PROJECT: WORKING CAPITAL MANAGEMENT-COMPARISON OF COMPANIES

(OPTION B) TERM PAPER

UNDER THE GUIDANCE OF

MENTOR: MRS. DIVYA MEHTA

SUBMITTED BY

NAME: NIKHIL AGARWAL

COLLEGE ROLL NO: 12/89109

UNIVERSITY ROLL NO.:12021204105

ACADEMIC SESSION: 2014-15

DYAL SINGH COLLEGE (M)

UNIVERSITY OF DELHI

DECLARATION

I, Nikhil Agarwal, student of B.Com. (Hons.) 3rd year hereby declare that the project work on Working Capital Management – Comparison of companies is my original piece of work. It is done according to my true understanding and knowledge of the subject and is not copied from any published source or website.

Nikhil Agarwal

(Name and signature of student)

CERTIFICATE

I hereby certify that the work which is being presented by Mr. Nikhil Agarwal in B.COM.(HONS.) Project Report entitled “Working Capital Management-Comparison of companies”, in partial fulfillment of the requirements for the award of the Bachelor of Commerce (Honors) is submitted to the Department of Commerce and is an authentic record of my own work carried out during the period of March 2015 (6th semester) under the supervision of Mrs. Diyva Mehta. To the best of my knowledge, the matter embodied in the project has not been submitted to any other University / Institute for the award of any Degree or Diploma.

Mrs. Divya Mehta

Teacher in-charge

Department Of Commerce

ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of a number of wonderful people

who have always given their valuable advice or lent a helping hand. I sincerely appreciate the

inspiration; support and guidance of all those people who have been instrumental in making this

project a success.

I, Nikhil Agarwal, the student of Dyal Singh College (M), am extremely grateful for the

confidence bestowed in me and entrusting my project entitled “Working Capital Management –

Comparison of companies”. At this juncture I feel deeply honored in expressing my sincere

thanks to Mrs. Divya Mehta for making the resources available at right time and providing

valuable insights leading to the successful completion of my project. Last but not the least I place

a deep sense of gratitude to my family members and my friends who have been constant source

of inspiration during the preparation of this project work.

(Mrs. Divya Mehta) (Nikhil Agarwal)

(Name and signature of Mentor) (Name and signature of student)

CONTENTS

1. Meaning of Working Capital

2. Concept of Working Capital

3. Trade off in Working Capital Management

4. Factors Influencing Working Capital Management

5. Working Capital Analysis

a. Ratio Analysis

b. Funds Flow Analysis

c. Working Capital Cycle

6. Case Study

a. Introduction of Companies

b. Balance sheet and Profit and Loss Statement

c. Ratio Comparison and Analysis

d. Conclusion

7. Working Capital Management Techniques

Meaning of Working Capital

Capital required for a business can be classified under two main categories via,

1)     Fixed Capital

2)     Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day

operations. Long terms funds are required to create production facilities through purchase of

fixed assets such as plant and machinery, land, building, furniture, etc. Investments in these

assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is

called fixed capital. Funds are also needed for short-term purposes for the purchase of raw

material, payment of wages and other day – to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1.     Gross working capital

2.     Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises.

Current assets are those assets which can be converted in to cash within a short period normally

one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1)     Cash in hand and cash at bank

2)     Bills receivables

3)     Sundry debtors

4)     Short term loans and advances.

5)     Inventories of stock as:

a.      Raw material

b.     Work in process

c.     Stores and spares

d.     Finished goods

6) Temporary investment of surplus funds.

7) Prepaid expenses

8) Accrued incomes.

9) Marketable securities.

 

In a narrow sense, the term working capital refers to the net working. Net working capital is

the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current

liabilities are more than the current assets.

Current liabilities are those liabilities, which are intended to be paid in the ordinary course of

business within a short period of normally one accounting year out of the current assts or the

income business.

CONSTITUENTS OF CURRENT LIABILITIES

1.     Accrued or outstanding expenses

2.     Short term loans, advances and deposits

3.     Dividends payable

4.     Bank overdraft

5.     Provision for taxation, if it does not amount to appropriation of profit

6.     Bills payable

7.     Sundry creditors

Trade-off in working capital management

There is a trade-off between stricter credit terms and the ability to make sales. Too strict

receivables terms would hamper sales and lenient terms would tie up too much capital.

Inventory management is also a trade-off: High inventory levels (as might be reflected by

low inventory turnover or longer days of inventory) will cause high costs of carry and

low inventory levels may result in lost sales due to stock outs.

