Introduction

Working capital management is the management of the firm’s short-term assets and liabilities, individually and in aggregate. Of all the functional areas of business financial decision-making, the one that occupies the largest amount of the time and effort for financial managers of a company is the management of working capital. Financial managers spend 60% of their time on decisions related to working capital management. Credit management, cash management, inventory management, and accounts payable management are all part of the management of working capital.

As part of the course completion requirements the students of this group were assigned to prepare this report. It intends to provide an in-depth view of working capital management in the pharmaceutical sector of Bangladesh. For this purpose three companies in the sector have been chosen. These are: Beximco Pharmaceutical Ltd., Ibn Sina Pharmaceutical Industry Ltd., Libra Infusions Limited.

Objective

• To conduct a thorough research on the working capital management in the pharmaceutical sector of Bangladesh

• To present information on current policy and industry practices.

• To relate various components of working capital management to overall growth of the firms under study.

• To arrive at some conclusive findings regarding working capital management in three companies.

 Methodology

The information presented in the report in obtained both from primary and secondary sources. Information and data about the companies’ working capital were obtained from companies’ annual reports, interviews with the officials and the Internet. The analyses, done for each component of working capital, are based on the methods described in the course textbook. These methods are described in the part where the data are analyzed.

Scope

The report is based on three companies in the pharmaceutical sector of the country. The components covered on the report are cash, liquidity, trade credit, and inventory.

Report Organization

The report is divided into six parts. These are: Part One: Introduction; Part Two; Company and sector profile; Part Three: Analysis; Part Four: Policies and Practices; Part Five: Comparative data analysis; Part Six: Summary of findings, policy implications and conclusion

Pharmaceutical Industry Profile:

Pharmaceutical Industry has grown in Bangladesh in the last two decades at a considerable rate. Its healthy growth supports development of auxiliary industries for producing glass bottles, plastic containers, aluminum collapsible tubes, aluminum PP caps, infusion sets, disposable syringes, and corrugated cartons. Some of these products are also being exported. Printing and packaging industries and even the advertising agencies consider pharmaceutical industry as their major clients and a key driving force for their growth.

Following the Drug (Control) Ordinance of 1982, some of the local pharmaceutical companies improved range and quality of their products considerably. The national companies account for more than 65% of the pharmaceutical business in Bangladesh. However, among the top 20 companies of Bangladesh 6 are multinationals. Almost all the life saving imported products and new innovative molecules are channeled into and marketed in Bangladesh through these companies.

The value of locally produced medicines rose from Tk 1.1 billion in 1981 to Tk 16.9 billion in 1999. At present, 95% of the total demand of medicinal products is met by local production. Local companies (LCs) increased their share from 25% to 70% on total annual production between 1981 and 2000.

There are about 210 pharmaceutical companies in the country engaged in producing quality allopathic medicines. In 1982 the annual market for Pharmaceuticals was Tk. 243 crores but in 2000 it increased to 1800 crores. Now, about 95% of the medicine are manufactured in Bangladesh by national pharmaceutical industries. And Bangladesh has become almost independent in manufacturing medicines.

Export of pharmaceutical products is still in an infant stage, although a number of private pharmaceutical companies have already entered the export market with their basic materials and finished products. They export their products to Vietnam, Singapore, Myanmar, Bhutan, Nepal, Sri Lanka, Pakistan, Yemen, Oman, Thailand, and some countries of Central Asia and Africa.

Pharmaceutical and chemical companies are high-risk/high-reward businesses. The significant costs of research and development, the risks involved in manufacturing and testing, and quickly changing environmental laws are among several factors that combine to present complex financial and operational challenges to the industries in this sector.

 Profile of BEXIMCO Pharmaceutical Limited

BEXIMCO Pharma is a leading edge pharmaceutical company, acclaimed for its outstanding product quality, strong brand equity, world-class manufacturing facilities, product development capabilities and outstanding service.

It produces and markets ‘branded generics’ for almost all diseases from AIDS to cancer, from infection to asthma, from hypertension to diabetes, both nationally and internationally. We partner our activities to the humanities quest for longer, healthier, and happier life.

Beximco Pharmaceuticals Ltd. is a leading edge pharmaceutical company and is a member of the BEXIMCO Group, the largest private sector industrial conglomerate in Bangladesh. The strategic strengths of Beximco Pharma are its strong brand recognition, highly skilled work force and diversified business mix.

