Business Finance

Submitted to:

Sir Kamran Rabani

Submitted by:

Sania Khalid (13662)

S. Neha Khalid (12109)

Procter &

Contents

PROCTER AND GAMBLE IN PAKISTAN............................................................................................3

BRANDS IN PAKISTAN:.............................................................................................................................3

VISION of P&G........................................................................................................................................4

MISSION STATEMENT..............................................................................................................................4

COMPETITOR’S ANALYSIS...................................................................................................................5

COMPETITORS IN ORGANIZED SECTOR...................................................................................................5

COMPETITORS IN LOCAL MARKETS.........................................................................................................5

Swot Analysis.........................................................................................................................................7

WORKING CAPITAL MANAGEMENT..................................................................................................9

Working Capital Turnover OF P&G........................................................................................................10

Liquidity.................................................................................................................................................11

DETERMING THE OPTIMUM LEVEL OF WORKING CAPITAL...................................................................12

CASH MANAGEMENT..........................................................................................................................13

Speeding up cash receipts and slowing down payouts..........................................................................14

Accounts Receivable Management...............................................................................................16

Possible Best Practices...........................................................................................................................16

Practices as per P&G..............................................................................................................................17

Inventory Management.....................................................................................................................18

Best practices for inventory management.............................................................................................18

Practices as per P&G..............................................................................................................................19

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PROCTER AND GAMBLE IN PAKISTAN

P&G started its operations in Pakistan in 1991. First it introduces its brand of Head& Shoulder After that it gave brand of Vicks and Olay oil.Now company has eleven brands in Pakistan .The yearly sales consistently doubled during the past three years. P&G Pakistan establish local manufacturing base.

BRANDS IN PAKISTAN:

· Head & Shoulder · Pert Plus · Vicks· Pentene · Rejoice · Camay· Safeguard · Pampers · Always· Ariel

TOTAL SALES OF P&G IN PAKISTAN:

In 1991 =1.1Billion RsIn 2001= 12 Billion Rs

Employees:

There are 300 employees with 12 managers serving on 150,000 stores in Pakistan. And all over the world the no of employees is 106,000.

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VISION of  P&G“To be a leading consumer goods company and to improve the lives of world consumers by providing valuable and innovative products”.

Ten years ago Procter and gamble started the journey to improve the lives of Pakistani consumers by providing them with world famous quality brands. P&G want to be an outstanding organization with a passion for winning that would felt by everyone everyday; in the office, in the field every where P&G vision is to lead business growth by proactively identifying opportunities and positively contributing to volume growth.

MISSION STATEMENT

We will provide products and services of superior quality and value that improve the lives of the world's consumers.As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders, and the communities in which we live and work to prosper.

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COMPETITOR’S ANALYSIS

Competitors of P&Gs product specifically safeguard can be categorized into two segments:-1. Competitors in organized sector2. Competition with local Producers

COMPETITORS IN ORGANIZED SECTOROne other major competitor is doing excellent business in soap industry along with safeguard that is direct competitors of Safeguard.

LEVER BROTHERS LIMITED

Lever Brother Limited is the oldest company in Pakistan. It is operating in Pakistan since its independence. They introduced soap with the name Lifebuoy Gold 1997, which became the lot selling soap.Their target market is upper class, middle class and lower class. They have produced products for each class with respect to different prices. For example, lifebuoy with 95gms is a lower price product for lower income people, while lifebuoy 140gms is high price quality product for upper class.Lever Brothers Limited emphasizes on the direct approach to the consumer and they have well-established sales force, and distribution channel. Mostly they are following Pull Strategy. They company offers 6% profit margin to retailers on retail price. No bonus is given to retailers. Also no discount is available on bulk purchases. There is no scheme for retailers of any kind. Distributor’s full force reaches almost every retailer irrespective of the size and delivers the product to him or her. Distributors also distribute the products to villages also after taking into consideration the budget as well as the business level of that village. There is a campaign started by company in order to cover the rural population, as most of the population lives in the villages. For this purpose, they have made rural cluster zones. They have heavily advertised their products on mass media. They display their product brochures at every retailer.The company has strong financial background and has much excess budget for launching a new product, because their market share is maximum in soap industry and they are carrying marvelous profits.

