CONCEPTUAL RESEARCH BASED ON FMCG COMPANIES FOR FINANCIAL APPRAISAL: A REVIEW
Prof. (Dr.) Kabeer Sharma
Professor, Faculty of Commerce & Management, Shri Khushal Das University, Hanumangarh, Rajastha
Pardeep Kumar
Research Scholar, Shri Khushal Das University Hanumangarh, Rajasthan
Abstract- Working capital management is one of the most important functions of corporate management. All organizations, public or private, whether for profit or not, need sufficient working capital, regardless of size or industry. Efficient working capital management is the most important factor in maintaining the survival, liquidity, solvency, and profitability of any business organization. Working capital is defined as short-term assets vs. short-term liabilities, so the quality of working capital, especially the size and inventory of debtors, is an important factor in determining working capital. Working capital is also becoming more important because it is directly related to the liquidity position of the company. However, in some cases, current assets are lower than current liabilities (known as negative working capital). So how can a company manage its level of liquidity? In the cash-based business, negative working capital is generated due to effective use of resources and solid inventory management, which leads to the lowest level of inventory and leads to a decrease in working capital as a whole. On the other hand, with better contracts and negotiations with creditors and suppliers, they make more generous lending, which raises the level of short-term debt.
Studying negative working capital is important for understanding business efficiency that improves profitability. Considering the importance of working capital management as a gray area of corporate finance function, two major FMCG companies (Hindustan Unilever Limited, Nestlé India Limited). This survey is based on secondary data, an annual report from selected companies. The survey period was 10 years, and traditional methods of data analysis and key numerical analysis were adopted as the final analysis tool for checking the efficiency of working capital management. Ultimately, it shows that companies with negative working capital are more profitable and shareholders receive more dividends and capital gains, maximizing shareholder value in the long run.
Keywords: Working capital, profitability, liquidity, bankruptcy, working capital cycle.
1. INTRODUCTION
All working capital surveys generally state that working capital needs to be managed effectively to improve profitability, and most studies require that the organization have sufficient working capital. Is recommended. All research on this subject concludes that companies should avoid under investing in working capital if higher rates of return are required.
Negative working capital carries the risk of bankruptcy, but this does not apply forever. If the company has a good image in the market and has a good relationship with the creditors, it can also benefit from negative working capital. Therefore, if the question arises whether negative working capital is good for the organization and the negative working capital company is consistently profitable, it may be a sign of operational efficiency or an opportunity may exist. Can you say that? Company
bankruptcy? With these views in mind, this research article discusses the conceptual background of negative working capital and how it affects a company's profitability. According to a survey, 23 out of 200 BSE companies have negative working capital, and short- term liabilities are greater than short- term assets or accounts receivable.
Basically, this means that companies do not have to use their capital to carry out their day-to-day business activities, nor do they need to borrow from banks. In fact, having negative working capital is very good because the company can get a relatively good profit on capital and capital. It also shows the operational efficiency of the enterprise. But that's not enough. Companies also need to have good fundamentals. Investors like these companies because of their relatively high compensation to shareholders. BSE 200
companies have an average rate of return on capital and a rate of return on equity capital of approximately 20%, well below the rate of return of 3,235% achieved by companies with negative working capital.
More importantly, the top 10 companies with negative working capital have a dividend payout rate of 62%, well above the average of 26% for BSE-200 companies.
Studying negative working capital is important for understanding business efficiency that improves profitability.
Negative working capital arises in cash- based businesses due to efficient use of resources and sound inventory management, resulting in minimal inventory levels, with an overall impact leading to lower working capital. On the other hand, with better contracts and negotiations with creditors and suppliers, they make more generous lending, which raises the level of short-term debt. At the same time, liquidity is important from a short-term solvency perspective, but not for negative working capital. Negative working capital is the opposite of normal working capital. Working capital is less than current debt. Negative working capital indicates the efficiency of a company with low inventory levels and low accounts receivable. This is because the company enjoys cash transactions because customers pay upfront and quickly. Products are delivered and sold to customers even before the company pays suppliers and creditors. Negative working capital does not necessarily mean poor financial conditions. This shows that most of the day-to-day activities are funded by the customer, not the company's own working capital.
In some recent examples, cinema customers pay first, and distributors usually pay later. Students pay the tuition fees of schools and educational institutions in advance every year, and the faculty receives salary one month later. Working capital can be reduced or negative as companies use supplier credit and customer advancement to meet their day-to-day needs. Banks, financial institutions, distributors, cash or dealers with prepaid contracts have negative working capital. Working capital analysis is usually always related to normal or positive working capital (excess or current assets and short-term owners). However,
working capital may be in the negative form (excess of short-term debt to short- term assets). How can a company manage liquidity with negative working capital in this situation? Taking the leading FMCG companies Nestle India Limited and Hindustan Uniliver Limited as examples, we analyze negative working capital and its impact on profitability and profitability. Ultimately, it shows that companies with negative working capital are more profitable and shareholders receive more dividends and capital gains, maximizing shareholder value in the long run.
