DETERMINANTS OF WORKING CAPITAL

MANAGEMENT ON FIRMS PROFITABILITY

CASE ON
AVA CHOLAYIL HEALTH CARE PVT LTD
Submitted by
ROHITH U J

Under the guidance of

Mr. Gireesh S Pathy
(Assist. Professor, BRIM)

In partial fulfillment of requirement for the award of

MASTER IN BUSINESS ADMINISTRATION
To

BHAVANS ROYAL INSTITUTE OF MANAGEMENT

(Approved by All India Council for Technical Education, AICTE, New Delhi.)
Thiruvankulam, Kochi 682305
2016-2018

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 DECLARATION

I ROHITH U J, hereby declare that this report on

DETERMINANTS OF WORKING CAPITAL MANAGEMENT
ON FIRMS PROFITABILITY A CASE ON AVA CHOLAYIL
HEALTH CARE PVT LTD is a record of my project work done for
AVA CHOLAYIL HEALTH CARE PVT LIMITED, under the
supervision of Assist. Professor Gireesh S Pathy, Bhavans Royal
Institute of Management. I also declare that this project report is my
original work and that it has not previously formed the basis for award
of any degree.

Date: 27/06-2017 ROHITH U

J
Place: Thiruvankulam

DEAN

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 ACKNOWLEDGEMENT

My special acknowledgement and gratitude to AVA Cholayil Health

Care Pvt. Limited for granting me the permission to carry on my
summer project in their reputed organization. I wish to express my
indebtedness and gratitude to Mr. Rony Joseph, C.F.O finance and Mr.
P. Santhanakrishnan, General Manager- Accounts for giving me
support to do this summer project in AVA Cholayil Health Care Pvt.
Limited.

I also express my sincere gratitude and thanks to Prof.

RAJAGOPALA NAIR, The DEAN and the faculty members at
Bhavans Royal Institute of Management for their able guidance and
support for the successful completion of my project.

I would also like to reserve a warm and special note of thanks to my

internal guide Assist. Professor Gireesh S Pathy whose wholehearted
support and guidance helped me to complete this project successfully.

Last but not least my gratitude is to the almighty for showering me

with abundant grace through the entire duration of this project. I believe
that the light that God has passed on to me shall be kept alight in all days
to come

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 ROHITH U
J
EXECUTIVE SUMMARY

This study tries to explore the impact of working capital management on

profitability of AVA Cholayil Health Care Pvt. Limited one of the leading FMCG
firm in India. Working Capital can be defined as the amount when current asset is
surpassing current liabilities. The focus of this paper is to analyze how the
company manages its working capital on the basis of cash, inventory period,
receivable period and payable period management and how it influence the
profitability of an organization.
This project paper starts with the objective of the study and the methodology. The
project paper contains the analysis of three years data of AVA Cholayil Health Care
Pvt. Limited commencing from the year 2014-2016. Most of the researchers found
that degree of efficiency of administration of working capital largely determines
the success or failures of overall operations of an organization. The objective of
this report is to analyze the previous studies and relate them with this paper.
Afterwards description of the company including its history, products, mission,
vision, organization structure etc. is discussed in chapter 3. In the fiscal year 2015-
16 AVA Cholayil Health Care contributed more than 8.9 Crore as taxes to the
national Exchequer. WCM policy for AVA Cholayil Health Care is discussed
elaborately in the chapter 6 as well.
They follow aggressive WCM policy because of their higher utilization of short
term financing. Inventory management performance is evaluated using inventory
conversion period. In the year 2014 it was approximately 56 days which is quite
high in compare to other years. AVA Cholayil Health Care Pvt. Limited time gap
between collecting money from the debtors is very satisfactory with an average
period of 2 days. The organization tries to delay the accounts payable as much as
possible. The time taken by AVA Cholayil Health Care Pvt. Limited to make
payments to creditors is around 75 days.
Analysis of the collected data is presented in chapter six. It contains descriptive,
correlation and t-test analysis of the variables with proper interpretation and it was
found that there is relationship between profitability and working capital

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components. Correlation analysis shows that receivable period is negatively related
with profitability and other variables are positively related. Finally findings and
conclusion chapter includes a summary of the results found in the

TABLE OF CONTENT

Page
SL.N Chapter Title No.
o
1 1 INTRODUCTION 9
2 1.1 Statement of the problem 10
3 1.2 Objective of the study 11
4 1.3 Scope of the study 11
5 1.4 Research Methodology 12
6 1.5 Limitation of the study 14
7 1.6 Chapter Scheme 14

8 2 INDUSTRY PROFILE 16
9 2.1 Overview 16
10 2.2 Consumer Products 18
11 2.3 Rural FMCG Market of India Overview 20
12 2.4 Road Ahead 21
13 2.5 Reaching Out to Consumers 21
14 2.6 PEST Analysis of FMCG Industry 23
15 3 COMPANY PROFILE 24
16 3.1 Company Overview 24
17 3.2 History 24
18 3.3 About the Founder 25
19 3.4 Board of Directors 26
20 3.5 Company Vision 26
21 3.6 Company Mission 26
22 3.7 AVA Group 27
23 3.8 Products and Services Offering 27
24 3.9 Factories 30
25 3.10 Major Competitors 30
26 3.11 Office Timing 30
27 3.12 Leave Eligibility and Procedure 31

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 28 3.13 Travel Policy 31
29 3.14 Reimbursement Policy 31
30 3.15 Functions of head office AVA Cholayil 32
Health Care Pvt. Limited
31 3.16 Departments in AVA Cholayil Health Care 32
Pvt. Limited
32 3.17 Financial Performance 32
33 4 LITERATURE REVIEW 36
34 4.1 Theoretical Concepts 36
35 4.2 Literature Review 48
36 5 RESEARCH DESIGN 51
37 6 DATA ANALYSIS AND 54
INTERPRETATION
38 6.1 Working Capital Management Policy in 54
AVA Cholayil Health Care Pvt. Limited
39 6.2 Data Analysis 64
40 7 FINDINGS AND SUGGESTIONS 69
41 7.1 Findings 69
42 7.2 Suggestions 71
43 7.3 Conclusion 72
44 7.4 Bibliography 73

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 LIST OF TABLES

SL.No Table No Particulars Page No

1 1 Products under Medimix brand 28
2 2 Total Sales 32
3 3 Balance Sheet 34
4 4 Profit and Loss Statement 35
5 5 Selected Variables 51
6 6 Financing policy Ratio 55
7 7 Inventory Conversion Period 56
8 8 Accounts Receivable Period 57
9 9 Accounts Payable Period 58
10 10 Cash Conversion Cycle 61
11 11 Current Ratio 62
12 12 Quick Ratio 63
13 13 Descriptive Analysis 64
14 14 Correlation Analysis 66
15 15 Summary of Hypothesis Testing 68

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 LIST OF FIGURES

SL.No Fig. Particulars Page No

No
1 1 Rural FMCG market trend 21
2 2 Total Sales 33
3 3 Kinds of WC 40
4 4 Financing under Matching Approach 42
5 5 Conservative Approach 43
6 6 Aggressive Approach 43
7 7 Financing Policy 55
8 8 Inventory Days 56
9 9 Receivable Days 57
10 10 Accounts Payable Days 59
11 11 Cash flow cycle 60
12 12 Cash Conversion Cycle 61
13 13 Current Ratio 62
14 14 Quick Ratio 63

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 CHAPTER-1
INTRODUCTION

The fast-moving consumer goods (FMCG) sector is an important contributor to

Indias GDP and it is the fourth largest sector of the Indian economy. Items in this
category are meant for frequent consumption and they usually yield a high return.
The Indian FMCG sector, which is the fourth biggest sector in the Indian economy,
has a market size of 2 trillion with rural India contributing to one third of the
sectors revenues. The Indian FMCG sector is highly fragmented, volume driven
and characterized by low margins. The sector has a strong MNC presence, well
established distribution network and high competition between organized and
unorganized players. The growth of the sector has been driven by both the rural
and urban segments. India is becoming one of the most attractive markets for
foreign FMCG players due to easy availability of imported raw materials and
cheaper labor costs.
Working capital management is an area which emphasize on the productive
utilization available funds created out of good cash flows, financial solvency and
growth strategies at the company. It represents the liquidity position of business
indicating the management of short term assets and liabilities. Basically net
working capital of a company is determined from the deviation of current assets
and current liabilities. When current assets are higher than current liabilities, that
means the company is capable enough to continue its operations and it also defines
that the company have sufficient funds to satisfy its short-term debt and upcoming
operational expenses. Working capital management of the AVA Cholayil Health
Care Pvt. Limited is satisfactory due to efficient management of inventory, debtors,
cash balances and working funds where the major elements of working capital
were inventory, debtors, cash balances and short term investments.

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 1.1 Statement of the problem

With a population of over one billion, India is one of the largest economies in the
world in terms of purchasing power and increasing consumer spending, next to
China. The Indian FMCG industry, with an estimated market size of 2 trillion,
accounts for the fourth largest sector in India. In the last decade, the FMCG sector
has grown at an average of 11% a year; in the last five years, annual growth
accelerated at compounded rate of 17.3%. The sector is characterized by strong
presence of global businesses, intense competition between organized and
unorganized players, well established distribution network and low operational
cost. Availability of key raw materials, cheaper labor costs and presence across the
entire value chain gives India a competitive advantage. The success of any
business house is in the effective utilization of resources which, in turn, is
dependent upon the effective circulation of working capital. The present economy
has become competitive and constrained by the financial imbalance, so it is very
important for any company to maintain sufficient level of working capital for
smooth run. Moreover the economy has faced many challenges like recession and
inflation during different phases of time but managing effective working capital
helps to overcome these challenges. However most of the time in financial decision
making management of working capital has been ignored because it is related with
the financing and investment in short time period. The requirement of working
capital is effected by the nature of the industry as well as the capacity of the firm.
The service industry demands less amount of working capital compared
manufacturing because in case of former ones they do not have to maintain
inventory. Manufacturing units have to keep a sufficient amount of working capital
as it is needed for day to day operations, and at the same time to meet the costs.
The companies that manage the working capital effectively will gain valuable
investment opportunity which adds further profits in its bag. After analyzing the
effectiveness of working capital management, its different components and their
impact on profitability will helps us to the state problem which shall be analyzed in
this study.

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 1.2 Objective of the study

The objective of preparing this report can be explained under two categories. They
are-
Broad Objective:
The objective of the study is to gain an insight into the concept of working capital
management, how working capital is managed at AVA Cholayil Health Care Pvt.
Limited and how it influences the overall performance of the company.
Specific Objective:
To examine the relationship between inventory conversion period and
profitability of the FMCG firms.
To investigate the relationship of Receivable collection period and profitability of
the FMCG firms.
To investigate the relationship of creditors payment period with the profitability
of the FMCG firms.