Accounts payable management is important as this is a source of working capital for the

firm. If a firm pays its payables before their due date, cash is used unnecessarily. A too

long a period in accounts payable would spoil the relationship with the suppliers and

could entail high interest costs (compared to other sources of short term financing).

Factors Influencing Working Capital Management

Nature of the Industry / Business: The management of working capital is completely different from industry to industry. Simple comparison of service industry and manufacturing industry can clarify the point. In a service industry, there is no inventory and therefore one big component of working capital is already avoided. So, the nature of industry is a factor to determining the working capital requirement.

Seasonality of Industry and Production Policy: Businesses based on seasons like manufacturing of ACs whose demand peaks in summer and dips in winter. Requirement of working capital will be more in summer compared to winter if they are produced in the fashion of their demand. The policy of producing throughout the year can smoothen the fluctuation of working capital requirement.

Competition: If the industry is competitive, quick response to customer needs is compulsory and therefore higher level of inventory is maintained. Liberal credit terms are also mandatory with good service to survive in the market. So, higher the competition, higher would be the requirement of working capital.

Production Cycle Time: The production cycle time refers to the time required for converting the raw materials into finished goods. Higher this time, higher would be the time of blocking funds in the working capital.

Credit Policy: Liberal credit policy demands higher level of working capital and tight credit policy reduces it.

Growth and Expansion: Some industries are static and others are growing. Obviously, growing industry grows the requirement of working capital also as compared to static industry.

Raw Material Short Supply: If the raw material supply is not smooth for any reason, companies tend to store more of raw materials than needed and that increased requirement of working capital.

Net Cash Profit: Profit or retained earnings are one of the sources of working capital for the business. It will depend upon net cash profits as to how much working capital financing is required from external sources.

Taxes: Taxes are often paid in advance. This also blocks a part of working capital. Depending on the tax environment of the industry, working capital needs are also affected.

Dividend Policy: Dividend policy determines the level of retained profits with the business and retained profits are also used for working capital. This is how; dividend policy affects the need for working capital.

Price Levels: The price levels of inventory and other expenses such as labour rates etc increase the working capital requirement. If the company also is able to increase the price of their finished goods, it reduces this impact.

Other factors that determine or impact the working capital in some or the other way are as follows:

Cash Requirements Volume of Sales Terms of Purchase and Sales Inventory Turnover Business Turnover Current Assets Requirements Profit Planning and Control Repayment Ability Cash Reserves Operation Efficiency Change in Technology Firm’s Finance and Dividend Policy Attitude towards Risk 

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of

working capital is very much essential for the smooth running of the business. And the most

important part is the efficient management of working capital in right time. The liquidity position

of the firm is totally effected by the management of working capital. So, a study of changes in

the uses and sources of working capital is necessary to evaluate the efficiency with which the

working capital is employed in a business. This involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1.     Ratio analysis.

2.     Fund flow analysis.

3.     Working Capital Cycle

1.    Ratio Analysis

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis

can be employed for measuring short-term liquidity or working capital position of a firm. The

following ratios can be calculated for these purposes:

1. Liquidity Ratios - Liquidity refers to the extent to which a company is able to meet its

short-term obligations using assets that can be readily converted to cash. In other words,

it is the ability of the firm to repay its short term liabilities (current liabilities). This is a

cash concept and not an accrual concept. It is very closely related to Working capital. In

fact, it is the mirror image of working capital. To measure the liquidity of a firm, the

following ratios can be calculated:

a. Current Ratio = Current assets

Current Liabilities

The ratio indicates the current assets available for each rupee of current liability. If this ratio is 2: 1, it means that the firm is having current assets of Rs.2 for every Re.1 of current liability.

Traditionally, the current ratio of 2: 1 is considered to be satisfactory as it denotes the fact that the firm is adequately liquid in order to meet its short term obligations.

However, too high current ratio may represent excess investment in current assets which may result in idle funds and which may further result in low profitability since idle funds earn nothing. Similarly, too low current ratio may represent inadequate investment in current assets which may result in low liquidity and may threaten the solvency of the enterprise.

b. Liquid Ratio (or quick ratio) = Quick Assets

Current Liabilities

This ratio indicates the quick assets available for each rupee of current liability.

Traditionally, quick ratio of 1: 1 is considered to be satisfactory as it denotes the fact that the liquid assets of the company are sufficient to meet the current liabilities.