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COMPETITORS IN LOCAL MARKETSAs local Producers of the soap industry, there is large number of producers and each producer has a minor share in total share of the local Producers. So, it’s difficult to isolate the major firms of this segment. Therefore, instead of this, we can see the overall characteristics of this segment.

They are successful in exploiting domestic customers on behalf of price sensitiveness.

Low overhead expenditures due to unorganized production operation. These are the firms under the protective tax policy of the government and even

most of them are not paying tax. Local based brands activate more sales. By using promotional tools, which cannot be used by the firms in organized

sector, they are offering small monetary incentive to the retailers, etc.

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Swot Analysis

STRENGTHS

Heavy and impressive promotional plan for products especially safeguard. Strong social & corporate image of P&G. Strong financial position of company. More concern towards total quality management. Direct contact with customers. P&G’s good relations with the supplier. Strong emphasis on environmental prosperity. Worldwide research and technology, engineering and manufacturing. Well-established and renowned distributors. Highly enthusiastic sales team of the company. They identified directly influence group such as wives and children in their target

market. Fifth-lowest Injury/Illness Rate for employees. Fourth-lowest lost Workday Rate for employees. Fifth-lowest property loss.

WEAKNESSES Safeguard is available in limited pack sizes; only two sizes are available. One is 125 gm

and other is 75 gm. Unwilling to serve low-income market. Price is especially very high towards lower

income groups. Due to limited manufacturing facility, they cannot reduce production cost of the

safeguard. But now expansion is being made in hub plant to increase production of safeguard. One Plant start production since 10th of April.

OPPORTUNITIES

According to the information obtained by Chamber of Commerce and Industry Lahore, the soap market is growing at an annual rate of 9.8%. The main reasons for this growth are:

Rapid growth in population, High urbanization Increase in awareness among people about new advancements.

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Due to this growing market, there are lots of opportunities for P&G to exploit this growing market by introducing new soaps.

P&G has a good corporate image among consumers. Therefore, they can get maximum share from the soap industry by introducing multiple brands of soaps because they have already different soaps in their international health and beauty care product line.

Due to rising awareness among people, switching trend toward health care soaps is high. Therefore, it is a good opportunity to capture this segment through efficient marketing practices.

THREATS

Increasing market share of local Producers. The local Producers are playing an important role in soap industry, because they are providing low price soaps and are trying to penetrate in their local market by replacing the branded products.

Threat of new entrants is also present. As Lever Brothers is a potential threat in soap industry, because they are already involved in different related businesses and providing raw material for soap production to different manufacturing companies like Colgate Palmolive, etc.

Increasing inflation in the country is also a major threat to P&G because it is reducing the purchasing power of consumers.

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WORKING CAPITAL MANAGEMENT

DEFINITION:

Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capita.

Current Assets of P&g Pakistan includes two components

Imported goods Locally manufactured goods like Ariel, Vicks and Safeguard

TYPES OF WORKING CAPITAL

1. Gross working capital

2. net working capital

3. permenant working capital

4. temporary working capital

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Working Capital Turnover OF P&GAnnual Data | Quarterly Data 

   Jun 30,

2013Jun 30,

2012Jun 30,

2011Jun 30,

2010Jun 30,

2009Jun 30, 2008

  Selected Financial Data (USD $ in millions)

Current assets

23,990 21,910 21,970 18,782 21,905 24,515

Less: Current liabilities

30,037 24,907 27,293 24,282 30,901 30,958

Working capital

(6,047) (2,997) (5,323) (5,500) (8,996) (6,443)

Net sales 84,167 83,680 82,559 78,938 79,029 83,503

Working Capital Turnover, Comparison to Industry

Procter & Gamble

Co.1– – – – – –

Industry, Consumer Goods

23.29 23.46 12.88 26.61 39.68

Source: Based on data from Procter & Gamble Co. Annual Reports2013 Calculations

1 Working capital turnover = Net sales ÷ Working capital= 84,167 ÷ -6,047 = –

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Ratio DescriptionThe

company

Working capital turnover

An activity ratio calculated as revenue divided by working capital.

LiquidityAt June 30, 2012 current liabilities exceeded current assets by $3.0 billion, largely due to short-term borrowings under P&G commercial paper program. P&G anticipate being able to support short-term liquidity and operating needs largely through cash generated from operations. P&G utilize short- and long-term debt to fund discretionary items, such as acquisitions and share repurchases. P&G have strong shortand long-term debt ratings, which have enabled and should continue to enable them to refinance their debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, P&G have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.