1.3 Scope of the study

Keeping the magnitude of the work in mind the scope of the study has been
determined. It covers the outset, a description of the role played by the corporate in
improving financial strength of organization. The working capital management
may positively or negatively affect the profitability of the firm. The number of
days accounts payable was negatively correlated with a firm's profitability,
whereas number of days accounts receivables and cash conversion period exhibit a
positive relationship with corporate profitability. This study helps to ascertain the
impact of working capital management in the profitability of FMCG industry.

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 1.4 Research methodology

1.4.1 Research approach

The present study is desk type research study that is it analyses the
data relating to working capital management of the AVA Cholayil Health Care
Pvt. Limited. The secondary sources of the data include annual reports and
audited financial statements. The data, which are presented in this report, have
been taken from secondary sources.
1.4.2 Sources of data
a) Primary data.
b) Secondary data.

a) Primary data: any information that is collected afresh for the first time
specifically for a study is called Primary data. The Primary data happen
to be original in characters. This is desk type research study using
secondary data but doubts clarification and policies of AVA Cholayil
Health Care Pvt. Limited and like which AVA Health Care Cholayil Pvt.
Limited cropped during the analysis of this were collected from officials
of AVA Cholayil Health Care Pvt. Limited who are managing the
working capital of AVA Cholayil Health Care Pvt. Limited.
b) Secondary data: information which has already been collected by
somebody else or some other agency with definite purpose and which
has already been processed is called Secondary data. Such data are
cheaper and more quickly obtained than the primary data. Company
records annual reports of AVA Cholayil Health Care Pvt. Limited were
the major source of secondary data. Some previous work on working
capital management of AVA Cholayil Health Care Pvt. Limited are taken
as secondary data.

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 1.4.3 Research Instrument:
For the present study component of cash conversion cycle (CCC)
have been taken as a measure of working capital and their impact has been checked
on Net Income (NI) which has been taken as a measure of profitability. For the
calculation of cash conversion cycle, inventory conversion period, debtors
collection period and creditors payment period of AVA Cholayil Health Care Pvt.
Limited are taken.

1.4.4 Research tool

Mathematical, statistical and operational research tools for analysis of

financial data related to working capital management were used in this study.
Ratio analysis, correlation analysis and multiple regression analysis were the major
tools used in the study.
a) Ratio analysis: Ratio analysis is one of the techniques of financial
analysis to evaluate financial condition and performance of business
concern.
b) Descriptive analysis: Descriptive statistics are brief descriptive
coefficients that summarize a given data set, which can be either a
representation of the entire population or a sample of it. Descriptive
statistics are broken down into measures of central tendency and measures
of variability, or spread.
c) Correlation analysis: Correlation is a statistical measure that indicates
the extent to which two or more variables fluctuate together. This study
contains Pearson correlation analysis to define the relationship between
firms profitability and Working Capital Management.

1.4.5 Research Period

This study was done during 5 th June 2017 to 30th June 2017 and it covers
working capital management of AVA Cholayil Health Care Pvt. Limited for the
period of 2013-14 to 2015-16

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 1.5 Limitation

The report faced some problems during its preparation, which has limited the
purpose of the report. The limitations are:
To maintain the confidentiality of the information data availability is
a big issue.
The internship has been made for one month duration but it is very
much difficult to set true practical experience with current world
circumstances in this short span of time.
The analysis is purely mathematical in nature.
The study is purely based on the data in the form of annual reports.

In spite of all these limitation I have tried to put the best effort as per as
possible.

1.6 Chapter Scheme

This project report is presented in seven chapters.

The first chapter consists the study which includes statement of the
problem, objectives of the study, scope of the study, research methodology,
limitations of the study and chapter scheme.
The second chapter is about the profile of FMCG industry which narrates
Indian FMCG sector, rural market and PEST analysis of FMCG industry.
The third chapter gives an overview about the profile of AVA Cholayil
Health Care Pvt. Limited which provides history, about the founder, board
members, products offered and financial performance of the company.
The fourth chapter contains theoretical background and literature review
and it gives an idea about the working capital management.
The fifth chapter contains the research design used for the project report,
hypothesis for the test result and the model used for research study in the
project report.
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 The sixth chapter presents the data analysis and interpretation of data
collected for the study
The seventh chapter lists the finding, suggestions and conclusion of the
research.

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 CHAPTER- 2
INDUSTRY PROFILE

2.1 Overview

The Indian FMCG sector is the fourth largest in the economy and has a market size
of US$13.1 billion. Well-established distribution networks, as well as intense
competition between the organized and unorganized segments are the
characteristics of this sector. FMCG in India has a strong and competitive MNC
presence across the entire value chain. It has been predicted that the FMCG market
will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003.16 The
middle class and the rural segments of the Indian population are the most
promising market for FMCG, and give brand makers the opportunity to convert
them to branded products. Most of the product categories like jams, toothpaste,
skin care, shampoos, etc., in India, have low per capita consumption as well as low
penetration level, but the potential for growth is huge. The Indian Economy is
surging ahead by leaps and bounds, keeping pace with rapid urbanization,
increased literacy levels, and rising per capita income. The big firms are growing
bigger and small-time companies are catching up as well.
The personal care category has the largest number of brands, i.e., 21, inclusive of
Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HUL brands in the
21, aggregating INR 3,799 crore or 54% of the personal care category.
Cigarettes account for 17% of the top 100 FMCG sales, and just below the
personal care category. ITC alone accounts for 60% volume market share and 70%
by value of all filter cigarettes in India.
The foods category in FMCG is gaining popularity with a swing of launches by
HUL, ITC, Godrej, and others. This category has 18 major brands, aggregating
INR 4,637 crore. Nestle and Amul slug it out in the powders segment. The food
category has also seen innovations like softies in ice creams, chapattis by HUL,
ready to eat rice by HUL and pizzas by both GCMMF and Godrej Pillsbury. This
category seems to have faster development than the stagnating personal care
category. Amul, India's largest foods company, has a good presence in the food

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category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also
ranks in the top 100 FMCG brands, dominates the biscuits category and has
launched a series of products at various prices.
In the household care category (like mosquito repellents), Godrej and Reckitt are
two players. Goodnight from Godrej, is worth above INR 217 crore, followed by
Reckitt's Mortein at INR 149 crore. In the shampoo category, HUL's Clinic and
Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene
are also trying hard to be positioned on top. Clinic is nearly double the size of
Sunsilk.
Indias GDP unlike that of other emerging developing countries has a bigger
consumer percentage than investment. This is because Indias economic growth
model has not followed the traditional export growth model of the other countries
in Asia like China. This makes India more resilient to external shocks like the
Lehman crisis and provides a more domestic orientation to growth. India has one
of the fastest growing economics in the world and as the per capita income
increase, consumer companies in India are reaping outsized rewards. India has a
competitive consumer goods market with a number of domestic and international
companies competing in multiple markets and segments. Some of the companies
like HLL which is a subsidiary of the global consumer giant Unilever has become
an Indian company all but in ownership. Fast Moving Consumer Goods (FMCG)
companies are different from Consumer Durables companies. FMGC companies
are what is known as Consumer Non-Discretionary Group of Companies. These
Companies sell products of everyday use and are recession proof in the sense that
the products sold by FMCG Manufacturers cant be ignored even in times of
economic recessions.
Fast Moving Consumer Goods Companies have been expanding rapidly in the
Indian market and are set to grow to the next level as Indias middle class grows
bigger and bigger and the existing middle class becomes richer. Indias Fast
Moving Consumer Goods Stocks form a great defensive investment class. They not
only have defensive characteristics but also growth as well. Indias FMCG sector
is expected to grow by more than 100% in the next 5-6 years as more and more
consumers move from unorganized 51 part of the industry to the organized
industry.

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 2.2 Consumer Products Products

2.2.1 Soaps

The product categories can be classified into three segments; premium (Lux,
Dove), popular (Nirma, Cinthol), and economy (Nirma Bath, Lifebuoy). The price
differential between the premium and economy segments is about 2X. The popular
and economy segments account for about 4/5ths of the entire market for soaps.
Penetration of toilet soaps is high at 88.6%. However per capita consumption
levels remain low India's per capita consumption of soap at 460 Gms per annum is
lower than that of Brazil at 1,100 Gms per annum.

Distribution network
Soaps are available in 5 m retail outlets in India, 3.75 m of which are in the rural
areas. Therefore availability of these products is not a problem. 75% of India's
population is in the rural areas; hence about 50% of the soaps are sold in the rural
markets.

Growth
Rural demand growth is expected to occur mainly with consumers moving up
towards premium products. But in the past, the proportion of premium soaps to
economy soaps has not changed much, in volume terms. This is because as some
consumers move up the value chain with increase in disposable incomes, some
consumers move down looking for cheaper substitutes as prices move up. This has
been the case especially, as growth in soap prices has generally outpaced overall
consumer inflation.

2.2.2 Detergents

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The Indian fabric wash market consists of synthetic detergents (comprising bars,
powder and liquids) and oil-based laundry soaps. Although the per capita
consumption of detergents in India (2.7 kg pa) is comparable to some countries like
Indonesia, China and Thailand (around 2 kg pa), it is lower than in others such as
Malaysia, Philippines (3.7 kg) and the USA (10 kg). The Indian detergent market is
expected to grow at 7-9% pa in volume terms. The synthetic detergent market can
be classified into premium (Surf, Ariel), mid-price (Rin, Wheel) and popular
segments (Nirma), which account for 15%, 40% and 45% of the total market,
respectively. The product category is fairly mature and is dominated by two
players, HUL and Nirma. Nirma created a revolution in the market by pioneering
the concept of low-cost detergents.

Growth
High consumer awareness and penetration levels will enable the market to grow at
an average 8-10% per annum with slightly higher growth in the rural areas. Higher
penetration stems from popularity of low-cost detergents. Hence, besides increase
in per capita consumption, there is tremendous scope for movement up the value
chain. HUL, Nirma and P&G are the major players in the market with 40%, 30%
and 12% share, respectively. While HUL dominates the premium segment, Nirma
is the leader in the popular segment.

