PROJECT REPORT :
WORKING CAPITAL
MANAGEMENT
HINDUSTAN UNILIVER (HUL)
Submitted To: Submitted By:
Ms. RENU BANSAL -TANYA CHATURVEDI
-PGDM Batch 2017-19
Date of Submission: PG/ Roll Number:
November 21, 201 - PG20171262
Subject:
Financial Management
Company Overview
Hindustan Unilever (HUL) is India's largest fast moving consumer goods company, with leadership in
Home & Personal Care Products and Foods & Beverages. HUL's brands, spread across 20 distinct
consumer categories, touch the lives of two out of three Indians. In the summer of 1888, visitors to the
Kolkata harbour noticed crates full of Sunlight soap bars, embossed with the words 'Made in England by
Lever Brothers'. With it, began an era of marketing branded Fast Moving Consumer Goods (FMCG).Soon
after followed Lifebuoy in 1895 and other famous brands like Pears, Lux and Vim. Vanaspati was
launched in 1918 and the famous Dalda brand came to the market in 1937.
In 1931, Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company,
followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three
companies merged to form HUL in November 1956; HUL offered 10% of its equity to the Indian public,
being the first among the foreign subsidiaries to do so. Unilever now holds 52.10% equity in the
company. The rest of the shareholding is distributed among about 360,675 individual shareholders and
financial institutions.
The erstwhile Brooke Bond's presence in India dates back to 1900. By 1903, the company had launched
Red Label tea in the country. In 1912, Brooke Bond & Co. India Limited was formed. Brooke Bond
joined the Unilever fold in 1984 through an international acquisition. The erstwhile Lipton's links with
India were forged in 1898. Unilever acquired Lipton in 1972, and in 1977 Lipton Tea (India) Limited was
incorporated.
Pond's (India) Limited had been present in India since 1947. It joined the Unilever fold through an
international acquisition of Chesebrough Pond's USA in 1986.
Since the very early years, HUL has vigorously responded to the stimulus of economic growth. The
growth process has been accompanied by judicious diversification, always in line with Indian opinions
and [Link] 1990s also witnessed a string of crucial mergers, acquisitions and alliances on the
Foods and Beverages front. In 1992, the erstwhile Brooke Bond acquired Kothari General Foods, with
significant interests in Instant Coffee. In 1993, it acquired the Kissan business from the UB Group and the
Dollops Icecream business from Cadbury India.
As a measure of backward integration, Tea Estates and Doom Dooma, two plantation companies of
Unilever, were merged with Brooke Bond. Then in July 1993, Brooke Bond India and Lipton India
merged to form Brooke Bond Lipton India Limited (BBLIL), enabling greater focus and ensuring synergy
in the traditional Beverages business. 1994 witnessed BBLIL launching the Wall's range of Frozen
Desserts. By the end of the year, the company entered into a strategic alliance with the Kwality Icecream
Group families and in 1995 the Milkfood 100% Icecream marketing and distribution rights too were
acquired.
Finally, BBLIL merged with HUL, with effect from January 1, 1996. The internal restructuring
culminated in the merger of Pond's (India) Limited (PIL) with HUL in 1998. The two companies had
significant overlaps in Personal Products, Speciality Chemicals and Exports businesses, besides a
common distribution system since 1993 for Personal Products. The two also had a common management
pool and a technology base. The amalgamation was done to ensure for the Group, benefits from scale
economies both in domestic and export markets and enable it to fund investments required for
aggressively building new categories.
HUL's brands – like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic,
Pepsodent, Close–up, Lakme, Brooke Bond, Kissan, Knorr–Annapurna, Kwality Wall's – are household
names across the country and span many categories – soaps, detergents, personal products, tea, coffee,
branded staples, ice cream and culinary products. They are manufactured over 37 factories across India.
The operations involve over 2,000 suppliers and associates. HUL's distribution network, comprising about
2,500 redistribution stockists, covering 6.3 million retail outlets reaching the entire urban population, and
about 250 million rural consumers.
HUL has traditionally been a company, which incorporates latest technology in all its operations. The
Hindustan Unilever Research Centre (HURC) was set up in 1958, and now has facilities in Mumbai and
Bangalore. HURC and the Global Technology Centres in India have over 200 highly qualified scientists
and technologists, many with post–doctoral experience acquired in the US and Europe.
