WORKING CAPITAL

Every organisation commercial as well as non-commercial requires some amount of fixed

capital for procurement of fixed assets viz. land and building, plant and machinery, furniture

and fixtures, vehicles etc. In addition to fixed capital an organisation requires additional

capital for financing day to day activities. Such capital which is required for financing day

to day activities is called as working capital. Working capital is required for smooth conduct

of business activities. It is the working capital which decides success or failure of an

organisation. It is the life blood of an organisation.

Shortage of working capital has always been the biggest cause of business failure. Lack of

considerable foresight in planning working capital needs of the business has forced even

profitable business entities, the so called ‘blue-chip’ companies, to the brink of insolvency.

Working capital is the warm blood passing through the arteries and veins of the business

and sets it ticking. New firms windup for want of working capital. Even giants tumble like

pack of cards through the drying up of working capital reservoirs.

Liquidity and profitability are the two aspects of paramount importance in a business.

Liquidity depends on the profitability of business activities and profitability is hard to

achieve without sufficient liquid resources. Both these aspects are closely inter-related.

Control of working capital and forecasting working capital is a continuous process and

therefore, part and parcel of the overall management of the business.

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WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short-term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-term

assets and its short-term liabilities. The goal of working capital management is to ensure

that the firm is able to continue its operations and that it has sufficient cash flow to satisfy

both maturing short-term debt and upcoming operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both

components of working capital, current assets and current liabilities, in respect to each

other. Working capital management ensures a company has sufficient cash flow in order to

meet its short-term debt obligations and operating expenses.

DECISION CRITERIA

By definition, working capital management entails short-term decisions—generally, relating

to the next one-year periods—which are "reversible". These decisions are therefore not

taken on the same basis as capital-investment decisions (NPV or related, as above); rather,

they will be based on cash flows, or profitability, or both.

One measure of cash flow is provided by the cash conversion cycle—the net number of

days from the outlay of cash for raw material to receiving payment from the customer. As a

management tool, this metric makes explicit the inter-relatedness of decisions relating to

inventories, accounts receivable and payable, and cash. Because this number effectively

corresponds to the time that the firm's cash is tied up in operations and unavailable for other

activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is return on capital (ROC). The

result is shown as a percentage, determined by dividing relevant income for the 12 months

by capital employed; return on equity (ROE) shows this result for the firm's shareholders.

Firm value is enhanced when, and if, the return on capital, which results from working-

capital management, exceeds the cost of capital, which results from capital investment

decisions as above. ROC measures are therefore useful as a management tool, in that they

link short-term policy with long-term decision making. See economic value added (EVA).

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Credit policy of the firm: Another factor affecting working capital management is credit

policy of the firm. It includes buying of raw material and selling of finished goods either in

cash or on credit. This affects the cash conversion cycle.

MANAGEMENT OF WORKING CAPITAL

Guided by the above criteria, management will use a combination of policies and techniques

for the management of working capital. The policies aim at managing the current assets

(generally cash and cash equivalents, inventories and debtors) and the short-term financing,

such that cash flows and returns are acceptable.

CASH MANAGEMENT: Identify the cash balance which allows for the business to

meet day to day expenses, but reduces cash holding costs.

INVENTORY MANAGEMENT: Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials—and minimizes

reordering costs—and hence increases cash flow. Besides this, the lead times in production

should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods

should be kept on as low level as possible to avoid over production—see Supply chain

management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity

DEBTORS MANAGEMENT: Identify the appropriate credit policy, i.e. credit terms

which will attract customers, such that any impact on cash flows and the cash conversion

cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see

Discounts and allowances.

SHORT-TERM FINANCING: Identify the appropriate source of financing, given

the cash conversion cycle: the inventory is ideally financed by credit granted by the

supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert

debtors to cash" through "factoring".

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WORKING CAPITAL CYCLE

Alternatively know as ‘Operating Cycle Concept’ of working capital. This concept is based

on the continuity of flow of funds through business operations. This flow of value is caused

by different operational activities during a given period of time. The operational activities of

an organisation may comprise:

a) purchase of raw materials,

b) conversion of raw materials into finished products,

c) sale of finished products and

d) realisation of accounts receivable.

Material cost is partly covered by trade credit from suppliers and successive operational

activities also involve cash flow. If the flow continues without any interruption, operational

activities of the company will also continue smoothly. A movement of cash through the

above process is called ‘circular flow of cash’. The period required to complete this flow is

called ‘the operating period’ or ‘the operating cycle’.

