The Impact of Working Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited

Ipsu Khadka Roll Number: 10450085 P.U. Registration Number: 2009-2-45-0026

A Project Report Submitted to Ace Institute of Management

Submitted for the degree of Bachelor of Business Administration Banking and Insurance (BBA-BI)

Kathmandu November, 2012

DECLARATION

This project entitled, The Impact of Working Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited which is submitted by me in partial fulfillment of the requirement for the award of BBA-BI degree of Pokhara University comprises only my original work and due acknowledgement have been made to materials used in the report.

Signature: Name of Student: Ipsu Khadka Date:

BONAFIDE CERTIFICATE

Certified that this project report (The Impact of Working Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited ) is the bonafide work of (Ipsu Khadka) who carried out the summer project work under my supervision. This report is forwarded for examination.

Prakash C. Bhattarai Supervisor

Vijay Anand Sharma Timilsina Program Director

Signature: Name of the External Examiner: Date:

Acknowledgment The successful accomplishment and preparation of the report on The Impact of Working Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited would not have been possible without the support and cooperation from different personals who provided their valuable comments and made other significant contributions.

First of all, I would like to thank Pokhara University for providing us a wonderful opportunity of conducting practical research to compliment our theoretical knowledge of working capital management. I am equally thankful towards Ace Institute of Management and its directors for facilitating us with an advanced computer lab and wellequipped library. I am also very grateful to Mr. Niranjan Phuyal, our Seminar in Working Capital Management course instructor, for entrusting me this substantial assignment and extending his support and guidance in accomplishment of this report.

It would be injustice if I forget to acknowledge Dabur Nepal Private Limited. Without their annual reports, I would never have been able to produce this report. Different books, articles, journals and thesis have been consulted in preparation of this report. Thus, I would like to thank all those authors and publishers. Lastly, I would like to take this opportunity to thank all those who have directly or indirectly helped me in the preparation of this research report.

Ipsu Khadka BBA-BI VI A

Abstract

In this paper, the relationship between profitability and working capital management is investigated. For the study, the data of Dabur Nepal Private Limited is taken for the period of 10 years from 2002-03 to 2011-12. The purpose of this paper is to establish a relationship between profitability, the cash conversion cycle and its components for the firm. The results of the research showed that there is a positive relationship between CCC and profitability. It also showed that there is a positive, negative, negative relation between ICP and profitability, PDP and profitability, and ARP and profitability respectively. But all these relations were statistically insignificant. This study contributes to the literature on the relationship between working capital management and profitability.

INTRODUCTION

Background of the study During the course of our study of working capital management, we have been reviewing articles on issues of working capital of the different industries and of different countries helping us gain theoretical knowledge. But practically, I am mostly familiar with the working capital management of the banking industry as I am a student of BBA-BI which specializes in banking and insurance. This report will analyze the financial statements of a manufacturing company i.e. Dabur Nepal Private Limited to understand the effects of working capital management on profitability of the company, combining the theoretical and practical knowledge of working capital that we have gained so far. Working capital is known as life giving force for any business organization and its management is considered among the most important function of corporate management. The management of working capital is very essential as it directly affects the efficiency of a firm. Working capital management refers to efficient utilization of funds which leads to sufficient cash flow in order to meet its short-term debt obligations and operating expenses (Investopedia). And cash conversion cycle CCC length is considered among the fundamental ingredients of the working capital management (Appuhami, 2008; Keown et al., 2003; and Bodie and Merton, 2000). Cash conversion cycle is the time it takes for a firm to convert its inputs into cashflows. Its components are inventory turnover period, account receivable period, and payable deferral period. Cash conversion cycle is invariably useful as a comprehensive measure because it effectively takes into account the time lag between the expenditure for the acquisition or purchases of raw materials and the collections from the debtors on account of the of sales of finished goods (Padachi, 2006). It has been argued that an effective and efficient handling of short term assets and the corresponding payables is really a question of life and death for the business enterprises and has much to do with the continued existence of the firms. (Jose et al.,1996).