2.2.3 Personal Care Products

The annual value of personal products business in India, including oral care, hair
cares and skin cares products, is currently estimated to be Rs 54.6 bn. Just five
years ago personal products were considered to be luxury items and attracted a
high excise duty of 120% (except the oral care category). Gradual taxation reforms
in India since 1991 have lowered the excise duty rates to a reasonable 30%,
making these products more affordable. At the same time, rising income levels
have led to rising aspirations on the part on Indian consumers. These factors have
been the catalysts in the exponential growth rate in the personal product category
over the past five years.
Personal care products are further divided into 6 categories:
Oral care
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 Hair care - oils
Hair care - shampoos
Skin care
Cosmetics
Feminine Hygiene

2.3 Rural FMCG Market of India Overview

The Rural FMCG Market of India is on the verge of registering substantial

expansion across the country. The Indian Rural FMCG market is mostly
unorganized and it is generally dominated by small time retailers. The organized
FMCG market is only confined to the urban areas of India. Rural India mostly
depends on agriculture, directly or indirectly for livelihood. Further, almost 70% of
Indian population lives in rural India in around 6,00,000 villages.
Rural India offers tremendous growth prospects for the FMCG industry.
Facilitation of better rural infrastructure like roads, telecommunication, electricity,
supply chain, and transportation would propel the growth of Rural FMCG Market
of India. Further, very low per capita consumption of FMCG products also provide
tremendous opportunity for the growth of Rural FMCG markets in India.
The FMCG sector, which offers tremendous growth prospects are Food and
beverage sector, health care and personal care. Presently, rural India accounts for
34% of total FMCG consumption, but it accounts for more than 40% consumption
in major FMCG categories like as personal care, hot beverages, and fabric care.
The government of India new road map for the development of Indian agricultural
sector will facilitate growth of rural FMCG industry. The Government of India's
latest decision to waive-off loan (Union Budget 2008- 2009) to the tune of ` 60,000
crores would help better crop production in India, which in turn would definitely
help the Indian Rural FMCG market grow to new heights.

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 Rural FMCG market(US$ billion)

100

29.4
18.92
12.3 12.1 14.8
9 10.4
2009 2010 2011 2012 2013 2015 2016 2025E

Fig-1: Rural FMCG market trend

2.4 Road Ahead

FMCG brands would need to focus on R&D and innovation as a means of growth.
Companies that continue to do well would be the ones that have a culture that
promotes using customer insights to create either the next generation of products or
in some cases, new product categories.
One area that we see global and local FMCG brands investing more in is health
and wellness. Health and wellness is a mega trend shaping consumer preferences
and shopping habits and FMCG brands are listening. Leading global and Indian
food and beverage brands have embraced this trend and are focused on creating
new emerging brands in health and wellness.
According to the PwC-FICCI report Winds of change, 2013: the wellness
consumer, nutrition foods, beverages and supplements comprise INR 145 billion to
150 billion market in India, is growing at a CAGR of 10 to 12%.

2.5 Reaching Out to Consumers

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The consumer reach is changing too. Paid advertising is being replaced by below
the line approaches which allow for direct contact with the public. Companies are
also beginning to use the emerging technologies to capture essential data and new
analytical models are developed to measure ROI.
Its a move that is transforming brand relationships and customer experiences of
advertising across the sector. Digital marketing platforms are being used to make
sure products capture peoples imagination. As Chris Lowe, chief marketing officer
for Coca-Cola says, to be effective in todays world. You have to focus on the
basic relationship with the consumer. This kind of thinking means that blogs,
social media and other digital technologies are being used to market products in a
whole new way. The FMCG companies have to react very fast to survive, as there
is no room for complacency. Increasing brand awareness through social media is
the key strategy for any savvy FMCG firm.
These changes all make for a very exciting time in the FMCG/CPG industry and
the ideal time to get involved. With strong cash flows, higher return on capital
employed and steady growth already clear to see, the prospects for the future look
good.
FMCG segment is the fourth largest sector in the Indian economy. The market size
of FMCG in India is estimated to grow from US$30 billion in 2011 to US$74
billion in 2018.
Food products are the leading segment, accounting for 43 percent of the overall
market. Personal care (22 percent) and fabrics care (12 percent) come next in terms
of market share. Growing awareness, easier access and changing lifestyles have
been the key growth drivers for the sector.

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 2.6 PEST Analysis of FMCG Industry

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Political (incl. Legal) Economic Social Technological

Environmental
Government
regulations andEconomic growth Income distribution
research spending
protection
Demographics,
Interest rates &Population growthIndustry focus on
Tax policies
monetary policies rates, Agetechnological effort
distribution
International trade
Government Labor / socialNew inventions and
regulations and
spending mobility development
restrictions
Contract enforcement
law Unemployment Rate of technology
Lifestyle changes
policy transfer
Consumer protection
Work/career and
leisure attitudes Life cycle and speed
Employment laws Taxation of technological
Entrepreneurial obsolescence
spirit

Government Energy use and

Exchange rates Education
organization / attitude costs

(Changes in)
Competition regulationInflation rates Fashion, hypes Information
Technology
Health
Stage of theconsciousness &(Changes in)
Political Stability
business cycle welfare, feelings onInternet
safety

Consumer (Changes in) Mobile

Safety regulations Living conditions
confidence Technology
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 CHAPTER-3
COMPANY PROFILE

3.1 Company Overview

AVA Care is an illustration and esteemed Ayurvedic group from Kerala,
which has a deep history in providing holistic health care. AVA care has the
pride of manufacturing the largest selling branded ayurvedic soap
MEDIMIX. Dr. V.P Sidhan is the founder of the MEDIMIX which is
manufactured using a wholly developed process with manual equipments.
The corporate office of medimix is situated in Chennai.
The company has recently listed in the Limca Book of Records. Its for 2015-
16 stood at INR 100 crore and it has a four percent market share in South
India.

3.2 History
The origin of AVA Cholayil can be traced to the kitchen of Dr. V.P Sidhan, a
physician who worked in the Indian Railways and belonged to a family of
Ayurveda practitioners in Trissur, Kerala. He used oils which his ancestors
had used to treat skin diseases, to produce soap and launched Medimix in
1969.
He kept the process handmade a there was very little money to invest. The
Cholayil Group which he set up, split amicably by the turn of the century.
AVA Cholayil is headed by the founders son-in law Dr. Anoop and handles
the southern market, while the rest of the Indian market is handled by Dr.
Sidhans son V.S Pradeep. Both the groups share the Medimix brand, but
Cholayil has mechanized some parts of the production process.
Medimix was initially sold as skin-care soaps. Its transformation as a
consumer product began in early 1980s when Dr. A.V Anoop entered in the
business. After the brands transformation as an FMCG product they

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 expanded by adding more factories but retained the hand making process.
The fact that handmade soaps had nil excise duty compared to 12.36% for
soaps manufactured using the mechanized process was a motivation (this
benefit was removed in 2005).
3.3 About the Founder
AVA products and services is promoted by Dr. A. V. Anoop, who is also the
managing director of AVA CHOLAYIL HEALTH CARE PVT. LTD. DR.
A.V Anoop is a well-known personality in the field of Ayurveda with over
29 years of experience in soaps, Pharmaceuticals. Cosmetics and food
industry.
Dr. A.V Anoop is an industrialist, property Developer, film producer, social
worker, organizer and Amateur Drama Artist. His tremendous passion for
business expansion has led to formation of AVA products and services in
March 2007 with the idea to deal in FMCG and other health.
The focus of AVAPS is to provide products and services which benefit the
human kind with the knowledge and time-tested procedures assimilated from
the traditional system of Ayurveda, Naturopathy and Yoga which has been
followed from time immemorial.
The handmade soap Medimix classic, Medimix transparent, Medimix sandal
and Medimix Hand wash are being marketed by AVAPS in the southern
states of India namely Andhra Pradesh, Karnataka, Tamil Nadu and Kerala.
Discover freedom from pimples, body odor and skin infections, with the
goodness of the largest selling Ayurvedic soap, Dry skin soap and Acne
soap.
A traditionally handmade soap, Ayurvedic soap, Dry skin soap and Acne
soap with a time tested and unique formulation that combines the goodness
of 18 herbs, Medimix is clinically proven to act effectively on many kinds of
skin problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne.
Discover freedom from pimples, body odor and skin infections with
goodness of the worlds largest selling Ayurvedic soap, Dry sin soap and
acne soap.
A traditionally handmade soap, Ayurvedic soap, Dry sin soap and Acne soap
with a time tested and unique formulation that combines the goodness of 18
herbs, Medimix is clinically proven to act effectively on many kinds of skin
problems like Blemishes/skin Blemishes, pimples, Dry skin, Acne.

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 3.4 Board of Directors

Dr. A.V.Anoop
Managing Director- AVA Cholayil Health Care Pvt. Limited
Mrs. Priya Anoop
Director, Specialist in culinary arts and development of recipes for Sanjeevanam
Restaurant.
Mr. Vivek Venugopal
Director (Business Development), having a Masters in Business Administration
with varied Business interests and experience.
Mrs. Lanchana Vivek
Director, having post-graduation in M.sc Management from UK and Bachelors
degree in law. Her key focus is in developing Sanjeevanam Ayurvedic Treatment
Center and Restaurants, Compliance of all legal/ statutory related matter.
3.5 Company Vision
CREATIVE SOLUTIONS ACTIONABLE RECCOMENDATION
The challenges faced by todays health care industry requires a global
understanding integrated with strong local knowledge. We want our clients invent
tomorrow health care providing fresh ideas, creative solutions and actionable
recommendations. Our success is due to the quality of our team in key locations
around the world with this global vision when local advantage and our selective
partnership with companies sharing our views.
3.6 Company Mission

PROVIDING EMERGING IN SIGHT FOR TOMMOROW

HEALTH CARE

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Medimix is dedicated to excellence in international health care marketing research
and service. Our mission is to provide;
Strategies precise and accurate information at or client finger tips with the
quickest turnaround time possible
Quality control by the client at every step to help you make complex
business decision in total confidence
Market intelligence to give you a better understanding of market
opportunities and help you to provide the best products and services around
the globe.

3.7 AVA Group

AVA Cholayil Health Care Pvt. Ltd - Manufacturers of Medimix soap and
hand wash
AVA Products & Services Marketers of Medimix soap and Hand wash
AVA Properties Pvt. Ltd Real estate business
AVA Productions Movie productions
AVA Charitable Trust Trust to help deserved
Sanjeevanam Vegetarian restaurant
Kaythra
Melam Masalas
MAAC Power

3.8 Products and Services Offering

AVA Group is a diversified conglomerate with interests in Fast Moving Consumer

Goods (FMCG), Health Care, Real Estate and Entertainment. Over the last many
decades, the group has established itself as a leader in each of the sectors it
operates in. Products and Services offered by AVA group of company are:

3.8.1 Medimix

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Launched in 1969, Medimix is the flagship brand of the AVA Group. The soap is
hand-made and has a unique 18 herbs Ayurvedic formulation. Over the years
Medimix has become one of the most recognized and trusted brands of India, in a
survey conducted by Economic Times in 2013, it was voted 13th on the list of
Personal Care brands and 56th on the list of Most Trusted Brands of India .