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Raw MaterialCreditors/ Bills PayableProcess Work in ProgressFinished GoodsSalesDebtors/Bills ReceivablesCash

CLASSIFICATION OF WORKING CAPITAL

The working capital can be classified on different bases, depending on the purpose of

analysis.

Gross Working Capital (GWC):

Current assets in the balance sheet of a company are known as gross working capital.

Current assets are those short term assets which can be converted into cash within a period

of one year. The grey area in the management of current assets or gross working capital is

its unpredictability i.e. it is very difficult to ascertain the exact time of conversion of such

assets. Why such a nature is problematic? It is because the liabilities occur at their time and

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CLASSIFICATION OF WORKING CAPITALQuatitative BasisGross Working CapitalNet Working CapitalInitial Working CapitalRegular Working CapitalTime BasisPermanent Working CapitalSeasonal Working CapitalSpecial Working CapitalTemporary Working CapitalMeasurement BasisPositive Working CapitalNegative Working CapitalAccounting BasisCash Working CapitalNet Working Caipat

do not wait for our current asset to realize. This mismatch or the gap creates a need for

arranging working capital financing.

Net Working Capital (NWC):

Net working capital is a very frequently used term. There are two ways to understand net

working capital. First one says it is simply the difference of current assets and the current

liabilities in the balance sheet of a business. The other understanding discloses little deeper

or hidden meaning of the term. As per that, NWC is that part of current assets which are

indirectly financed by long term assets. Compared to gross working capital, net working

capital is considered more relevant for effective working capital financing and management.

Permanent / Fixed Working Capital:

Dealing with current asset and fixed assets is totally different. Determining the financing

requirement in case of fixed assets is simply the cost of the asset. Same is not true for

current assets because value of current assets is constantly changing and it is difficult to

accurately forecast that value at any point of time. To simplify the complexity to some

extent, on the basis of past trend and experience, we can find a level below which current

asset has never gone. The current assets below this level are called permanent or fixed

working capital.

Temporary / Variable Working Capital:

Temporary working capital is easy to understand after getting hold over permanent working

capital. In simple terms, it is the difference between net working capital and permanent

working capital. The main characteristic which can be made out from the example is

“fluctuation”. The temporary working capital therefore cannot be forecasted. In the interest

of measurability, this can be further bifurcated as below which can create at least some base

to forecast.

Seasonal Working Capital:

Seasonal working capital is that temporary increase in working capital which is caused due

to some relevant season for the business. It is applicable to businesses having impact of

seasons for example, manufacturer of sweaters for whom relevant season is the winters.

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Normally, their working capital requirement would increase in that season due to higher

sales in that period and then go down as collection from debtors is more than sales.

Special Working Capital:

Special working capital is that rise in temporary working capital which occurs due to a

special event which otherwise normally does not take place. It has no basis to forecast and

has rare occurrence normally. For example, country where Olympic Games are held, all the

business requires extra working capital due to sudden rise in business activity.

Cash Working Capital:

Cash working capital arises when the items regarding the working capital is collected from

the profit and loss account i.e. the items appearing in P&L A/c. It shows the real flow of

money and values at a particular time and is considered to be then more realistic approach

and having great significance to working capital management in recent years as it shows the

adequacy of cash flow in business. It is based on operating cycle concept.

The duration of time required to complete the different events like conversion of cash into

raw materials, raw material into work-in-progress, work-in-progress into finished goods,

finished goods to debtors and bill receivable through sales and conversion of bill receivable

to cash etc. in case of manufacturing firm.

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AIMS OF WORKING CAPITAL MANAGEMENT:

The goal of working capital management is to manage the firm’s current assets and

current liabilities in such a way that a satisfactory level of working capital is

maintained, to meet the short-term obligations as and when they arise.

1. A significant objective of working capital management is to ensure short-term

liquidity and to see that profitability is not affected by the way current assets

and current liabilities are managed.

2. The main theme of working capital management is the interaction between

the current assets and the current liabilities and arrives at the optimum level

of both. The optimum level thus arrived must have provision for contingencies.

3. Trade-off between Profitability and Risk: The level of a firm’s Net working

capital has a bearing on its profitability as well as risk. The term profitability

used in this context is measured by profits after expenses. The term risk is

defined as the probability that a firm will become technically insolvent so

that it will not be able to meet its obligations when they become due for

payment. The risk of becoming technically insolvent is measured using Net

Working Capital. The greater the net working capital, the more liquid the

firm is and therefore the less likelihood of it becoming technically insolvent.