This report is the observation and analysis of financial information of Dabur Nepal Private Limited in order to establish the relationship of the components of working capital management and their significance on the profitability of the company. This is a case study which will help us derive conclusions of the whole manufacturing industry. This report thus emphasizes the significant factors to take into study in order to maximize profitability. Company Profile: Dabur Nepal Private Limited Dabur Nepal Private Limited was set up as an independent group company in 1992 which is a subsidiary of Dabur India Limited. Dabur India Limited is a leading Indian consumer goods company with interests in Hair Care, Oral Care, Health Care, Skin Care, Home Care and Foods. Dabur Nepal, set amidst the verdant greens and towering mountains of the Himalayan of Nepal, has established a unique bond of technology and preservation. The guiding force behind Dabur's growth and success has been the wealth of nature and its limitless capacity to support life. With their overall vision of eco-sustenance and to expand Dabur's resource and production base, Dabur Nepal Private Limited was set up. With its successful operation, Dabur Nepal has set some of the highest business standards with ultra-modern production facilities manufacturing premium products like Real fruit juices Vatika Hair Care products, Dabur Hajmola and Dabur Honey both for the domestic as well as international markets. Over the period of two decades, Dabur has established itself as a strong nationwide brand, selling in over 20,000 retail outlets throughout Nepal. Statement of the problem The importance of working capital components on profitability has been established theoretically, but these theories are not examined practically in Nepal. With the help of this study, the extent of the impact of working capital components over profitability of a firm if there is any is shown. It basically investigates the established theoretical knowledge of working capital management in practical workings of manufacturing companies of Nepal, taking Dabur Nepal Private Limited as the sole sample. The questions that I would like to address in this study are: What are the relationships of the components of working capital management and profitability of Dabur Nepal Pvt. Ltd.?

How does the cash conversion cycle relate to profitability of Dabur Nepal? Do the working capital management practices of Dabur Nepal Pvt. Ltd. concur with the established theories of working capital management?

Objectives of the study The main object of this paper is to provide some empirical evidence on the relationship between working capital management and profitability for manufacturing companies, using Dabur Nepal Pvt. Ltd. as a case study for the period of 10 years from 2002/03 to 2011/12. Another important objective is to fulfill the requirement set by Pokhara University for course completion of BBA-BI, sixth semester. This objective is fulfilled with the help of following specific objectives: To examine the effects of inventory turnover period on profitability of Dabur Nepal. To examine the effects of payable deferral period on profitability of Dabur Nepal. To examine the effects of account receivable turnover period on profitability of Dabur Nepal. To examine the effects of overall cash conversion cycle on profitability of Dabur Nepal Private Limited. Literature Review The concept of working capital management of firms has been investigated time and again by different researchers and academicians. It is such a tool which can define a significant portion of a firms overall efficiency and profitability. The main used independent variable defining WCM is the Cash Conversion Cycle (CCC). The idea of CCC was pioneered by Richards and Laughlin (1980) as a powerful tool for measuring how well a firm is employing its WCM practices. Gentry et al. (1990) concluded that a firms market worth was invariably associated with the CCC. CCC basically shows how long a firm takes to convert resource inputs into cash flows (Quayyum, 2012). Authors such as Deloof (2003), Shin and Soenen (1998), Laziridis and Tryfonidis (2006), Garcia-Teruel and Martinez-Solano (2007), Samiloglu and Demirgunes (2008), Karaduman et al. (2011), Uyar (2009) and Wang (2002), whom did research in

respectively Belgium, USA, Greece, Spain, Turkey, Turkey, Turkey and Japan and Taiwan all found a negative relation between WCM, using the CCC, and firm profitability. This negative relation is in line with the theoretical aspect of working capital management which says shortening the cash conversion cycle so that your money is not tied up in the production process any longer than necessary leads to higher profits. This means that a firm will have higher profitability by having a WCM policy which results in the lowest possible accounts receivables and inventories and the highest amount of accounts payables. Contradicting evidence is found by Gill et al. (2010), whom did research in the USA and found a positive relation between CCC and a firms profitability. Such evidence is also found by Sharma and Kumar (2011) in India. They found evidence of a positive relation, which means that loosening the three parts of a firm working capital management leads to higher profit. They argue that this is caused by the fact that India is an emerging market and reputations of creditworthiness of firms are not fully developed and therefore many companies loosen their working capital management. Another reason they state is that only profitable firms can loosen their working capital and therefore its because these firms are profitable, that they loosen their working capital management and not the other way around. (Baveld, 2012) In terms of related studies executed by researchers in terms of the components of cash conversion cycle, the following table (Table 1) presented below summarizes the individual relationships of account payable period, inventory turnover period and payable deferral period with profitability of firms found by different researchers. All these different studies give us the results and conclusions of those researches already conducted on the same area for different countries and environment from different aspects. What can be concluded from the previous research studies conducted is that though most studies found the existence of traditional, theoretical relationships between the components of working capital management and profitability, there have been studies resulting in contradictions to each of those relationships as well. On basis of these researches done in different countries, the methodology of the research has been formulated.