Medimix Products:

Product
1. Soaps Medimix Classic Soap
Medimix Sandal Soap
Medimix Clear Glycerin- Deep Hydration
Medimix Clear Glycerin- Oil Balance Soap
Medimix Clear Glycerin- Natural Toning Soap
Medimix Transparent Soap.
2. Hand Wash Medimix Herbal Hand wash
Medimix Sandal Hand wash
3. Face Wash Medimix Clear Glycerin Face wash- Oil Balance
Medimix Clear Glycerin Face wash- Natural
Toning
Medimix Clear Glycerin Face wash- Deep
Hydration
Table-1: Products under Medimix brand

3.8.2 Melam
Brand Melam has been a house hold favorite for decades. Its recent takeover by the
diversified AVA group has added further strength to this brand and is sure to delight
the consumers. Over the years Melam has carved a respected name for itself owing
to its quality products and authentic recipes. AVA group has intensified these
efforts along with the setup of modern plant, strict QC norms and checks and by

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going deep in to the roots of Kerala to get authentic and some possibly forgotten
recipes.

3.8.3 Kaytra
Amibika Pillai the renowned hairstylist and makeup artist in the fashion industry
with her knowhow of the industry has joined hands with AVA group which has the
ayurvedic expertise supported by full-fledged R & D team of AVA to market
products in haircare & skincare vertical under the brand name Kaytra.

Products under Kaytra:

KAYTRA SHAMPOO FOR FRIZZY HAIR
KAYTRA SHAMPOO FOR TREATED HAIR
KAYTRA REVITALISING HAIR CREAM
KAYTRA HAIR OIL
KAYTRA HAIR PACK

3.8.4 Sanjeevanam

Sanjeevanam is a holistic health center where you will find a confluence of natural
solutions for all health issues. A complete health package of treatment, beauty, diet
and food have been specially formulated in the four divisions. Ayurvedic Therapy
center, Natural Beauty center, Vegetarian Restaurant and Natural store.
Good health is ensured naturally through proper Ayurvedic treatment, beautified
through our Beauty center, replenished through our restaurant and complemented
by our natural store. The Sanjeevanam concept has been born out of a wealth of
understanding natural living and healing using only natural solutions. The main
idea is to rejuvenate the body physically, mentally and spiritually for better living.
Sanjeevanam is yet another feather in the cap of AVA CARE group. Sanjeevanam
represents total health by integrating the principles of Ayurveda, Naturopathy and

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Yoga. Sanjeevanam is ISO 9001:2008 certified and commenced operations in July
2004.
Health and intellect are the two blessings of life. Sanjeevanam seamlessly blends
conventional and modern Ayurvedic medicinal values based on the above
inspirational principle to provide a healthy body, mind and soul to mankind.
Sanjeevanam comprises of;
Treatment centers.
Hair and face care units.
Vegetarian restaurant.
Health products counters.

3.9 Factories

Thirumazhisai
Madhavaram
Pondicherry
Bangalore
Villupuram (Third partyunit)
Thandalacherry (Water Plant)

3.10 Major Competitors

Mysore sandal soap

Hammam
Dettol
Margo
Chandrika
Manjal
Pears

3.11 Office Timing

9.30 AM to 5.30 PM with Lunch break for an hour (1.00 PM to 2.00 PM)
Employees should be reporting to duty on or before 9.30 AM
9.30 Am 9.35 AM is considered as a grace period

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 9.35 AM 9.45 AM will be treated as late. Only 3 late is permissible per
month above which the casual leave (half day) eligibility may be deducted.
9.45 AM 10.30 AM will be treated as permission and only one permissible
per month above which casual day (half day) eligibility may deducted.
Information regarding late/permission/leave to be passed on to the concerned
head pf the department and Time office/Front office.

3.12 Leave Eligibility and Procedure

For new joiners one casual leave & one sick leave eligibility per month.
After completing one year, eligible for one earned leave per month
additionally.
All leave will be informed in advance and prior sanction is must for all from
their HOD in the leave card provided.
Leave card will be provided on the date of joining by times office/front
office and the same should be submitted to times officer after obtaining the
HODS consent.
In the case emergency leave the information should be passed to the HOD &
Time office/Front office.

3.13 Travel Policy

Employees who are required to outstations for official duty shall be eligible
for travel expenses as appropriate to the employee grade more details of the
travel policy framed from time to time which will be provided at the time of
joining.
Ticket booking is done by admin department for all officials travels which
should be duly authorized by the head of the department.
The request for ticket booking must initiated well in advance

3.14 Reimbursement Policy

Reimbursement such as conveyance, medical & telephone will be credited in

the reimbursement account opened with the Dhanalakshmi Bank.
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 Reimbursement amount will be credited during the second week of the
subsequent month.
The bill for the reimbursement must be submitted to Admin department by
15th march for the whole year.

3.15 Functions of head office AVA Cholayil Health Care Pvt.

Limited
Marketing and Sales
Finance and Accounts
Production, Operations and Purchase
Information Technology
Legal Administration
HR
Media

3.16 Departments in AVA Cholayil Health Care Pvt. Limited

Purchase Department
Production Department
HR & Admin Department
Finance & Accounts Department
Marketing Department
IT Department
Legal Department
Research Department
Maintenance Department
Development Department

3.17 Financial Performance

3.17.1 Total Sales

Year Total Sales ( INR in Lakhs)

2014 10324.59
2015 12622.96
2016 13521.45

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 Table:2 Total Sales

Fig:2 Total Sales

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 3.17.2 Financial Statement

Balance Sheet as at 31st March 2015

Particulars As at As at
31/03/2015 31/03/2014
Rupees in Lakhs Rupees in Lakhs

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 1. EQUITY AND LIABILITIES

(1) Shareholders Funds

(a) Share Capital 1.00 1.00
(b) Reserves and Surplus 2869.33 1899.19

(2) Share application money pending allotment

(3) Non-Current Liabilities

(a) Long-term borrowings 78.51 148.46
(b) Deferred tax liabilities (Net) - -
(c) Other long term liabilities - -
(d) Long term provisions 89.13 130.89

(4) Current Liabilities

(a) Short-term borrowings 244.57 320.48
(b) Trade payables 775.51 587.54
(c) Other current liabilities 251.86 176.08
(d) Short-term provisions 1122.40 614.08

Total 5432.30 3877.72

1. ASSETS
(1) Non-current assets
(a) Fixed assets
i. Tangible assets 888.20 887.42
ii. Intangible assets 6.90 8.37
iii. Capital work-in-progress 99.37 64.02
iv. Intangible assets under - -
development
(b) Non-current investments 18.07 15.57
(c) Deferred tax assets (Net) 86.81 60.78
(d) Long term loans and advances 88.47 346.43
(e) Other non-current assets 3.96 2.12

(2) Current assets

(a) Current investments 558.52 237.35
(b) Inventories 723.23 811.75
(c) Trade receivables 37.64 6.58
(d) Cash and Cash equivalents 1627.22 797.20
(e) Short-term loans and advances 104.17 135.56
(f) Other current assets 1189.76 504.56
Total 5432.30 3877.72

Table 3: Balance Sheet

Profit and Loss statement for the year ended 31st March 2015
Particulars For the year ended For the year ended
31/03/2015 31/03/2014
Rupees in Lakhs Rupees in Lakhs

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 i. Revenue from operations (Gross) 14659.40 11985.16
Less: Excise Duty 2036.44 1660.58
Revenue from operations (Net) 12622.96 10324.59
ii. Other Income 218.15 166.23
iii. Total Revenue (i+ii) 12841.11 10490.82
iv. Expenses:
Cost of material consumed 6267.60 5152.43
Purchase of Stock-in-Trade 236.33 147.88
Changes in inventories of finished goods, work- (2.20) (12.96)
in-progress and stock in trade
Employee benefit expense 1768.18 1856.47
Financial costs 62.30 71.30
Depreciation and amortization expenses 122.96 80.09
Other expenses 2931.49 2664.74
Total Expenses 11386.66 9959.96
v. Profit before exceptional and extraordinary 1454.45 530.85
items and tax (iii-iv)
vi. Exceptional Items - 258.87
vii. Profit before extraordinary items and tax ( v-vi) 1454.45 789.72
viii. Extra ordinary items - -
ix. Profit before tax (vii-viii) 1454.45 789.72
x. Tax expenses:
(1) Current tax 495.00 261.78
(2) Deferred tax (20.82) (24.24)
xi. Profit/(Loss) from the period from continuing 980.26 552.18
operations
xii. Profit /(Loss) from discontinuing operations - -
xiii. Tax expenses of discontinuing operations - -
xiv. Profit / (Loss) from discontinuing operations - -
( xii-xiii)
xv. Profit / ((Loss) for the period (xi + xiv) 980.26 552.18
xvi. Earning per equity share: (Rs)
(1) Basic 9802.61 5521.81
(2) Diluted 9802.61 5521.81

Table:4 Profit and Loss Statement

CHAPTER-4
LITERATURE REVIEW

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 4.1 Theoretical Concept

4.1.1 Working Capital

Working capital may be regarded as lifeblood of a business. It is defined as the
amount of money a company has on hand, or will have, in a given year. Working
capital is calculated by subtracting current liabilities from current assets. That is,
one takes the value of all debts and obligations for the current year and subtracts
that from the value of all cash and assets that might reasonably be converted into
cash in the current year. This is a good measure of the short and medium-term
financial health of a company, and may indicate by how much it can expand its
operations without resorting to borrowing or another capital raising tactic. Working
capital is also called operating assets or net current assets.
A study of working capital is of major importance to internal and external analysis
because of its close relationship with the current day to day operations of a
business.

4.1.2 Concept of working capital

There are two type of working capital, they are
a) Gross working capital
b) Net working capital

a) Gross working capital:

Gross Working Capital is the general concept which determines the
working capital concept. Thus, the gross working capital is the capital
invested in total current assets of the business concern. Gross Working
Capital is simply called as the total current assets of the concern.
Gross working capital = Current Assets

b) Net working capital:

Net Working Capital is the specific concept, which, considers both
current assets and current liability of the concern. Net Working Capital is the
excess of current assets over the current liability of the concern during a
particular period. If the current assets exceed the current liabilities it is said

38 | P a g e
 to be positive working capital; it is reverse, it is said to be Negative working
capital.
Net working capital = Current asset Current liabilities

4.1.3 The Need or Objective of Working Capital

Working Capital is an essential part of the business concern. Every business
concern must maintain certain amount of Working Capital for their day-to-day
requirements and meet the short-term obligations.
Working Capital is needed for the following purposes.
Purchase of raw materials and spares:
The basic part of manufacturing process is, raw materials. It should purchase
frequently according to the needs of the business concern. Hence, every
business concern maintains certain amount as Working Capital to purchase
raw materials, components, spares, etc.
Payment of wages and salary:
The next part of Working Capital is payment of wages and salaries to labor
and employees. Periodical payment facilities make employees perfect in
their work. So a business concern maintains adequate the amount of working
capital to make the payment of wages and salaries.
Day-to-day expenses:
A business concern has to meet various expenditures regarding the
operations at daily basis like fuel, power, office expenses, etc.
Provide credit obligations:
A business concern responsible to provide credit facilities to the customer
and meet the short-term obligation. So the concern must provide adequate
Working Capital.
Optimal return on current asset investment:
The return on the investment made in current assets should be more than the
weighted average cost of capital so as to ensure wealth maximization of the
owners. In other words, the rate of return earned due to investment in current
assets should be more than the rate of interest or cost of capital used for
financing the current assets.