The company uses the conservative approach. As the name suggests it is a conservative approach which suggests that the entire requirement of current assets should be financed through long term sources and short term sources should be used only in case of emergency. There is high cost, low risk and low profit in this approach. This option means that the company’s finance is going to be relatively high cost (that is sacrificing low cost finance) but low risk; this will make the company’s profit to be low but does not run the risk of being faced with liquidity problem as a result of withdrawal of its source of finance. The conservative method is where a company predominantly finance all its permanent current assets and most of its fluctuation current assets using long term source of finance and it is only a small proportion of its fluctuating current assets that is financed using short-term source of finance. short term and longterm finance mix to invest for Current assets

For short term financing to invest in current assets the company has its own cash reserves because of good financial position but for long term financing it has the option of LC or the bank loans which it required during the launch of Ariel in Pakistan. The optimal level of current assets is determined through the process of financial forecasting which happens every quarter and the responsibility comes under the Treasury department. P&G Have one distributer In Pakistan.

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DETERMING THE OPTIMUM LEVEL OF WORKING CAPITAL

Optimal level of working capital is that level where company is capable to pay day to day expenses and company has enough cash to buy the stocks in case if it does not receive money from debtors on the time. This level is achieved by thinking and using the techniques of working capital management. We all know that both low level or over level of working capital is harmful for development of business. If company has not enough cash to repay its liability, it will create the risk of solvency and liquidity and company may go for liquidation. In case, company has over working capital, it will be misuse of money because that money is not gaining any earning and its opportunity cost will suffer by shareholders and ultimately it will decrease the value of share in share market. So, as finance manager, you should try to create equilibrium or optimal or optimum level of working capital. P&G determines optimal level of working capital through the process of financial forecasting which happens every quarter and the responsibility comes under the Treasury department.

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CASH MANAGEMENT

Cash is known as most liquid and less productive assets of a firm. If cash remains idle, earns nothing but involves cost in terms of interest payable to finance it. Although cash is least productive current assets, firm should hold certain amount of cash for marketable securities. Mainly, there are three motives for holding cash.

1. Transaction Motive Of Holding Cash

Transaction motive refers to the need to hold cash to satisfy normal disbursement collection activities associated with a firm's ongoing operation. Transaction means the act of giving and taking of cash or kinds in the ordinary course of business. A firm frequently involves in purchase and sales of goods or services. A firm should make payment in terms of cash for the purchase of goods, payment of salary, wages, rent, interest, tax, insurance, dividend and so on. A firm also receives cash in terms of sales revenue, interest on loan, return on investments made outside the firm and so on. If these receipts and payments were perfectly synchronized, a firm would not have to hold cash for transaction motive. But in real, cash inflows and outflows cannot be matched exactly. Some times receipts of cash exceeds the disbursement whereas at other time disbursement exceeds the receipt. Because of this reason, if disbursement exceeds the receipt, a firm should hold certain level of cash to meet current payment of cash in excess of its receipt during the period.

2. Precautionary Motive Of Holding Cash

Precautionary motive refers to hold cash as a safety margin to act as a financial reserve. A firm should hold some cash for the payment of unpredictable or unanticipated events. A firm may have to face emergencies such as strikes and lock-up from employees, increase in cost of raw materials, funds and labor, fall in market demand and so on. These emergencies also bound a firm to hold certain level of cash. But how much cash is held against these emergencies depends on the degree of predictability associated with future cash flows. If there is high degree of predictability, less cash balance is sufficient. Some firms may have strong borrowing capacity at a very short notice, so that they can borrow at the time when emergencies occur. Such a firm may hold very minimum amount of cash for this motive.

3. Speculative Motive Of Holding Cash

The speculative motive refers to the need to hold cash in order to be able to take advantage of bargain purchases that might arise, attractive interest rates and favorable exchange rate fluctuations. Some firms hold cash in excess than transaction and precautionary needs to involve in speculation. Speculative needs for holding cash require that a firm possibly may have some profitable opportunities to exploit, which are out of the normal course of business. These opportunities arise in conditions, when price of raw material is expected to fall, when interest rate on borrowed funds are expected to decline and purchase of inventory occurs at reduced price on immediate cash payment.

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P&G holds it cash for:

1) Precautionary Motive: as it recently introduced ariel detergent which begin manufacturing locally 3 years back.