Beximco Pharma started its operation in 1980, manufacturing products under the licenses of Bayer AG of Germany and Upjohn Inc. of USA and now has grown to become nation’s one of the leading pharmaceutical companies, supplying 10% of country’s total medicine need. Today Beximco Pharma manufactures and markets its own `branded generics’ for almost all diseases from AIDS to cancer, from infection to asthma, from hypertension to diabetes, both nationally and internationally.

Beximco Pharma manufactures a range of dosage forms including tablets, capsules, dry syrup, power, cream, ointment, suppositories, large volume intravenous fluids, metered dose inhalers etc. in several world-class manufacturing plants, ensuring high quality standards complying with the World Health Organization (WHO) approved current Good Manufacturing Practices (CGMP). Beximco Pharma is the largest exporter of pharmaceuticals from Bangladesh, spreading its presence in many developing and developed countries across the globe. Another important business activity of Beximco Pharma is the contract manufacturing for major international brands of leading multinational companies.

To meet the future demand Beximco Pharma has invested US$ 50 million to build a new state-of-the-art manufacturing plant, confirming to USFDA and UK MHRA standards. This new plant will also offer contract-manufacturing facility to leading pharmaceutical companies, especially from Europe and US.

Beximco Pharma employs 1800 staff and has an annual turnover of US$ 60 million.

Profile of IBN SINA Pharmaceutical Industry Ltd

The IBN SINA Pharmaceutical Industry Ltd. is a leading pharmaceutical company in Bangladesh involved in manufacturing and marketing of quality medicines of different therapeutic groups. It’s mission is to become a premier pharmaceutical company, with a balanced focus in complementary therapeutic areas.

The IBN SINA Pharmaceutical Industry Ltd. was founded in 1983 in a campus of about 15 acres of land, about 56 km away from Dhaka city. The Industry was established by the Board of Trustee as a private limited company. Then it was converted into a public limited company in 1989. IBN SINA TRUST owns 50% share of the industry and the public shares the rest 50%.

The commercial production was started in May 1986 with only few standard finished Pharmaceutical dosage forms. Since the beginning IBN SINA was committed to provide high quality healthcare services in Bangladesh and within a very short period of time it fulfilled its commitment. The company is always devoted to ensure the high quality of medicines by implementing state of art technologies and modern machineries. The IBN SINA Pharmaceutical Industry Ltd. has become a reputed pharmaceutical company in Bangladesh with sufficient expertise and experiences.

Key facts and 5 year Statistics of the company’s corporate operational result is given in Appendix-I.

 Profile of Libra Infusions Limited

Libra Infusions Limited (former Libra Pharmaceuticals Ltd) was incorporated on 2 January 1976 as a private limited company and was converted into a public limited company in 1994. The company is engaged in manufacturing and marketing of life saving injections namely intravenous (I.V.) fluids of different quality/grades. The number of employees at the end of June 2004 was at 592 persons.

The company is committed to manufacturing world class quality products using modern technology, maintaining Quality Management System through documentation of all activities of the company complying with international standard requirement, customer satisfaction through service upto their level of expectation.

Vision of the company is all of its activities should benefit the society to take health care. Mission of the company is to produce world class products using modern technology, to maintain quality, to satisfy the customers, to ensure compliance with objectives.

5 years Statistics of the company is shown in Appendix-I

Financial Ratio Analysis

Financial ratio analysis calculates and compares various ratios of amounts and balances taken from the financial statements.

The main purposes of working capital ratio analysis are:

To indicate working capital management performance; and

To assist in identifying areas requiring closer management.

Liquidity

For analysis of liquidity position we have analyzed each firm on the basis of the following measures:

Traditional approach

The ratios used for measuring liquidity under traditional approach are:

A. Current ratio: Current Assets divided by Current Liabilities

The current ratio measures the level of liquidity, that is, the level of safety provided by the excess of current assets over current liabilities. The higher this ratio, the more liquid the firm is said to be.

B. Quick ratio: (Total Current Assets – Inventory)/ Total Current Liabilities

The quick ratio or acid test ratio excludes inventories from the current assets, considering only those assets most swiftly realizable.

C. Accounts Receivable Turnover: Sales divided by accounts receivable

The higher the turnover and the lower the average collection period, the quicker is a   receivable turned into cash and the more liquid is the firm.

