparing with its in future, so that efficiency of available working capital one years are known. Working capital turnover ratio can thus be computed by dividing sales by net working capital. There have been thumb rules stated to be 3 : 1 but 5:1 should be in fact a very reasonable ratio for comparison.
ASSETS TURNOVER RATIO
Assets are used to generate sales. There fore, a firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover. Several assets turnover ratios can be calculated as follows.
1. NET ASSETS TURNOVER RATIO
The Net Assets turnover ratio tells that how many times the company producing sales for one rupee of capital employed in net assets It can be calculated as follows Net Assets Turnover = Sales ----------------Net Assets
2. TOTAL ASSETS TURNOVER
This ratio shows the firms ability in generating sales form all financial resources committed to total assets. Total Assets Turnover = Sales ----------------Total Assets
3. FIXED ASSETS TURNOVER
The firm may know its efficiency of utilizing fixed assets by using the fixed assets turnover ratio
For generating a sale of one rupee we can know how much the company invested in fixed assets. Net Fixed Turnover = Sales -----------------------Net Fixed Assets
4. CURRENT ASSETS TURNOVER RATIO By calculating this ratio we can that, for generating a sale of one rupee we can know how much the company invested in current assets.
Formula = Sales ----------------Current Assets
doc_365495336.doc
working capital management in nutrient confectionery company pvt. Ltd. Chittoor
NUTRINE CONFECTIONEY COMPANY PRIVATE LIMITED
PROFILE Nutrine Confectionery company private limited was founded in 1952 by Sri. B.Venkatarama Reddy, a graduate from the National University during the chancellorship of Sri. Ravindranath Tagore a Nobel Laureate. Late Sri. B. Venkatrama Reddy, popularly known as B.V. Reddy had foresight about the needs and demands of confectionery in India and ventured to set up a factory when Parry confectionery was the market leader and Parry’s flag was flying high.
NCCPL has always believed in high levels of conservatism. The company was set up as small unit with a capital of Rs. 5 Lakhs to manufacture various types of candies. After the demise of Sri. V.Dwaraknath Reddy, who is presently the chairman of the Nutrine group of companies. Mr. Dwaraknath Reddy holds a master degree in Chemical engineering from Louisiana University, U.S.A. Before taking over the reins of the company, he gained considerable experience in the filed of confectionery production when he worked for certain confectionery units in U.S.A. He also had a short stint at Addisons under the leadership of Sri. Anantharama Krishnan. Nevertheless expertise gained by him in the
field of confectionery manufacture at Nutrine between 1956 and 1989, has helped to guide the company to its present position of market leader.
At present, Mr. V.Vikram Reddy, nephew of Sri. V.Dwarakanth Reddy, looks after the day to day management of the company Mr. Vikram Reddy holds a post graduate degree in management from U.S.A. He has been groomed under Mr. Dwaraknath Reddy since 1977 and is presently the Managing Director of the company. Mr. Vikram Reddy has the admirable support of other Directors, Mr. V. Madhusudhan Reddy and Mr. V.Dinesh Reddy.
Mr. K.Sivamohan Reddy, Executive Director, is in charge of operations and all the departments other than finance under this control.
The finance department is lead by Mr.S.Vasudevan, a chartered accountant, who is with the company since 25 years. He has jointed the company as Management trainee and has risen to the position of Executive Vice-President. He has the support of a good team of professionals and senior executives who are in the service of the
company since three decades.
The marketing team is headed by Mr.S.Gopal Krishnan, V.P. (Sales) and ably supported by Area Sales manager, zonal Sales Managers and other . Senior Vice-President (Production) Mr.
H.Ananthapadmanabhan, a graduate in Chemistry, possesses long experience in the production management and senior Vice-President (Research & Products), Mr. G.Lakshminarayanan again a chemistry graduate with a lot of exposure in the sugar industry, has been specializing in development of various products for Nutrine today.
Mr. S.R.Raju, a P.G. Diploma holder in Materials Management, is in charge of materials department and Mr. B.Giasuddin, a law graduate and a diploma holder in personnel management, is heading the personnel department.
NCCPL has around 1200 employees under its direct employment and over 50,000 families directly and indirectly growing with in the country. From a small unit manufacturing only candies, Nutrine has grown to be a multi-product, multi-market giant and has reached the position of single largest manufacturer of confectionery and toffees in India.
