TRAINING PROJECT REPORT

ON

WORKING CAPITAL MANAGEMENT OF GSK

SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
of

PUNJAB TECHNICAL UNIVERSITY

Submitted By:
Arashdeep Kaur
1440411
MBA III SEMESTER
UNDER THE SUPERVISION OF

Dr. Ramandeep Saini

(Associate Professor)

Chandigarh Business School, Landran, Mohali

2014-16
1

CERTIFICATE OF SUPERVISOR

This is to certify that Mr. / Ms. Arashdeep Kaur Roll No. 1440411 has
completed the research project titled Working Capital under my supervision
in partial fulfillment of the degree of MASTER OF BUSINESS
ADMINISTRATION of Punjab Technical University.

Supervisors signature:
Dr. Ramandeep Saini
Associate Professor
Date:
Place:

DECLARATION

I, hereby declare that the research project report titled Working Capital is my
own original research work and this report has not been submitted to any
University/Institute for the award of any professional degree or diploma.

Arashdeep Kaur
MBA III semester
Chandigarh Business School

Date:
Place:

Acknowledgement
Writing a report is always the most challenging part of a students life. It was definitely the
most important academic contribution by me. This however would not have been possible
without the encouragement and support of a few people. I consider it pleasant privilege to
express my heartiest gratitude and indebtedness to those who have assisted me towards the
completion of my project report.
First and foremost, I would like to thank Mr. Somit Pandit Senior Manager, Finance and IT
GlaxoSmithKline, for making me capable of conducting such a study.
I express my heartiest and sincere thanks to my company guide Mr. Sunil Sharma and Mr.
Shiv Kaushal, Mr. Vikas Bansal, Mr. Aman Bansal, Mr. Puneet and Mr. Sumit Bansal of
Finance department, GSK who have been a constant source of inspiration and encouragement
to me in carrying out this study.
I am very much thankful to Dr. Ramandeep Saini (Associate Professor at CBS, Landran) for
her continuous guidance & support.
I would like to thank my parents for their blessings and good wishes and to my friends who
helped me to complete the project.
Last but not the least; I would like to thank God for all.

Thank You.
Arashdeep Kaur

PREFACE
The problem of unemployment is one of our major problems. This problem has been
troubling us ever since we gained independence. One reason for growing unemployment in
the country is our faulty education system. Students are given bookish knowledge without
any training for specific jobs. To mitigate such problems of our education system to some
extent, training programs are being introduced. These programs help the students to widen
their horizon. Training can be done in industries, business-houses, sales and income tax
department of various central, state, local, government societies etc.
A training program in industry is to get an overall view and exposure of the industry and its
working environment. It enhances the confidence and boosts the morale of the students
preparing themselves to work in industry in future. These programs continuously find place
in curriculum of management studies for development of the personality of students and to
provide them with a firsthand experience about working in industry.

Abstract
Working capital nowadays has been identified as a major thrust area by almost all the firms
throughout world in order to manage the current assets and consequentially current liabilities.
Working capital refers to the capital which is used to carry out the day to day operation of a
business. Every business needs funds for two purposes, for its establishment and to carry on
its day to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as Plant, machinery, and building, furniture etc. Funds are also
needed for short-term purposes i.e. for the purchase of raw material, payment of wages and
carry on day-to-day operations of business etc. These funds are known as working capital.
The above idea of Working capital suggests that lifeline of a business is cash. Cash flows in a
cycle into, around and out of a business. If a business is operating profitably, then it should,
in theory, generate cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire.
The cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.
For similar reasons optimization of working capital came into existence as an exhaustive
project at GlaxoSmithKline, Nabha.
The project conducted for optimization of working capital is a project at GSK, Nabha under
the name Working Capital. The project basically deals with analysis of credit terms of
suppliers, supplying different items at all the seven sites of GlaxoSmithKline involved in
production as well as packaging of different products of the company. Apart from analyzing
the credit terms of suppliers for the company standard norms for holding the inventory of raw
materials, packaging materials was also analyzed to determine the opportunities for reducing
the working capital.

CONTENTS
Chapter

Page No.

Chapter : 1..Introduction (Industry Profile)

1.1
Market Size
1.2
Players in industry
1.3
Road Ahead
1.4
Government Initiatives

Chapter : 2..Company Profile

2.1
History
2.2
Products
2.3
Organization structure

11

Chapter : 3......Research Methodology

3.1
Literature Review
3.2
Need of the Study
3.3
Objectives of the Study
3.4
Research Design
3.5
Limitations of the study

20

Chapter : 4.........Theoretical Framework

25

Chapter : 5...Data Analysis & Interpretation

57

Chapter : 6...Findings & Conclusions

77

Chapter : 7...Recommendations
Suggestions
Bibliography

79

Chapter 1: Industry Profile

Introduction

Indias consumer confidence continues to be the highest globally and has improved in the
second quarter of calendar year 2015 (Q2), riding on a positive economic environment and
low inflation. Nielsens findings reveal that the consumer confidence of urban India
increased by one point in the second quarter of 2015 from that in the preceding quarter.
Urban Indias consumer confidence is 131 in the second quarter of 2015, up three points from
128 in the previous corresponding period. The current score helps India stay on top of the
global consumer confidence index for the quarter and is followed by the Philippines (122)
and Indonesia (120). Confidence in India has risen for the seven consecutive quarters.
Global corporations view India as one of the key markets from where future growth is likely
to emerge. The growth in Indias consumer market would be primarily driven by a favourable
population composition and increasing disposable incomes. A recent study by the McKinsey
Global Institute (MGI) suggests that if India continues to grow at the current pace, average
household incomes will triple over the next two decades, making the country the worlds
fifth-largest consumer economy by 2025, up from the current 12th position.
According to a report by Boston Consulting Group (BCG) and the Confederation of Indian
Industry (CII), Indias robust economic growth and rising household incomes would increase
consumer spending to US$ 3.6 trillion by 2020. The maximum consumer spending is likely
to occur in food, housing, consumer durables, transport and communication sectors. The
report further stated that India's share of global consumption would expand more than twice
to 5.8 per cent by 2020.

Indias market is consumer driven, with spending anticipated to more than double by 2025.
The Indian consumer segment is broadly segregated into urban and rural markets, and is
attracting marketers from across the world.

1.1: Market size

The growing purchasing power and rising influence of the social media have enabled Indian
consumers to splurge on good things.
A study by US-based networking solution giant CISCO, reveals that in India, the secondlargest smartphone market globally, the number of smartphones is expected to grow strongly
to over 650 million by 2019.
According to CISCOs Visual Networking Index (VNI) global mobile data traffic forecast for
201419, in India, one of the world's fastest growing Internet market, the number of tablets is
estimated to reach more than 18 million by 2019.
Rating agency Crisil estimates that online retailing, both direct and through marketplaces,
will grow threefold to become a Rs 50,000 crore (US$ 8.06 billion) industry by 2016. Also,
the growth in Internet retail is expected to boost offline retail stores.

1.2: Players in Industry

Following are some major investments and developments in the FMCG sector.

FMCG major Hindustan Unilever (HUL) announced a reorganization of its go-tomarket operations from the traditional four sales branches to 14 consumer clusters in
order to provide services to diverse consumers across channels and geographies. The
company has termed the initiative as Winning in Many Indians.

Hero Group is set to acquire a majority stake in direct-to-home devices manufacturer

Mybox Technologies through its subsidiary Hero Electronix. The deal is the first step
by Hero Group, which operates in numerous business verticals, towards entering the
consumer electronics market.

In a series of strategic buy-outs this year, SnapDeal, which acquired online utility
service provider Freecharge and financial services portal RupeePower, has signalled
its ambition to build a service platform so as to stand out in an online marketplace,
which until now was dominated by an array of products from cameras to apparel and
furniture.

Chinese technology major Huawei is entering the consumer broadband networking

segment in India, with a range of devices aimed at homes and SOHO customers. With
the aim to strengthen its position in the Indian market, online cashback and coupon
site CashKaro.com plans to list about 50 global retailers over the next six months,
according to one of its founders.

1.3: Road Ahead

According to a recently published TechSci Research report, "India Food Services Market
Forecast & Opportunities, 2020", the food services market in India is expected to expand at a
CAGR of over 12 per cent through 2020, primarily driven by increasing disposable income,
changing lifestyle, and changing tastes and preferences of consumers. Another major factor
propelling the demand for food services in India is the growing youth population, primarily
in the countrys urban regions. India has a large base of young consumers who form the
majority of the workforce and, due to time constraints, barely get time for cooking.

10

According to the report titled "India Machine-to-Machine (M2M) Modules Market

Opportunities & Forecast, 2020", the M2M modules market in India is expected to exceed
US$ 4.4 billion by 2020. The market research firm stated that over the last few years, India
has become one of the fastest growing markets for M2M modules in Asia-Pacific (APAC).

1.4: Government Initiatives

The Government of India has allowed 100 per cent Foreign Direct Investment (FDI) in the
electronics hardware-manufacturing sector through the automatic route. The government has
also enabled 51 per cent FDI in multi-brand retail and 100 per cent in single-brand retail so
as to attract more foreign investment into the country.
With the demand for skilled labour growing among Indian industries, the government plans
to train 500 million people by 2022 and is also encouraging private players and entrepreneurs
to invest in the venture. Many government, corporate and educational organisations are
working towards providing training and education to create a skilled workforce.

Chapter 2: Company Profile

Introduction to GSK
GlaxoSmithKline Consumer Healthcare Ltd. (GSKCH) is an Indian associate of
GlaxoSmithKline plc, U.K.
GSKCH is one of the largest players in the Health Food Drinks industry in India. The
Company, with its manufacturing plants located in Nabha, Rajahmundry and Sonepat, has
a total workforce of over 2700 people, each driven by a spirit of enterprise.
Its flagship product, Horlicks, is a highly respected brand, which is over 100 years old in
India. The Company also manufactures and markets Boost, Viva, Malt ova, Biscuits and in

11

addition promotes and distributes a number of products in diverse categories, including

prominent brands such as Eno, Crocin and Iodex.
GSKCH has a strong marketing and distribution network in India comprising over 1800
wholesalers and direct coverage of over 4,00,000 retail outlets.