High Quick Ratio may represent excess investment in quick assets and low quick ratio may represent inadequate investment in quick assets. Therefore, it is always recommended to maintain quick ratio as near to its ideal level of 1: 1.

c. Cash Ratio (or super liquid) = Cash and marketable securities Current Liabilities

The objective of this ratio is to ascertain the ability of the enterprise to meet its very short term obligations without relying upon the realization of stock and debtors.

A very high ratio would represent high liquidity at the cost of profitability since idle cash does not generate any return and marketable securities generate return at a rate lower than operating return near to its ideal level of 1: 1.

2. Current Assets Movement Ratios - Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a

firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are :

a. Receivable Turnover Ratio = Credit Sales Average Debtors

This ratio explains the speed with which the debtors are converted into cash. If this ratio is 50 times, it means that annual credit sales are 50 times of

average debtors balance. In other words, the amount blocked as investment in debtors is Re.1 despite the fact that the company is able to achieve sales of Rs.50 during the years.

Hence, it can be concluded that higher debtor turnover represents lesser funds blocked in debtors and low ratio will represent higher funds blocked in debtors as compared to sales.

b. No. of days of receivable = 365 days or 12 months Debtors Turnover Ratio

This period shows the average period for which credit sales remain outstanding. In other words, it represents the promptness or slowness with which money is collected from debtors.

Any business organization would like to achieve maximum sales, lesser funds blocked in debtors and recover the funds as early as possible. Hence, every effort should be made to maintain high debtor’s turnover as it will automatically represent the promptness, in collection period.

Similarly, low debtors turnover ratio will mean that funds are late collected from debtors.

c. Inventory Turnover Ratio = Cost of goods sold

Average Stock

The ratio explains the efficiency level of converting inventory into sales. The ultimate objective of any business organization is to achieve higher amount of sales but still maintaining lower amount of stock.

If stock turnover ratio of a company is 35 times then the company is able to achieve sales of Rs.35 during the year at average stock level of Re.1. Hence, high ratio certainly indicates efficient performance in the context of attaining higher sales at low inventory levels.

d. No. of days of Inventory (or stock velocity) = 365 days or 12 months Inventory Turnover Ratio

This ratio explains the efficiency level of the company of being able to sell the goods as early as possible after being produced. If stock velocity of a company is 10 days, it means that the company is able to sell the goods within 10 days after production.

It is to be noted that the objective of Stock Turnover Ratio and Stock Velocity are simultaneously achieved. It means that higher Stock turnover Ratio will automatically produce lower stock velocity period and vice-versa.

e. Credit Turnover Ratio = Credit Purchase Average Creditors

This ratio represents the speed with which cash is paid to the creditors. In general, a high ratio indicates shorter payment period and low ratio indicates late payment to creditors.

Let us assume that creditors turnover ratio of a company is 16 times. It means that if there have been total credit purchases of Rs.16 during the year Re.1 is the average creditors balance maintained during the year.

Let one thing be made very clear: It is wrong to assume that late payment to creditors is favorable. The relationship with creditors must be maintained at satisfactory level and for long lasting period. Hence, proper timely payment to creditors is essential.

f. No. of days of Creditors = 365 days or 12 months Creditors Turnover Ratio

It represents the promptness or slowness with which money is paid to the creditors.

It is to be noted that the results of creditor’s turnover and creditor’s velocity are related to each other. Low creditors turnover will ultimately produce the situation of delayed payment to the creditors and Vice-versa.

It is also recommended to compare creditors Velocity with Debtors Velocity in order to ensure that one should not make payment to creditors at a pace which is faster than the pace of receiving payment from debtors.

2. Funds Flow analysis Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of:

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital)

business enterprise between beginning and ending of the financial dates.

3. Working Capital Cycle

Working capital cycle measures how long a firm will be deprived of cash if it increases its

investment in resources in order to expand customer sales. It is thus a measure of the liquidity

risk entailed by growth. However, shortening the cycle period creates its own risks while a firm

could even achieve a negative net operating cycle by collecting from customers before paying

suppliers, a policy of strict collections and lax payments is not always sustainable. There are two

working capital cycles:

a. Operating cycle – It is the average no. of days that it takes to turn raw materials into cash

proceeds from sales.

Operating Cycle = Inventory holding period + receivable collection period

b. Cash Conversion cycle or net operating cycle – Apart from operating cycle it also takes into account the time taken to pay back the suppliers for goods purchased on credit.

Cash conversion cycle = Operating cycle – Creditors payment period

Very long cash conversion cycle is undesirable.