Nutrine has wide range of more than 50 varieties of candies, toffees, lozenges etc. Nutrine Mahalacto, Nutrine cookies, Honey fab, Assay, Chacolate Eclairs and Melters are the popular brands ofNutrine. Being the leader in the industry for more than a decade, nutrine has always endeavored to satisfy the customers changing wants and desires with its own emphasis on quality, range and cost effectiveness.
The company has centralized manufactured unit at Chittoor and also utilizes the services of job workers presently at Hyderabad and Surendra Nagar (Gujarat). NCCPL enjoys a high market share of 35 to 40 % in confectionery in the organized sector in India. The strength of Nutrine lies in its manufacturing capabilities and also to a large extent to its marketing skills. Nutrine’s product range is available through a net work of 35 depots and C & Fs, 2700 distributors and stockists and 150,000 dealers.
The company has modernized its plant by importing sophisticated candy manufacturing machinery from Robert Bosch of Germany for making hygienic confectionery. The machines imported are the five or six machines of its kind in the world. The company also imported automatic weighing and packing machines. With the use of these machines, Nutrine is able to produce good quality confectionery with exacting standards.
With sustained support from the valued stockists, Nutrine is growing stronger in the market and retaining its no. 1 position. With the facilities available to be included in the coming years, Nutrine will emerge as one of the big-food giants in the country in the next few years.
The Govt. of A.P. has conferred “Best Management Award” on 1 st May, 2003 for the out standing performance in maintenance of the industrial relations and labour welfare
CONCEPTS OF WORKING CAPITAL
Finance is the life blood of every business activity without which the wheels of modern organization system cannot be greased. Working Capital management is one of the important facets of a firm’s overall financial management. It is concerned with the management of firm’s current accounts, which include current assets and current liabilities. Its objective is to put the current assets into optimal use by speeding up their flow to ensure that money does not stagnate any way in any form. The management of working capital is becoming increasingly important as firms realize that approximately half of the investments are in working capital. Working capital sphere, therefore, throws open a welcome challenge and an opportunity for the finance manager to play a key role
for effective planning, controlling, directing and utilizing the working funds in an enterprise.
CONCEPT OF WORKING CAPITAL
To understand the concept of working capital it is important to know the precise meaning of current assets and current liabilities. Current assets are those assets, which are used in the production and selling operations of the business and can be converted into cash with in a year. They comprise inventory, debtors, bills receivable, marketable securities, cash and bank balances. Current liabilities are those which are intended to be paid during the accounting period out of current assets or the income of the business. They include bank loans, loan other than bank, bills payable and sundry creditors. Two concepts of working capital now in vogue are found useful in the management of working capital viz., gross and net. The former concept concerns with the quantitative approach whilst the latter deals with qualitative approach.
GROSS WORKING CAPITAL CONCEPT
Working capital employed in business concern is equal to the total current assets employed. This is also known as circulating capital or operating capital as these assets rotate continuously as long as the firm
exists. The gross working capital concept focuses attention on two aspects of current assets management. They are (a) optimum investment in current assets and (b) financing of current assets. To quote westion and brigham, gross working capital refers to firm’s investment in short term assets such as cash, short term securities, accounts receivable and inventories. The supporters of this concept like field, baker and Mallot and Mead argued that the management is more concerned with total current assets as they constitute the total funds available for operating purpose.
NETWORKING CAPITAL CPAITAL CONCEPT
The qualitative concept examines working capital as excess of current assets over current liabilities. Working capital deficit exists if current liabilities exceed current assets. Similar views are express by Guthmann and Dougal and McMullen Accountants Hand Book also completely endorses the view. Gerstenberg supports it the following way:
“Any comprehensive discussion on the working capital includes the excess of current assets over current liabilities”.
Famous economists like Lincoln, Stevens and sailers fully endorsed this concept and expressed that it helps creditors and investors
judge the financial soundness of an enterprise. Another alternative definition of net working capital is that portion of firm’s current assets which is financed with long term funds. Net working capital, thus indicates the liquidity of the business whilst gross working capital with which the business has to operate.