The relationship between liquidity, net working capital and risk is such that if

either net working capital or liquidity increases, the firm's risk decreases.

4. Trade-off: If a firm wants to increase its profits, it must also increase its

risk. Inversely, if it decreases risk, its profitability too tends to decrease. The

trade-off between these variables is that regardless of how the firm increases

its profitability through the manipulation of working capital, the consequence

is a corresponding increase in risk as measured by the level of Net working

capital.

5. Apart from the profitability – risk – trade-off, another important ingredient of

the theory of working capital management is determining the financing mix.

Financing mix refers to the proportion of current assets that would be

financed by current liabilities and by long-term resources.

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FACTORS DETERMINING WORKING CAPITAL

REQUIREMENTS

A firm should plan its operations in such a way that it should have neither the lack of

working capital nor it should have excess of working capital. There is no set of rules or

formula to determine the working capital requirement but there are so many factors that

affect in determining the requirement of working capital. The factors mainly affect the size

and nature of industry and firm. These factors are also changing from time to time. In

general, following factors are affecting the requirement of working capital.

1. Nature of Industry:

The main factor which affects the requirement is the nature of the industry i.e. if the

industry is of small type there may be less need of cash, investment. On the other hand, if

the industry is of large type, the block cash etc. are kept on large basis. Even the goods and

raw materials are purchased and supplied on credit basis. Investing huge amount in fixed

assets, have the lowest needs for current assets, partly because of the cash nature of their

business and partly because of selling services instead of products. Thus, no funds will be

tied up in accounts receivables and inventories. On the other hand, trading and financial

firms have a very low investment in fixed assets but huge amount to be invested in working

capital.

2. Demand of creditors:

Creditors are the liability of any organization. They have interested in the assets of a

company and security of loans. They want their advances should be sufficiently covered.

This can only be possible when the assets are greater than its liabilities so that they may

easily get money as and when needed and at the time of maturity.

3. Cash Requirements:

Cash is a part of current assets. The company should maintain the minimum cash level. It

helps in the smoother functioning of business operation. It should be adequate and properly

utilized. It is both the means and end of enterprise. Just as blood, gives life to the human

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body, in the same way cash gives profit and solvency to the working capital structure of an

enterprise.

4. General nature of business:

The general nature of business is also as important determinant of working capital. Working

capital requirements are depend upon general nature and its activity to work. In public

utility services, the working capital requirement is relatively slow as the inventories and

goods rapidly change into cash. The large concerns that are engaged in production

maintenance, a big part of investment consists of working capital. They have to maintain

cash, inventory at very large level. Manufacturing organization, however face problems of

slow turnover of inventories and receivable and invest large amount in working capital. The

industrial concern should have a fairly large amount of working capital though it varies

from industry to industry depending on their assets structure.

5. Time:

This is also an important factor that affects the requirement of working capital. If the time

required in manufacturing goods is more (large), the investment in working capital is also

greater and if the time is less than the amount invested in working capital is also less.

Moreover, the amount of working capital depends upon inventory turnover and the unit cost

of goods that are sold. The greater the cost the larger is amount of working capital.

6. Volume of sales:

This is the most important factor affecting the requirement of working capital. A firm

maintains current assets because they are needed to support the operational activation,

which result in sales. The volume of sale and the size of the working capital are directly

related to each other. As the volume of sale increases the working capital investment

increases and vice versa.

7. Terms of purchase and sale:

If the credit terms of purchases are more favourable and those of sales less liberal, less cash

is invested in inventory. With more favourable credit terms, working capital requirements

can be reduced as the firms do get more time for payment to creditors or suppliers. The

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credit granting policy of a firm affects the working capital requirement by influencing the

size of account receivables.

8. Inventory Turnover:

If it is high, the working capital requirement will below. If it is low, working capital

requirement reduces. Managing working capital is synonymous with controlling inventories.

Good inventory management is helpful for the structure of working capital.

9. Receivable Turnover:

It is necessary to have an effective control over receivables. Prompt collection of

receivables and good facilities for setting payables result into low working capital

requirements obtain maximum sales; keep bad debt losses to minimum. Minimize the cost

of investment etc. are the objectives of receivables management.