2) Transaction Motive

Speeding up cash receipts and slowing down payouts

Accounts receivable woes plague many businesses in a challenging economy. The hardest part of running a business should be product or service design, marketing the product or managing employees. For many these things pale compared to the simple act of collecting money from the customer. Some methods will make this process easier and get you back to doing the parts of business you enjoy.

One of the best methods of ensuring a quick turnaround of accounts receivable is to offer a discount for payment within a specified time. Some offer 2/10 Net 30 terms that provide a 2-percent discount for payment within ten days or full statement rate due within 30 days. This is often effective if you calculate the amount of the discount on the statement and provide specific details as to the exact day payment is due for the reduced rate along with instant-payment options. A follow-up call on the last of the discount days may yield a payment as well Communicate Debt Efficiently

You must invoice in a way that eliminates excuses for late payments. List invoice numbers, purchase order numbers, invoice details and all relevant dates. Either list payment addresses in larger, bold print or include a self-addressed, stamped envelope with the invoice. Include in bold print your accounts receivable department's contact information and hours of operation, and an explanation of automated payment options. Be prompt and consistent in invoicing on the same day every month. List due dates with on-time invoice amounts and late dates with invoice amounts adjusted to show late penalties. Explain on your invoice that late payments may cause the customer to lose net-terms privileges. Communicate in an empathetic, yet firm way. Other methods include concentration banking, System of banking adopted by a firm in which the organization concentrates banking activities with one bank. Fast consolidation of funds from various geographically distributed regional banks to a single account in the concentration bank avoids complexity of handling multiple bank accounts.

P&G uses the concentration banking technique inorder to speed up its cash receipts. the collection float can be described in the following manner:

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•It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts

•To help suppliers deal with the changes, P&G is working with banks that will offer to advance cash to suppliers after 15 days.

•P&G is planning to make the service more affordable by lowering the interest rates, Suppliers that take up the financing offer would get cash advances in 15 days that build in a low interest rate based on P&G's high investment-grade credit rating.

Some suppliers can choose to get paid in as few as five to 10 days, even though their customers are taking as long as 90 days to pay.

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Accounts Receivable Management

Possible Best Practices

Accounts receivable is typically one of a company's largest and most visible assets on the balance sheet. Managing such a large asset is an activity of paramount importance, as poor receivables management may hinder cash flow and cause the company to incur bad debt expense. Companies should consider following a set of best practices when managing their receivables.

Credit Application

Companies should require new customers to complete a credit application before extending credit. The credit application should collect the necessary information to perform a credit check, such as the customer's tax identification number or social security number and the legal name and fictitious names used -- DBA name -- by the company. Require new customers to submit a list of credit references and contact them to ensure that the potential client is creditworthy.

Timely Invoicing

Timely invoicing is an essential practice to develop to expedite payment from customers. Many customers customarily pay their invoices late as part of their accounting policy; however, timely invoicing can prod them to pay their invoices quicker. Because delayed payments from customers can have a profound impact on a small business' cash flow, the importance of sending customer's their invoice in a timely manner is vital to maintain a successful business.

Early Pay Discounts

Sales discounts to encourage early payment are a best practice that can improve the cash flow of a business. The discount offered should be enough to provide an incentive to the customer to pay the invoice within the specified time period, but small enough to avoid profit margin erosion. It is essential to inform customers that the discount will not be honored if payment is received after the discount date listed on the invoice, as this alleviates potentially damaging confrontations at a later date.

Debt Collection

It is essential to have a plan of action when attempting to collect a debt from customers who are delinquent. Attempt to contact the customer before taking any action, as this is the cheapest and quickest way to resolve the debt. However, it may be necessary to pursue other courses of action, including mediation, arbitration and referring the debt to an external debt collection agency. Mediation and arbitration are legally acceptable ways that bring the seller and buyer together to negotiate a settlement. Mediation allows the two parties to determine a

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collections

through cheques

collectors collect

the cheques

collectors manually deposit

cheques in bank

solution; arbitration provides for a resolution determined by a court appointed arbitrator. Use debt collection agencies as a last resort, as they can be costly and are not required to accept every case referred to them

Practices as per P&G

Credit and collection policies

The collection policies are basically defined by agreement as far as P&G is concerned. The number of days assigned for credit payments are mutually aligned. In order to keep this procedure as simple as possible P&G in Pakistan has one sole distributor.

