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Dabur India Ltd Essay

5467 words - 22 pages

ltdDabur India - Working Capital and Cost Management
Dr. Narender L. Ahuja, Institute for Integrated Learning in Management, New Delhi, India Ms. Sweta Agarwal, Institute for Integrated Learning in Management, New Delhi, India

ABSTRACT

After running as a family business for over 100 years, when in late 1990s the management of the Dabur was handed over to a team of professional managers, the new management faced a gigantic task of improving performance in several critical areas. In particular, working capital and cost management required urgent attention as the company’s performance in these areas had been far from satisfactory. The then prevailing current ratio of 3.2 and quick ratio ...view middle of the document...

Bo (nick named for Bose) had spent the morning studying the company’s balance sheets for the years 2003-04 and 2004-05 and was surprised to see that the company’s current liabilities exceeded its current assets. He remembered reading in his textbooks that such a situation indicated that the company could face difficulties in meeting its short-term liabilities. “I don’t know about that”, Sharad replied, “but I think it is a highly profitable company.” “Sure, no problem with the company’s profitability. In fact the net profit in 2004-05 jumped by as much as 46% to Rs 148 Crore from Rs 101 Crore last year.” “Wow, that’s a lot of increase in one year,” Sharad said, “In fact I am told the company has an impressive market share in its product line and is the fourth largest FMCG company in India. But if the company is making high profits and has a good market share, then where is the problem?” Bo was ready with his reply, “The way I understand, that could be a common trap for the profitable but fast growing companies. Liquidity and profitability are two separate issues and it is naïve to assume that a profitable company would necessarily be liquid too. See, what happens is that in order to provide finance for expansion and diversification projects, a company could cut down on inventories, reduce the credit period to customers while at the same time seek extended credit facilities from its suppliers of raw materials, other goods and services. Also, it tries to manage with nil or as little cash in hand as possible. As

a result, the current assets represented by inventories, debtors and cash would be reduced and current liabilities represented by creditors would increase, culminating in a situation when the company might not have enough current assets to pay for its current liabilities if all creditors wanted them to be settled at once, what to talk about leaving some surplus to continue with its normal business operations.” Bo said emphatically. Dabur India’s corporate office was housed in a beautifully landscaped, imposing six storied glass building set on several acres of prime land at Kaushambi adjacent to New Delhi. “Well, if the company can make its working capital more efficient, I don’t see any body should have a problem with that. But don’t forget we have an orientation meeting with the finance department in a little while from now.” Bo was too engrossed with his own thoughts to be affected by such interruption, and continued, “The traditional wisdom of having a positive net working capital means that at least some part of the working capital finance should come from the company’s long term sources so that at any time, even if the company has to settle all its current liabilities at once, it would still be left with some minimum current assets with which it could continue to do its normal business. In technical terms, they say a company needs some permanent working capital and a fluctuating working capital. From what I have read, ideally the...

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