GSK MISSION
Our global quest is to improve the human life by enabling the people
TO DO MORE, FEEL BETTER, AND LIVE LONGER.
People at Glaxo SmithKline consumer healthcare limited are dedicated us to delivering
medicines and products that help million of people around the world LIVE LONGER,
HEALTHIER AND HAPPIER LIVES.

GSK Vision
We want to become the indisputable leader in our industry-not simply in terms of size, but in
how we use that size to achieve our mission and to improve the quality of human life.
Becoming the indisputable leader in our industry means conquering the challenges that face
us as an industry, and as global society.

2.1: HISTORICAL BACKGROUND

GlaxoSmithKline Consumer Healthcare Ltd. is a pharmaceutical and healthcare company
born out of the merger of two leading international organizations SmithKline Beecham and
Glaxo Welcome.
YEAR

DESCRIPTION

1955: Horlicks a milk product manufactured by Horlicks Ltd. Slough, England was being
imported, bottled and sold in India. Due to changes in import policy import stopped.

12

195657: A team from the organization visited to explore the possibilities of setting up a
plant with the support of Maharaja of Nabha, His highness PRATAP SINGH, and a plant was
set up at Nabha.
1958: On May 31, 1958 His highness Pratap Singh laid the foundation stone of the Company
at Nabha.
1960: On 24th March 1960, the factory went into production.
1969: Horlicks Group disposed off their holding in India and U.K. to BEECHAM GROUP
OF INDUSTRIES" which was a multinational and owned more than 500 companies in more
than 200 countries engaged in manufacturing of Brylcream, Hair cream, Eno Fruit Salt,
Macleans, Toothpaste, Pure Silvikrin etc. Immediately after taking over the management,
Beecham Group shifted its head office from Nabha to Delhi.
1979: Beecham India (Pvt.) Ltd. Mumbai merged with Hindustan Milk food Manufacturers
Ltd. and the name was changed to H.M.M. Ltd. Beecham Group Plc.
1991: SmithKline U.S.A. merged on September 16, 1991 to form Smith Kline Beecham
Consumer Brands, Plc. with its registered office in the U.K. H.M.M.
1994: The name was changed to Smithkline Consumer Healthcare Ltd. to reassert the
company's promise of providing Healthcare to consumers. The company decided to do away
with its toiletry products and sold its brands like Brylcream and Silvikrin to Sara Lee.
2000: The Company acquired MALTOVA and VIVA brands of nutritional from Jagatjit
Industries Ltd.
A merger took place between Smithkline Beecham and Glaxo

Welcome

and the new

company Glaxo Smithkline (GSK) was formed on 27-12-2002.

Glaxo
Merger

GlaxoSmithKlin

Smith Kline
Beecham
2002: Change of name took place from 23-04-02

13

2003: Company installed another manufacturing unit in Haryana - Sonepat

2004: The Bank of Punjab has tied up with the company for facilitating finance
on attractive terms to its milk suppliers.
2005: Deutsche bank has tied up with GSK for facilitating their fund management as well as
treasury management on a centralized basis
2006: Companys packing unit at Excise Free Zone Baddi (Himachal Pradesh) came into
existence.
2007: Companys packing unit at Excise Free Zone Gauhati(Assam) came into existence.
2008: Company launched Actibase and Actigrow products - Energy drinks
2009: GSK becomes a leader in skincare with the acquisition of Stiefel. Worlds largest
malaria vaccine trial gets underway in seven African countries. GSK signs agreement with
the World Health Organization to donate 50 million doses of pandemic H1N1 vaccine for
distribution to developing countries.
2010: GSK announces open innovation strategy to help deliver new and better medicines for
people living in the worlds poorest countries. GSK increases support for WHO strategy to
improve childrens health with new 5 year commitment to expand donations of albendazole
medicine.
2011: GSK announces move to new environmentally friendly building in Philadelphia USA.
Launch of Sensodyne Repair & Protect, the worlds first everyday fluoride toothpaste with
NovaMin technology that can repair sensitive teeth.

2.2: PRODUCT PROFILE

GlaxoSmithKline Consumer Healthcare Ltd. is having three production units, which are at
Nabha, Rajahmundry and Sonepat. The unit at Nabha is the mother unit and its production
capacity is 99500 MT per annum and the products manufactured by this company fall under
two categories of consumer healthcare:
Nutritional
Health Drinks

Horlicks and its

variants

Gastrointestinal

ENO Fruit Salts

14

1.

HORLICKS
The flagship brand of the company, this product name is associated with that of the company.
It would be interesting to know how and where this global brand took off. Way back in 1883,
James Horlicks, a London based chemist experimented with powered malt mixed with milk
and launched this product in Chicago, USA, as "Malted Milk". In 1906 he returned to
England and set up a factory at Slough. Renamed as 'Horlicks' in 1931, it became a part of
the giant Beecham Group in 1969. India forms almost half the world's market for Horlicks.

2.

BOOST
Boost was launched in 1976 as an energy drink in the Brown Powder segment. An Indian
Brand, this is manufactured at the Nabha Plant. It is also exported to Countries in West Asia.
Very popular in the South, Boost has grown an average growth rate of 15% per annum.
Sportsmen like Kapil Dev and Sachin Tendulkar back it, making it the secret of OUR
ENERGY!!

3.

JUNIOR HORLICKS WITH DHA

Junior Horlicks was launched in 1991 in Karnataka in an attempt to cater to the specialized
needs of certain age groups. This special nourisher, an India brand was targeted at 1-3 years
old as a delicious tasting Milk food drink based on the international standards of nutrition.

4.

MOTHER HORLICKS WITH DHA

Mother Horlicks is manufactured for lactating mothers. Mothers Horlicks (launched in
November96), is a special nourisher scientifically designed to help meet the nutritional
needs of pregnant and lactating women, as part of a healthy diet.

5.

GOPIKA GHEE (BY PRODUCT)

The main by-product of this company is Gopika Ghee. Gopika Ghee is packed in the factory
itself, rest of the product are bulk packed in containers, which contain 186 kg of Horlicks and
124 kg. of Boost. These are sent to the packing near the major markets.

15

6.

ELAICHI HORLICKS
Elaichi Horlicks was launched in October 1974. Horlicks position as the market leader in the
Milk Food Drinks (MFD) category was further strengthened with the launch of Chocolate
Horlicks in November 1990. Elaichi Horlicks is Horlicks with a fresh cardamom taste and
aroma along with natural goodness of wheat, milk and malted barley making an appetizing
and easily digestible drink.

7.

ENO
Eno is a 100 years old global brand. It is a part of Gastrointestinal category Eno is the only
powder antacid and has shown favorable growth over the years. This has been strengthened
of the lemon variant and the sachet pack.

8.

BISCUITS
The biscuit division has spread its wings and set flight with a 54% increase in the turnover.
Horlicks biscuits are now a truly national brand. The division has a number of plans for the
future growth with the lot of exciting new variety up its sleeves.

2.3: ORGANISATION STRUCTURE

CHAIRMAN
Simon J. Scarff, O.B.E
MANAGING DIRECTOR
Zubair Ahmed
DIRECTORS
Mukesh H. Butani
Kunal Kashyap
P. Dwarakanath

16

Praveen K Gupta
Ramakrishnan Subramania
Subodh Bhargava
COMPANY SECRETARY
Surinder Kumar
BANKERS
Deutsche Bank
Citibank N.A.
Bank of America
The Hongkong & Shanghai Banking
Corporation Limited
State Bank Of Patiala
AUDITORS
Price Waterhouse
REGISTERED OFFICE
Patiala Road
Nabha 147201 (Punjab)
EMAIL FOR INVESTORS: - investors.2.co@gsk.com
COMPANY WEBSITE ADDRESS: - www.gsk-ch.in
STATUS
Multinational Company with promoters from U.K
QUALITY STATUS
OHSAS-18001
ISO 9000:2000
ISO 14001:2004

DEPARTMENTS

The various departments in GSKCH, Nabha are:

Manufacturing Department
Engineering Department
Quality Assurance Department.
Warehouse & Supply Chain Management
Procurement Department (Milk Sourcing Procurement and Purchase Department)
Finance & IT Department
Human Resources and Administration Department.
Environment, Health and Safety Department (EHS)

17

Operational Excellence
E nv iron m e n t,
H ea lth a n d Sa fety
D e.
O p era tio n al
E xcellen ce

H R
A d m in istra ti
on D e.

P ro cu re m en
t
D epa rtm en t
En g in ee rin
g
D ep a rtm en
t

D EPA
M E NT
IN G S
Q u a lity
A ssura n ce
D ep a rtm en t.

Wa reho u se &
Su p ply C h ain
M g t.

FIN A
NCE &
IT

M a n u fa c
tu rin g
DE.

Finance Department Overview

18

FINANCE DEPARTMENT

19

Main Functions of Finance Department are as Follows:

Vendor Payment: - When an article arrives at the gate, an entry permit is made and they
are sent to the GOODS INWARD DISPATCH section (GID). A goods inward from (GID) is
filled up and sent to the finance department for payment. The vendors submit the bill to
purchase department. The finance department also receives a hard copy of the corresponding
purchase order (PO). There is online passing and payment system. This contains a database
of all purchase order issued.

Disbursement of Salaries: - The HR Department sends a compile list of all employees

on the payroll together with their monthly working records .The salaries are paid mainly
through the bank, except for a few temporary workers.

Payment to Government Bodies: -Excise is paid to all suppliers for goods purchased
.The company obtains reimbursement for the excise from the govt. According to the
CENVAT. Excise is however paid for the finished goods. Property tax, VAT, Insurance claims
also paid in case of accidents & breakdowns, for which claims are called for assessment.
VAT is paid to Excise & Taxation Department of Punjab.