4.1.4 Adequacy, Inadequacy and Excessive Working Capital

Adequacy of working capital:
Working capital should be adequate for the following reasons:
39 | P a g e
 It protects a business from the adverse effect of shrinkage in the value of
current assets.
Possible to pay the entire current obligation promptly and take advantage of
cash discount.
Permits the carrying of inventories at a level that would enable a business to
serve satisfactorily the need of its customers.
Enable a company to operate its business more efficiently because there is
no delay in obtaining material etc. because of credit difficulties.
Inadequacy of working capital:
The credit worthiness of the company is likely to be put at risk because of
the lack of liquidity.
The company may not be able to take advantage of profitability business
opportunity.
The modernization of equipment and even routine repairs and maintenance
facilities may be difficult to administer.
The company cannot afford to increase its cash sale and many have to
restrict its activities to credit sale only.
The company cannot afford to increase its cash sales and many have to
restrict its activities to credit sales only.
Excessive working capital:
Excessive working capital rise to following problems.
High liquidity may reduce a company to undertaken greater production which
may not have a matching demand. It may find itself in an embracing position
unless its marketing policies are properly adjusted to boost up the market for its
good.
The company may invest heavily in its equipment which may be justified
by actual sales or production. This may provide a fertile ground for later
over- capitalization.
The company may enjoy high liquidity and at the same time, suffer from
low profitability.
The company may be tempted to overtrade and lose heavily.
The company keeps very big inventories and tip up its funds
unnecessarily.

4.1.5 Kinds of Working Capital

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Working capital can be classified into three important types on the basis of time.
a) Permanent Working Capital:
It is also known as Fixed Working Capital. It is the capital; the business
concern must maintain certain amount of capital at minimum level at all
times. The level of Permanent Capital depends upon the nature of the
business. Permanent or Fixed Working Capital will not change irrespective
of time or volume of sales.
b) Temporary Working Capital:
It is also known as variable working capital. It is the amount of capital which
is required to meet the Seasonal demands and some special purposes. It can
be further classified into Seasonal Working Capital and Special Working
Capital. The capital required to meet the seasonal needs of the business
concern is called as Seasonal Working Capital. The capital required to meet
the special exigencies such as launching of extensive marketing campaigns
for conducting research, etc.
c) Semi Variable Working Capital:
Certain amount of Working Capital is in the field level up to a certain stage
and after that it will increase depending upon the change of sales or time.

Fig:3 Kinds of WC

4.1.6 Factors Determining Working Capital:

Working Capital requirements depends upon various factors. There are no set of
rules or formula to determine the Working Capital needs of the business concern.

41 | P a g e
The following are the major factors which are determining the Working Capital
requirements.
Nature of business:
Working Capital of the business concerns largely depend upon the nature of
the business. If the business concerns follow rigid credit policy and sell
goods only for cash, they can maintain lesser amount of Working Capital. A
transport company maintains lesser amount of Working Capital while a
construction company maintains larger amount of Working Capital.
Production cycle:
Amount of Working Capital depends upon the length of the production
cycle. If the production cycle length is small, they need to maintain lesser
amount of Working Capital. If it is not, they have to maintain large amount
of Working Capital.
Business cycle:
Business fluctuations lead to cyclical and seasonal changes in the business
condition and it will affect the requirements of the Working Capital. In the
booming conditions, the Working Capital requirement is larger and in the
depression condition, requirement of Working Capital will reduce. Better
business results lead to increase the Working Capital requirements.
Production policy:
It is also one of the factors which affects the Working Capital requirement of
the business concern. If the company maintains the continues production
policy, there is a need of regular Working Capital. If the production policy of
the company depends upon the situation or conditions, Working Capital
requirement will depend upon the conditions laid down by the company.
Credit policy:
Credit policy of sales and purchase also affect the Working Capital
requirements of the business concern. If the company maintains liberal credit
policy to collect the payments from its customers, they have to maintain
more Working Capital. If the company pays the dues on the last date it will
create the cash maintenance in hand and bank.
Growth and expansion:
During the growth and expansion of the business concern, Working Capital
requirements are higher, because it needs some additional Working Capital
and incurs some extra expenses at the initial stages.
Availability of raw materials:

42 | P a g e
 Major part of the Working Capital requirements are largely depend on the
availability of raw materials. Raw materials are the basic components of the
production process. If the raw material is not readily available, it leads to
production stoppage. So, the concern must maintain adequate raw material;
for that purpose, they have to spend some amount of Working Capital. 8.
Earning capacity: If the business concern consists of high level of earning
capacity, they can generate more Working Capital, with the help of cash
from operation. Earning capacity is also one of the factors which determines
the Working Capital requirements of the business concern.

4.1.7 Approaches of Financing Working Capital

Determining the finance mix is an important part of working capital management.
Under this decision, the relationship among risk, return and liquidity are measured
and also which type of financing is suitable to meet the Working Capital
requirements of the business concern. There are three basic approaches for
determining an appropriate Working Capital finance mix.
a) Hedging or matching approach
b) Conservative approach
c) Aggressive approach
a) Hedging or matching approach:
Hedging approach is also known as matching approach. Under this
approach, the business concern can adopt a financial plan which matches
the expected life of assets with the expected life of the sources of funds
raised to finance assets. When the business follows matching approach,
long-term finance shall be used to fixed assets and permanent current
assets and short-term financing to finance temporary or variable assets.

43 | P a g e
 Fig:4 Financing under Matching Approach

b) Conservative Approach:
Under this approach, the entire estimated finance in current assets should
be financed from long-term sources and the short-term sources should be
used only for emergency requirements. This approach is called as Low
Profit Low Risk concept.

Fig:5 Conservative Approach

c) Aggressive Approach:

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 Under this approach, the entire estimated requirement of current assets
should be financed from short-term sources and even a part of fixed
assets financing be financed from short- term sources. This approach
makes the finance mix more risky, less costly and more profitable.

Fig:6 Aggressive Approach

4.1.8 Sources of Working Capital

The two segments of working capital viz., regular or fixed or permanent and
variable are financed by the long-term and the short-term sources of funds
respectively. The main sources of long-term funds are shares, debentures, term-
loans, retained earnings etc.
The sources of short-term funds used for financing variable part of working capital
mainly include the following:
1. Loans from commercial banks
2. Public deposits
3. Trade credit
4. Factoring

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5. Discounting bills of exchange
6. Bank overdraft and cash credit
7. Advances from customers
8. Accrual accounts

Loans from Commercial Banks:

Small-scale enterprises can raise loans from the commercial banks with or without
security. This method of financing does not require any legal formality except that
of creating a mortgage on the assets. Loan can be paid in lump sum or in parts. The
short-term loans can also be obtained from banks on the personal security of the
directors of a country.
Such loans are known as clean advances. Bank finance is made available to small-
scale enterprises at concessional rate of interest. Hence, it is generally a cheaper
source of financing working capital requirements of enterprise. However, this
method of raising funds for working capital is a time-consuming process.
Public Deposits:
Often companies find it easy and convenient to raise short- term funds by inviting
shareholders, employees and the general public to deposit their savings with the
company. It is a simple method of raising funds from public for which the
company has only to advertise and inform the public that it is authorized by the
Companies Act 1956, to accept public deposits.
Public deposits can be invited by offering a higher rate of interest than the interest
allowed on bank deposits. However, the companies can raise funds through public
deposits subject to a maximum of 25% of their paid up capital and free reserves.
Trade Credit:
Just as the companies sell goods on credit, they also buy raw materials,
components and other goods on credit from their suppliers. Thus, outstanding
amounts payable to the suppliers i.e., trade creditors for credit purchases are
regarded as sources of finance. Generally, suppliers grant credit to their clients for
a period of 3 to 6 months.
Thus, they provide, in a way, short- term finance to the purchasing company. As a
matter of fact, availability of this type of finance largely depends upon the volume

46 | P a g e
of business. More the volume of business more will be the availability of this type
of finance and vice versa.
Factoring:
Factoring is a financial service designed to help firms in managing their book debts
and receivables in a better manner. The book debts and receivables are assigned to
a bank called the 'factor' and cash is realized in advance from the bank. For
rendering these services, the fee or commission charged is usually a percentage of
the value of the book debts/receivables factored.
This is a method of raising short-term capital and known as 'factoring'. On the one
hand, it helps the supplier companies to secure finance against their book debts and
receivables, and on the other, it also helps in saving the effort of collecting the
book debts.
Discounting Bills of Exchange:
When goods are sold on credit, bills of exchange are generally drawn for
acceptance by the buyers of goods. The bills are generally drawn for a period of 3
to 6 months. In practice, the writer of the bill, instead of holding the bill till the
date of maturity, prefers to discount them with commercial banks on payment of a
charge known as discount.
The term 'discounting of bills' is used in case of time bills whereas the term,
'purchasing of bills' is used in respect of demand bills. The rate of discount to be
charged by the bank is prescribed by the Reserve Bank of India (RBI) from time to
time. It generally amounts to the interest for the period from the date of
discounting to the date of maturity of bills.
If a bill is dishonored on maturity, the bank returns the dishonored bill to the
company who then becomes liable to pay the amount to the bank. The cost of
raising finance by this method is the amount of discount charged by the bank. This
method is widely used by companies for raising short-term finance.
Bank Overdraft and Cash Credit:
Overdraft is a facility extended by the banks to their current account holders for a
short-period generally a week. A current account holder is allowed to withdraw
from its current deposit account up to a certain limit over the balance with the
bank. The interest is charged only on the amount actually overdrawn. The overdraft
facility is also granted against securities.
Cash credit is an arrangement whereby the commercial banks allow borrowing
money up to a specified-limit known as 'cash credit limit.' The cash credit facility

47 | P a g e
is allowed against the security. The cash credit limit can be revised from time to
time according to the value of securities. The money so drawn can be repaid as and
when possible.
The interest is charged on the actual amount drawn during the period rather on
limit sanctioned. The rate of interest charged on both overdraft and cash credit is
relatively higher than the rate of interest given on bank deposits.
Advances from Customers:
One way of raising funds for short-term requirement is to demand for advance
from one's own customers. Examples of advances from the customers are advance
paid at the time of booking a car, a telephone connection, a flat, etc. This has
become an increasingly popular source of short-term finance among the small
business enterprises mainly due to two reasons.
Accrual Accounts:
Generally, there is a certain amount of time gap between incomes is earned and is
actually received or expenditure becomes due and is actually paid. Salaries, wages
and taxes, for example, become due at the end of the month but are usually paid in
the first week of the next month. Thus, the outstanding salaries and wages as
expenses for a week help the enterprise in meeting their working capital
requirements. This source of raising funds does not involve any cost.