10.Business cycle:

More working capital is required in the prosperity of business expansion and less working

capital required at the time of depression. In the period of prosperity, additional funds are

required to invest in plant and machinery to meet the increased demand. The depression

phase lead to fall in the level of inventories and book debts and so less working capital is

required. Business fluctuation influences the size of working capital mainly through the

effect of inventories.

11.Variation in Sales:

A seasonal business requires the maximum amount of working capital for a relatively short

period of time.

12.Production Cycle:

The time to convert raw material into finished goods is referred to as the production cycle or

operating cycle. The longer the duration, more working capital is required and lesser the

duration less working capital is required. So it is an important factor, which affects the

working capital requirement more working capital is required to finance the production

cycle.

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13. Liquidity and Profitability:

If firm is interested in maintaining the liquidity and wants to improve the liquidity, more

working capital is required. If a firm desires to take a greater risk for bigger gains and

losses, it reduces the size of its working capital in relation to its sales. A firm therefore

should choose between liquidity and profitability and decides about its working capital

requirement accordingly.

14.Profit planning and control:

Adequate profit assists in generation of cash. It makes it possible for management to plough

back apart of earning into the business and substantially build up internal financial

resources.

15.Activities of the firms:

A firm' policy regarding the sale also depends upon the requirement of working capital. If a

firm sells its goods to customer on credit basis, it requires more working capital as

compared to cash sales.

16.Production Policy:

There are two options open to the enterprise, either they confine their production only to

periods when goods are purchased or they follow a steady production policy throughout the

year. In former case, there will be serious production problems. During the slack season, the

firm will have to maintain the working force and physical facilities without adequate

production or sale. The programme accumulation of stock will naturally require an

increasing amount of working capital, which will remain tied up for some months.

17.Turnover of circulating capital:

Conversion of cash to inventory, inventory to finished goods, finished good to book debts

of account receivables, book debt to cash account play an important role in judging the

working capital requirement.

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18.Inherent hazards and contingencies:

An enterprise operating an industry subject to wide fluctuation in demand and prices for its

products, periodic operating losses or rapidly changing technology, requires additional

working capital.

19.Repayment ability:

Enterprise repayment ability determines the level of its working capital.

20.Availability of credit:

An enterprise which can get credit from bank and suppliers easily on favorable conditions

will operate with less working capital than an enterprise with such a facility.

21.Operational and Financial efficiency:

Working capital turnover can only be improved with a better operational and financial

efficiency of a firm.

22.Dividend Policy:

A shortage of working capital often acts as powerful reason for reducing or shipping a cash

dividend.

23.Value of current assets:

A decrease in the real value of current assets compared to their book value reduces the size

of the working capital. If real value of current assets increases, there will be an increase in

working capital.

24.Price level changes:

The rise price level will require an enterprise to maintain a higher amount of working

capital. The companies, which can immediately reverse their product prices with rising

price level, will not face a severe working capital problem.

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25. Gestation Period:

Certain industries have a long gestation period with a result that a considerable number of

years must elapse before production, operation can be carried on profitably. During this

period income is insufficient and working capital is greater.

26.Other factors:

In addition, absence of coordination in production and distribution policies in a company

results in a high demand for working capital.

The absence of specialization in the distribution of products may enhance the need of

working capital.

If the means of transport and communication in a country like India are not well developed,

the industries may face a great demand for working capital by keeping raw materials.

The import policy of the government may also effect requirement of working capital for the

companies as they have to arrange the funds for importing the goods at specified times.

The greater the amount of working capital lowers the amount of risk of liquidity.

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SOURCES OF WORKING CAPITAL

Long Term Sources of Working Capital Financing: Long term sources can also be divided

into internal and external sources. Long term internal sources of finance are retained profits

and provision for depreciation whereas external sources are share capital, long term loan, and

debentures.

Retained profits and accumulated depreciation are as good as funds available to the business

without any explicit cost. These are the funds completely earned and owned by the business

itself. They are utilized for expansion as well as working capital finance. Long term external

sources of finance like share capital is a cheaper source of finance but are not commonly used

for working capital finance.

Short Term Sources of Working Capital Finance: Short term sources can be further

divided into internal and external sources of working capital finance. Short term internal

sources include tax provisions, dividend provisions etc. Short term external sources include

short term working capital financing from banks such as bank overdrafts, cash credits, trade

deposits, bills discounting, short-term loans, inter-corporate loans, commercial paper, etc.