Milk Accounting: - Every milk supplier has a code, the first two digits indicating
whether the milk is from cow, buffalo and the next three digits indicating the supplier.
Payments are made within 10 days by cheque/DD.

Cash/Banking: - There are separate accounts for raw material excluding milk, stores,
services, capital and packing material every department submits its monthly cash
requirement and sends it to finance where it is consolidated.

Payment of services: - The finance department pays for various services like rent, truck
hire etc.

Capital budgeting: - Every department submits an annual budget, which is allocated

quarter wise. The concern department also sends a capital investment proposal, which has to
be approved in different forums depending on the investment required.

Chapter 3: RESEARCH METHODOLOGY

20

3.1: LITERATURE REVIEW

Eljelly, (2004):
elucidated that efficient liquidity management involves planning and controlling current assets
and current liabilities in such a manner that eliminates the risk of inability to meet due shortterm obligations and avoids excessive investment in these assets. The relation between
profitability and liquidity was examined, as measured by current ratio and cash gap (cash
conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and
regression analysis. The study found that the cash conversion cycle was of more importance as
a measure of liquidity than the current ratio that affects profitability. The size variable was
found to have significant effect on profitability at the industry level. The results were stable
and had important implications for liquidity management in various Saudi companies. First, it
was clear that there was a negative relationship between profitability and liquidity indicators
such as current ratio and cash gap in the Saudi sample examined. Second, the study also
revealed that there was great variation among industries with respect to the significant measure
of liquidity.

Deloof,( 2003):
discussed that most firms had a large amount of cash invested in working capital. It can therefore
be expected that the way in which working capital is managed will have a significant impact on
profitability of those firms. Using correlation and regression tests he found a significant negative
relationship between gross operating income and the number of days accounts receivable,
inventories and accounts payable of Belgian firms. On basis of these results he suggested that
managers could create value for their shareholders by reducing the number of days accounts
receivable and inventories to a reasonable minimum. The negative relationship between accounts
payable and profitability is consistent with the view that less profitable firms wait longer to pay
their bills.

Shin and Soenen, (1998):

21

highlighted that efficient Working Capital Management was very important for creating value
for the shareholders. The way working capital was managed had a significant impact on both
profitability and liquidity. The relationship between the length of Net Trading Cycle,
corporate profitability and risk adjusted stock return was examined using correlation and
regression analysis, by industry and capital intensity. They found a strong negative
relationship between lengths of the firms net-trading Cycle and its profitability. In addition,
shorter net trade cycles were associated with higher risk adjusted stock returns.

Smith and Begemann (1997):

emphasized that those who promoted working capital theory shared that profitability and
liquidity comprised the salient goals of working capital management. The problem arose
because the maximization of the firm's returns could seriously threaten its liquidity, and the
pursuit of liquidity had a tendency to dilute returns. This article evaluated the association
between traditional and alternative working capital measures and return on investment (ROI),
specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). The
problem under investigation was to establish whether the more recently developed alternative
working capital concepts showed improved association with return on investment to that of
traditional working capital ratios or not. Results indicated that there were no significant
differences amongst the years with respect to the independent variables. The results of their
stepwise regression corroborated that total current liabilities divided by funds flow accounted
for most of the variability in Return on Investment (ROI). The statistical test results showed
that a traditional working capital leverage ratio, current liabilities divided by funds flow,
displayed the greatest associations with return on investment. Well- known liquidity concepts
such as the current and quick ratios registered insignificant associations whilst only one of
the never working capital concepts, the comprehensive liquidity index, indicated significant
associations with return on investment.

3.2: NEED OF STUDY:

22

Today financial soundness and profitability of business enterprises largely depend upon
the working capital management by the firm. If there is shortage of working capital it
affects the day to day operations of the business firm, if there is excess of working
capital, fund become idle it also affects the financial soundness of the firm. In this
perspective there is need to manage the working capital effectively in any business. The
question which strike the mind during reviewing various literatures that how GSK
managing its working capital being public sector undertaking. Hence study is undertaken
to answer the above mentioned question.

23

3.3: OBJECTIVES OF STUDY

The above project was conducted keeping in mind the components of Working capital
mentioned above i.e. inventory, receivables, and payables and further, credit terms with
suppliers; project Working Capital took its shape. The project Working Capital was started at
Nabha plant of GSKCH Ltd. early this year with an idea of standardization of credit period
across sites, scrutinizing the inventory holding period of raw materials, packaging materials
and finished goods and estimating the working capital thus released through these initiatives.
The study was conducted with following broad and specific objectives:
BROAD OBJECTIVE:
Main objective of the project is to analysis the whole data of GSK of various sites and find
various opportunities to improve the working capital of the company
SPECIFIC OBJECTIVES:

To determine the amount of the working capital employed by GSK.

To analyze the working capital management financial performance of the GSK.
To understand the cash forecasting and budgeting at GSKCH, Nabha.
To standardize the credit period provided by the suppliers of raw materials, packaging materials,

finished goods and store items.

To determine the difference between the standard norms and actual number of days for which the
inventory of raw materials, packaging materials, finished goods and store items is kept.

3.4: RESEARCH DESIGN

24

Data Collection:
The data required has been collected from the following sources:
Primary Sources:
Discussions with the management.
Briefings with the concerned officers.
Secondary Sources:
1.

The secondary data of the organization helped me a lot. I have collected all the figures
from the Annual Reports and financial statements of GSK.

2.

Records of the company: This helped me to get details regarding the history of the
organization.

3.

Library Research: A number of books on finance were referred to collect theoretical

background related to finance.

4.

GSK Consumer Healthcare Ltd website: www.gsk-ch.in

Techniques of Analysis: Ratio Analysis

3.5: Limitations of study

Working as a trainee for a period of two months the company was reluctant to reveal its
complete information.

The time was not enough for giving an in-depth review of the working capital management.

25

CHAPTER 4.: THEORATICAL FRAMEWORK

MEANING OF WORKING CAPITAL
In simple words working capital means that which is issued to carry out the day to day
operation of business. Capital required for a business can be classified under two main
categories.

Fixed capital

Working capital
Every business needs funds for two purposes, for its establishment and to carry on its day to
day operations. Long term funds are required to create production facilities through purchase
of fixed assets such as Plant, machinery, and building, furniture etc. Investment in these
assets represent that part of firms capital, which is blocked on a permanent or fixed basis, is
called fixed capital. Funds are also needed for short-term purposes i.e. for the purchase of
raw material, payment of wages and carry on day-to-day operations of business etc. These
funds are known as working capital.
The management of fixed and current assets however, differs in three important ways: -

1.

In managing fixed assets, time is a very important factor consequently discounting

and compounding techniques play a significant role in capital budgeting and a minor one in
the management of current assets.

2.

Large holding of current assets, especially cash, strengthens firms liquidity

position but it also reduces the overall profitability.

3.

Levels of fixed as well as current assets depend upon expected sales, but it is not
only current assets which can be adjusted with sales fluctuating in short run.
In simple words working capital refers to that part of firms capital, which is required, be
financing short term and current assets such as cash, marketable securities, debtors and
inventories.
26

WORKING CAPITAL MANAGEMENT

COMPOSITION OF WORKING CAPITAL
The management of working capital is concerned with two problems that arise in attempting
to manage the current assets, current liabilities and the inter relationship that assets between
them. The basic goal of working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital is
maintained i.e. it is neither inadequate nor excessive.
CURRENT ASSETS

CURRENT LIABILITIES

Cash in hand and bank balance

Bills payable

Bills receivables

Sundry creditors

Sundry debtors

Accrued loans

Short term loans and advances

Short term loans

Investment of stock as:

Advances and deposits

Raw material

Dividend payable

Work in progress

Bank overdraft

Finished goods

Provision for taxation

Store and spares

Temporary investment
Prepaid expenses

27

DETERMINANTS OF WORKING CAPITAL

There are no set of rules to determine working capital requirements of the firms. A large
number of factors influence working capital needs of firms. All factors are of different
importance. The following is the description of factors, which generally influence the
working capital requirements of firms.
1.

NATURE AND SIZE OF BUSINESS:

Working capital requirement of a firm are basically influenced by nature of its business.
Trading and financial firms have a very small investment in fixed assets, but require a large
sum of money to be invested in working capital. In contrast, public utilities have a very
limited need of working capital because they provide services on cash basis. Hence no funds
will be tied up in debtors and stocks. Working capital needs of most manufacturing concerns
fall between two extremes.
In GSK Nabha final product is Horlicks, which is made by milk, which is perishable in
nature. And it is not possible to store it for long period, because of that milk is
purchased daily, for which they need to keep large amount of working capital with
them.

2.

MANUFACTURING CYCLE:
The manufactures cycle start with the purchase and use of raw materials and completes with
the production of finished goods. Longer the manufacturing cycle, larger will be the firms
working capital requirements.
In GSK the manufacturing Cycle is moderates i.e. neither too long nor too short. So
their working capital requirements are moderate. This is successfully maintained by
them.

3.

BUSINESS FLUCTUATION:
Most firms experience seasonal and cyclical fluctuations in the demand for their products and
services. These business variations affect the working capital requirements specially the
temporary working capital requirements of the firm. When there is an upward swing in the

28

economy, sales will increase correspondingly, the firms investment in inventories and book
debts will also increase.
In GSK the main raw materials they require for production are Milk, Wheat Flour,
Malted Barley etc. They purchase raw materials other than milk on contract basis for a
year, so there is no fear of fluctuation of prices for them. And for milk, there is
fluctuation in prices but these fluctuations are so small to effect the working capital
requirements of the company. And from sales point of view there is no fluctuation at all.
4.