NEED FOR WORKING CAPITAL
The need for working capital in a business undertaking cannot be over emphasized. The objective of financial decision making is to maximize the shareholders wealth. To achieve this it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend upon the magnitude of the sales among other things. A successful sales programme is in other words, necessary for earning profits by any business enterprise. However, sales do not convert into cash instantly. There is invariably a time lag between the sale of goods and the receipt of cash. There is, therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Sufficient working capital is thus, necessary to sustain sales activity.
FACTORS INFLUENCING WORKING CAPITAL
The business undertaking should plan its operations in such away that it should have neither too much nor too little working capital. The total working capital requirements are determined by a variety of factors which determine the quantum of working capital in a business undertaking are as follows.
1. General nature of the business-companies which sell a service and that too for immediate cash, require little working capital. But for a manufacturing firm which produces a product and sells it on credit basis, working capital required is high. 2. Production cycle if the production process is lengthy working capital required is more and vice-versa. 3. speed of operating cycle if the speed of operating cycle is slow working capital needed is high. 4. Credit terms if the company purchase raw materials on credit basis and sells finished goods on cash basis, working capital requirements will be low. 5. Growth and expansion – firms with larger growth prospects demand greater working capital. 6. Dividend policy – Firms pursuing a liberal dividend policy require more working capital.
7. Other factors (a) Production Policies (b) unpredictability in the availability of raw materials, (c) depreciation policies, (d) impact of business cycle (e) operating efficiency and (f) absence of coordination between production and distribution policies.
WORKING CAPITAL CYCLE AND ITS MANGEMENT – AN EXPLANATORY NOTE
The general factors as explained above that too those factors which are uncontrollable due to external reasons of nature, lead-time of manufacture and existence of market conditions would limit ones effort of meticulous management by the controllable constituents of Working Capital requiring judicious options of applicability should consume almost all the time for efficient management. In order to understand the management of working capital in all its faces, I deal with the constituents of Working Capital, its management, so also the financing forms available in the following paragraphs. For the purpose of analysis the following working capital cycle is framed the cycle shown below is a typical working capital cycle. Its changes in shape, reduction in length could be, where products are sold on cash, fully or partially, materials purchased on cash or credit, which have been dealt-with in the “Management” part of it in a narrative form.
Debtors
Sales
Cash
Finished goods
Raw Material
Work in progress
The working capital operating cycle normally confines to a year to year with reference to which various factors affecting working capital are evaluate. Working capital cycle is the period within which either Raw material converts itself to cash or commences with cash and ends with cash.
RAW – MATERIAL
The components of Raw- Material in a Working Capital cycle assumes very significant role. Generally, more than 50% of the years turnover are spent on raw-Materials. Undue accumulation of Raw material tells upon the profitability due to costs of its carrying.
The maintenance of optimum level of inventories of Raw-Materials maximizes with lower working capital requirement and shortage of Raw Materials lead to disruption in production, non-utilisation of capacities of production and consequent adverse impact on profitability (S ince larger internal generation from higher profitability directly leads to lesser cost on Working Capital). There have been scientific methods established not only for procurement but also for storing.
The whole of the manufacturing activity, be the purchase of rawmaterials and conversion of it into work-in-progress or into Finished goods would necessarily be for meeting the market demand, if accelerating the demand perse is taken as a separate exercise. If it is so, the level of finished goods should be such that it meets the demand in full and in time and at the same time does not await sale for an avoidable length of time. Any excess quantum of finished goods should be such that it meets the demand in full and in time and at the same time does not await sale for an avoidable length of time. Any excess quantum of finished goods on hand could be more disastrous from the point of view of working capital requirements or the ultimate operating cost simply because the finished goods at the distribution points, after suffering heavier does of duties and taxes are maintained higher than anything barely necessary would make the situation all the more worse.” Unlike
the raw-material, where, external factors of its availability, seasonality etc. would necessitate certain inevitable volume to be stored, in case of finished goods many factors to keep at optimum level would be controllable. There can be host of measures that could be taken for maintaining minimum quantity in the form of finished goods.
RECEIVABLES
The sale of the products against cash would be an ideal situation to eliminate a stage in the working capital cycle thus achieving the objective of drastic reduction in its length and the requirement of working capital. The existence of numerous competitors in the era of globalization and liberalized economy, such sales on cash could only be next to impossibility if growth of the organization is any aspiration. In the present complex market scenario one leads the other, in offering more value for money to their customers and extending credit has been one such major step. This encounters the organization with substantial blockage of working capital. Indiscriminate extension of credits in the name of growth could erase the entire profitability and as stated above non-extending of credit would keep the organization out of business. A great deal of planning and efficiency is warranted to keep receivables at the optimum level. I would choose to little elaborate on two measures in this regard.