Table 1: Effects of individual parts of the cash conversion cycle (Baveld, 2012) Effect Variable Number of days Accounts Receivables Significant negative relation on a firms profitability Deloof (2003) Laziridis and Tryfonidis (2006) Gill et al. (2010) Garcia-Teruel and Martinez-Solano (2007) Samiloglu and Demirgunes (2008) Karaduman et al. (2011) Falope and Ajilore (2009) Raheman and Nasr (2007) Mathuva (2010) Deloof (2003) Laziridis and Tryfonidis (2006) Garcia-Teruel and Martinez-Solano (2007) Karaduman et al. (2011) Sharma and Kumar (2011) Falope and Ajilore (2009) Raheman and Nasr (2007) Deloof (2003) Laziridis and Tryfonidis (2006) Garcia-Teruel and Martinez-Solano (2007) Samiloglu and Demirgunes (2008) Karaduman et al. (2011) Sharma and Kumar (2011) Falope and Ajilore (2009) Raheman and Nasr (2007) Significant positive relation on a firms profitability Sharma and Kumar (2011)

Number of days Accounts Payables

Mathuva (2010)

Number of days Accounts Inventories

Mathuva (2010)

Research Methodology This report analyses the impact of working capital management on firms performance with the study of Dabur Nepal Private Limited. To study the relationship between working capital management and profitability, multiple regression has been chosen as the primary method. Other techniques include descriptive analysis and correlation analysis of the variables.

Sample & Data Collection Since this report is a case study of Dabur Nepal Private Limited, we can say that to attain the abovementioned research objectives, this paper uses a sample of only 1 manufacturing company. The study uses secondary data where data was collected from the companys financial statements over the period 2002/03-2011/12 i.e. 10 years. Research model This study undertakes the issue of identifying key variables that influence working capital management of Dabur Nepal Pvt. Ltd. The choice of the variables is influenced by the previous studies on working capital management. Dependent variable: Profitability represented by ROTA (Return on Total Assets)

Independent variables: Inventory conversion period (ICP) Payable Deferral Period (PDP) A/c receivable period (ARP) Cash Conversion Cycle (CCC)

Control variables: Various studies have utilized the control variables along with the main variables of working capital in order to have an opposite analysis of working capital management on the firms profitability (Deloof, 2003). The control variables chosen for this study are: Size of the firm (LNS) Firm growth (FG) Current ratio (CR) Debt ratio (DR)

Therefore our regression model is: Y = a+ b1X1 + b2 X2 + b3X3 + b4 X4 + b5 X5 Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR

The various methods and formulae used in the models are given below in Table 2. Table 2: Methods and Formulae used Dependent variables: - ROTA= Net Profit/ Total Assets Independent variables: - Inventory conversion period (ICP) = (Inventory/Cogs) * 365 - Payable Deferral Period (PDP) = (A/c payable/ Cogs) * 365 - A/c receivable period (ARP) = (Receivables/ Sales) * 365 - Cash Conversion Cycle (CCC) = ICP + ARP - PDP Control variables: - Size of the company = Natural logarithm of sales (LNS) - Firm growth (GROW) = (Salest Salest-1)/ Salest-1 - Current ratio (CR) = Current assets / Current liabilities - Debt ratio (DR) = Total debt/ Total assets Note: - For Net profit, NPAT was used - Total assets = Long term assets (viz. Fixed assets, Capital WIP, Investments) + Total Current assets - For a/c payable, Creditors for goods was used - For a/c receivable, sundry debtors was used - For current liabilities, the provisions are excluded since they are not true current liabilities. - Total debt = Bank loan + Short term liabilities i.e. Total Current Liabilities and Provisions Using Excel, the descriptive analysis, correlation analysis and regression analysis were completed. Limitations During the course of this study, I faced several limitations. Since only one sample company of Dabur Nepal is taken, the results may not be able to generalize the conditions of the entire manufacturing industry of Nepal. The study would be more meaningful if a larger sample was taken. The study undertook only the past records of last ten years. The efforts, resources and expertise are all limited since the study had to be conducted within a very limited time, along with efforts to accomplish several other responsibilities of the researcher.

DATA ANALYSIS AND FINDINGS Descriptive analysis This section contains the minimum, maximum, mean, and standard deviation of all dependent, independent and control variables of the study. Table 3: Descriptive statistics
ROTA Mean Standard Deviation Minimum Maximum ICP PDP ARP CCC LNS Growth CR DR 3.74% 116.62 2.28% 0.08% 18.60 95.23 39.68 34.21 111.14 10.56 30.88 13.33 11.23 20.50 32.03 0.29 0.10 2.35 0.63 0.10 0.92 0.04 0.00 1.40 0.56 0.31 4.45 0.71