PRODUCTION POLICY:
We just noted that a strategy of constant production might be maintained in order to resolve
the working capital problems arising due to seasonal changes in the demand for the firms
product. A steady production policy will cause inventories to accumulate during the offseason period and the firm will be exposed to greater inventory costs & risks. Thus,
production policies will differ from firm to firm, depending upon circumstances of individual
firm.
In GSK, sales for next three years are forecasted on the basis of their production policy.
Accordingly they maintain their working capital requirements. Seasonal changes do not
effect their working capital requirements.

5.

AVAILABILITY OF CREDIT:
The working capital requirements of a firm are also affected by credit terms granted by its
creditors. A firm will need less working capital if liberal credit terms are available to it.
Similarly, the availability of credit from banks also influences the working capital needs of
the firm. A firm, which can get bank credit easily on favorable conditions, will operate with
less working capital than a firm without such a facility.
In GSK, as it is the Multinational Company it finds no difficulty in getting credits on
their required terms. So they need not maintain high amount of working capital with
them.

29

6.

GROWTH AND EXPANSION ACTIVITIES:

The working capital needs of the firm increase as it grows in term of sales or fixed assets. A
growing firm may need to invest funds in fixed assets in order to sustain its growing
production and sales. This will, in turn, increase investment in current assets to support
enlarged scale of operation. It should be realized that a growing firm needs funds
continuously.
In GSK capital budget is prepared every year, which is helpful in determining the
requirements of working capital in the coming year. So if there is any expansion plan of
company then it keeps into consideration while preparing capital budget. Last
expansion of GSK, it established a Plant in Sonepat 5 years back. It was for spraydrying technology.

7.

OPERATING EFFICIENCY
The operating efficiency of the firm relates to the optimum utilization of resources at
minimum costs. The firm will be effectively contributing to its working capital if it is
efficient in controlling operating costs. The use of working capital is improved and pace of
cash cycle is accelerated with operating efficiency. Better utilization of resources improves
profitability and, thus helps in releasing the pressure on working capital.
GSK installed a plant that re-utilizes the waste of company in generating fuel for
further production. This plant helps in optimum utilization of recourses which in turn
reduces cost also.

30

WORKING CAPITAL CYCLE

Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital and investment.
The cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.
Bear in mind that the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash

Inventory (stocks and work-in-progress)

Receivables (debtors owing you money).

The main sources of cash are Payables (your creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has two
dimensions:

TIME

MONEY

When it comes to managing working capital - TIME IS MONEY. If one can get money to
move faster around the cycle (e.g. collect money due from debtors more quickly) or reduce
the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will
generate more cash or it will need to borrow less money to fund working capital. As a

31

consequence, you could reduce the cost of bank interest or you'll have additional free money
available to support additional sales growth or investment. Similarly, if you can negotiate
improved terms with suppliers e.g. get longer credit or an increased credit limit; you
effectively create free finance to help fund future sales.
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles
etc. If you do pay cash, remember that this is now longer available for working capital.
Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity,
leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and,
like water flowing downs a plughole, they remove liquidity from the business. More
businesses fail for lack of cash than for want of profit.
It is this importance of cash that, cash management is one of the key areas of working capital
management. Apart from the fact that it is the most liquid asset, cash is the common
denominator to which all the current assets can be reduced because the other major liquid
assets, that is, receivables and inventory eventually get converted into cash. This underlines
the significance of cash management.
The term cash with reference to cash management is used in two senses. In a narrow sense it
is used to cover currency and generally accepted equivalents of cash, such as cheques, drafts
and demand deposits in banks. The broad view of cash also includes, near cash assets such as
marketable securities and time deposits in banks.
A firm is well advised to hold adequate cash balances but should avoid excessive balances.
The firm has, therefore, to assess its need for cash properly. Cash budget is a device that
helps affirm to plan and control the use of cash. It is statement showing the estimated cash
inflows and outflows over the planning horizon. In other words, the net cash position (surplus
and deficiency) of a firm as it moves from one budgeting sub period to other is highlighted
by cash budget.

32

The various purposes of cash budgets are:

To coordinate the timings of cash needs
It pinpoints the periods when there is excess of cash
It helps to arrange the funds on most favorable terms and prevents excess
accumulation of cash.

It enables a firm which has sufficient cash to take advantage of cash

on its accounts payables, to pay obligations when due, to

formulate

discounts
dividend

policy, to help unify the production schedule during the year so that the firm can
easily smooth out the heavy fluctuation

seasons.

33

OPERATING CYCLE
There is a difference between current assets and fixed assets in terms of their liquidity. A firm
requires many years to recover the initial investment in fixed assets such as Plant &
Machinery. On the contrary, investment in current assets is turned over many times in a year.
Operating cycle is the time duration required to convert sales (after conversion of resources
into inventories and inventories into finished goods) into cash.
The operating cycle of a manufacturing Company involves three phases: -

Acquisition of resources such as raw material labor, power and fuel etc.

Manufacture of the product which includes conversion of raw material into work-inprogress into finished goods.

Sale of the product either for cash or on credit. Credit sales create book debts for
collection.

The length of the operating cycle of a manufacturing firm is the sum of:

Inventory conversion period (ICP) and

Book debts conversion period (BDCP).

The inventory conversion period is the total time needed for producing and selling the
product. It includes:

1.

Raw material conversion period (RMCP)

2.

Work in progress conversion period (WIPCD)

3.

Finished goods conversion period.

34

The book debts conversion period is the time required collecting outstanding amount from
customer. The total of inventory conversion period and book debts conversion period is the
maximum time required to collect outstanding amount from customers and sometimes it
referred to as gross operating cycle. Generally, a firm acquires resources on credit and
temporarily postpones payment of certain expenses. The payable deferral period (PDP) is the
length of the time the firm is
able to defer payments on various resource purchases. The difference between operating
cycle and payables deferral period is net operating cycle. The length of operating cycle can
be determined as: GOC =ICP+BDCP
NOC=ICP+BDCP-PDP
ICP=RMCP+WIPCP+FGCP
Where, GOC=Gross Operating Cycle; NOC=Net Operating Cycle;
ICP=Inventory Conversion Period; BDCP= Book Debts Conversion Period;
PDP= Payable Deferral Period; RMCP= Raw Material Conversion Period;
FGCP= Finished Good Conversion Period.

35

CASH MANAGEMENT
Cash management refers to practices and techniques designed to accelerate and control
collections, ensure prompt deposits of receipts, improve control over disbursement methods,
and eliminate idle cash balances. In general, cash management involves the effective and
efficient use of cash to maximize cash flow at minimum cost. While system institutions
generally dont maintain high cash balances, the cash management process is an integral part
of organizations financial activities and encompasses a wide variety of financial decisions.
Such areas can include information systems management, investment management, fund
management, and liquidity management.
In todays financial environment, electronic delivery systems are becoming increasingly
important because of increased competitions and demand for more efficient and convenient
capabilities. A significant number of transactions and amounts of funds can be moved
electronically from one place to another almost instantaneously, consequently, the
opportunities presented can pose significant risks to a financial organization. Such threats
include internal and external fraud, theft and unauthorized manipulation of financial data.

36

Motive for holding cash

1.

The transactions motive

2.

The precautionary motive

3.

The speculative motive

The transaction motive requires a firm to hold cash to conduct its business in the
ordinary course. The firm needs cash primarily to make payments for purchases, wages,
operating expenses, taxes, dividends etc. the need to hold cash would not arise, if there
were perfect synchronization between cash receipts and cash i.e enough cash was
received to make the payments .but cash receipts and payments dont coincide most of
the times. Some time cash receipts are more and securities. However ,the transaction
motive mainly refers to holding of cash to meet the payment .for those period when the
payments are more, the firm should maintain some cash balances to pay the required
amount, for this firm may invest in marketable anticipated payments whose timing is not
perfectly match with the receipts.

37

The precautionary motive is the need to hold the cash to meet any contingencies
in future. It provides a cushion or buffer to withstand some unexpected emergency. The
precautionary amount of cash depends upon the predictability of cash flows. The more
the accuracy in predicting the cash flows the lesser will be the amount required to be
kept for this purpose. The amount of precautionary cash is also influenced by the firms
ability to borrow at short notice when the need arise. Better the firms position in raising
funds at short notice the less the need for precautionary balances. This balance may be
kept in cash and marketable securities .the marketable securities should be selected
keeping in view the risk, safety and liquidity and profit factors.

The speculative motive relates to holding of the cash for investing in profit making
opportunities as and when the rise in other words it is concerned with the pocketing of
differences by taking advantage of the price fluctuations. The firm will hold cash, when it
is expected that interest rate will rise and security price will fall. Securities can be
purchased when the interest rate is expected to fall. The will benefit by the subsequent
fall in interest rates and increase in security prices. The firm may also speculate on
materials prices. If it is expected that material price will fall, the firm can postpone
materials purchasing and vice-versa.
The firm must decide the quantum of transaction and precautionary balances to be held.
This depends upon the following factors;
1. The expected cash inflows and outflows based on the cash budget and forecasts.
2. The degree of deviation between the expected and actual net cash flows.
3. The maturity structure of the firms liabilities.
4. The firms ability to borrow at short notice, in the event of any emergency.
5. The efficient planning and control of cash.

38

Utilization of fund
The excess cash or fund in the enterprises can be utilized by investing it somewhere
.keeping in view the safety, maturity & marketability aspect of the securities purchased.
Safety: Usually a firm would be interested in receiving a high rate of return on its
investment in marketable securities as is possible. But the higher return yielding securities
are relatively more risky. The form should thus invest in very safe security as the
transaction & precautionary balance invested in them are needed in near future. The default
risk, which means the possibility of default in payment of interests or principal on time and
in the amount promised, should be minimum.
Maturity: Maturity refers to the time period over which interest & principal are to be
made. The price of the long-term security fluctuates more widely with the change in the
interest than the price of short-term security. Overtime interest rate has a frequency to
change. Because of these two reasons the long-term securities are more risky & the firm
should go in for short-term securities, preferable for investing surplus cash.