D. Inventory Turnover ratio: Cost of sales divided by Average inventory

The higher the turnover, the more liquid the asset.

Improved indices for measuring aggregate liquidity

• Cash conversion cycle
• Comprehensive Liquidity Index
• Net liquid balance
• Lambda Index

Cash conversion cycle: (Operating cycle period minus payment deferral period)

The cash conversion cycle is the net time interval between the expenditure of cash in paying the liabilities and the receipt of cash from the collection of receivables. The lower the cash conversion cycle the more liquid the firm is. It is more often a more accurate measure of overall liquidity than is the current ratio.

Comprehensive Liquidity Index: 1- ( 1/ Turnover ratio of assets/liabilities)

This is a liquidity-weighted version of the popular current ratio. This index weights each current assets and liabilities based on its nearness to cash (turnover).

Net Liquid Balance: (Cash + marketable Securities – Notes payable)/ Total Assets

This index centers on the firms’ balance of cash and marketable securities. This balance represents the firm’s true reserve against unanticipated cash needs, since other remedies for cash shortage can be very costly. Here only notes payable (short term, interest bearing debts) are treated as maturing obligation.

Lamda Measure: (Initial Resrve +E(NCF))/Uncertainty

The data from which the above basic liquidity analyses are done in shown in Appendix-II.

Cash Forecasting

Proper cash flow forecasting is essential to successful working capital management.  To do this effectively, organizations must take into account internal and external working capital drivers and consider the sensitivity of those drivers to changes in the business or market.

Cash forecasting is the process of predicting future cash flows based on an analysis of historical and current data obtained from internal sources (e.g., accounts payable and accounts receivable departments) and external sources (e.g., banking partners).

Assumptions underlying cash forecasting :

• The forecasted period is 2005.
• All of the three companies uses distribution approach
• Total Cash receipt are calculated according to payment pattern behavior approach
• The 1st prior period is 2004
• The second prior period is 2003
• As pharmaceutical products are highly demand products to distributors or consumers major share of the payment is made in the year of selling.

For Beximco pharmaceuticals the cash receipt on sales is assumed to be as follows:

For IBN SINA the cash receipt on sales is assumed to be as follows :

For Libra Infusions the cash receipt on sales is assumed to be as follows ( The company mainly sales to local customers):

• The sales growth rate is assumed to grow as the past growth rate.
• The growth rate in other items are also based on relative growth.
• Cash disbursement items are derived from cash flow statement
• Total disbursements are calculated by adding all the individual disbursement items .

For Libra infusions the desired cash holding on sales is assumed to be as follows :

For Beximco pharmaceuticals the desired cash holding on sales is assumed to be as follows :

For IBN Sina the desired cash holding on sales is assumed to be as follows :

The forecasted cash holding amount is available in cash or in bank that is available on a phone call or  any prompt measure without irritating its inherent liquidity.

Caution :

• The calculations of forecasted data are said to be a bench mark for the period and the company may make its investment / borrowing/divestment strategy based on surplus or borrowing amount.

• The company must keep some safety stock of cash based on uncertainty of cash inflow or outflow.

• The cash flow forecasting is best tried to match with the best possible actual amount based on financial statement data, theoretical tool and practice.

BEXIMCO Pharmaceutical Ltd

 IBN SINA Pharmaceutical Industry Ltd

Libra Infusions Ltd

 Trade Credit

The companies sell products on credit to their respective sole distributors on certain terms and conditions. They do not have to spend time to decide among a number of customers to grant credit or not. They have special agreements with their respective sole distributors.

Inventory Analysis

Pharmaceutical companies use hundreds of raw materials in varying units of measurement to produce finished goods. Besides these they have hundreds of units of work in process at any time during production process.

To analyze the raw material inventory of all three companies we have used the basis EOQ model.  We have based our analysis on certain assumptions that reflected the companies’ actual position. Although both IBN Sina and BEXIMCO use internally developed computer based software for inventory management, we did the analysis based on paper an pencil. We had to assume certain data because of both companies management’s refusal to divulge any data.

 Aalysis of Raw material inventory Consumed:

Obviously average inventory for a stock item is represented by half the stock. A replenishment delivery is received (Q) and is added to any remaining stock. In an out of stock situation some of it may indeed be allocated already to outstanding (waiting) orders. The stock is now issued to jobs and orders and steadily depletes.

Costs of Inventory

Costs are tied up in the inventory itself and in ordering and carrying the stock.