69.08 10.24

6.88% 157.14 107.56 55.23 171.19 11.14

From the above table, we see that the average return on assets of Dabur Nepal for the last 10 years was only 3.74% with a standard deviation of 2.28%. The minimum value of ROTA as a measure of profitability is 0.08% and the maximum value is 6.88%. It takes a lot of days for Dabur Nepal to turn its inventory to sales on average around 116 days, the minimum being 95 and maximum 157 days. In comparison to inventory conversion period, it takes a lot less days for Dabur Nepal to turn its sales to cash i.e. ARP with an average of 34 days. About the payment deferral period (PDP) i.e. time between receipt of inventory and payment for it is an average of 40 days. Dabur Nepal has had a minimum time of 11days and maximum of 108 days to pay its purchases on account. Overall, the average cash cycle is 111.14 days. The firm has had 171 days as maximum time between cash disbursement and cash collection and a minimum of 69 days. The size of the firm as measured by LNS on average is 10.56 with only a slight deviation of 0.29. The mean growth of the firm in terms of sales is 10% meaning the sales amount of Dabur is in a steady increasing trend, with a SD of 10%. The average current ratio for Dabur Nepal is 2.35. Usually, the average current ratio for manufacturing firms is around 2:1. Dabur is following this trend as well by keeping around twice as much current assets as its current liabilities. Also, the mean debt ratio of Dabur Nepal is 0.63 i.e. 63%. Dabur Nepal is an aggressive manufacturing company financing more assets with debt than with equity. The maximum DR was 71% and even the minimum was high with 56%.

Correlation analysis Presented below are the correlation matrix and analysis of the relationships between the variables of the study. Table 4: Correlation matrix of the variables
ROTA ROTA ICP PDP ARP CCC LNS 1 0.1439 1 1 0.4493 1 1 0.1089 1 0.8577 1 1 1 ICP PDP ARP CCC LNS Growth CR DR

-0.3929 -0.0491 -0.7902 -0.2792 0.1336 -0.5816

0.5121 -0.8059 -0.1793 0.3935 0.1662 0.2768 0.4542 0.3537

Growth -0.6598 CR DR

0.4845 -0.1398

0.6990 -0.1185 -0.3499 -0.3913 0.1267 -0.1129 0.3517

0.1058 -0.5311 -0.6397

0.0581 -0.3806 -0.0615

0.2271 0.2579

The table shows that there is a low positive correlation between inventory conversion period (ICP) and profitability. This correlation indicates that in contrast to most theories, any increase in inventory period leads to the increase in the profitability of Dabur Nepal. Also contrasting theories, it is also shown that there is a negative correlation between payable deferral period (PDP) and profitability. Correlation analysis also indicates that there is a negative correlation between account receivable collection period (ARP) and profitability. This means that if Dabur Nepal reduces the time between sales and actual cash collection, it will lead to increased profitability. This finding is in line with the theory of working capital management. It is found that the relationship between cash conversion cycle and profitability is positive, which also contradicts to most literature. There is a negative correlation between LNS and profitability. This may occur if managerial utility maximization replaces profit maximization as the firms objective function (Alchian, 1965). Managerial utility maximization is a by-product of the separation of ownership from management in modern corporations. This separation may

increase with firm size, making large firms more vulnerable to managerial utility maximization than smaller firms. Managerial utility maximization thus provides a conceptual framework for a negative relationship between firm size and profitability. The table also shows that there is a negative correlation between growth of sales and profitability. There is a positive correlation between liquidity (current ratio) and profitability and a low positive correlation between debt ratio and profitability as well. Regression analysis In the regression models given below, the column "Coefficient" gives the least squares estimates of bj while the p-value to each variable is used to derive the significance of the relationship between the dependent and explanatory variables. Adjusted R2 is a modification of R2 that adjusts for the number of explanatory terms in a model. Standard Error is the sample estimate of the standard deviation of the error u. The standard error here refers to the estimated standard deviation of the error term u. It is not to be confused with the standard error of y itself (from descriptive statistics) or with the standard errors of the regression coefficients. Table 5: Results of Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR
Variables Intercept ICP LNS Growth CR FL R Square Adjusted R Square Standard Error Coefficients 0.265019937 0.000460948 -0.030676378 -0.024742621 0.011205177 0.02938995 0.676847468 0.272906803 0.019404766 Standard Error t Stat P-value

0.736300655 0.359934 0.737096 0.000415303 1.109907 0.329266 0.064265727 -0.47734 0.658034 0.23882128 -0.1036 0.922471 0.012283152 0.91224 0.41325 0.261761654 0.112278 0.916012