39

Payment procedure for regular supplier of raw material

Supplier of raw material doesnt receive direct cash payment from GSK. All the payments
are made by the head office through deutsche bank. Head office is in gurgaon. To make the
payments to suppliers the 1st step is booking of payment voucher/bills. The cashier at head
office generates the payments on daily basis except Saturday & Sunday because these are
holidays at head office. Head office upload the payment to deutsche bank on its web site
with an instruction regularly dispatched of payment. On the due dates of the bills payment
is made to the suppliers. In the case of direct payment to suppliers, deutsche bank
dispatched the payment to suppliers. Deutsche bank transfers the money to the concerned
banks from which payment is made to suppliers. These banks make the drafts & send to
Nabha factory then these drafts are dispatched to suppliers.

Payment procedure for some other important items

Milk: Milk is the important raw material for manufacturing of horlicks & its payment
procedure is as follow. Payment for milk is made on 10 days credit basis. On receiving the
milk the persons who envisages the milk prepares the automatic milk card reader in which
the following information is given;
Code no.

Name of supplier

Can wise weight

Total

Fat%

clr.

Weight
Where clr. = corrective lactometer reading
To make the payments to the milk suppliers firstly payment bill are booked & deutsche bank
makes payment.
Beside it, by the automatic milk card reader, the above written information is printed and
saved in the excel sheet. After that, they keep the hard copy if information in their record
files.

Salaries
Salaries are of two types;
1.) Salaries for staff/executive

40

2.) Salaries for workers

Salaries to the staff &the executive are paid on 24-25th of every month.
Salaries to workers are paid on 1st of every month. Besides the two dates mentioned above,
there are some other dates also mentioned in cash forecast on which payments have been
made under the salaries & establishment head &these are;

To permanent workers-payments made on the 2nd of every month.

To temporary workers-payments made on the 5th of every month.

Under other employ include:

Payment made on the 21st regarding ESI (employee state insurance)
Payment made on the 15th regarding EPS (employee pension scheme)

Payment of loan:
Payment of loan applied for is made on 25th of every month.

Payment of PF loan:
Which can be availed only by the staff & permanent workers & that too after one year from
the date of joining is made on the 20th of every month. For disbursement of such loans head
office advice is to be received. For such loan everything has to be clear, like the amount of
loan being given whether it is recoverable or not i.e. whether the amount will be repaid
through installments or the entire amount will be deducted directly from the provident fund
etc.

Purchase tax& sale tax

The payment of purchase &sale tax is made on quarterly basis but a monthly provision for
the same is made in the books of the organization. This tax as it is to be paid quartly its
monthly amount is not shown in the cash forecast which is prepared on monthly basis.

Freight payments
When the material comes in the organization then freight charges are dispatched with it and
it is given to the transporters. The freight charges are given either 7th or 22th of every month.

Receipts
41

In GSK the only cash sale is made for ghee &scrap.

Ghee
For ghee sales the credit period allowed is of 30 days & the payment is done on book billing
basis. The dealer for ghee sale at nabha is ruldu ram& sons who pick up the material from
the factory according to their requirement &makes payment through cheques or bank draft.

Scrap value
The credit period allowed is of 7 days &the scrap sale include the sale of;
Gunny bags
High density plastic &low plastic bags
Husk(which is the outer cover of malted barley)
Coal cinder (this is the residue of coal obtained on burning of coal in the boilers)
The scrap sale is made on contact basis. An advertisement is given in a daily news paper&
tenders are invited for the sale of scrap. This contract is for a fixed period of time after
which it is renewed or given to some other party. The contractor is required to pick up the
scrap regulatory after due intervals from the company. The procedure for this is as follow:
When any vehicle enters the factory for picking up the scrap, firstly the empty vehicle is
weighted & the weight of the vehicle & vehicle no. is feed into the computer installed near
the weight machine. Then this vehicle goes to the scrap yard accompanied by a person
from the store department. After picking up the material when the vehicles leaves the
factory it is again weighted & the record of the material taken, the date of taking material,
the type of material taken is kept.

Gunny bags
For the number of bags that are to be given out as scrap to a person from the store
department prepares a delivery note for all the material going out. This note is prepared in
triplate,1 copy of the note is kept by the store department,1 copy is given to the gate
keeper who again checks the material going out &1 copy is given to the person taking the
material.
42

RECEIVABLE MANAGEMENT
To increase the sales firm has to resort to sell the goods on credit basis. It has the element of
risk as the cash payment is yet to be received. Receivables constitute a big part of current
assets in many firms. Business firms generally sell goods on credit that is granted to facilitate
sales.
Receivable management is the process of making decisions relating to investment in trade
debtors. Certain investment in receivables is necessary to increase the sales and profits of the
firm. But at the same time, investment in this asset involves cost considerations also. There is
always a risk of bad debts too. Thus, the objective of receivable management is to take a
sound decision as regards investment in debtors. The objective of receivables management is
to promote sales and profits until that point is reached where the return on investment in
further funding of receivables is less than the cost of funds raised to finance that additional
credit.

DIMENSIONS OF RECEIVABLES MANAGEMENT

Receivable management involves the careful consideration of the following aspects:

43

Forming the credit policy

Executing the credit policy

Collection efforts
1. FORMING CREDIT POLICY
For efficient management of receivables, a concern must adopt a credit policy. A credit policy
is related to decisions such as credit standards, length of credit period, cash discount etc.

(a)

Credit standards: Credit standards are the criteria, which a firm follows in selecting
customers for the purpose of credit extension. The volume of sales will be influenced by the
credit policy of a concern. By liberalizing credit policy, the volume of sales can be increased
resulting into increased profits.

(b)

Length of credit period: Length of credit period means the period allowed to the
customers for making the payment. The customers paying well in time may also be allowed
certain cash discount. There is no binding on fixing the length of credit period. A concern
fixes its own terms of credit depending upon its customers and the volume of sales.

(c)

Cash discount: Cash discount is allowed to expedite the collection of receivables. The
funds tied up in receivables are released. The concern will be able to use the additional funds
received from expedited collections due to cash discount.

2.

EXECUTING CREDIT POLICY

After formulating the credit policy, its proper execution is very important. The evaluation of
credit applications and finding out the credit worthiness of customers should be undertaken.

(a)

Collecting credit information: The first step in implementing credit policy will be to
gather credit information about customers. This information should be adequate enough so
that proper analysis about the financial position of the customers is possible. The information
may be available from financial statements, credit rating agencies; report from banks, firms
records etc.

44

(b)

Credit analysis: After gathering the required information, one should analyze it to find
out the credit worthiness of potential customers and also to see whether they satisfy the
standards of the concern or not. Keeping three basic c factors does this: character, capacity
and collateral. The credit analysis will determine the degree of risk associated with the
amount, the capacity of the customer to borrow and his ability and willingness to pay.
To estimate the probability of default, the financial or credit manager should consider three

1.

Character

2.

Capacity

3.

Condition
Character:

Character refers to willingness of customers to honor his obligation. The moral

factor is of considerable importance in credit evolution in practice.

Capacity: - Capacity refers to the customers ability to pay. Ability to pay can be judged by
a crossing the customers capital and assets offered as security.
Conditions: - Conditions refer to the prevailing economic and other conditions, which also
affect the customers ability to pay.
The GSK unit is selling its products through branches and on the consignment basis.
Before granting sales to any party, these branches have the policy of getting information
about the party. They also take into consideration the market position of the party, their
reputation, makes the study of financial data relation of that customer with other
supplies.
(c)

Credit decision: After analyzing the credit worthiness of the customer, the finance
manager has to take a decision whether the credit is to be extended and if yes, then up to
what level. He will match the credit worthiness of the customer with the credit standards of
the company. If customers credit worthiness is above the credit standards then credit is
granted otherwise not.

45

The strip valuations under which the firm sells on credit to customer are called credit term.
These stipulations include

Credit period

Cash discount

3. COLLECTION EFFORTS
Every firm should follow a well laid down collection policy that may be lenient or strict, and
procedure to collect dues from its customers. When the normal credit period granted to a
customer is over, and he has not made the payment, the firm should send a polite letter to him
reminding that the account is overdue. If the customer does not respond, the firm may send
progressively strong-worded letters. If receivables still remain uncollected, telephone,
telegram and personal visit of the firms representative may follow letters. If the payment is
still not made, the firm may initiate a legal action against the customer.
In this unit, there is no receivable management, as all the sales are controlled by the
head office situated at Gurgaon receives payments. To boost up the sales, the company
pays an attractive cash discount to its customers for early payments so that the credit
collection period is decreased. The credit worthiness of the customer is compared with
the credit standards of the company. It takes into account the promptness of the
customer to pay. For giving credit to new customer, the financial position of the
customer is investigated. The frequency of payment and cash discount availed helps in
forming an opinion about the customer.

NEED OF WORKING CAPITAL

For the purchase of raw material components and stores

For the payment of wages and salaries.

46

To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses.

To meet the selling cost as packing, advertising etc.

To provide credit facility to the customers.

To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.

To meet the requirement of anticipated needs of future.

To face business crisis in emergencies such as depression, because during such

periods, generally, there is much pressure on working capital.

INVENTORY MANAGEMENT
Every business needs inventory for smooth working of its activities. It serves as a link
between production and distribution activities. Inventory the most significant part of current
assets.
Large size of inventory is maintained by firms, a considerable amount of fund is required to
be committed in them. Therefore, one of the most significant decision areas concerning
finance manager is inventory management. Inventories consisting raw material, WIP, finished
goods, maintenance spare parts a significant preparation of total assets.
Inventory management means preparing the stock of goods at such I level that neither the
stock should be excessive or inadequate. It is a system, which ensures that right quality of
material, is available in the right quantity at right time and right place with the right amount
of investment. Large size of inventory ensures efficient and smooth production and sales
operations, while minimum investment in inventories maximizes profitability. Both the
extreme points are dangerous. An efficient manager always determines the optimum points in
between of the two extremes. Excess installments in the inventory pees danger like
47

unnecessary the up of firms funds and loss of profit excess carrying cost, risk of liquidity
and risk of physical deterioration of inventories. On the other hand inadequate investment in
inventories seeks to production hold ups failure to meet delivery commitments. Thus, the aim
of inventory management is to balance between the two and maintain sufficient inventories.
According to Curry and Frank:
Because materials constitute such a significant part of product cost and since this cost is controllable,
proper planning, purchasing, handling and accounting are of great importance.