1.1 Objective of Study
Much has been written and studied about working capital management and the profitability of companies in various industries, but this study only looks at two companies in the FMCG sector, Nestle India Limited and Hindustan Uniliver Limited. Limited to. This benefits management and policy makers of various companies in determining the optimal amount of working capital, how to manage it, and general guidelines for working capital management. You can also get a clear understanding of the relationship between the working capital components and the profitability of the company. The survey also serves as a guide for those conducting surveys on similar topics, and is brief on profitability for corporate shareholders, prospects, and creditors in terms of efficient working capital management and policies. Provide information. Ultimately, this research benefits researchers in gaining new knowledge about the problem under study and provides a clear overview of what is called research.
2. NEGATIVE WORKING CAPITAL:
INDIAN FMCG COMPANIES
In India, negative working capital is as popular as global companies such as:
McDonald's and Amazon.com. In India, HUL and Nestlé are fast-moving consumer goods (FMCG) companies with negative working capital for over a decade. The question arises as to how to keep daily operations running smoothly, even if there is not enough liquidity. Nestlé India is one of the leading FMCG companies with a strong marketing network, sales channels and a strong brand that offers
an economic advantage over its competitors. Since other FMCG companies such as HUL, Britannia, ITC, Corrugate, Dabur. Belonging to a similar business area usually has positive working capital (except for a few years).
Traditionally, FMCG companies have been known to have negative working capital for efficient supply chain management.
The industry typically has low debtor quotas funded by creditors or suppliers.
This situation provides them with some negative working capital related benefits.
Another contextual benefit of the FMCG industry is that its sales do not depend on its production (like other manufacturing industries), but on its ability to sell in highly competitive markets. Therefore, the greatest resources are used for marketing and product promotion. Please use it for manufacturing activities (because most products are manufactured by small and medium-sized enterprises based on consignment manufacturing contracts).
Similarly, the development of SCM, ERP, JIT, etc. has realized effective inventory management and resource management, and the scale of working capital has been greatly minimized. In working capital, almost 50% of the market share is in the form of inventories, but FMCG companies have reduced inventories for efficient supply chain management and warehousing compared to other industries (for example). Another important change in the nature of investors is the rational way of thinking about investment.
Strategic investors these days are also focusing on working capital management for a company as it is directly related to the profitability of the company. A survey of top Indian companies with high ROIs found that many companies had negative working capital.
3. LEVERAGING ON SUPPLY CHAIN FMCG companies sell goods first and then pay raw material suppliers. This is only possible if the company is very large and makes up the majority of the supplier's sales. Strong brand loyalty in the FMCG sector helps keep inventory levels low and generate fast sales. In such situations, they can always twist the supplier by getting more credit. In this way, the product is sold to the customer and money is generated even before the company pays the supplier. The
additional cash generated can be used for other purposes. Nestlé collects money from customers in just 4 days (average payback time) and pays raw material suppliers in 52 days. HUL, which had negative working capital, was able to maintain 64 credit days compared to 16 debt days. ..
FMCG The popularity and dominance of the industry has led these companies to negotiate with debtors and creditors to extend the payment cycle in their favor. FMCG companies were able to keep their creditors almost equal to their debtors and inventories, resulting in high levels of cash for those companies being reinvested in their businesses. These companies also invest in short-term paper and overnight money, which allows them to make good profits. Traditionally, FMCG companies are known for maintaining negative working capital backed by strong supply chain management. With few debtors in the industry, all transactions are funded by producer-side creditors and supply-side sellers and traders.
4. RECOMMENDATIONS
Negative working capital produces a lot of economic benefits, but at the same time has some negative effects.
Low or poor working capital (or negative working capital) as a company increases its daily business borrowing. Apply artificial pressure. Due to late payments to creditors, the ranking of such companies is sometimes poorly treated, which affects the cost of borrowing or capital (in the form of higher interest rates).
As the business expands and changes, negative working capital creates financial barriers (decreased liquidity). It creates an artificial barrier for an organization to grow.
Investors are cautious due to low liquidity. It will cause financial turmoil among general investors.
They are worried about their investment and future profits.
At the time of corporate valuation, negative working capital represents a hurdle to a better valuation as it can pose a risk of bankruptcy in a short period of time.
Negative working capital positions only work if the company is growing
sales (like General Motors, which used it for several years before sales began to decline). When a company's earnings decline, the positive effects of a negative working capital position are reversed, and annual working capital investment begins as soon as the company has the least margin.
Organizations operating with negative working capital should be aware of the above effects of negative working capital.
If a company can overcome the deficit, it can take advantage of negative working capital.
5. CONCLUSIONS
Negative working capital indicates a lack of liquidity or reduced liquidity within the company and is not advantageous at any stage of the business. Industrial companies like FMCG can efficiently manage negative working capital and generate shareholder value through higher EPS and higher market capitalization. At the same time, companies with high working capital have sufficient liquidity to be more successful through liquidity and to expand and grow their business as much as possible.
However, companies with a lot of working capital need higher profits to maintain a healthy operating rate. A better credit management system will help these companies achieve high ROCE in the long run. However, low liquidity levels are not desirable in all situations. In the long run, there needs to be an appropriate trade-off between liquidity and working capital.
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