1. LAYING DOWN CREDIT POLICY
The organization specifying applicability of general credit policy i.e., the period of credit extendable as a thumb rule would fall short of its effort in controlling receivables. The credit policy requires to be more selective and should bear, the growth, recoverability, the product strength, distribution network etc., in its upper most mind. The variation in credit policy could also customer based. As we would observe there would be two sets of organizations, one looking for a lower margin with high growth through a liberal credit policy, the other one, higher margin with reasonable growth through a conservative credit policy. The credit policy should not lay-down the period of credit but also a well through out procedures for extending credit in order to prevent or minimize the debts going bad. A systematic evaluation of customers credibility, financial strength and their usefulness to the organization in terms of quantum of sale etc. would fetch desired results. The credit policy should specify the level of management authorized to extend general credit and instead of decentralizing the power of extending any further dispensation such decisions could be taken by fairly senior personnel, few in number. Depending upon the market conditions the policy could also specify incentives for early payments like cash discounts, so also interest on delayed payments.
2. MONITORING RECEIVABLES
Monitoring receivables are as important, if not more, as laying down a credit policy. It has to be constant and continuous in order to bring down the level of receivables to an optimum level in conformity with the laid down credit policy of the organization. When we talk of monitoring receivables two ready indicators are remembered. The collection period and the age of the book debts.
a. Collection Period The collection period would be in terms of number of days average credit sales. Such a calculation area-wise, marketing personnel wise at frequent intervals would provide information for selective credit control. An application of incentive for faster collection in certain selective areas also would render possible, the collection faster.
b. Aging of Book Debts The collection efforts could be intensified on greater analysis of receivables from the point of view of the number of days it is outstanding. Higher the number of days, the debt is outstanding, the probability of it becoming doubtful of recovery is higher. Earlier detection ofsuch outstanding from customers would facilitate taking hard decisions of
stoppage of further sales, in order minimize bad debts. Collection of book debts just as per the credit policy would enable the organization to achieve planned profitability.
FINANCING THE WORKING CAPITAL NEEDS
Financing working capital needs of a business enterprise is yet another key area wherein the finance manager can play an active role. He can employ different sources in financing of current assets. There exists three distinct sources in financing of current assets. There exists three distinct sources of financing current assets.
I.
Long Term Financing : It consists equity and preference shares retained earnings debentures and borrowed funds from financial institutions.
II.
Short Term Financing : It includes short term bank loans, commercial papers, and factoring bills receivables.
III.
Spontaneous Financing : It acts as an instantaneous source which includes trade credit and accruals. Every firm tries its best for the maximum use of the spontaneous sources which are cost free.
In financing current assets the choice is exclusively between short term and long term sources since the spontaneous sources were exploited on routine lines. The finance manager has to decide the extent of long term and short term sources to finance his concerns working capital requirements depending upon the conditions under which the company operates, the type of product it manufactures, its earning power, the interest charges on different sources of funds and their availability. The short sources of funds involve less cost and have more flexibility but more risky than the long term source of funds. Therefore, the firm should use both the sources intelligently to finance its current assets. Financing current assets through a right source assumes a greater significance in the management of working capital
DATA COLLECTION
Personal interview were held with key personnel of finance department.
Secondary data from published annual reports for 6 years (1998 – 2003) and few other relevant data were availed from Nutrine.
RESEARCH TOOLS
1. Operating Cycle Method • Raw Material Conversion Period • Work-in-Process Conversion Period • Finished goods Conversion Period • Receivables Conversion Period
2. Statement of changes in working capital 3. Trend Analysis • Capital trend • Sales trend • PBT trend
4. Ratio Analysis • Liquidity Ratios • Activity Ratios • Assets Trunover Ratios
RESEARCH METHODOLOGY OBJECTIVES OF THE STUDY
1. To analyse the existing working capital of the Nutrine company. 2. To study the components of current assets and measure its impact on the working capital 3. To suggest possible solutions for better management of working capital in Nutrine.