CASE STUDY: BERGER PAINTS VS ASIAN PAINTS

BERGER PAINTS

With modest beginnings in India in 1923, today, Berger Paints India Limited is the second largest paint company in the country with a consistent track record of being one of the fastest growing paint company, quarter on quarter, for the past few  years. Undergoing a number of changes in ownership and nomenclature in its 88 year old history in India, the company has come a long way. Starting out as Hadfield's (India) limited, it had just one factory in Howrah, West Bengal. By the close of 1947, Hadfield's was acquired by British Paints (Holdings) Limited, UK and came to be known as British Paints (India) Limited. In 1983, the name of the Company was changed to Berger Paints India Limited. Currently, the majority stake is with the Delhi based Dhingra brothers. Berger Paints has established itself through a long course of time. From an annual sales turnover of Rs.25 lakhs, business revenues today are in excess of Rs.3,600 crores on a consolidated basis. Headquartered at Kolkata, with 11 strategically located manufacturing units and about 170 sales offices (all including those belonging to the Company’s own division and subsidiaries). The company also has an international presence in 3 countries. With employee strength of about 2,500 and a countrywide distribution network of 15,000+ dealers, Berger is acclaimed as a game changer in the sector with a vibrant portfolio of paints and tailor-made customer services in every paint segment. Committed to being a responsible corporate citizen, Berger proactively pursues strategies both within and without that bring multiple societal and environmental benefits to all stakeholders.

ASIAN PAINTS

Asian Paints is India's largest paint company and Asia's third largest paint company, with a

turnover of Rs 127.15 billion. The group has an enviable reputation in the corporate world for

professionalism, fast track growth, and building shareholder equity. Asian Paints operates in 18

countries and has 26 paint manufacturing facilities in the world servicing consumers in over 65

countries. Besides Asian Paints, the group operates around the world through its subsidiaries

Berger International Limited, Apco Coatings, SCIB Paints, Taubmans and Kadisco.

Asian Paints was included in Forbes Asia's 'Fab 50' list of Companies in Asia Pacific in 2011,

2012, 2013 and 2014. Forbes Global magazine USA ranked Asian Paints among the '200 Best

Small Companies in the World' for 2002 and 2003 and presented the 'Best under a Billion'

award, to the company. Asian Paints is the only paint company in the world to receive this

recognition. Forbes has also ranked Asian Paints among the 'Best under a Billion companies in

Asia' in 2005, 2006 and 2007.

The company has come a long way since its small beginnings in 1942. Four friends who were

willing to take on the world's biggest, most famous paint companies operating in India at that

time set it up as a partnership firm. Over the course of 25 years Asian Paints became a corporate

force and India's leading paints company. Driven by its strong consumer-focus and innovative

spirit, the company has been the market leader in paints since 1967. Today it is double the size of

any other paint company in India. Asian Paints manufactures a wide range of paints for

Decorative and Industrial use.

In Decorative paints, Asian Paints is present in all the four segments v.i.z Interior Wall Finishes,

Exterior Wall Finishes, Enamels and Wood Finishes. It also introduced many innovative

concepts in the Indian paint industry like Colour Worlds (Dealer Tinting Systems), Home

Solutions (painting solutions Service), Kids World (painting solutions for kid's room), Colour

Next (Prediction of Colour Trends through in-depth research) and Royale Play Special Effect

Paints, just to name a few.

Asian Paints has always been ahead when it comes to providing consumer experience. It has set

up a Signature Store in Mumbai, Delhi and Kolkata in India, where consumers are educated on

colours and how it can change their homes.

RATIO COMPARISON

1. Current ratio

a. Asian paints 2013-14 - 3982.41 = 1.43 2783.84

b. Asian paints 2012-13 - 3040.94 = 1.29 2357.24

c. Berger paints 2013-14 - 1342.56 = 1.36 987.22

d. Berger paints 2012-13 - 1199.45 = 1.45 825.29

Analysis – From the previous year current ratio for asian paints has been improved but is not the same in case of berger paints. From all the four scenarios it has been concluded that the firms are adequately liquid in both years in order to meet its short term obligations. But if compared to satisfactory level which is 2:1 both the firms are looking pretty weak on numbers. Well, if both are compared to each other than berger paints has better ratio than asian paints for 2012-13 but asian paints improves themselves in the next year having current ratio of 1.43 as compared to 1.36 of berger paints.