DEFINITION OF INVENTORY
The dictionary meaning of Inventory is a list of goods. In a wider sense, inventory can be
defined as an idle resource, which has an economical value. It is however, commonly used to
indicate various items of stores kept in stock in order to meet future demands.
In any organization, there may be following four types of inventory:
a)

Raw materials & parts- These may include all raw materials, components and
assemblies used in the manufacture of a product.

b)

Consumables & Spares- These may include materials required for maintenance and
day-to-day operations.

c)

Work-in-progress- These are items under various stages of production not yet
converted as finished goods.

d)

Finished goods- These are the goods that are not yet sold or put into use.

48

INVENTORY CYCLE
In inventory cycle first of all raw material is purchased and then it is sent for manufacturing
where work in progress is then converted into finished stock which is readily available for
sale.
Same process is followed in GSK but at Nabha plant only manufacturing of
products is to be done whereas a sale finished product is done through the Head office. In
GSK at Nabha raw materials are malted barley, Milk, Wheat Flour, Vitamins, etc. And in
GSK work in progress is not considered for accounting because it is not calculated, it is only

49

that part of production which is in pipelines. And in last finished product is produced which
is filled in Drums and send to Head office (Gurgaon) for sale.

VARIOUS INVENTORY MANAGEMENT TECHNIQUES

Selective Management: In this technique, various items of stores are classified in various
classifications depending upon their consumption value, unit price, criticality for the
organization, source of supply, purchasing problems, rate of withdrawals from the stores,
seasonality and stores balances on a particular date. Different approaches of control are being
followed for different types of items.

Two such classifications ABC & FSN are followed in GSK

Management by Exception: - In this technique, items with certain exceptions are tackled on
different points of time. For example, overstock items; surplus items and inactive items may
require more attention.

50

In GSK management by exception is followed for such goods that are stock
outs for some period.
Rationalization: - Techniques of standardization and variety reduction are used to minimize
lead-time of the material, and reduce unnecessary inventory carrying costs.
Value Analysis: - Functions performed by the materials are analyzed and alternative
designs/raw materials are suggested to achieve the same function at minimum cost.
Computerization: - Computer outputs can be used for scientific forecast of demand to solve
many inventory models, providing optimum safety and for controlling funds.

GENERAL STORE INVENTORY

General store is a major part of the inventory in all the concerns. It provides the information
regarding how much material we can purchase, and how much material we can keep in store
such as it is helpful to provide the information regarding all levels. The major part of working
capital of all the concern spent in General store inventory.

NATURE OF GENERAL INVENTORY IN GSK

Inventories are stock of the product a company is manufacturing for sale and components
that make up the product. The various forms in which inventories exist in a manufacturing
company are: raw materials, work in progress, finished goods & stores and spares.
Raw materials are those basic inputs that are converted into finished product through the
manufacturing process. Raw material inventories are those units, which have been purchased
and stored for future productions.
In GSK Malted Barley, Wheat flour, Skim Milk Product (SMP), Fine Crystalline Sugar
(FCS), Roasted Malted Barley, Calcium, Potassium, Sodium, Vitamin Flavors etc., are
main raw materials.
51

Work-in-process. The work-in-process is that stage which is in between raw material and
finished goods. The raw material enters the process of manufacture but they are yet to attain a
final shape of finished goods. The quantum of work-in-process depends upon the time taken
in the manufacturing process. The greater the time taken in manufacturing, the more will be
the amount of work in process.
In GSK at Nabha there is no work in progress.
Consumables. These are the materials, which is needed for smooth process of production.
These materials do not directly enter in the production but they act as catalysts, etc.
consumables may be classified according to their consumption and criticality. Generally,
consumables stores do not create any supply problems and form a small part of production
cost. There can be instance where these materials may account for much value than the raw
materials The fuel oil may form a substantial part of cost.
In GSK Nabha Polythene, Drum Seal, Tape roll, Label, Cleansing Agent, Hand gloves,
Oil, Chemical, Coal, etc. are examples of some consumables.
Finished goods. These are the goods, which are ready for the customers.

The s tock of

finished goods provides a buffer between production and market. The purpose of maintaining
inventory is to ensure proper supply of goods to customers. In some concerns the production
is undertaken on the order basis, in general without waiting for specific orders.
In GSK main finished goods are Horlicks, Boost, Vanilla Horlicks, Elachi Horlicks,
Boost intermediate, Horlicks high fat, Junior Horlicks DHA, mother Horlicks DHA etc.
are products, which are produced for consumption in India. Mother Horlicks DMI and
Junior Horlicks DMI are products manufactured for export package and send to
Bangladesh.
Spares. Spares also form a part of inventory. The consumption pattern of raw material,
consumables, finished goods are different from that of spares. The stocking policies of spares
are different from industry to industry. Some industry like transport will require more spares
52

than other concern. Costly spare parts like engines, maintenance spares etc. are not discarded
after use, rather they are kept in ready position for further use. All decision about spares is
based on the financial cost of inventory on such spares and the costs that may arise due to
their non-availability
In GSK examples of Spares are Barring, V-Bolt etc

GENERAL STORE INVENTORY IN GSK

General store is that which the part of the production becomes indirectly. Without such
inventory no production will be there. This store inventory includes:

Polythene bags

Consumables like diesel etc.

Cleaning material like nitric acid, caustic soda etc.

Floor cleaning towels

Spare parts of the machines

Under the general store inventory total no. of items are 2517, which have the ABC
classification. Their total consumption value is Rs. 51714106.83. It includes 45 items,
some of which dont have any classification because these items are used as and when

53

required during the year as such do not fall under any category and some are capital
related spares.

JUST IN TIME INVETORY SYSTYEM

Just in time purchasing is the purchase of material or goods in such a way that delivery of
purchase item is assured before their use or demand. Just in time purchase recognizes too
much carrying cost associated with holding high inventory levels. Therefore, it advocates
developing good relation with supplier and making timely purchases from proven suppliers
who can make ready delivery of goods available as and when need arises EOQ (Economic
order quantity) model assumes a constant order quantity where as JIT purchasing policy
advocates a different quantity for each order if demand fluctuates. EOQ lays emphasis on
ordering and carrying cost but inventory management extends beyond carrying and ordering
cost to include purchase cost, quantity cost and stakeout cost .JIT purchasing takes into
consideration all these cost and move outside the assumptions of the EOQ model.
There are 150 JIT items in GSK, Nabha.
ADVANTAGES: Investment in inventory is reduced because more frequent purchase order
of small quantities made.

Carrying cost is reduced as a result of investment in inventory.

A reduction in the number of suppliers. Only proven suppliers who can give quick
delivery of quality goods are given purchase order.

Quality costs such as inspection cost of incoming material or goods, scraps and
rework costs are reduced because JIT purchasing assures quick and frequent deliveries of
small size orders which h results in low level of inventories causing minimum possible
wastage.

54

FINANCIAL RATIO ANALYSIS

Financial ratio analysis is a study of ratios between various items or group of items in
financial statement and the turnover ratios. Ratio analysis is the powerful tool of financial
analysis. In financial analysis, ratio analysis is used as an index or yardstick to measure the
performance of the firm.
Working capital is that part of total capital which is important in current assets. To get better
insights about the working capital position of the firm ratio analysis has been utilized.
To determine the Working Capital position of the firm following ratios have been analyzed:

CURRENT RATIO:
The current ratio is very popular financial ratio which is used to measure the ability of a firm
to meet its current liabilities. Current assets are converted into cash for the payment of

55

current liabilities. Apparently higher is the current ratio, greater is the short term solvency.
Current ratio is given by the formula:
Current Assets
Current Liabilities

QUICK RATIO ( ACID TEST RATIO):

Quick ratio is much more exacting measure than the current ratio. By excluding inventories,
it concentrates on really liquid assets, with value fairly certain.
Quick Assets consist of only cash and near cash assets. Inventories are deducted from current
assets on the belief that these are not near cash assets. Quick ratio is given by the formula:
Liquid assets
__________________
Current liabilities

CURRENT ASSETS TURNOVER RATIO:

The idea of the current assets turnover is to ascertain the contribution of the current
assets to sales. The relationship indicates efficiency or otherwise utilization of current
assets to attain the maximum turnover sales.
Sales
__________________
Current assets
WORKING CAPITAL TURNOVER RATIO: Net working capital turnover ratio
indicated the velocity of the utilization of working capital. A higher ratio indicates the
effective utilization of working capital and a low ratio indicate otherwise.