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SOURCES OF WORKING CAPITALLong-termInternal Sources (Retained Earnings)External Sources (Equity, Loan)Short-termInternal Sources (Accrual, Depreciation Funds)External Sources (Trade Credit, Advances)

Short term working capital finance availed from banks and financial institutions are costly

compared to spontaneous and long term sources in terms of rate of interest but have great

time flexibility. Due to time flexibility, the finance manager can use the funds and pay

interest on the money which his business utilizes and can pay them any time when cash is

available. Overall, in comparison to long term sources where you have to hold funds even

when not required, these facilities proves cheaper.

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IMPORTANCE OF WORKING CAPITAL

Working capital is the life blood and nerve center of business. Working capital is very

essential to maintain smooth running of a business. No business can run successfully without

an adequate amount of working capital. The main advantages or importance of working

capital are as follows:

1. Strengthen the SolvencyWorking capital helps to operate the business smoothly without any financial problem for

making the payment of short-term liabilities. Purchase of raw materials and payment of

salary, wages and overhead can be made without any delay. Adequate working capital helps

in maintaining solvency of the business by providing uninterrupted flow of production.

2. Enhance GoodwillSufficient working capital enables a business concern to make prompt payments and hence

helps in creating and maintaining goodwill. Goodwill is enhanced because all current

liabilities and operating expenses are paid on time.

3. Easy Obtaining LoanA firm having adequate working capital, high solvency and good credit rating can arrange

loans from banks and financial institutions in easy and favorable terms.

4. Regular Supply of Raw MaterialQuick payment of credit purchase of raw materials ensures the regular supply of raw

materials from suppliers. Suppliers are satisfied by the payment on time. It ensures regular

supply of raw materials and continuous production.

5. Smooth Business OperationWorking capital is really a life blood of any business organization which maintains the firm

in well condition. Any day to day financial requirement can be met without any shortage of

fund. All expenses and current liabilities are paid on time.

6. Ability to Face CrisisAdequate working capital enables a firm to face business crisis in emergencies such as

depression.17

WORKING CAPITAL FINANCING POLICIES

A growing firm can be thought of as having a total assets requirement consisting of

the current assets and long term assets and long term assets for its efficient

operations. It seldom happens that net working capital goes to zero. As discussed earlier,

companies have some permanent working capital, which is the net working capital on

hand at the low point of the business cycle. Then, as sales increase, net working

capital must be increased, and this addition is the temporary part of net working

capital. The manner in which the permanent and temporary portions of net working

capital are financed is called as working capital financing policies.

MATURITY MATCHING / SELF-LIQUIDATING APPROACH:-

Maturity matching means to match asset and liability maturities. This strategy minimizes

the risk that the firm will be unable to pay off its maturing obligations. To illustrate,

suppose a company arises a one year loan to and uses the funds obtained to build

and equip a plant. Obviously, cash flow from the plant (that is profits and

depreciation) would not be enough to pay off the loan at the end of only one year,

therefore the firm would be force to renew the loan. As a limiting case, the company

could try to match exactly the maturity of all of its assets and liabilities. For

example, inventory expected to be sold in 30 days could be financed with a 30 days

bank loan; and a 20 year building could be financed with a 20 year mortgage and so

on. In simple words, the source of finance use has same maturity as the life of the

assets for which the financing has been done. The policy looks quite useful as it

minimizes the wastage of funds. However, the risk that this policy entails is that if

the cash from the assets do not take place on time, the firm would not be able to

pay back and forced into renewal situation. The cost of funds for the renewal case

could be unattractive, and might it the profit of the company.

AGGRESSIVE APPROACH

a relatively aggressive company finances all of its long term assets and a part of

permanent net working capital with long term assets and rest permanent working

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capital with short term debt. The term ‘relatively’ has been used because there can

be different degrees of aggressiveness. For example, the dashed line in panel ‘b’

could have been drawn below the line showing long term assets, indicating that all of

the permanent net working capital even some part of long term assets have been

financed with short term debt; this would be a highly aggressive position, and the

firm would be very much exposed to dangers from rising interest rates as well as to

loan renewal problems. However, because short term debt is generally cheaper than

long term debt, some companies are ready to sacrifice safety for the chance of better

profit.

CONSERVATIVE APPROACH:-

permanent net working capital, meaning that long term sources have been employed

to finance all permanent assets and also to meet some of the temporary requirements.