4.1.9 Estimation of Working Capital

Working Capital requirement depends upon number of factors, which are already
discussed in the previous parts. Now the discussion is on how to calculate the
Working Capital needs of the business concern. It may also depend upon various
factors but some of the common methods are used to estimate the Working Capital.
Estimation of components of working capital method:
Working capital consists of various current assets and current liabilities.
Hence, we have to estimate how much current assets as inventories required
and how much cash required to meet the short term obligations. Finance
Manager first estimates the assets and required Working Capital for a
particular period.

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 Percent of sales method:
Based on the past experience between Sales and Working Capital
requirements, a ratio can be determined for estimating the Working Capital
requirement in future. It is the simple and tradition method to estimate the
Working Capital requirements. Under this method, first we have to find out
the sales to Working Capital ratio and based on that we have to estimate
Working Capital requirements. This method also expresses the relationship
between the Sales and Working Capital.

Operating cycle:
Working Capital requirements depend upon the operating cycle of the
business. The operating cycle begins with the acquisition of raw material
and ends with the collection of receivables.
Operating cycle consists of the following important stages:
1. Raw Material and Storage Stage, (R)
2. Work in Process Stage, (W)
3. Finished Goods Stage, (F)
4. Debtors Collection Stage, (D)
5. Creditors Payment Period Stage, (C)

4.2 Literature Review

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Many authors have analysed working capital management from different
perspective in different economic arena, some of which are found very interesting
and useful for my present study. The crux of those literatures is mentioned below:
Nunn deal with strategic determinants of working capital on a product line basis
and examined why firms have different levels of working capital. He used factor
analysis to test 166 variables against the working capital policies of over 1700
businesses or product lines from 1971 to 1978. The study showed that small batch
production, order backlog, capital intensity and relative breadth of product line
were positively correlated to working capital. On the other hand, continuous
process production, capacity utilization and made to order products were
negatively associated with working capital levels. He also found that working
capital divided by sales are positively correlated to industry concentration. Gupta
and Huefer, in the year 1972 examined the differences in financial ratio between
industries and found that differences exist between ratio means among industries.
Frecka and Lee (1983), focused an area of research on the issue of using regression
analysis verses financial ratios for analysis and prediction,
Filbeck and Krueger (2005) discover that significant differences exist between
industries in working capital measures across time. In addition, they discovered
that these measures for working capital change significantly within industries
across time. Maynard Rafuse, (1993) proposed that improvement of working
capital by delaying payment to creditors is an inefficient and ultimately damaging
practice, both to its practitioners and to the economy as a whole. Stock reduction
strategies, drawing on some of the techniques of lean production are far more
effective, and the article proposes that those seeking concentrated working capital
reduction strategies should focus on stock reduction. The authors experience says
that a good proportion of the finance managers will take the view that these
arguments are good in theory, but not in the real world. In the event, when cash
flow pressures arise, suppliers (and even customers) are invariably the first to feel
the draught. Apart from being ethically questionable, this reflects dangerous short-
termism.
Deloof (2003) investigated the relationship between working capital management
and corporate profitability for a sample of 1,009 large Belgian non-financial firms
for the 1992-1996 periods. The result from analysis showed that there was a
negative correlation between profitability that was measured by gross operating
income and cash conversion cycle as well number of days accounts receivable and
inventories. He suggested that managers can increase corporate profitability by
reducing the number of days of accounts receivable and inventories. Singh and
Pandey (2008) studied the impact of working capital components on profitability

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of Hindalco Industries Limited in India for period from 1990 to 2007. Results of
the study showed that current ratio, liquid ratio, receivables turnover ratio and
working capital to total assets ratio had statistically significant impact on the
profitability of Hindalco Industries Limited. Lazaridis and Tryfonidis (2006) have
investigated relationship between working capital management and corporate
profitability of listed company in the Athens Stock Exchange. They used a sample
of 131 listed companies for period of 2001-2004 to examine this relationship. The
result from regression analysis indicated that there was a statistical significance
between profitability, measured through gross operating profit, and the cash
conversion cycle. From those results, they claimed that the managers could create
value for shareholders by handling correctly the cash conversion cycle and keeping
each different component to an optimum level. Ganesan, (2007), analyzed impact
of working capital management upon the performance of firms in Telecom
industry. The variables used were, days sales outstanding, number of days for
payment to vendors, average days inventory held, cash conversion efficiency,
revenue to total assets, revenue to total sales, etc. Findings reveal negative &
insignificant relationship between profitability and daily working capital
requirement in the said industry. Amarjit Gill et.al (2010) explored the relation
between Working Capital Management and the firms profitability by taking a
sample of 88 American Manufacturing Companies which are listed on the New
York Stock Exchange for the period of 3 years from 2005 -2007 and found out that
there existed no statistically significance difference between Average Days of
Accounts Payable and Corporate Profitability. In some of the studies, positive
correlation exists between Average Days of Accounts Payable variable and the
firms profitability. This can be explicated with the fact that lagging payments to
suppliers ensures that the firm has some cash to buy more inventory for sale thus
escalating its sales level hence also enhancing its profits. (Huynh Phuong et.al,
2010). Tahir and Anuar in their paper did a literature review of the related papers
from 2008-2010 and found out that the firms Growth (in Sales) has significant and
positive influences on the firms profitability. They also mentioned that some of the
studies in literature showed that the ratio of fixed financial Assets to total Assets
has a negative relation with the Dependent Variable. Reheman et.al (2010)
conducted a study of working capital management policy of 204 firms from the
manufacturing sector in Pakistan for the period from 1998 till 2007. Their results
showed that the manufacturing firms in Pakistan follow a conservative working
capital management and that the firms need to improve their collection and
payment policy.

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The review of literature highlights the relationship between profitability and
working capital management and how various components of cash conversion
cycle are affecting the profitability of the firms. All the previous studies also lay
emphasis on how important for a firm is to conduct working capital analysis.
Although most of the studies were carried in different environment across different
countries but majority of them suggested similar trends.

CHAPTER- 5

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 RESEARCH DESIGN

This research is ex-post facto research. This approach evaluates the relationship
between variables which have been already occurred. Here variables were used to
test the relationship between the working capital management and the profitability.
I have used quantitative methods as financial data collected from the database was
analyzed.

VARIABLES CODE DESCRIPTION OF HYPOTHESIS EXPECTED

VARIABLES SIGNS
Net Income NI Measure of Dependent
profitability Variable
X1 RCP Receivable Collection Higher gap in (-)
Period, time gap in the collecting money
collection of money from customer
from the customers. lower the profit
X2 APP Accounts Payable Higher the payable (+)
Period, credit period day higher the
offered by the profit.
supplier.
X3 ICP Inventory Conversion Higher the (-)
Period, it represent inventory day lower
how a company the profitability.
holding its inventory
X4 CCC Cash Conversion Higher the CCC (-)
Period, movement of lower the
cash in terms of profitability.
operation.
X5 SOF Size of the firm Higher the size of (+)
determined by log of the firm higher the
total assets of the firm profitability.
Table 5: Selected Variables

HYPOTHESIS
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Hypothesis 1
H0: There is no relationship between receivable period and profitability
H1: Receivable period and profitability are negatively related higher the
receivable period lower the profitability.

Hypothesis 2
H0: There is no relationship between the inventories days and the profitability.
H2: The inventory days are negatively related to the profitability higher the
inventories day lower the profitability.

Hypothesis 3
H0: There is no relationship between the payable days and the profitability.
H3: The payable days are positively related to the profitability higher the payable
days higher the profitability.

Hypothesis 4
H0: There is no relationship between the cash conversion cycle and the
profitability.
H4: Cash conversion cycle (CCC) is negatively related to the firms profitability
higher the CCC lowers the profitability.

Hypothesis 5
H0: There is no relationship between the size of the firm and the profitability.
H5: There is a positive relationship between the size of the firm and the
profitability.
MODEL

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The model is developed on the basic components of Working Capital Management.
As my selected topic is to analyze the impact of Working Capital Management on
profitability, receivable, payable and inventory periods are the basic and core
measures. Net income was considered as the benchmark of profitability as it is the
amount after all kind of deduction. Cash Conversion Cycle was taken to get a
better idea about the relationship between determinants of working capital
management and profitability. Finally size of a firm may influence profitability. As
it is a manufacturing firm and has higher assets, logarithm of total assets was
considered as size of the firm.

NI = [Receivable days(X1), Payable Days(X2), Inventory Days(X3), Cash

Conversion Cycle(X4), Size of the firm(X5)]

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 CHAPTER-6
DATA ANALYSIS AND INTERPRETATION

6.1 Working Capital Management Policy in AVA Cholayil Health

Care Pvt. Limited
In simple terms working capital can be defined as current assets minus current
liabilities. When a company is unable to manage its current liability through its
current assets liquidity problem arises. This can threaten the future existence of the
company. On the other hand when there are excess cash, a company should invest
in short term securities to enhance the wealth of the shareholders. Working capital
policy can be mainly classified in three categories. They are defensive policy,
aggressive policy and conservative policy. If the firm can forecast accurately its
level and pattern of sales, inventory procurement time, inventory usage rates, level
and pattern of production, production cycle time, split between cash sales and
credit sales, collection period, and other factors which impinge on working capital
components, the investment in current assets can be defined uniquely. In case of
uncertainty, the outlay on current assets would consist of a basic component meant
to meet normal requirements and a safety component meant to cope with unusual
demands and requirements. The safety component depends on how conservative or
aggressive is the current asset policy of the firm. If the firm pursues very
conservative policy it would carry a high level of current assets in relation to sale.
On the basis of previous discussion it can be referred that AVA Cholayil Health
Care Pvt. Limited follows an aggressive working capital policy. This company
finances their working capital through short term debt. In an aggressive working
capital policy the whole amount of current assets are financed by short-term debt.
Some part of the non-current assets also will be finance by short term debt. This
policy will push the finance department to be proactive in the management of
working capital always, as they need to sell stocks fast and collect receivables on a
timely manner. In order to, settle the short term debts on time. As AVA Cholayil
Health Care Pvt. Limited has higher sales or growth aggressive working capital
policy suits them the most. The way of determining the nature of working capital
policy is illustrated below:
Financing Policy= Current Liabilities/ Total Asset
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Year Current Liabilities Total Assets Financing Policy
Ratio
2014 169818000 721510000 0.437
2015 239434000 543230000 0.441
2016 278138000 387772000 0.385
Table:6 Financing policy Ratio

Fig:7 Financing Policy

In AVA Cholayil Health Care Pvt. Limited the ratio of current liabilities to total
asset is high which means major portion of their current liabilities are used to
finance their total asset.