56

COGS or Sales
Net Working Capital
Working capital is segregated into Inventory turnover, Debtors turnover and creditors
turnover

INVENTORY TURNOVER RATIO:

This ratio is also known as stock turnover ratio and establishes the relationship between
the cost of goods sold during the year and average inventory held during the year. It is
calculated as follows:
Sales
Average Inventory

DEBTORS TURNOVER RATIO:

In case firm sells goods on credit, the realization of sales is delayed and the receivables are
created. The cash is realized from these receivables later on. The speed with which these
receivables are collected affects the liquidity position of the firm. The debtors turnover ratio
throws light on the collection and credit policies of the firm. The debtors turnover ratio is
calculated as follows:
Sales
Average Accounts Receivable
CREDITORS TURNOVER RATIO:
This ratio is calculated on same lines as receivable turnover ratio is calculated. This shows
the velocity of debt payment by the firm. A low creditors turnover ratio reflects liberal terms

57

granted by the suppliers. While a high ratio shows the accounts are settled rapidly. It is
calculated as follows:
Credit Purchases
Average Accounts Payable

CHAPTER 5: DATA ANALYSIS & INTERPRETATION:

ANALYSIS OF WORKING CAPITAL

GROSS WORKING CAPITAL OF GSK: CURRENT ASSETS

RS. LACS

Inventories

36995.58

Sundry Debtors

9919.07

Cash & Bank Balance

Loans & Advances
Other current assets

107965.44
7213.58
4915.64

58

Total

167009.31

Interpretation:
Simply called working capital it is total of current assets, it refers to the firms investment in
current assets. Current assets refer to those assets, which in the ordinary course of business
can be continued into cash within an accounting year.
As per the above table gross working capital of GSK is 167009.31

NET WORKING CAPITAL

Net Working Capital= Current assets - Current Liabilities
CURRENT

RS. LACS

ASSETS
Inventories
Sundry Debtors
Loans & Advances
Other current assets

36995.58
9919.07
7213.58
4915.64

Total

59043.87

CURRENT LIABILITIES &

PROVISIONS
Sundry Creditors
Other Liabilities
Advances
Trade Security Deposits
Unclaimed Dividend
Provisions
Total

RS. LACS
50102.48
11225.51
740.51
4385.75
177.51
10017.55
76649.31

59

Interpretation:
Net working capital = Current Assets Current Liabilities
Therefore, Net Working Capital of GSK= Rs. 59043.87-76649.31= - Rs 17605.44Lacs.
A positive working capital arises when current assets exceed current liabilities a negative net
working capital occurs when current liabilities are more than current assets.

OPERATING CYCLE OF GSK

1.

Raw Material Conversion Period (RMCP)

Average raw material inventory x 365
Raw material consumed during the year

Particular

2.

2014( Rs. Lacs)

Opening stock of R.M.

4524.72

Closing stock of R.M.

7368.95

Average stock

5946.83

Raw material consumed

47727.81

Raw material conversion period

46 days

Finished Goods Conversion Period (FGCP)

60

Average finished goods inventory x 365

Cost of goods
Particular
Opening stock
Closing stock.

2014 ( Rs. Lacs)

9193.47
11993.15

Average stock
Cost of goods Sold

10593.31
170147.22

Finished Goods Conversion Period

23 days

3. Work in process conversion period (WIPCP)

Average stock in process inventory x 365
Cost of production

Particular

2014 (Rs. Lacs)

Opening stock of
Work in Process

788.99

Closing stock of
Work in process

670.26

Average stock of
Work in process

729.63

Cost of production

89927.01

Conversion period

2.96

3. Debtors Conversion Period or Book Debts Conversion Period

Average debtors x 365
Credit sale
Particulars

2014 ( Rs. Lacs)

61

Average debtors
Credit sales
Debtors Conversion Period

(4325.02+2736.19)/2 *365
170147.22
8 days

Note:

Total Sales are taken as Credit Sales.

5. Creditors Conversion Period or Payable Deferral Period

Average creditors x 365
Credit purchases
Particular

2014 (Rs. Lacs)

Opening creditors

14393.14

Closing creditors

17252.17

Average creditors

15822.65

Credit purchase

178381.90

Creditors Conversion Period

17 days

RMCP = 46 days
WIPCP = 3 days
FGCP = 23 days
DCP = 8 days
CCP = 17 days
Gross operating cycle = 46 + 3 + 23 + 8 = 80 days
Net Operating cycle = 80 17 = 63 days

62

CASH AND PAYMENT PROCEDURE IN GSK

FORMAT FORECASTING
The Format of cash forecast plays a very significant role in management of funds in
enterprises as it is on the basis of this forecast only the company can make its decisions
regarding the use and application of funds. Thus the forecast should be simple and contain all
the required information.
In GSK nabha, the present method of preparing the forecasts for the whole organization start
with the submission of forecasts for the individual departments to the finance department by
the 25th of every month.
The final cash forecast is prepared on monthly basis which starts with an opening balance
and consists of proper record of day-wise- receipts and payments and also gives information
about closing balances.
The cash requirements shown in the cash forecast are then clubbed and a consolidated
demand draft for the required amount is called for from the head office of the company
which is situated at Gurgaon. This demand draft is made from state bank of Patiala, nabha
and collection charges to the tune are paid per DD.s.
This format shows the movement of cash during the month. For e.g. on day one if the total
receipts are six lacs and the total payment are of 10 lac, we are left with a closing balance
deficit of Rs. 4 lacs. These 4 lacs will come in funds required column of day 1. The amount
then calls in for a dd. The amount that we get after our calculation in the dd required for plus
closing balance column will be the opening balance of day 2. In this way, we will continue
our cash calculations for the rest of the days.

63

FUND FORECASTING-JUNE 2015

SIX MONTHS CASH FORECAST
FOR THE PERIOD June 2015 - Nov 2015

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

(Rs.i
n
lacs)
Nov15

GHEE

SCRAP SALES

SMP / PSMP(FROM HO PURCHASE)

RAW BARLEY (FROM HO PURCHASE)

OTHER (RM/PM)

SALARY & WAGES

EXCISE DUTY

SALES TAX / TDS

STORES & SERVICES

COAL

Location
PARTICULARS

RECEIPTS

OTHER RECEIPT
TOTAL

PAYMENTS

64

CONVERSION CHARGES
FREIGHT

CAPITAL EXPENDITURE

OTHERS

TOTAL

NET REQUIREMENT

Payment Details

(MonSat)
Week 1

0.0

Week 2

0.0

Week 3

0.0

Week 4

0.0

Week 5

0.0

TOTAL

Total Monthly Spend ( A+B)

Check

Deutsch
e Bank

65

Analysis of Various Components of Working Capital

Inventory analysis:
Inventory is the total amount of goods and materials. Inventory means stock of three:
1. Raw material
2. Semi finished goods
3. Finished goods
Position of inventory in GSK
Particulars
Raw material
WIP
Finished goods
Total

2010
13921225
4735793
8283102
26940120

2011
12230900
4901850
4509348
21642098

2012
29407402
6270176
5499646
41177224

2013
37297025
9756023
20800165
67853213

2014
28833211
5912280
9022153
43767644

66

 Sundry debtors analysis

Debtors or an account receivable is an important component of working capital and fall under
current assets. Debtors will arise only when credit sales made.
Position of sundry debtors in GSK
Particulars
2010
Debtors over a
67.7
period of 6
months
Other debtors
Total debtors

2,668.50
2,736.20

2011
127.5

2012
69.43

2013
106.44

2014
137.9

4,197.52
4,325.02

3,066.21
3,135.64

4,930.20
5,030.20

9,781.17
9,919.07

Total debtors
12,000.00
9,919.07
10,000.00
8,000.00
5,030.20
6,000.00
4,325.02
3,135.64
4,000.00 2,736.20
2,000.00
0.00
2010

2011

2012

2013

Total debtors

2014

Interpretation:
In the table, we see that there are continuous variations in the debtors of GSK in the last five
successive years. A simple logic is that debtors increase only when the sales increase and if
sales increase it is a good sign for growth. We can see that in the year 2010 the debtors are at
minimum level. But in the year 2014, debtors are higher due to increase in the sales.
We can say that it is a good sign as well as negative sign. Company policy of debtors is very
good but a risk of bad debts is always present in high debtors. When sales are increasing with

67

a great speed the profit also increases. If the company decreases the debtors, they can use the
money in many investment plans.

Cash and bank balance analysis

Cash called the liquid asset and vital current assets; it is an important component of working
capital. In narrow sense, cash includes notes, bank draft, cheque etc.
Particulars
Cash

2010
9,366.6

2011
47,997.69

2012
81,979.89

2013
97,609.83

2014
1,07,965.44

CASH
120000
100000
80000

CASH

60000
81979.69

40000

107965.44

47997.69

20000
0

97609.83

9366.6

2010

2011

2012

2013

2014

Interpretation:
If we analyze the above table we find that it follows an increasing trend. Cash is continuously
increasing from the year 2010. Through analysis, we got that company is utilizing the fixed
cash for exploding the projects that is good for growth.

68

 Current liabilities analysis

Current liabilities are any liabilities that are incurred by the firm on the short term basis or
liabilities that have to be paid within a year.
Particulars
Current liabilities

2010
2,48,67

2011
3,12,46

2012
5,11,09

2013
8,00,40

2014
9,37,67

Interpretation:
If we analyze the above table, we can see that the current liabilities are continuously
increasing. When a company has a minimum liability, it creates a better goodwill in the
market. Higher current liabilities indicate that company is using credit facilities by creditors.

Current asset analysis

Particulars
Current assets

2010
3,71,13

2011
8,53,37

2012
11,72,91

2013
14,23,13

2014
16,70,09

Interpretation:
If we analyze the above table, we can see that the current assets are continuously increasing.
Current assets are continuously increasing may be due to the increase in the cash, cash is
increasing may be due to the increase in sale, but if the current assets are increasing due to
increase in the inventory, then this is not the good sign, because inventory is increasing due
to decrease in sale and there are chances that inventory becomes obsolete and moreover
company has to incur storage cost and other expenses for handling the inventory.

69

FINANCIAL RATIO ANALYSIS

CURRENT RATIO:
Current ratio is given by the formula:
Current Assets
Current Liabilities
Year
2014
2013
2012
2011
2010

Current Assets
16,70,09
14,23,13
11,72,91
8,53,37
3,71,13

Current Liabilities
9,37,67
8,00,40
5,11,09
312,46
2,48,67

CURRENT RATIO
1.78
1.78
2.29
2.73
1.49

Current Ratio
4
Current Ratio

2
0
2010

2011

2012

2013

2014

Interpretation:
A current ratio of 2:1 is generally considered to be acceptable. The current ratio of GSK is
1.78 in 2014 and 2013 and it is decreasing from the year 2010 due to increase in current
assets and increase in current liabilities. The overall position of current ratio for GSK is
satisfactory.