WORKING CAPITAL FOR HINDUSTAN UNILIVER:
A. On Monetary Basis:
1) GROSS WORKING CAPITAL = TOTAL CURRENT ASSETS
Total current assets = 10218 (in Rs. Cr) {2016-17}
Total current assets = 10345 (in Rs. Cr) {2015-16}
2) NET WORKING CAPITAL = CURRENT ASSETS -
CURRENT LIABILITIES
NWC = 10218 – 7714 = 2504 {2016-17}
NWC = 10345 – 7067 = 3278 {2015-16}
B. On the basis of Time:
1. PERMANENT/FIXED WORKING CAPITAL
- Refers to the minimum level of current assets that a firm needs to
maintain.
2. TEMPORARY or VARIABLE WORKING CAPITAL
- Refers to the amount of working capital, required to meet the
seasonal demands of the firm.
MANAGEMENT OF WORKING CAPITAL
A. “WCM is concerned with the problems that arise in attempt to
manage the current assets, current liabilities & the inter-relationship
that exist between them.”
B. It should also be taken into account that the working capital should
never be excessive or inadequate.
C. Proper balance among the different constituents of current assets is
maintained so that no current has more than required amount
invested in it.
D. To maintain the optimum level of working capital in a big
organization like HUL is a really challenging task
E. The 3 basic components that determine the level of working capital
in any organization are: -
- CASH
- DEBTORS, BILLS RECEIVABLES
- INVENTORY
ANALYSIS OF CASH MANAGEMENT WITH THE HELP OF
CERTAIN RATIOS
The term CASH MANAGEMENT refers to the management of
cash & near cash assets while cash includes coins, currency notes,
cheques, bank drafts, demand deposits; the near cash assets include
marketable securities & time deposits with banks.
Such securities & deposits are easily convertible into cash.
WORKING CAPITAL MANAGEMENT
Working capital represents the net current assets available for day-to-day operating activities. It
is defined as current assets less current liabilities and, the components are usually inventory and
trade receivables, trade payables and bank overdraft.
Many businesses that appear profitable are forced to cease trading due to an inability to meet
short-term obligations when they fall due. Successful management of working capital is essential
to remaining in business.
Working capital management requires great care due to potential interactions between its
components. For example, extending the credit period offered to customers can lead to additional
sales. However, the company’s cash position will fall due to the longer wait for customers to
pay, potentially leading to the need for a bank overdraft. Interest on the overdraft may even
exceed the profit arising from the additional sales, particularly if there is also an increase in the
incidence of bad debts.
Working capital management is central to the effective management of a business because:
Current assets comprise the majority of the total assets of some companies.
Shareholder wealth is more closely related to cash generation than accounting profits.
Failure to control working capital, and hence to manage liquidity, is a major cause of
corporate collapse.
One of the two key objectives of working capital management is to ensure liquidity. A business
with insufficient working capital will be unable to meet obligations as they fall due, leading to
late payments to employees, suppliers and other providers of credit. Late payments can result in
lost employee loyalty, lost supplier discounts and a damaged credit rating. Non-payment
(default) can lead to the compulsory liquidation of assets to repay creditors.
The other key objective is profitability. Funds tied up in working capital tend to earn little, or no,
return. Hence, a company with a high level of working capital may fail to achieve the return on
capital employed (Operating profit ÷ (Total equity and long-term liabilities)) expected by its
investors.
Therefore, when determining the appropriate level of working capital there is a trade-off between
liquidity and profitability:
Working capital management commonly involves monitoring cash flow, assets and liabilities through
ratio analysis of key elements of operating expenses, including the working capital ratio, collection ratio
and the inventory turnover ratio.
LIQUIDITY RATIOS
Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the
calculation of metrics including the current ratio, quick ratio and operating cash flow ratio. Current
liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term debts in an
emergency. Bankruptcy analysts and mortgage originators use liquidity ratios to evaluate going concern
issues, as liquidity measurement ratios indicate cash flow positioning.
Liquidity ratios can be broken down into 3 different categories:
Current Ratio
Quick Ratio
Cash Flow Ratio
CURRENT RATIO
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and
long-term obligations.
Current Ratio = Current Assets / Current Liabilities
If the current ratio falls below 1 this may indicate problems in meeting obligations as they fall due. Even
if the current ratio is above 1 this does not guarantee liquidity, particularly if inventory is slow moving.
For 2016-17:
Current Ratio = 10218/7714
= 1.32
For 2015-16:
Current Ratio = 10345/7067
= 1.46
QUICK RATIO
The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s
ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes
inventories from current assets, and is calculated as follows:
Quick ratio = (current assets – inventories) / current liabilities
The higher the quick ratio, the better the company's liquidity position. It is also known as the “acid-test
ratio" or "quick assets ratio."