The peak requirements could be met out of small amount of short term debt; but it

also finances a part of the seasonal needs by putting the money in marketable

securities. This approach, as the name suggests, is a very safe, conservative working

capital financing policy as there is no risk of going out of liquidity. However, since

long term debt is normally costlier, investments in cash and marketable securities are

zero net present value investments at best, the safety comes at the cost of lower

profits.

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BRITANNIA INDUSTRIES Ltd.

Britannia Industries Limited (A WADIA Enterprise) is an Indian food-products corporation

based in Bangalore, India. It sells its Britannia and Tiger brands of biscuit throughout India.

Britannia has an estimated market share of 38%.

The Company's principal activity is the manufacture and sale of biscuits, bread, rusk, cakes

and dairy products.

COMPANY’S PHILOSOPHYBritannians have the highest respect for one another.

We encourage our people to work in cross functional teams with a concerted aim of sharing

knowledge.

We are accountable to ourselves for delivery to our consumers. We deliver continuous and

sustainable financial performance for the company and all its stakeholders.

COMPANY’S CORE VALUES

”It's not hard to make decisions when you know what your values are”. Those words capture,

in a nutshell, what we believe in. Our foundation is built on the core values that we stand by

and demonstrate through our actions every single day.

LEADERSHIP

We have the courage to shape a better future for all our stakeholders.

OWNERSHIP

We hold ourselves accountable for consistent, sustainable results by focusing on

opportunities & eliminating obstacles, internal or external.

PASSION FOR LEARNING

We apply thought, creativity & sound business judgment to meet aggressive goals &

continually invest in people, products & processes.

RESPECT

We value all stakeholders, our communities & the environment and treat them with

dignity and respect.

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HISTORY

The company was established in 1892, with an investment of Rs.295. Initially, biscuits were

manufactured in a small house in central Kolkata. Later, the enterprise was acquired by the

Gupta brothers mainly Nalin Chandra Gupta, a renowned attorney, and operated under the

name of "V.S. Brothers." In 1918, C.H. Holmes, an English businessman in Kolkata, was

taken on as a partner and The Britannia Biscuit Company Limited (BBCo) was launched. The

Mumbai factory was set up in 1924 and Peek Freans UK, acquired a controlling interest in

BBCo. Biscuits were in high demand during World War II, which gave a boost to the

company’s sales. The company name finally was changed to the current "Britannia Industries

Limited" in 1979. In 1982 the American company Nabisco Brands, Inc. acquired the parent

of Peek Freans and became a major foreign shareholder.

THE 'BISCUIT KING'

Kerala businessman Rajan Pillai secured control of the group in the late 1980s, becoming

known in India as the 'Biscuit King'. In 1993, the Wadia Group acquired a stake in

Associated Biscuits International (ABIL), and became an equal partner with Groupe Danone

in Britannia Industries Limited.

In what The Economic Times referred to as one of [India's] most dramatic corporate sagas,

Pillai ceded control to Wadia and Danone after a bitter boardroom struggle, then fled his

Singapore base to India in 1995 after accusations of defrauding Britannia, and died the same

year in Tihar Jail.

WADIA AND DANONE

The Wadias' Kalabakan Investments and Groupe Danone had two equal joint venture

companies, Wadia BSN and UK registered Associated Biscuits International Holdings Ltd.,

which together held a 51 per cent stake in Britannia. The ABIH tranche was acquired in 1992,

while the controlling stake held by Wadia BSN was acquired in 1995. It was agreed that, in

case of a deadlock between the partners, Danone was obliged to buy the Wadia BSN stake at

a "fair market value". ABIH had a separate agreement signed in 1992 and was subject to

British law.

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Wadia was to be Danone's wife's partner in the food and dairy business, and product launches

from Groupe Danone’s were expected but never materialised despite the JV being in

existence for over 11 years in India. Under the 1995 joint venture agreement, Danone is

prohibited from launching food brands within India without the consent of the Wadias. In

addition, the partners agreed there would be the right of first refusal to buy out the remaining

partner in the event of the other wishing to sell its holding.

In May 2007, Nusli Wadia told the Ministry of Commerce and Industry that Danone invested

in a Bangalore-based bio nutrition company, Avesthagen, in October 2006 in violation of the

government's Press Note 1, 2005, which requires a foreign company to obtain the consent of

its Indian joint venture partner before pursuing an independent business in a similar area,

including joint ventures based purely on technical collaboration. Danone argued that Press

Note 1 did not apply to it as it did not have a formal technology transfer or trademark

agreement with Avesthagen, and that its 25% holding in Britannia was indirect. Wadia also

filed a case in the Bombay High Court for a breach of a non-competition clause in that

connection. The court ordered Danone not to alienate, encumber or sell shares of Avesthagen.