2. Liquid ratio

a. Asian paints 2013-14 - 3982.41 - 1665.05 = 0.83

2783.84

b. Asian paints 2012-13 - 3040.94 - 1480.79 = 0.66 2357.24

c. Berger paints 2013-14 - 1342.56 - 618.70 = 0.73

987.22

d. Berger paints 2012-13 - 1199.45 – 576.91 = 0.75

825.29

Analysis – Quick ratio of both the companies represent inadequate investment in quick assets when compared to satisfactory ratio of 1:1. Quick ratio for asian paints has improved from 0.66 in previous year to 0.83 in current year. However it’s not the same for berger paints. As it was seen in current ratio that berger paints had a better ratio in 2012-13 and ratio for asian paints was better in 2013-14, the same is in the case of quick ratio.

3. Cash ratio

a. Asian paints 2013-14 - 745.36 + 482 + 201.54

= 0.51 2783.84

b. Asian paints 2012-13 - 551.57 + 105 + 162.72 = 0.34

2357.24

c. Berger paints 2013-14 - 90.17 + 163.07 + 76.89 = 0.33

987.22

d. Berger paints 2012-13 - 9.82 + 222.54 + 54.80 = 0.34

825.29

Analysis – If compared to satisfactory ratio of 1:1 cash ratio of both the companies represent inadequate investment in super liquid assets which reduces the ability of the enterprise to meet its short term obligations. Cash ratios for both the companies for previous year are equal. However, in the current year asian paints have improved its ratio by 50% whereas for berger paints ratio remains the same.

4. Receivable turnover ratio

a. Asian paints 2013-14 - 10300.22 = 15.30(712.36 + 633.88)/2

b. Asian paints 2012-13 - 8909.97 = 15.71(633.88 + 500.24)/2

c. Berger paints 2013-14 - 3384.82 = 9.56 (383.21 + 324.55)/2

d. Berger paints 2012-13 - 3024.21 = 9.60 (324.55 + 305.16)/2

Analysis - Asian paints have a higher ratio in both the years when compared to berger paints which means less amount of working capital is blocked in debtors in asian paints to produce sales. If compared to previous year asian paints have improved its debtor’s turnover ratio whereas for berger paints it’s almost same. There is no ideal ratio for debtor’s turnover ratio as it depends on industry to industry.

5. No. of days of receivable

a. Asian paints 2013-14 - 365 = 24 days 15.30

b. Asian paints 2012-13 - 365 = 23 days 15.71

c. Berger paints 2013-14 - 365 = 38 days

9.56

d. Berger paints 2012-13 - 365 = 38 days

9.60

Analysis – 38 days in case of berger paints represents that on an average after 38 days of investment of working capital in debtors the company will receive its blocked funds from all debtors. Whereas if compared to asian paints no. of days reduces by 14 days to make the no. of days of receivable to 24 days. Both the companies have been consistent on the no. of days of receivable when compared to their previous year.

6. Inventory Turnover Ratio

a. Asian paints 2013-14 - 5758.71 + 256.58 – 75.34 = 3.77

(1665.05 + 1480.79)/2

b. Asian paints 2012-13 - 5125.48 + 174.11 – 136.17 = 3.76 (1480.79 + 1264.42)/2

c. Berger paints 2013-14 - 1772.94 + 306.19 – 27.19 = 3.43

(618.70 + 576.91)/2

d. Berger paints 2012-13 - 1667.46 + 235.78 – 41.49 = 3.41

(576.91 + 513.96)/2

Analysis – Inventory turnover ratio for the companies are pretty much same when compared to their previous years. However asian paints have achieved more efficiency in converting inventory into sales which ultimately results in better management of working capital. There is no ideal ratio for inventory turnover ratio as it differs from business to business.

7. No. of days of Inventory

a. Asian paints 2013-14 - 365 = 97 days 3.77

b. Asian paints 2012-13 - 365 = 97 days 3.76

c. Berger paints 2013-14 - 365 = 107 days

3.43

d. Berger paints 2012-13 - 365 = 107 days 3.41

Analysis – 97 days of stock velocity represents that the company have been able to sell goods after 97 days from the day of production on an average. But it took 107 days for berger paints to do the same. Both the companies were consistent in both years in taking their time to sell goods after production.