6.1.1 Inventory Management

Inventory Period is an efficiency ratio that shows how quickly a company uses up
its supply of goods over a given time frame. While inventory period is shortening
in some industries, such as grocery stores, than in others, such as department
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stores, comparatively lengthening inventory period means that a company has poor
sales or too much inventory. It is computed by dividing inventories by the
company's average daily cost of goods sold.
Inventory Period= Inventories/ COGS * 365

Table:7 Inventory Conversion Period

Inventory Days
60

50

40

30

20

10

0
2013-14 2014-15 2015-16

Fig:8 Inventory Days

Interpretation:
From the above analysis we can see that the inventory conversion period was
highest in the FY 2013-14. After that there is a decline in the inventory conversion
period which is a sign of increase in performance of the products.

6.1.2 Accounts Receivable Days

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Number of Days Accounts Receivable is the length of time required to collect cash
receipts. It is also called "Days of Sales Outstanding". Lesser the time of Accounts
Receivable that means more efficient CCC. AR is a very important module of
WCM that fulfills its term to efficiency. Accounts Receivable is calculated by
dividing the receivables by the net sale per day.

Accounts Receivable Period= Receivables/ Net Sales * 365

Table:8 Accounts Receivable Period

Receivable Days
1.2

0.8

0.6

0.4

0.2

0
2013-14 2014-15 2015-16

Fig:9 Receivable Days

Interpretation:

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 The above figure shows that accounts receivable period of AVA Cholayil
Health Care Pvt. Limited is in between 0 to 2 days which is really satisfactory. It
means they collect money from their customers within a very short period of time.
This indicates their efficiency in cash conversion cycle.

6.1.3 Accounts Payable Period

Accounts Payable is very important component of WCM. It is the length of time
for which the firm is able to delay payment on the purchase of raw materials to its
suppliers. The longer the period of AP, company has better opportunity to finance
on other things. It helps the company to reduce costs by not taking loans for other
expenses. Accounts Payable Period is calculated by dividing trade payables by the
company's cost of goods sold per day.

Accounts Payable Period= Trade Payables/ COGS *365

Table:9 Accounts Payable Period

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 Payable Days
80

70

60

50

40

30

20

10

0
2013-14 2014-15 2015-16

Fig:10 Accounts Payable Days

Interpretation:
We know that higher the payment period the better. In comparison with AVA
Cholayil Health Care Pvt. Limiteds receivable period they hold a higher payable
periods. Though payable days were lower in 2013-14, early payment in later years
has its advantage such as good reputation among creditors. In order to ensure
highest possible amount of cash in hand payable period were increased to 74.745
and above in the year 2015-16.

6.1.4 Cash Conversion Cycle

A cash conversion cycle (or jut cash cycle) is the amount of time it takes for a
company, business or organization to receive payment for its products after it has
paid for its materials or inventory. Calculate cash conversion cycle by adding
inventory costs over a certain time to accounts receivable costs over that same
period and then subtracting accounts payable cost over that period.
CCC mainly helps to figure out how cash is moving throughout the company in
terms of duration. When CCC shortens that means the company has more cash for
other usages such as investing on equipment or innovating manufacturing and
selling process. On the other hand, when CCC lengthens, cash tied up in firm's
operation activities where there is little chance for other investment.
In the below figure the cash conversion cycle of a FMCG firm is illustrated:

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 Fig:11 Cash flow cycle

Operating Cycle is the interval between the order of inventory stock and the date
when cash is collected from receivables. And CCC begins when the company pays
cash to suppliers for the materials purchased and ends when cash is collected from
customers for credit sales.

In general,
CCC = Operating Cycle - Accounts Payable Period
Or
CCC = (Inventory Period + Accounts Receivable Period) - Accounts Payable
Period

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 Year ICP RCP APP CCC
2014 56.037 0.233 40.559 15.711
2015 40.601 1.088 43.536 -1.847
2016 42.098 0.924 74.745 -31.723
Table:10 Cash Conversion Cycle

Cash Conversion Cycle

20

10

0
2013-14 2014-15 2015-16

-10

-20

-30

-40

Fig:12 Cash Conversion Cycle

Interpretation:
In the above figure, it shows CCC of AVA Cholayil Health Care Pvt.
Limited for 2013-2014 is positive. But in the following years the CCC of AVA
Cholayil Health Care Pvt. Limited is keep on decreasing. It comes to negative in
the year 2015 and 2016. That basically means they are getting paid by their
customers long before they pay their suppliers. Essentially this is an interest free
way to finance their operations by borrowing from their suppliers.
The lower the cash cycle the better it looks for a companys finances, so a negative
cash cycle is very desirable. A negative cash cycle is one in which firm dont pay
for their inventory or materials until after the firm has sold the final product
associated with them. It means the firm using their working capital as efficiently as
possible and have available cash for other things.

6.1.5 Cash Management

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One of the techniques of assessing working capital management is measuring the
performance of cash management. The finance manager must maintain adequate
liquidity so that the firm can pay off its obligations. In order to test the liquidity of
a firm one of the best techniques that can be used is the liquidity ratios.
Current ratio
The liquidity and efficiency ratio that evaluates an organizations capability in
paying off its short-term debts using the current assets is called current ratio.

Current Ratio = Current Asset / Current Liability

Year Current Assets Current Liabilities Current Ratio

2014 249300000 169818000 1.468
2015 424054000 239434000 1.771
2016 243974000 278138000 0.877
Table:11 Current Ratio

Current Ratio
2
1.8
1.77
1.6
1.4 1.47
1.2
1
0.8 0.88
0.6
0.4
0.2
0
2013-14 2014-15 2015-16

Fig:13 Current Ratio

Interpretation:

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 The current ratio is fluctuating over the years. The rate is between 0.8 and 1.7
which indicates a sound liquidity position of the company.

Quick Ratio
Quick ratio measures how efficiently the company can pay off its short term
financial liabilities. It is a better measure than current ratio as it deducts less liquid
assets such as inventory.

Quick Ratio = (Current Assets Inventory) / Current Liabilities

Sl. No F.Y Quick Assets Current Liabilities Quick Ratio

1. 2013-14 168119820 169818000 0.99
2. 2014-15 351728546 239434000 1.469
3. 2015-16 169664180 278138000 0.61
Table:12 Quick Ratio

Quick Ratio
1.6
1.47
1.4

1.2
0.99
1

0.8
0.61
0.6

0.4

0.2

0
2013-14 2014-15 2015-16

Fig:14 Quick Ratio

Interpretation:
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 From the above chart a fluctuating quick ratio of that AVA Cholayil Pvt.
Limited can be observed over the years. But it is considered that a quick ratio of
1:1 is satisfactory. So it can be said that AVA Cholayil Pvt. Limited is not
performing very well in managing its cash. In the FY 2014-15 it increased to 1.469
but again decreases to 0.61 in the FY 2015-16. This should be taken care by the
management of the organization soon.

6.2 Data Analysis

6.2.1 Descriptive Analysis

Descriptive statistics are brief descriptive coefficients that summarize a given data
set, which can be either a representation of the entire population or a sample of it.
Descriptive statistics are broken down into measures of central tendency and
measures of variability, or spread. Measures of central tendency include the mean,
median and mode, while measures of variability include the standard deviation or
variance, the minimum and maximum variables, and the kurtosis and skewness.
Mean is to measure central tendency which is the average value of a data set
whereas standard deviation to measure dispersion of the studied sample in which it
is the average difference between observed values and the mean.

Count Mean Std. Min. Max.

Deviation
ICP 3 46.24533333 8.512802378 40.601 56.037
RCP 3 0.748333333 0.453762419 0.233 1.088
APP 3 52.94666667 18.9365027 40.559 74.745
CCC 3 -5.953 23.9820874 -31.723 15.711
Size of the 3 8.727267516 0.134998447 8.588576447 8.858242355
Firm
Table:13 Descriptive Analysis

Interpretation:
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Above table shows the descriptive statistics of the variables used in the study. It
embodies number of observation, mean, standard deviation, minimum and
maximum of the variables used.
The organization receives payment from the customers at an average of 0.7483 and
the standard deviation of the receivable day is 0.4537 which means less than one
day. It is a positive indicator for the organization. It shows that the receivable days
of the organization is positively influencing its profitability.
The maximum value for payable days is of 74.745 days which is very significant.
The average payable days is of 52.946 days indicate approximate 2 months credit
period. It is also positively influencing the profitability of the firm.
The mean value of inventory days is of 46.2453 days which is quite high. The firm
take an average of more than 1month to convert inventory to cash. It can affect the
profitability of the firm negatively.
The average value of cash conversion cycle is -5.953 and the minimum value is
-31.723. The reason behind negative CCC is the significant difference between
receivable and payable periods.

6.2.2 Correlation Analysis

Correlation analysis is a method of statistical evaluation used to study the strength
of a relationship between two, numerically measured, continuous variables. This
particular type of analysis is useful when a researcher wants to establish if there are
possible connections between variables.
If correlation is found between two variables it means that when there is a
systematic change in one variable, there is also a systematic change in the other;
the variables alter together over a certain period of time. If there is correlation
found, depending upon the numerical values measured, this can be either positive
or negative.
Positive correlation exists if one variable increases simultaneously with the
other, i.e. the high numerical values of one variable relate to the high
numerical values of the other.

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 Negative correlation exists if one variable decreases when the other
increases, i.e. the high numerical values of one variable relate to the low
numerical values of the other.
Pearsons product-moment coefficient is the measurement of correlation and
ranges (depending on the correlation) between +1 and -1. +1 indicates the strongest
positive correlation possible, and -1 indicates the strongest negative correlation
possible. Therefore the closer the coefficient to either of these numbers the stronger
the correlation of the data it represents. On this scale 0 indicates no correlation,
hence values closer to zero highlight weaker/poorer correlation than those closer to
+1/-1.
The correlation coefficients are interpreted in this report as per the following scale:
0 to 0.2 Very weak, negligible
0.2 to 0.4 Weak, low
0.4 to 0.7 Moderate
0.7 to 0.9 Strong, high, marked
0.9 to 1.0 Very strong, very high

Table: 14 Correlation Analysis

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Interpretation:
The result shows a negative relationship between net income and inventory days
which is -0.9482. It indicate that higher the inventory conversion period lower the
profitability of the firm. Correlation coefficient of inventory conversion period is
0.9 which shows a very strong relationship. The p value is 0.02 which is less than
the level of significance. It shows that there is a significant relationship between
the net income and inventory days.
The coefficient for the receivable day is 0.973 which indicate very strong positive
correlation with profitability. The receivable days of the organization takes an
average of less than 1 day for receiving payments. It increases the profitability of
the firm. There is a significant relationship between the profitability and receivable
days with a p value of 0.024.
The correlation result between accounts payable period and net income indicate
with positive coefficient of 0.189 which shows very weak relationship. The result
for correlation between the accounts payable days and profitability is positive even
though accounts payable days of the organization making only slight changes in
the profitability.
Cash Conversion Cycle of the organization shows a negative relationship which is
significant. The correlation coefficient of CCC is -0.468 which is moderate.
The relation between size of the firm and profitability is moderately correlated
with a coefficient of 0.633. The level of significance is 0.02 which shows a
significant relationship between size of the firm and the profitability. When the size
of the firm increases it affect the profitability of the firm positively with a moderate
correlation.