Holding costs
– expressed as a % of stock value and may be 15-30 % per annum.

Insurance, Taxes, and Opportunity Cost

Shrinkage Cost

Obsolescence Cost

Cost of Counting

Cost of Rent, Utilities, and Moving Material

Acquisition/ordering costs
Purchasing order processing costs

Detailed calculations are shown in Appendix-III.

Introduction

Policies and practices of the three companies are more or less similar for these three aspects working management. Instead of documenting separate policies we have mentioned the similarities and differences.

These companies are utilizing working capital policies and practices to streamline operations, reduce production costs, and be more responsive to demand fluctuations. These policies and practices of cash forecast, liquidity, trade credit, and inventory are required for the following reasons:

1. Need for accurate and timely forecast of customer demands.

2. Capability to respond quickly to the availability and changes in raw materials.

3. Facility to easily scale formulas and recipes based on inventory levels.

4. Ability to maintain brand equity and increase market position through superior quality and value-added services.

5. Visibility to and analysis of real-time, enterprise-wide information throughout the supply chain.

6. Continual streamlining of operation processes to minimize manufacturing costs and maximize yields.

7. Control and optimize inventory levels to reduce carrying cost and still create the perfect order that is complete, accurate, on time, and in perfect condition.

 Policy and practice regarding cash and liquidity:

The companies should establish policies so that business units contribute the financial information needed for forecasts.

For maximum effectiveness, the companies’ managements believe the policy needs to be supported by appropriate incentives.

• The companies believe in maintaining a healthy level of Cash and liquidity position.

• For that purpose the companies’ policy is to maintain a 2:1 current asset to current liability ratio or somewhere in between 1 and 2.

• The companies usually use traditional method calculating working capital ratio for reporting and management purpose.

• In practice the companies cannot maintain that level of current ratio.

• Beximco invests excess cash in shares that matches its cash needs.

• The companies prepares cash budget in the beginning of each quarter and forecasts cash in weekly basis. Beximco and IBN Sina use computer software for this purpose. Libra uses less sophisticated tools.

• Beximco and IBN Sina use sensitivity and simulation analyses to analyze the effects of various situations on cash forecasting. Issues analyzed  are: How will unforeseen events impact working capital requirements?  What if a sudden market downturn or upturn occurs?  What if the company loses a major customer?  What happens if a major competitor takes a significant action to improve its market position?

• Since each of these could have a sizable impact on the business, the companies prepare accordingly.

• All the companies hedges cash balance by holding extra cah balances in bank and arranging extra borrowing capacity.

• The companies also have to borrow short-term loan from the banks.

• Companies have the policies for contingency plans that take a holistic view of the organization in the context of a variety of different challenging situations.  This helps minimize the adverse effects of unforeseen events and provide financial flexibility in uncertain times by having working capital as a ready source of cash.

 Policies and practices regarding trade credit

Each of the companies has a sole distributor of its products and thus the company sells the goods to that firm. The companies do not deal with any other buyers except with their respective sole distributors and importers.

Beximco and Libra grant trade credit to their respective local distributors. Libra provides trade credit on four tier basis.

The tiers and amounts are given below

IBN Sina does not sell products on credit to local distributors.Beximco and IBN Sina grants 60 days credit period to the importers.  Companies do not have policy to offer any trade discount.

Since these companies deal with commercial accounts, they typically have fewer customers with larger invoice amounts. The basic processes in the accounts receivable function, however, remain the same.

The three basic processes that make up the accounts receivable function of these companies are:

• Remittance processing — including payment methods and automated processing.

• Credit management — including communication of credit policies, credit checks and approvals, and credit maintenance.

• Collections — including methods to monitor and motivate internal and external collections agents, collections techniques, and technology.

The companies recognize that they cannot force its customers to pay their bills. They can, however, take a number of steps to ensure payment.

The companies use a credit report of its distributor and foreign buyers before deciding to grant trade credit.A credit report summarizes historical financial information collected to determine an individual’s or an entity’s creditworthiness, that is, the means and willingness to repay an indebtedness. The company utilized credit reports to gauge credit reputation, and thus determine whether to extend credit, and on what terms.

Policy and practice regarding inventory management

In the 1990’s, with the advent of information technology use in every business operations in the world,  BEXIMCO and IBN Sina and Libra recognized that they needed to develop their own information systems for controlling and managing their inventory and other current asset. In response to this need, several computer software companies developed comprehensive inventory management modules and systems. These new packages include many new features, designed to help producers effectively manage inventory.

