Working capital comprises current assets, which are distinct from other assets. In the first instance, current assets consist of assets, which are of short duration. The actual life span of these assets is contingent upon the time required in the activities relating to procurement, production, sales and collection and degree of synchronization among these activities. The WC cycle starts with cash and ends with cash. The amount required as WC should solely depend on the level of sales for two basic reasons; the first is that all goods manufactured are for sale and the second is that cash is generated from sales only. The correlation between WC and sales should be of the highest order. Any change in the WC must immediately be reflected in sales and vice_versa.
For all practical purposes, the WC should be adequate. No enterprise can afford to have excess or deficit WC. It is this challenge of correct estimation of WC requirement, which is faced by all Financial Managers and, to a certain extent, affects the profitability of the organization. The near-to-accurate estimation of WC requirement prevents the organization from the situation of overtrading or undertrading. Overtrading arises when a business expands beyond the level of funds available. Overtrade means an attempt to finance a certain volume of sales with inadequate WC, while undertrade is an opposite situation, where sales figures do not support the large WC figures.
Dabur India Limited (DIL) is a strong name owning brands like Dabur, Vatika, Hajmola, Real and Anmol. Its sales amounted to Rs. 2,233 cr in FY-07. Since Dabur India Limited is doing enormous manufacturing with numerous types of raw materials, including some natural resources, it has been chosen to analyze the degree of correlation between WC and sales and the deviation of actual figures of WC and sales from the projected ones. |