1. OPERATING CYCLE METHOD
The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivable. It may be divided into 4 stages. • Purchase of Raw materials Stage • Work-in-Process Stage • Finished goods inventory Stage • Debtors Collection Stage
The firm beings with the purchase of raw materials which are paid after a delay which represents the accounts payable period. The firm converts the raw materials into finished goods and then sells the same.
The time lay between the purchase of raw materials and the sale of finished goods is the inventory period the elapses between the data of the sales and the data of collection of receivable is the accounts payable.
The duration of the operating cycle is equal to the sum of the duration of each of these stages less the credit period allowed by the suppliers of the firm. In symbols. O=R+W+F+D+C Where, O = Duration of operating cycle R = Raw material storage period W = Work in process period F = Finished goods storage period D = Debtors collection period L = Creditors collection period
The time the elapses between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle. It can be represented as follows.
2. STATEMENT OF CHANGES IN WORKING CAPITAL
The technique helps to analyse changes in working capital components between tow dates. The comparison of current assets and current liabilities are shown in the table at the beginning and end of the specific period. By this statement we can know the difference of individual components in CA & CL for the two years respectively.
By this technique we can know the increase or decrease of working capital for a specific year.
3. TREND ANALYSIS
Trend analysis gives a picture of performance of the company over a period of years, By the trend analysis we can know whether the company is in profit or in loss a) Capital Trend It gives the picture of whether the company increase their capital or decreasing its capital over the period of study. b) Sales Trend Sales trend gives picture whether the company sales are increasing or decreasing by this we can known when the company sales decreased and increased. c) PBT Trend
Profit before tax trend can tells the profits earn by the company before tax is in E, increasing trend or decreasing.
RATIO ANALYSIS
Over several years scientific tools have been evolved for determining optimum level of working capital online assessment of each of the components of current assets for selective application of management control. Undisputedly the ratio analysis occupies place of prime importance. Ratios are compiled and studied for profitabilities, assessment of financial position sufficiency of working capital stradagies perused by the organization short term and long term solvency liquidity etc. I would deal with some of the predominant ratios more relevantly applicable in working capital management studies.
LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations as they become due. Liquidity ratios measure ate ability of the firm to meet its current obligations. In fact, analysis of liquidity needs the preparation of cash budgets and cash and funds flow statements, but liquidity ratios by establishing a relationship between cash and other current assets to current obligations provide a quick measure of liquidity.
A firm should ensure that it odes not suffer from lack of liquidity, and also that it does not have excess liquidity. The failure of a company to need its obligations due to lack of sufficient liquidity will result in poor credit worthless lack of creditors confidence, or even in legal resulting in the closure of the company a very high degree of liquidity is also bad, idle assets earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity.
The most common ratios which indicate the extent of liquidity or lack of it are. 1. Current Ratio 2. Quick Ratio (or) Liquid Ratio 3. Cash Ratio 4. Net Working Capital Ratios
1. CURRENT RATIO
The current ratio is a measure of the firms short-term solvency. It indicates the availability of current assets in rupees for every one rupee of current liabilities. A ratio of greater than one means that the firm has more current assets then current claims against them
Formula Current Ratio = Current Assets -------------------Current Liabilities
2. QUICK (OR) LIQUID RATIO
Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. Although quick ratio is a more penetrating test of liquidity than the current ratio, yet it should be used cautiously. A quick ratio of 1 to 1or more does not necessarily imply sound liquidity position. It should be remembered that all debtors may not be liquid, and cash may be immediately needed to pay operating expenses. It should also be noted that inventories are not absolutely nonliquid.