8. Credit Turnover Ratio

a. Asian paints 2013-14 - 4938.29 + 914.78 + 256.58 = 4.50

(1498.84 + 1214.12)/2

b. Asian paints 2012-13 - 4388.02 + 771.67 + 174.11

= 4.74 (1214.12 + 1034.68)/2

c. Berger paints 2013-14 - 1548.60 + 253.75 + 306.19 = 5.05 (488.47 + 346.50)/2

d. Berger paints 2012-13 - 1468.52 + 226.77 + 235.78 = 5.68

(351.65 + 328.17)/2

Analysis – This ratio works oppositely when compared to inventory and debtors turnover ratio as in this the company has to pay cash after a period of time and not receive it. Both the companies have improved themselves from previous year in management of working capital in this area. Both have decreased their speed of paying creditors their money back. Though asian paints have improved less effectively than berger paints but they still have a favourable ratio than their competitor.

9. No. of days of Payables

a. Asian paints 2013-14 - 365 = 81 days 4.50

b. Asian paints 2012-13 - 365 = 77 days 4.74

c. Berger paints 2013-14 - 365 =72 days

5.05

d. Berger paints 2012-13 - 365 = 64 days 5.68

Analysis – Here no. of days specifies the time period to pay their creditors after purchasing the raw material from creditors on credit basis. Both the companies have improved in terms of working capital management from their previous year as they now take more time to repay their creditors. In the current year, berger paints takes less time than asian paints to pay their creditors which means more quickly their working capital goes out.

CONCLUSION

In the year 2012-13, liquidity position of berger paints had been better off than asian paints.

However, as far as other ratios like receivable turnover, inventory turnover and payables

turnover are concerned berger paints were outplayed by their competitor asian paints in all of

these areas.

In the year 2013-14, asian paints has improved as a unit and is now in a better liquidity position

whereas last year they were lagging behind berger paints in this area. Credits should be given to

the top management of asian paints to show concern on the liquidity of the company and also

improving it effectively in just a single year. Asian paints should also be praised for continuing

their efficient and effective performance in managing short term business operations. They have

not only achieved an efficient working capital management by maintaining their ratios to the

same level as of previous year but also has been better than berger paints by a good margin.

However, berger paints had also made progress by decreasing their payables turnover ratio from

previous year but still they have a lot to do to meet the numbers of asian paints.

Liquidity of both asian and berger paints are less than the satisfactory level. Hence, both the

companies need to step up to improve their liquidity ratios either by investing more in liquid

assets or by reducing their current liabilities. As far as ratios reflecting efficient use of working

capital are concerned berger paints are lagging behind asian paints in every aspect whether it

would be getting cash from debtors/sales or paying off to creditors. Let’s take a look at the

overall picture by calculating and analyzing working capital cycle.

Working Capital Cycle

1. Asian paints 2013-14 - 24 + 97 – 81 = 40 days

2. Asian paints 2012-13 - 23 + 97 – 77 = 43 days

3. Berger paints 2013-14 - 38 + 106 – 72 = 72 days

4. Berger paints 2012-13 - 38 + 107 – 64 = 81 days

These figures clearly show that there is a huge difference between both the companies on working capital management aspect and I would suggest that the top management of berger paints should take serious steps to get close to the efficiency level of asian paints.

Some Working Capital Management Techniques

1. Cash Budgeting: Cash budgeting is another important technique for working capital management which helps keeping optimum level of cash in the business. Cash budgeting involves estimating the requirements of cash by estimating all the fore coming receipts and payments. For effective management, a balance is needed between both excess and shortage of cash. It is because both ends are costly. Speeding up of collection and getting relaxed credit terms from the creditors can reduce the cash requirements.

2. Inventory Management: Inventory is an important component of working capital or current assets. Optimum level of inventory can save on costs heavily.

EOQ: Economic Order Quantity (EOQ) model is a famous model for managing the inventories. It helps the inventory manager know how to find the right quantity that should be ordered considering other factors like cost of ordering, carrying costs, purchase price and annual sales. The formula used for finding EOQ is as follows:

EOQ = √{ (2 * A * O) / (P * C)}

A – Annual Sales

O – Cost per Order

P – Purchase price per unit

C – Carrying Cost

Just-in-Time: Just-in-time is another very important technique which brought about paradigm shift in the management of inventories. It did not reduce cost of inventory but it abolished it completely. Just-in-time means acquiring raw material or manufacturing product at the time when it is required by the customer. This strategy is very difficult to implement but if implemented can bring down inventory cost to minimum levels.

3. Debtors management : Identify the appropriate credit policy i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa).

4. Short-term financing : Identify the appropriate source of financing. Given the cash conversion cycle, the inventory is ideally financed by credit granted by the supplier. However, it

may be necessary to utilize a bank loan (or overdraft) or to convert debtors to cash through "factoring".

Thank You!