F-statistic Significance F

1.67561111424822 0.318608139756546

From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.2650 on the dependent variable ROTA. The coefficient of Inventory Conversion Period (ICP) is positive but statistically insignificant (P-value > 0.05). It means that 1unit change in the ICP will result in 0.0004

unit change in the same direction in the profitability represented by ROTA. A positive relationship between ROTA and ICP can be explained by the fact that firms which maintain high inventory levels reduce the cost of possible interruptions in the production process. This helps in preventing loss of business due to the scarcity of products and reducing the cost of supplying the goods. (Mathuva, 2010). In doing so, firms are protected against price fluctuation (Blinder and Maccini, 1991). This is especially important in Nepal that is very prone to political risks such as strikes and bandhs. Among the control variables, the size of the firm i.e. LNS and growth have negative coefficient of -0.0307 and -0.0247 respectively. It indicates that as the firms size and growth rate increases, its profitability tends to decrease. However, both of these relationships are not statistically significant. Alternatively, among the control variables, the current ratio and debt ratio have positive coefficients of 0.0112 and 0.0294 respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals profitability tends to increase as well. However, both of these relationships are not significant as the P-values are greater than 0.05. A simple summary of the above output is that the fitted line is ROTA= 0.2650 + 0.0005 ICP 0.0307 LNS 0.0247 Growth + 0.0112 CR + 0.0294 DR Adjusted R2 = 0.2729 means that 27.29% of the variation of y i.e. profitability (ROTA) is explained by the regressors. The remaining variation is due to other factors not accounted for in the model. Here, we can see that the model is not significant. Table 6: Results of Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR Coefficients Standard Error t Stat P-value Intercept -0.10527 0.747923 -0.14075 0.894875 PDP -0.00011 0.000288 -0.3977 0.71116 LNS 0.005738 0.062181 0.092282 0.930911 Growth -0.12264 0.247913 -0.49468 0.646762 CR 0.007328 0.01412 0.518976 0.631168 DR 0.129106 0.303444 0.42547 0.692386 R Square 0.593403 Adjusted R Square 0.085156 F-statistic 1.167549 Standard Error 0.021766 Significance F 0.453021

From the table, we see that the intercept (b0 or a) has a fixed negative effect of 0.2650 on the dependent variable ROTA. The coefficient of Payable Deferral Period (PDP) is negative but statistically insignificant (P-value > 0.05). It means that 1unit change in the PDP will result in -0.0001 unit change in the same direction in Y i.e. the profitability represented by ROTA. Any decrease in the period of payable conversion has positive effects on the profitability of Dabur Nepal. According to Deloof 2003, those companies with low profitability tend to delay the payment of their liabilities. In other words, the acceleration of debts payment is related to the increase in profitability which is consistent with the findings of Farzinfar and Arani, 2012. Among the control variables, the growth of the firm has negative coefficient of -0.12264. It indicates that as the firms growth rate increases, its profitability tends to decrease. However, this relationships is not statistically significant as the P-value is greater than 0.05. Alternatively, among the control variables, the current ratio and debt ratio have positive coefficients of 0.0073 and 0.1291 respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals profitability tends to increase as well. However, both of these relationships are not significant as the P-values are greater than 0.05. Another relationship worth noting is the coefficient of LNS which is 0.0057. It was found earlier in the correlation analysis that LNS and ROTA were negatively correlated. But in this Model 2 regression, the relationship is positive. Since the independent variables are correlated with each other as well, then such effects take place. In other words, if there are several regressors and they are not independent then you can see the effect called confounding. A simple summary of the above output is that the fitted line is ROTA= -0.1053 0.0001 PDP + 0.0057 LNS 0.1226 Growth + 0.0073CR + 0.1291DR Adjusted R2 = 0.0852 means that 8.52% of the variation of y i.e. profitability (ROTA) is explained by the regressors of the model but we see that the model is statistically insignificant.

Table 7: Results of Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR Coefficients Intercept ARP LNS Growth CR DR R Square Adjusted R Square Standard Error Standard Error t Stat 0.293753 -2.41819 -0.27542 -0.07038 0.956869 0.227654 3.859686 0.107547 P-value 0.783558 0.072905 0.796633 0.947266 0.39282 0.831078 0.145164 0.49417 -0.001 0.000413 -0.01129 0.040989 -0.01181 0.167745 0.008442 0.008823 0.042711 0.187612 0.828315 F-statistic 0.613708 Significance F 0.014144

From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.1452 on the dependent variable ROTA. The coefficient of Account Receivable Period (ARP) is negative and statistically insignificant (P-value > 0.05). It means that 1unit change in the PDP will result in -0.001 unit change in the same direction in Y i.e. the profitability represented by ROTA. Any decrease in the period of receivable conversion has positive effects on the profitability of Dabur Nepal. In other words, the ROTA of the Dabur increases if the accounts receivable conversion period is reduced. This shows the importance of the management of working capital in Dabur. Although granting more credit and longer deadline to customers may increase sales volume, but limiting the period of receivables conversion improves the results of the performance of Dabur. This finding is in line with most literature. Among the control variables, the size of the firm i.e. LNS and growth have negative coefficient of -0.0113 and -0.0118 respectively. It indicates that as the firms size and growth rate increases, its profitability tends to decrease. However, both of these relationships are not statistically significant. Alternatively, among the control variables, the current ratio and debt ratio have positive coefficients of 0.0084 and 0.0427 respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals profitability tends to increase as well. However, both of these relationships are not significant as the P-values are greater than 0.05. A simple summary of the above output is that the fitted line is ROTA= 0.1452 0.001 ARP 0.0113 LNS 0.0118 Growth + 0.0084 CR + 0.0427 DR