To a measure extent, inventories are available meet current obligations. Thus, a company with a high value of quick ratio can suffer from the shortage of funds it has slow-paying, doubtful and long duration outstanding debtors. On the other hand, a company with a low value of quick ratio may really be prospering and paying its current obligation in time if it has been turning over its inventories efficiently. Nevertheless the quick ratio remains an important index of the firms liquidity. Quick Ratio = Liquid Assets ----------------------Current Liabilities
3. CASH RATIO
Since cash is the most liquid asset, a financial analyst may examine cash ratio and its equivalent to current assets. If the company carries a small amount of cash, there is nothing to be worried about the lack of cash if the company has resume following panel. Formula = Cash Balance -----------------------Current Assets
4. NET WORKING CAPITAL RATIO
The difference between current assets and current liabilities excluding short-term bank borrowing is called net working capital (NWC) or Net current assets (NCA). NWC is sometimes used as a measure of firms liquidity. It is considered that, between two firms, the having the layer NWC has the greater ability to meet its current obligations. This is not necessary so, the measures of liquidity is a relationship, rather than the difference between current assets and current liabilities, NWC is however, measures the firms potential reservoir of funds. It can be related to net assets of capital employer. NWC = Net working capital (NWC) ----------------------------------Net Assets (NA)
ACTIVITY RATIOS
Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the layer the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm managers and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets general reflects that assets are managed well. Several ability ratios can be calculated to judge the effectiveness of asset utilization The activity ratio are as follows
1. INVENTORY TURNOVER RATIO
This ratio indicates the no. of times the any stock of finished goods is turnover or sold during a year. It also indicates whether there is our stocking or under stoking of finished goods. There is no fixed norm for inventory turnover, which depends greatly on the nature of the industry and on the sales policies followed by the firm. A low inventory turnover reflects dull business. This may cause blockage of working capital in the
form of inventory, which means inefficient use of working capital in the form of inventory, which means inefficient use of working capital finance, where as relatively high inventory turnover ratio indicates increased no. of items the available working capital is turned over resulting in better profitability.
Formula Inventory Turnover Ratio = Sales ----------------Inventory
2. DEBTORS TURNOVER RATIO This ratio matches net credit sales of a firm to trade debtors there by indicating the ratio of which cash is generated by turnover of receivables or debtors. Since debtors constitute a major element of current assets, the credit and collection policies of the business must be under continuous watch. Through there is no rule of thumb in this respect, a low debtors turnover ratio indicates inefficiency of the firm to collect the payments from its clients, but at the same time higher debtor
turnover
any indicate
ineffective
utilization
of
market
opportunities at time.
Cash Balance Debtors Turnover Ratio = -------------------- (or) Current Assets
Credit Sales ----------------Any Debtors
3. AVG COLLECTION PERIOD
The avg collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the any collection period, the better the quality of debtors, since collection period implies the prompt payments of debtors. They any no. of days for which debtors remain outstanding is called the any collection period (ACP) and can be computed as follows. Sales X 360 ------------Inventory
4. CREDITORS TURNOVER RATIO
This ratio matches net payables of a firms to tread creditors there by indicating the rate at which payments are made to creditors. Again here, there is no rule of thumb. If a organization delays in paying to its creditors, it generates the cheapest means of short term finance. However such undue delay in payments may give wrong signals to the creditors
about he liquidity of an organization. This may result in with deawal or disconfirmation of some creditors from supplying raw materials to the organization or they might supply at higher prices. Formula for creditors turnover ratio Purchases ----------------Creditors (or) Credit Purchase -------------------Any Creditors
5. AVG PAYMENT PERIOD
The avg payment period represents the avt no. of days taken by the firm to pay its creditors. It is calculated by Purchases X 360 ------------Creditors
6. WORKING CAPITAL TURNOVER RATIO
It would be useful for an organization to relate net current assets to sales for the reasons of fixing a norm and comparing with its in future, so that efficiency of available working capital one years are known. Working capital turnover ratio can thus be computed by dividing sales by net working capital. There have been thumb rules stated to be 3 : 1 but 5:1 should be in fact a very reasonable ratio for comparison.
ASSETS TURNOVER RATIO
Assets are used to generate sales. There fore, a firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover. Several assets turnover ratios can be calculated as follows.
1. NET ASSETS TURNOVER RATIO
The Net Assets turnover ratio tells that how many times the company producing sales for one rupee of capital employed in net assets It can be calculated as follows Net Assets Turnover = Sales ----------------Net Assets
2. TOTAL ASSETS TURNOVER
This ratio shows the firms ability in generating sales form all financial resources committed to total assets. Total Assets Turnover = Sales ----------------Total Assets
3. FIXED ASSETS TURNOVER
The firm may know its efficiency of utilizing fixed assets by using the fixed assets turnover ratio
For generating a sale of one rupee we can know how much the company invested in fixed assets. Net Fixed Turnover = Sales -----------------------Net Fixed Assets
4. CURRENT ASSETS TURNOVER RATIO By calculating this ratio we can that, for generating a sale of one rupee we can know how much the company invested in current assets.
Formula = Sales ----------------Current Assets
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