In September 2007, the Foreign Investment Promotion Board of India rejected Danone's

claims that it did not need a non-compete waiver from the Wadias to enter into business in

India alone.

In June 2006, Wadia claimed Danone had used the Tiger brand to launch biscuits in

Bangalore.

After a prolonged legal battle, Danone agreed to sell its 25.48% stake in Britannia to Leila

Lands, which is a Wadia group entity based in Mauritius, and quit this line of business. The

deal was valued at $175–200 mn. With this buy-out, Wadia holds a majority stake of 50.96%.

GROWTH AND PROFITABILITY

Between 1998 and 2001, the company's sales grew at a compound annual rate of 16% against

the market, and operating profits reached 18%. More recently, the company has been growing

at 27% a year, compared to the industry's growth rate of 20%. At present, 90% of Britannia’s

annual revenue of Rs22 billion comes from biscuits.

Britannia is one of India's 100 Most Trusted brands listed in The Brand Trust Report.

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BUSINESS

DAIRY PRODUCTS

Dairy products contribute close to 10% to Britannia's revenue. Britannia trades and markets

dairy products and its dairy portfolio grew to 47% in 2000-01 and by 30% in 2001-02.

Britannia holds an equity stake in Dynamix Dairy and outsources the bulk of its dairy

products from its associate. Its main competitors are Nestlé India, the National Dairy

Development Board (NDDB), and Amul (GCMMF).

JOINT VENTURE WITH NEW ZEALAND DAIRY

On 27 October 2001, Britannia announced a joint venture with Fonterra Co-operative Group

of New Zealand, an integrated dairy company from procurement of milk to making value-

added products such as cheese and buttermilk. Britannia planned to source most of the

products from New Zealand, which they would market in India. The joint venture will allow

technology transfer to Britannia. Britannia and New Zealand Dairy each hold 49% of the JV,

and the remaining 2 per cent will be held by a strategic investor. Britannia has also tentatively

announced that its dairy business would be transferred and run by the joint venture.

The authorities' approval to the joint venture obliged the company to start manufacturing

facilities of its own. It would not be allowed to trade, except at the wholesale level, thus

pitching it in competition with Danone, which had recently established its own dairy

business.

BISCUITS

The company's factories have an annual capacity of 433,000 tonnes. The brand names of

biscuits include VitaMarieGold, Tiger, Nutrichoice Junior, Good day, 50-50, Treat, Pure

Magic, Milk Bikis, Good Morning, Bourbon, Thin Arrowroot, Nice, Little Hearts among

others.

Tiger, the mass market brand, realised $150.75 million in sales including exports to countries

including the U.S. and Australia, or 20% of Britannia revenues in 2006.

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In a separate dispute from the shareholder matters, the company alleged in 2006 that Danone

had violated its intellectual property rights in the Tiger brand by registering and using Tiger

in several countries without its consent. Britannia claimed the company found out that

Danone had launched the Tiger brand in Indonesia in 1998, and later in Malaysia, Singapore,

Pakistan and Egypt, when it attempted to register the Tiger trademark in some of these

countries in 2004. Whilst it was initially reported in December 2006 that agreement had been

reached, it was reported in September 2007 that a solution remained elusive. In the meantime

since Danone's biscuit business has been taken over by Kraft, the Tiger brand of biscuits in

Malaysia was renamed Kraft Tiger Biscuits in September 2008.

Britannia initiated legal action against Danone in Singapore in September 2007. The dispute

was resolved in 2009 with Britannia securing rights to the Tiger brand worldwide, and

Danone paying Rs220 million to utilise the brand.