70

 QUICK RATIO ( ACID TEST RATIO):

Quick ratio is given by the formula:
Liquid assets
__________________
Current liabilities
Particulars

2010

2011

2012

2013

2014

Quick Assets (In Lacs)

35165

5,76,19

9,06,87

11,11,12

13,00,14

Current Liabilities (In Lacs)

24867

3,12,46

5,11,09

8,00,40

9,37,67

QUICK RATIO (Times)

1.41

1.84

1.77

1.38

1.38

QUICK RATIO
1.84

2
1.5

1.77

1.41

1.38

1.38
QUICK RATIO

1
0.5
0
2010

2011

2012

2013

2014

Intrepretation:
A quick ratio of 1:1 is considered as acceptable. A higher ratio of 1.38:1 ensures the ability of
the firms quick assets to meet its current liabilities. For GSK, the quick ratio presents an

71

uneven change over the past 5 years. It was 1.41 in 2010 and then increased to 1.84 in 2011
and then decreased t0 1.38 in 2014.

CURRENT ASSETS TURNOVER RATIO:

Formula:

Sales
__________________
Current assets

Particulars
Net Sales
Current Assets
Ratio

2010
13,955.05
3,71,13
0.37

2011

2012

2013

1,70,044.8
85,336.62
1.99

2,02,512.04
1,17,290.83
1.73

2,43,077.18
1,42,312.92
1.71

2014
2,83,209.55
1,67,009.31
1.69

Current asset turnover ratio

2.5
2
1.5
1
0.5
0
2010

1.99

1.73

1.71

1.69

Current asset
turnover ratio

0.37

2011

2012

2013

2014

Interpretation:
Current asset turnover ratio is continuously decreasing from year 2011 due to the increase in
the current assets. Although sales are also increasing but increase the % increase in the
current assets is more as compared to % increase in the sales.

72

WORKING CAPITAL TURNOVER RATIO:

COGS or Sales
Net Working Capital
Particulars

2011

2012

2013

2014

Net Working
Capital
Sales
Ratio

54,135.42

66,182.25

62,273

73,252.7

1,70,044.8
3.14

2,02,512.04
3.06

2,43,077.18
3.90

2,83,209.55
3.86

WCTR
6
4

3.14

3.06

3.9

3.86
WCTR

2
0
2011

2012

2013

2014

Interpretation:
This ratio indicates the number of times the working capital is turned over in the course of a
year. A high working capital ratio indicates the effective utilization of working capital and
less working capital ratio indicates less utilization. For GSK, the ratio is quite same for the
past four years. It was 3.14 in 2011 which decreased to 3.06 in 2012 and then rise to 3.9 in
2013 and then there is negligible change in 2014 when compared to 2013. This ratio has
improved over the last four years. Hence we can see that the component of working capital is
consistently reducing which is considered as a positive sign from the point view of the
finance.
73

Working capital is segregated into Inventory turnover, Debtors turnover and creditors
turnover

INVENTORY TURNOVER RATIO:

Sales
Average Inventory
Particulars
Opening Inventory
Closing Inventory
Average Inventory
Sales

2011

2012

2013

19,482.4
27,717.03
23,599.69
1,70,044.8

27,717.03
26,603.20
27,160.12
2,02,512.0
4
7.45

26,603.20
31,200.06
28,901.63
2,43,077.1
8
8.41

ITR

7.2

2014
31,200.06
3,69,95.58
3,40,97.82
2,83,209.55
8.30

ITR
9
8

8.41
7.45

7.2

8.3
ITR

7
6
2011

2012

2013

2014

Interpretation:
It was observed that Inventory turnover ratio indicates maximum sales achieved with the
minimum investment in the inventory. Therefore, high inventory turnover is desirable but
high inventory turnover ratio may not necessary indicates the profitable situation. An

74

organization, in order to achieve a large sales volume may sometime sacrifice on profit,
inventory ratio may not result into high amount of profit.

DEBTORS TURNOVER RATIO:

The debtors turnover ratio is calculated as follows:
Sales
Average Accounts Receivable
Particulars

2011

Opening Debtors
Closing Debtors
Average debtors
Sales
DTR

2,736.2
4,325.02
3,530.61
1,70,044.8
48.16

2012

2013

2014

4,325.02
3,135.64
3,730.33
2,02,512.04
54.28

3,135.64
5,036.64
4,086.14
2,43,077.18
59.48

5,036.64
9,919.07
7,477.85
2,83,209.55
37.87

DTR
80
60

48.16

54.28

59.48
37.87

40

DTR

20
0
2011

2012

2013

2014

Interpretation:
Debtors turnover indicates the number of times the debtors are turned over during a year.
Generally, the higher the value of debtors turnover the more efficient is the management of
debtors/sales and less liquid debtors.

75

 CREDITORS TURNOVER RATIO:

It is calculated as follows:
Credit Purchases
Average Accounts Payable
Particulars

2011

2012

2013

2014

Opening Creditors
Closing Creditors
Average
Annual Purchase
CTR

14,393.14
17,245.92
15,819.53
44,297.50
2.80

17,245.92
28,499.78
23,154.89
49,763.51
2.15

28,499.78
35,692.46
32,096.12
59,350.20
1.85

35,692.46
50,102.48
42,897.47
65,326.10
1.52

2011

2012

C
CTR
T

R 2013

2014

Interpretation:
Actually, this ratio reveals the ability of the firm to avail the credit facility from the suppliers
throughout the year. Generally, a low creditor turnover ratio implies the favorable since the
firm enjoys lengthy credit period. Now if we analyze the four years data we find that in the
year 2011 the ratio was 2.8 which mean that its position of creditors that year was not very
good, but when we turn ahead the other years creditors turnover ratio is in pretty good
position. In all the four years it has followed, a decreasing trend, which is very good sign for
the company. Therefore, we can say that it enjoys the good credit period from suppliers.

76

Chapter 5: FINDINGS & CONCLUSION:

Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the interrelationship that exists between
them. The major current assets are cash, marketable securities, accounts receivable and
inventory.
Current liabilities are those liabilities which are intended, at their inception, to be paid in the
ordinary course of business, within a year, out of the current assets or earnings of the
concern. The basic current liabilities are accounts payable, bills payable, bank overdraft, and
outstanding expenses.
The goal of working capital management is to manage the firms current assets and liabilities
in such a way that a satisfactory level of working capital is maintained.
The majority of Indian companies maintain relatively lower cash/bank balances. Marketable
securities are yet to emerge as a popular means of cash management. The excess cash is
deployed to retire short term debt/ in short term bank deposits.
Though there is a notable decline over the years but yet inventory constitutes an important
part of total current assets.
Debtors/ receivables also constitute an important part of current assets. The collections are
required to be as quick as possible and thus corporate offer cash discounts for the purpose.
Accounts payables and short term loan/ advances are major components of current liabilities.
The project Working Capital cardinally focuses on inventory and credit terms for the
creditors and debtors.
The approach followed in the project is to reduce the inventory so as to adhere to the
standard norms of the inventory holding thereby releasing the working capital out of it.
Secondly to revise the credit terms in such a way so as to make them uniform across all the
sites. Thus releasing the working capital at the sites where the credit terms were proposed to
be revised.

77

Chapter 6: RECOMMENDATIONS
The result of the live project done at GSK is presented in the form of following
recommendations:
Working capital can be improved by:
1. Reducing the inventory holding period of items.

INVENTORI
ES
4.

Increasing the credit period of Creditors.

CREDIT
PERIOD
3. Decreasing the credit period of Debtors.

CREDIT
PERIOD

78

SUGGESTIONS

Credit period of raw material suppliers to be checked for standardization

Credit period of same supplier to be checked for standardization across all locations

General PO terms to be checked for revision for Simplification

Inventory holding to be validated for checking against the norms

Credit period of same raw material supplied by different supplier to be standardized at

same site in case they differ

If more than one supplier supply raw material at same site then their credit period

should be same
If same supplier supply raw material at different site within the same company then

their credit period should be same

If the same supplier supplies the raw material to different companies then their credit
period should be same.

The company should borrow some funds from markets. As Loan today is the cheaper
source of Finance

Company has to give due consideration on current liabilities which are increasing
though these are increasing slightly but it must be taken into consideration.

The Company to strengthen its cash resources and also to reduce the dependence on
Head Office funds. The company should accelerate its cash sales of Ghee. As is
evident from the Cash Forecast the Ghee sales projected are just Rs. 89 lakhs. This
could be done by extensive marketing activities, covering new markets, exports of the
product etc.

The company should aware of the competitors strategy.

The company should spend more on the advertisements like distributing free testing
of products to the people at public place.

79

BIBLIOGRAPHY
Journal:

G. W. Collins, Analysis of Working Capital, Accounting Review, vol. 21, Issue 4,

pp. 430-441, 1945.

Eljelly Ama ( 2004 ) . Liquidity Profitability trade off : An Empirical investigation

in an Emerging market . International Journal of Commerce and Management . Vol ,
14 , NO . 2 , pp . 48 61 .

Shin . , Soenen , l . ( 1998 ) . Efficiency of working capital and corporate

profitability . Journal Finance Practice and Education . Vol 8 , pp . 37 -45 .

Deloof, M. (2003). Does working capital management affect profitability of Belgian

firms? Journal of Business Finance & Accounting, 30(3-4), 573-588.

Smith, M.B. and E. Begemann, (1997): Measuring Association between Working

Capital and
o Return on Investment. South Africa. Journal of Business Management, Vol 28:
1-5.

Website:

www.gsk-ch.in
www.Money Control.com
www.indiainfoline.com
www.thehackettgroup.com/working-capital-management/

Book:

Prasanna Chandra, Financial Management Theory and Practice, 5 TH

Edition, Tata McGraw Hill Publishing Company Limited, New Delhi, 2001.

Guide to Working Capital Management (McGraw-Hill finance guide series) by Keith

Vincent Smith (Author)

80