Adjusted R2 = 0.6137 means that 61.37% of the variation of y i.e. profitability (ROTA) is explained by the regressors of the model but we see that the model is statistically insignificant. Table 8: Results of Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR Coefficients Intercept -0.059890482 CCC 7.14408E-05 LNS 0.001218016 Growth -0.116203624 CR 0.008302993 DR 0.108368563 R Square 0.584821561 Adjusted R Square 0.065848512 Standard Error 0.021994902 Standard Error 0.759918468 0.000265831 0.064744074 0.252750276 0.013880654 0.298026563 F-statistic Significance F t Stat P-value -0.07881 0.940968 0.268746 0.801417 0.018813 0.985891 -0.45976 0.66957 0.59817 0.581948 0.36362 0.734545 1.126882 0.46697064

There is an insignificant and very low positive correlation between the return on assets and cash conversion cycle. Based on this relation, an increase in CCC days would result in increase in profitability of Dabur. It gives a strong indication to the firm manager/ owners that longer the CCC turnover in days, lesser capital will be deployed in current assets and eventually there will be more capital investment leading towards a higher profitability of the firm. (Attari and Raza, 2012). The rationale is also supported by the concept of optimum liquidity position promulgated by Schilling (1996). A simple summary of the above output is that the fitted line is ROTA= -0.0599 0.00007CCC + 0.0012 LNS 0.1162Growth + 0.0083CR + 0.1084DR Adjusted R2 = 0.0658 means that 6.58% of the variation of profitability (ROTA) is explained by the regressors of the model but we see that the model is statistically insignificant.

DISCUSSIONS The findings of this study can be summarized as follows: The Inventory Conversion Period (ICP) of Dabur is positively related to the profitability of Dabur Nepal. The Payable Deferral Period (PDP) of Dabur is negatively related to the profitability of Dabur Nepal. The Accounts Receivable Period (ARP) of Dabur is negatively related to the profitability of Dabur Nepal. The Cash Conversion Cycle (CCC) of Dabur is positively related to the profitability of Dabur Nepal. The positive relationship of ICP with ROTA indicates that higher inventory stocks will increase profitability. This relationship can be explained by the fact that firms which maintain high inventory levels reduce the cost of possible interruptions in the production process, especially important in Nepal which is very prone to political risks such as strikes and bandhs. Any decrease in the period of payable conversion has positive effects on the profitability of Dabur Nepal. In other words, the acceleration of debts payment is related to the increase in profitability which is consistent with the findings of Farzinfar and Arani, 2012. Any decrease in the period of receivable conversion has positive effects on the profitability of Dabur Nepal. . This means that if this company makes its credit terms tighter, it will result in quick collection from debtors. As a result, the firms profitability increases. Also, an increase in CCC days would result in increase in profitability of Dabur. It gives a strong indication to the firm manager/ owners that longer the CCC turnover in days, lesser capital will be deployed in current assets and eventually there will be more capital investment leading towards a higher profitability of the firm. (Attari and Raza, 2012). We see that except for the relationships between ARP and profitability, all other relationships contradict the theories of working capital management and profitability. It suggests that Dabur Nepal could further increase its profits by taking a longer time to convert its inputs to sales, shorter time to pay its creditors, and shorter time to collect

from its debtors. Overall, if the cash conversion cycle is elongated, it will lead to increased profits for Dabur Nepal. On the other hand, these relationships have not proven to be statistically significant. Neither the individual variables of the models are significant, nor are the models themselves significant. The results of this study seems to indicate that there is no convincing evidence that any of the independent variables i.e. the components of working capital management have an effect on the dependent variable i.e. profitability. Said more carefully, it means that the data are compatible with the dependent variable values not being affected by any of the independent variables. All the regression models are insignificant because either the independent variables are affecting each other and/or because reality is more complex than perceived by the models. Let us look at the trends of net profit after tax, sales, and assets of Dabur to get a more clear perspective.