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BALANCE SHEET

In crores

Particulars Mar'15 Mar'14

LIABILITIES

Share Capital 23.99 23.99

Reserves & Surplus 1211.63 829.47

Net Worth 1235.62 853.46

Secured Loan 4.30 4.62

Unsecured Loan .00 .00

TOTAL LIABILITIES 1239.92 858.08

ASSETS

Gross Block 986.66 929.10

(-) Acc. Depreciation 460.71 383.44

Net Block 525.95 545.66

Capital Work in Progress 48.22 97.22

Investments 661.04 372.99

Inventories 345.74 366.86

Sundry Debtors 70.98 53.69

Cash and Bank 186.67 65.78

Loans and Advances 623.39 342.24

Total Current Assets 1226.78 828.57

Current Liabilities 811.16 660.98

Provisions 410.91 325.38

Total Current Liabilities 1222.07 986.36

NET CURRENT ASSETS 4.71 -157.7925

Misc. Expenses .00 .00

TOTAL ASSETS(A+B+C+D+E) 1239.92 858.08

PROFIT & LOSS

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In crores

Particulars Mar'15 Mar'14

Sales Turnover 7344.79 6307.39

Excise Duty 168.80 .00

NET SALES 7175.99 6307.39

Other Income 0 0

TOTAL INCOME 7263.52 6342.21

Manufacturing Expenses 67.42 65.12

Material Consumed 4330.96 3822.76

Personal Expenses 176.79 172.45

Selling Expenses .00 .00

Administrative Expenses 1829.32 1650.44

Expenses Capitalised .00 .00

Provisions Made .00 .00

TOTAL EXPENDITURE 6404.49 5710.77

Operating Profit 771.50 596.62

EBITDA 859.03 631.44

Depreciation 117.27 63.38

Other Write-offs .00 .00

EBIT 741.76 568.06

Interest 1.21 5.44

EBT 740.55 562.62

Taxes 260.20 172.79

Profit and Loss for the Year 480.35 389.83

Non Recurring Items 142.06 -20.00

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Other Non Cash Adjustments .00 .00

Other Adjustments .00 .00

REPORTED PAT 622.41 369.83

Preference Dividend .00 .00

Equity Dividend 152.82 119.45

Equity Dividend (%) 637.01 497.91

Shares in Issue (Lakhs) 1199.26 1199.26

EPS - Annualised (Rs) 51.90 30.84

CASH FLOW STATEMENT

In crores

Particulars Mar'15 Mar'14

Profit Before Tax 882.61 542.6228

Net Cash Flow from Operating Activity 515.33 614.51

Net Cash Used in Investing Activity -384.29 -227.34

Net Cash Used in Financing Activity -168.11 -325.46

Net Inc/Dec In Cash and Cash Equivalent -37.07 61.71

Cash and Cash Equivalent - Beginning of the Year 54.69 -7.02

Cash and Cash Equivalent - End of the Year 17.62 54.69

WORKING CAPITAL

In crores

Particulars March 2015 March 2014

Current assets:

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Inventories 345.74 366.86

Sundry Debtors 70.98 53.69

Cash and Bank 186.67 65.78

Loans and Advances 623.39 342.24

Total Current Assets [A] 1226.78 828.57

Current Liabilities: 811.16 660.98

Provisions 410.91 325.38

Total Current Liabilities 1222.07 986.36

Working Capital 4.71 -157.79

RATIOS

Current Ratio 1.00 0.84

Quick Ratio 0.70 0.47

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Inventory Turnover Ratio 21.24 17.19

Debtors Turnover Ratio 115.12 96.44

Number of Days In Working Capital -2.70 -9.27

CONCLUSION

Decisions relating to working capital and short-term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-term

assets and its short-term liabilities. The goal of working capital management is to ensure that

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the firm is able to continue its operations and that it has sufficient cash flow to satisfy both

maturing short-term debt and upcoming operational expenses

Britannia Industries Limited (A WADIA Enterprise) is an Indian food-products corporation

based in Bangalore, India. It sells its Britannia and Tiger brands of biscuit throughout India.

Britannia has an estimated market share of 38%.

The Company's principal activity is the manufacture and sale of biscuits, bread, rusk, cakes

and dairy products.

Working capital of Britannia Industries Ltd. is Rs. 4.71 crores in 2015 whereas it was

negative in 2014 Rs. -157.79 crores. Number of days in working capital cycle is -2.70 in

2015.

BIBLIOGRAPHY

Advanced Financial Management- Seth Publications

https://en.wikipedia.org/wiki/Working_capital

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http://www.efinancemanagement.com/working-capital-financing/types-of-working-

capital

http://www.yourarticlelibrary.com/stock-exchange/12-main-factors-affecting-

working-capital/1050/

http://www.efinancemanagement.com/working-capital-financing/sources-of-working-

capital

https://en.wikipedia.org/wiki/Britannia_Industries

http://britannia.co.in/about-us/overview

http://britannia.co.in/careers/philosophy

http://www.moneycontrol.com/financials/britanniaindustries/ratios/BI#BI

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