Discounts/Bad debt

Since P&G tries to keep things as simple as possible it has one distributor, Abu Dawood, which is also one of P&G’s partner.

The two types of discounts that P&G offers are; prompt payment discount which are given upon early payments and quality discount which are given on bulk purchases. As its relations with its sole distributor are very smooth and reliable the risk of bad debts is minimal. It however has a policy of bad debt when the debt is over due by more than 90days. With P&G delayed payments do happen but its extremely rare.

Collection procedures

P&G has a very active process that tracks payments on a daily basis. The following chart explains its collection procedure.

Analyzing credit applicant

As P&G works with one sole distributor it doesn’t really have to worry about analyzing credit applicants but its distributors in turn have to, since they have to give huge credits to retailers like Macro and Naheed.

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Entire credit/collection functions outsourced to a third party company

One of P&Gs competitor is Unilever who has many distributors, but P&G on the other hand works on simplifying work and therefore it deals with an individual firm and thus easily manages credit and collection functions itself rather than outsourcing them to any third party.

Inventory Management

Best practices for inventory management

Keep the proper amount of stock

Determining the proper inventory levels doesn’t have to be complicated. Consider the cost of having an excess vs the cost of having a deficiency. This can easily be accomplished by simply determining the all the associated costs of having an extra item sitting on the shelf versus the costs of being one item short.

Look at trends

Regular review of inventory levels at different times of the year can be beneficial when determining appropriate stock levels. If your business has a considerable level of complexity, there is stock software available that can be beneficial. Much of successful inventory management relies on data analysis.

Have quality control systems in place and use them

Quality systems are critical to accurately determining inventory levels. This includes both incoming materials and finished goods. It does little good to believe you have 100 items on the shelf when only 90 are suitable for shipping. Part of your quality system should include the review of your inventory documentation.

Be safe and secure

Hazardous materials need to be secured in a safe manner. Expensive items also require special storage, as these items are subject to ‘shrinkage’.

Be careful with perishable items

Items with a limited shelf life require special attention regards to inventory levels. It is also important to utilize a first-in first-out process to avoid waste.

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Inventory management best practices can save your company a considerable amount of money. This is accomplished through minimizing waste, avoiding shortages of stock, and avoiding an excess of stock. Best practices for inventory management can be a considerable task but that doesn’t necessarily mean it needs to be complicated. Relatively simple processes that are followed religiously can be very effective. Examine your current practices consider whether they should be viewed as ‘best practices’.

Practices as per P&G

P&Gs inventory management is done by the logistics department of Supply Network Operations (SNO)

How to determine appropriate level of inventory

In order to determine the appropriate level of inventory, the brand teams work collectively to gain monthly forecasts of sales volume.

How much to order

The concept of SKUs is followed which is stands for Stock Keeping Units, whereby everything is defined at level of detail. P&G has two major ends as far as stock keeping is concerned first is inventory management by company and second is shipment to distributors which comprises of both imported goods like shampoo and locally manufactured goods such as arial and safeguard.

In order to forecast future sales and determine how much to order, there are proper forums in the finance department and brand teams participate in the forecasting for which logistics have to come up with a plan.

P&G in Pakistan doesn’t really have its own warehouse instead it uses a third part warehouse and thus pays extra cost for it.

How often do they order

The ordering cycle varies from brand to brand. It is different for slow moving products versus fast moving products. Moreover since it is involved in imported and locally manufactured goods it tends to set the time between the next order accordingly. For instance for products like Arial which is manufactured in Karachi at port Qasim, they ensure that at least a 2 day notice is given before they start running out of stock as manufacturing takes place on a daily basis. As far as imported products are concerned they keep a margin of at least 15-20 days, so that they are able to meet customer requirements without delay.

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Does the company keep safety stock?

The company does keep safety stock, the main factors that influence the amount of this are:

Economic stability Position and condition/performance of firm Expectations of market

Do they rely on Just in time stock (stock acquired exactly when needed)?

The firm relies on Just in Time stock only as far as locally manufactured goods are concerned, such as safe guard and arial, reason being that their prompt delivery is less riskier than that of imported goods.

Just in Time stock is not a reliable concept as far as stock of imported goods is concerned, it is essential to ensure availability of stock before hand.

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