NPAT
2000.00 Rs. (in lacs) 1500.00 1000.00 500.00 0.00 NPAT

Chart 1: NPAT trends of Dabur Nepal Pvt. Ltd. We can see that the net profit after tax for Dabur has been highly volatile over the period of last ten years with no fixed trend. The NPAT have significantly decreased in the years 2008-09 and 2011-12. According to the companys annual report, in FY 2008-09, the recession has crippled the world economy. As a result of this, the commodity prices touched sky high with the price of crude oil crossing USD 140 per barrel. Similarly, the cost of other inputs has also increased. Further, during the year, there was huge appreciation in the value of USD, resulting in huge exchange loss to the Company. As a

result of these factors, the Profit after Tax of Dabur has decreased significantly. Similarly in 2011-12, due to Euro-zone crisis, there was huge appreciation in USD compared to rupee, and hence Dabur Nepal incurred forex losses. Let us now look at the total assets and sales trends of Dabur Nepal.
80000.00 70000.00 60000.00 50000.00 40000.00 30000.00 20000.00 10000.00 0.00 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Rs. (in lacs)

Total assets Sales

Chart 2: Sales and Total assets trend of Dabur Nepal Pvt. Ltd. We can see above that the total assets and sales of Dabur have been in an increasing trend. The effects of these two components have the following effect on ROTA of Dabur:

ROTA
0.08 0.06 0.04 0.02 0 1 2 3 4 5 6 7 8 9 10

Chart 3: Trends to ROTA of Dabur Nepal. Because of the volatility of Daburs NPAT, the ROTA has been volatile as well despite increasing asset trends. As per the annual reports of Dabur, the world wide recessions and crisis are to be blamed for such volatility. Further as mention in the annual reports of Dabur Nepal, the political

trends of Nepal are also to be accounted for such volatility. The ROTA is lowest the 7th year i.e. 2008-2009 where the company had to undergo shut down of its operation for 1 month due to political crisis. What can be suggested to Dabur Nepal is that it should implement ways to protect itself from forex risks. Since it is a subsidiary of a multinational company, it is more prone risks of the international markets along with the domestic risks. Since the sample period taken for research is unordinary and not the usual case, the results of the research has been unordinary as well. It can only be concluded that the independent variables taken into account could not show their true effects on the dependent variables due to the extraordinary external factors faced by the dependent variable but not accounted for in the model. Taking everything into consideration, a suggestion for further studies could be to look at working capital management and profitability at normal times when the economy is stable and growing, and at abnormal times like in crisis situations or recessions as conducted by Baveld, 2012 in Impact of Working Capital Management on the Profitability of Public Listed Firms in The Netherlands During the Financial Crisis.

References

Ammar, A., Hanna, A. S., Nordheim, E. V., & Russell, J. S. (n.d.). Indicator Variables Model of Firm's Size-Profitability Relationship of Electrical Contractors Using Financial and Economic Data. Retrieved November 2012, from http://www.engr.wisc.edu/cee/faculty/russell_jeffrey/007.pdf Arani, Z. G., & Farzinfar, A. A. (2012). The Assessment of Effect of Working Capital Management on the Profitability of Pharmaceutical Companies of Tehran Stock Exchange. American Journal of Scientific Research , 121-129. Attari, M. A., & Raza, K. (2012). The Optimal Relationship of Cash Conversion Cycle with Firm Size and Profitability. International Journal of Academic Research in Business and Social Sciences . Baveld, M.B. (2012). Impact of Working Capital Management on the Profitability of Public Listed Firms in The Netherlands During the Financial Crisis. Coefficient of Determination. (n.d.). Retrieved November 2012, from Wikipedia: http://en.wikipedia.org/wiki/Coefficient_of_determination#Adjusted_R2 Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms?. Journal of Business Finance & Accounting, 30(3) & (4), pp. 573 587. Falope, O. I. & Ajilore, O. T. (2009). Working Capital Management and Corporate Profitability: Evidence from Panel Data Analysis of Selected Quoted Companies in Nigeria. Research Journal of Business Management, 3(3), pp. 73-84. Garcia-Teruel, J.P. & Martinez-Solano, P. (2007). Effects of Working Capital on SME profitability. International Journal of Managerial Finance, 3(2). pp. 164 177. Gentry, J.A., Vaidyanathan, Lee, R., and Wai, H., (1990), A Weighted Cash Conversion Cycle, Financial Management, Vol. 19 (No. 1, Spring),, pp. 90-99. Gill, A, Biger, N. & Mathur, N. (2010). The Relationship Between Working Capital Management And Profitability: Evidence From The United States. Business and Economics Journal, 2010. Karaduman, H.A., Akbas, H.E., Caliskan, A.O. & Durer, S. (2011). The Relationship between Working Capital Management and Profitability: Evidence from an Emerging Market. International Research Journal of Finance and Economics, 62(2011), pp. 61-67. Lazaridis, I. & Tryfonidis, D. (2006). Relationship Between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 19(1), pp. 26-35. Mathuva, D. M. (2010). The Influence of Working Capital Management Components on Corporate Profitability: A Survey on Kenyan Listed Firms. Research Journal of Business Management , 1-11.