HYPOTHESIS TESTING

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 Hypothesis Result
H01: There is no relationship between receivable period and the Rejected
profitability.
H02: There is no relationship between the inventories days and Rejected
the profitability.
H03: There is no relationship between the payable days and the Rejected
profitability.
H04: There is no relationship between the cash conversion cycle Rejected
and the profitability.
H05: There is no relationship between the size of the firm and Rejected
the profitability.
Table:15 Summary of Hypothesis Testing

CHAPTER 7
FINDINGS AND SUGGESTIONS

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 7.1 Findings of the Study
A firm must have adequate working capital, i.e.; as much is needed the firm. It
should neither be excessive nor inadequate. Both situation are dangerous.
Excessive working capital means the firm has idle funds which earn no profits for
the firm. Inadequate working capital means the firm does not have sufficient funds
for running its operations. It will be interesting to understand the relationship
between the determinants of working capital and profitability of the firm. The basic
objective of working capital management is to manage firms current assets and
current liabilities in such a way that the satisfactory level of working capital is
maintained, i.e.; neither inadequate nor excessive.
After conducting the report through various analysis and evaluation of influence of
Working Capital Management on AVA Cholayil Health Care Pvt. Limited
Profitability, many findings have been found; it includes both positive and negative
findings. From the study, it is shown that there is a significant relationship between
profitability and the determinants of working capital management. The
performance of the company should not be judged only on the basis of profitability
measured in terms of return on sales and investment. This performance has a direct
link with the fluctuation of working capital of the firm. Thus, management should
also emphasize the growth and efficiency of investment in working capital along
with the effective management of fixed capital over time.
The major findings after detailed analysis of AVA Cholayil Health Care Pvt.
Limited profitability by using determinants of working capital management model
are as follows
a) AVA Cholayil Health Care Pvt. Limited follows an aggressive working
capital policy. The firm utilizes their estimated requirement of current assets
which are financed from short-term sources and even a part of fixed assets
be financed from short- term sources. This approach makes the finance mix
more risky, less costly and more profitable. As AVA Cholayil Health Care
Pvt. Limited has higher sales or growth aggressive working capital policy
suits them the most.
b) AVA Cholayil Health Care Pvt. Limited maintain an effective fund collection
system of account receivable which is excellent over the years. It takes an
average of 1 day for collection of receivables from the debtors. It helps to
increase the profitability of the firm. Low processing time for collection of
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 receivables from the debtors makes high profitable to the firm. It has a very
strong positive relationship between the profitability of the firm.
c) Accounts Payable Period of the organization have a positive and significant
relation with the profitability of the firm. AVA Cholayil Health Care Pvt.
Limited maintain an average of 52 days for the payment to their creditors.
Higher the payment period higher will be the profit. Even though the firm
have a positive correlation between the profitability and accounts payable
period which is very weak. It indicate that the payable period making only a
slight positive changes to the profit. Even though in the year 2016 payable
period of the firm comes to 74 days which is almost double from the past
years 2014 and 2015. It is a good sign that the organization has a good
reputation among creditors. It helps to increase the payable period in the
future. The longer the period of accounts payable period, the organization
has better opportunity to finance on other things. It helps the organization to
reduce costs by not taking loans for other expenses.
d) The inventory conversion period of AVA Cholayil Health Care Pvt. Limited
is too high hitting a maximum of 56 days in the year 2014. The firm try to
decrease the inventory conversion period in the recent years but still it is
high. Since it cannot convert inventory into sales quickly enough, its
inventory increases resulting in decreased quick ratio. From the study it
shows that there is a very strong negative and significant relation among the
profitability and inventory conversion period. Inventory conversion period
of the organization is pulling back the profit of the firm. Raw material and
Work-in-Progress are the main inventories making a negative impact on
profitability. In certain cases the organization have to purchase raw material
and stock them in advance which is advisable to the firm. But inventories
under work-in-progress pulling back the profit of the firm. Higher the
inventory conversion period lower will be the profit.
e) The firms Cash Conversion Cycle is negative which is very desirable. A firm
with negative cash conversion cycle one in which firm dont pay for their
inventory or materials until after the firm has sold the final product
associated with them. It means the firm using their working capital as
efficiently as possible and have available cash for other things. After
analyzing the correlation between the profitability and cash conversion cycle
it shows a negative relationship which is significant. Cash conversion cycle
shows a negative correlation because of high inventory period which makes
the profit lower. But the cash conversion cycle have only moderate impact

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 on profitability. It is just because receivable days have high positive
correlation. If the firm reduces its inventory conversion period there will be
a positive impact on cash conversion cycle. Even though the efficiency of
finance department of the organization try to keep on decreasing cash
conversion cycle to negative.
f) Size of the firm also make an impact of profitability of the organization. As
sales increases the size of the firm also increases. It has a positive
relationship with profitability.
g) Current Ratio of the organization is fluctuating over the years. Even though
the organization have sound liquidity position, the current ratio of the
organization reduces from 1.771 to 0.877. If the current ratio decreases the
firm capability to paying off its short term debt also decreases which affect
the organizations credit worthiness.
h) A fluctuating quick ratio of AVA Cholayil Health Care Pvt. Limited can be
observed over the years. But it is considered that a quick ratio of 1:1 is
satisfactory. So it can be said that AVA Cholayil Health Care Pvt. Limited is
not performing very well in managing its cash. In the FY 2014-15 it
increased to 1.469 but again decreases to 0.61 in the FY 2015-16. This
should be taken care by the management of the organization soon.
i) Net Sale of AVA Cholayil Health Care Pvt. Limited is increasing in the
recent years.
j) The effective management of working capital like other areas of
management require a clear statement of goals to pursue and responsibilities
to be allotted.

7.2 Suggestions
The working capital management is very important for maintaining financial
position of any firm which further signifies the success of the firm in all
dimensions. It can be apprehended from the study that, especially in the context of
FMCG sector it plays a significant role for managing the profitability of the firm. It
is important for the firm to preserve an adequate level of working capital because
inadequate level of working capital impairs profitability. Profitability of the
business may be dependent on many factors together with the working capital
management of a concern. Therefore, the present study endeavors to examine the
relationship between the determinants of working capital and profitability.

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 Inventory conversion period should be reduce by the management in the
future years. Past 3 years inventory conversion period was not satisfactory
because it pullback the profitability of the firm. The management should
focus on raw material and work in progress to reduce the inventory
conversion period. A detailed analysis should be taken before advance
purchase and stocking of raw material. A comparative study should be taken
to know whether advance purchase and stocking is profitable than reducing
raw material conversion period. Also work-in-progress period should be
reduce to increase the profit of the firm.
Accounts payable period is positively related to the profitability of the
organization even though a very weak positive impact is making on
profitability. Therefore the management should maintain to increase trust
worthiness among the creditors. So the payable period of the firm can be
increased. For the purpose of credibility among the creditors the firm should
focus to increase the current ratio and quick ratio of the firm.
Cash Conversion Cycle of the firm is in negative. It shows the efficiency of
the finance department who maintain a negative cash conversion cycle. But
to make an impact on profitability the cash conversion cycle should be keep
on decreasing. The inventory period should be less and accounts payable
period should be high. Through that in the future years the organization can
maintain a negative cash conversion cycle.

7.3 Conclusion
One of the best ways to judge a company's cash flow health is to take a deep
look on its working capital management. The better a company can manage its
working capital the lower company's need of borrowing.
Working capital management of AVA Cholayil Health Care Pvt. Limited is
highly effective. The project is very much profitable. There is available internal
source of fund due to satisfactory amount of period during the period under
study. They have no difficulties in management of inventory, debtors, cash
balances and current liabilities. The liquidity position of the company is
satisfactory due to good turnover of current assets, inventory, debtors and cash
balances. The company enjoys good facility of cash credit and other working
capital loan though the borrowing amount of the company is very low. There is
no difficulty in repayment of current liabilities out of the operating profit.

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 Working Capital Management of AVA Cholayil Health Care Pvt. Limited has
been doing very important to the company. It has lots of challenges as
competition increases in the market and also has lots of scope of developing in
several areas. If challenges can be faced technically by maintaining continuous
support to sales teams and dealers then the credit management practice of this
company can be more effective to the overall development of the company.

7.4 Bibliography

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MANAGEMENT PRACTICED IN PHARMACEUTICAL COMPANIES
LISTED IN DHAKA STOCK EXCHANGE, BRAC University Journal,
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Deloof, M. (2003) Does Working Capital Management affect Profitability of
Belgian Firms, Journal of Business Finance and Accounting, 30 (3), pp 573-
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Eljelly, Abuzar M.A. "Liquidity Profitability Tradeoff: An Empirical
Investigation In An Emerging Market". Int Journal of Commerce & Mgt
14.2 (2004): 48-61. Web.
Filbeck, G., & Krueger, M. T. (2005). An Analysis of Working Capital
Management Results Across Industries. Mid-American Journal of Business,
(20), 11-18.
Ganeshan, V. (2007) An Analysis of Working Capital Management
Efficiency in Telecommunication Equipment Industry. Rivier academic
journal, 3 (2). [Online] Available from: http://www.rivier.edu/journal/ROAJ-
Fall-2007/J119-Ganesan.pdf [Accessed 2 April 2016]
Bhunia A. (2010). A study of managing liquidity. Journal of Management
Research, 1(9), 21.http://dx.doi.org./ 1941899X/20110701
Sharma, A. K. and Kumar, S. (2011). Effect of Working Capital
Management on Firm Profitability. Global Business Review, 12(1), 159-173.
Khan and Jain(2004): "Financial Management", Tata Mcgraw Hill
publishing company, New Delhi 4th edition . 8. Panigrahi A.K. and Sharma,
A, Working Capital Management and Firms Performance: An Analysis of
selected Indian Cement Companies, Asian Journal of Research in
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 Consortium, Issue 8, Volume III, Sept. - 2013, Page 115 130.
Available at SSRN: http://ssrn.com/abstract=2342085.
Arora, A. (2013): Negative Working Capital and its Impact on Profitability
The Management Accountant, March 2013
Bhalla, V. (1997): "Financial management and policy", Anmol publications
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Annual Report of AVA Cholayil Health Care Pvt. Limited

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