For 2016-17:
Quick Ratio= (10218-2541)/7714
= 0.99
For 2015-16:
Quick Ratio= (10345-7067)/2726
=1.202
Profitability Ratios
Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate
earnings compared to its expenses and other relevant costs incurred during a specific period of time.
The main purpose of business unit is to make profit. The profitability ratios are computed to throw light
on the current operating performance and efficiency of the business firm when they are related to some
other figures such as sales , cost of goods sold , operating expenses, capital invested etc.
For 2016-17:
Net Profit Ratio = 14.07
For 2015-16:
Net Profit Ratio = 12.76
ASSET TURNOVER RATIO:
This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always
more favorable. Higher turnover ratios mean the company is using its assets more efficiently. Lower
ratios mean that the company isn’t using its assets efficiently and most likely have management or
production problems.
Asset Turnover Ratio= Net Sales/ Average Total Assets
For 2016-17:
Asset Turnover Ratio (%) = 216.18
For 2015-16:
Asset Turnover Ratio (%) = 225.78
EFFICIENCY RATIOS
The efficiency ratio is typically used to analyze how well a company uses its assets and
liabilities internally. An efficiency ratio can calculate the turnover of receivables, the repayment
of liabilities, the quantity and usage of equity, and the general use of inventory and machinery.
Inventory Turnover Ratio= Cost of Sales/ Average Inventories
This shows how quickly inventory is sold; higher turnover reflects faster-moving inventory.
For 2016-17:
Inventory Turnover Ratio = 13.50
For 2015-16:
Inventory Turnover Ratio = 12.65
FINANCIAL PERFORMANCE
FINANCIAL
NET REVENUE Cash from Operations
2016-17 2016-17
34,487 6,500+
(in Crores) (In Crores)
-The Domestic Consumer -Cash from operations was up
business grew by 4% with 1% ` 1079 crores over the previous
underlying volume growth in a year
challenging environment
EBITDA EPS (basic)
2016-17 2016-17
6,047 20.75
(In Crores)
-Last year basic EPS: ` 19.12
-Earning Before Interest Tax per share
Depreciation and Amortisation
(EBITDA) improved by 38 bps
Economic Order Quantity (EOQ)
Economic order quantity (EOQ) is an equation for inventory that determines the
ideal order quantity a company should purchase for its inventory given a set cost of
production, demand rate and other variables. This is done to minimize variable
inventory costs, and the formula takes into account storage, or holding, costs,
ordering costs and shortage costs. The full equation is as follows:
where :
-S = Setup costs
-D = Demand rate
-P = Production cost
-I = Interest rate (considered an opportunity cost, so the risk
free rate can be used)
BREAKING DOWN 'Economic Order Quantity - EOQ'
-The EOQ formula can be modified to determine different production levels or
order interval lengths, and corporations with large supply chains and high variable
costs use an algorithm in computer software to determine EOQ.
Activity Based Costing
Activity based costing ABC is a method for assigning costs to products, services
projects, tasks, or acquisitions, based on -
Activities that go into them.
Resources consumed by these activities.
ABC contrasts with traditional costing (cost accounting), which sometimes assigns
costs using somewhat arbitrary allocation percentages for overhead or the so-called
indirect costs. As a result, ABC and traditional cost accounting can estimate cost of
goods sold and gross margin very differently for individual products. Contradictory
and uncertain cost estimates can be a problem when management needs to know
exactly which products are profitable and which are selling at a loss.
What Are the Benefits of ABC?
Cost accountants know that traditional cost accounting can hide or distort
information on the costs of individual products and services—especially where
local cost allocation rules misrepresent actual resource usage. As a result, the move
to ABC is usually driven by a need to understand the "true costs" of individual
products and services more accurately. Companies implement activity based
costing in order to:
Identify individual products that are unprofitable.
Improve production process efficiency.
Price products appropriately, with the help of accurate product cost
information.
Reveal unnecessary costs that can be eliminated.
Firms that use ABC consistently to pursue these objectives are practicing activity
based management ABM.
CONCLUSION :
A. The Company maintained a cautious liquidity strategy, with a positive cash balance
throughout the year ended 31st March, 2017 and 31st March, 2016. Cash flow from
operating activities provides the funds to service the financial liabilities on a day-to-day
basis.
B. The Company regularly monitors the rolling forecasts to ensure it has sufficient cash on
an on-going basis to meet operational needs. Any short term surplus cash generated,
over and above the amount required for working capital management and other
operational requirements, is retained as cash and cash equivalents (to the extent
required) and any excess is invested in interest bearing term deposits and other highly
marketable debt investments with appropriate maturities to optimize the cash returns
on investments while ensuring sufficient liquidity to meet its liabilities.