Quayyum, S. T. (2012). Relationship between Working Capital Management and Profitability in Context of Manufacturing Industries in Bangladesh. International Journal of Business and Management, 7 (1), pp. 58 69. Raheman, A. & Nasr, M. (2007). Working Capital Management and Profitability-Case in Pakistani firms. ICFAI Journal of Applied Finance, 54(3), pp. 279-300. Richards, V.D., and Laughlin, E.J., (1980), A Cash Conversion Cycle Approach to Liquidity Analysis, Financial Management, Vol. 9 (1), pp. 32-38. Samiloglu, F. & Demirgunes, K. (2008). The Effects of Working Capital Management on Firm Profitability: Evidence from Turkey. The international Journal of Applied Economics and Finance, 2(1), pp. 44 50. Sharma, A.K. & Kumar, S. (2011). Effect of Working Capital Management on Firm Profitability: Empirical Evidence from India. Global Business Review, 12(1), pp. 159 173. Shin, H. & Soenen, L. (1998). Efficiency of Working Capital Management and Corporate Profitability. Financial Practice and Education (Now named Journal of Applied Finance) 8. pp. 37 - 45. Ujar, A. (2009). The Relationship of Cash Conversion Cycle with Firm Size and profitability: An Empirical Investigation in Turkey. International Research Journal of Finance and Economics, 24(2009), pp. 186-193. Wang, Y.J. (2002). Liquidity Management, Operating Performance, and Corporate Value: Evidence from Japan and Taiwan. Journal of Multinational Financial Management. 12(2), pp. 159-169. Working Capital Management. (n.d.). Retrieved November 2012, from Investopedia: http://www.investopedia.com/terms/w/workingcapitalmanagement.asp#ixzz2CfOdv0fz

Annex Calculation of necessary individual components:

2002-03 NPAT Cogs Sales Inv. TA CA CL AP AR TD 1521.86 19654.45 27961.79 5936.81 23350.03 14440.19 3241.81 1404.90 2121.03 16551.03 2003-04 1445.60 20383.69 28347.35 5318.12 21019.10 13246.84 5410.23 1720.22 1722.47 13162.74 2004-05 1116.68 21849.55 29634.41 7097.31 23182.47 14203.90 6549.33 1403.67 1664.65 14582.61 2005-06 775.50 22180.51 31040.46 7062.56 25080.72 14919.06 7367.94 1915.97 2145.73 15170.61 2006-07 852.70 25771.58 35181.33 6977.87 28447.79 18840.10 6952.06 3506.85 4847.33 17750.69 2007-08 705.30 28476.16 39159.92 9878.98 32407.06 20518.94 12661.68 8391.20 5365.60 20978.50 2008-09 23.65 32275.02 43519.23 8827.17 29730.43 17644.02 10903.84 992.85 6585.28 17795.09 2009-10 1509.77 31415.65 44268.26 11381.11 28861.34 17553.83 5488.59 1909.65 2714.87 16243.80 2010-11 1858.98 37219.51 52335.45 16024.02 39345.30 26004.79 13902.31 1539.73 4178.73 24899.76 2011-12 414.83 49413.88 68542.07 15062.33 44483.09 31020.12 22113.52 10726.69 7406.83 29827.77

Where, Inv.= Inventories, TA= Total Assets, CA= Current Assets, CL= Current Liabilities, AP= A/c payable, AR= A/c Receivable, TD= Total Debt

Calculation of necessary ratios:

2002-03 ROA ICP PDP ARP CCC LNS FG CR FL 0.0652 110.2517 26.0902 27.6869 111.8484 10.2386 4.4544 0.7088 2003-04 0.0688 95.2288 30.8031 22.1785 86.6042 10.2523 0.0138 2.4485 0.6262 2004-05 0.0482 118.5616 23.4485 20.5031 115.6162 10.2967 0.0454 2.1688 0.6290 2005-06 0.0309 116.2207 31.5290 25.2313 109.9230 10.3430 0.0474 2.0249 0.6049 2006-07 0.0300 98.8268 49.6671 50.2902 99.4499 10.4683 0.1334 2.7100 0.6240 2007-08 0.0218 126.6261 107.5562 50.0114 69.0814 10.5754 0.1131 1.6206 0.6473 2008-09 0.0008 99.8269 11.2282 55.2314 143.8301 10.6810 0.1113 1.6181 0.5985 2009-10 0.0523 132.2304 22.1871 22.3846 132.4279 10.6980 0.0172 3.1982 0.5628 2010-11 0.0472 157.1425 15.0996 29.1435 171.1863 10.8654 0.1822 1.8705 0.6329 2011-12 0.0093 111.2592 79.2336 39.4428 71.4684 11.1352 0.3097 1.4028 0.6705