The companies perform inventory control management through computer programs that provide them with the facilities to manage, pick, and control its inventory in the ways most conducive to how it does business and optimize results. A new generation of inventory management technology is at last enabling companies to properly account for variability and multi-level activity in the supply chain.

The practices of all three companies are:

Besides developing a good system that performs up to it potential, companies have emphasized the following in their policies and practices for of good inventory management:

1. Protect the company against theft
2. Establish an approved stock list
3. Assign and use bin locations
4. Record all material leaving warehouse
5. Process paperwork in a timely manner
6. Set appropriate objectives for Make sure every employee is aware of the cost of bad inventory management
7. Ensure that stock balances are accurate and will remain accurate
8. Determine the most advantageous replenishment path for each item in each warehouse –
9. Distributive purchasing
10. Central Warehousing
11. Cooperative Purchasing
    1. Specify guidelines for setting the reorder method an other purchasing parameters to maximize inventory turns and minimize stockouts:
    2. Minimum/Maximum quantities
    3. Economic order quantities
    4. Order up to a specific stock level
    5. Safety stock quantities
    6. Preseason buys
       1. Document replenishment procedures:
       2. Line buys
       3. Non-stock items
       4. Price-break purchasing
       5. Preseason buys
       6. Importing material
          1. Initiate an excess inventory control program – Excess inventory is usually considered to be any quantity of a product greater than a 12 month supply.
          2. Transfer excess stock to a branch that needs the material
          3. Return the stock to the vendor
          4. Lower the price of items with excess inventory
          5. Substitute surplus inventory for lower cost items that are still popular
          6. Offer special commissions for the sale of surplus merchandise
          7. Sell the excess inventory to a competitor
          8. Donate excess stock to a non-profit agency
          9. Throw it out, take the “write-off” for your financial statement, and free up room in your warehouse
          10. Make inventory management considerations part of corporate strategic planning..

11. Implementing technologies such as bar coding systems, and pick-to-light.

 Liquidity

The above data indicates that the liquidity position of Beximco is better than other companies under traditional method. However, under comprehensive liquidity index IBN Sina’s liquidity position is better than others. This occurs due to IBN Sina’s having no account receivable.

Under cash conversion cycle IBN Sina has higher conversion cycle than others. Beximco’ performance in converting current assets in cash is very slow.

In terms of net liquidity balance IBN Sina is the best performer.

In terms of improved measure of liquidity IBN Sina is the best performer.

Cash Forecasting

BEXIMCO has huge surplus cash which mainly arises from short term borrowing from bank. As a pharmaceutical giant BEXIMCO has the ability to borrow huge amount from banks.

Trade Credit

BEXIMCO high account receivables than the company. IBN Sina does not sell on credit.

Inventory Analysis

Libra’s inventory turnover is higher than other companies. This shows that the company’s performance is best in this regard.

 Analysis of Raw material inventory Consumed:

 The comparative performance data of the three companies are given below:

BEXIMCO

IBN SINA

Libra

In summarized form the above the data is shown in this table:

Performance of three firms in terms of working capital management aspects:

*Rankings ranges 1 to 3
1 indicates the best and 3 indicates the poor performer

So overall we can see IBN Sina is the best performer which is reflected in their per share price and high market share growth.

 Findings

Beximco holds huge inventory level which causes poor performance in inventory turnover.

Traditional methods of liquidity measures go in favour of Beximco Pharma

Beximco’s forecasted cash budget is a surplus budget due to its effective credit line with the bank.

IBN Sina does not provide credit in sales.

As its current six year plans for business expansion it spends a substaial amount in fixed investment which causes deficit cash balance budget and lower liquidity in traditional measures.

IBN Sina through its efficient working capital management holds a comparatively better position than the other two.

Libra as a result of purchasing about half of its materials from local sources successfully handles its inventory management which causes a best level inventory turn over in the industry.

Libra also has deficit cash budget and  goes to its internal sources of financing (loan from directors).

 Conclusion

The pharmaceutical market of Bangladesh is very dynamic and competitive, the market here is comparable to the market in the developed countries. Every year the national market is expanding. The size of pharmaceutical market is about Tk. 2865 crore. Last year national growth was 8.6%.

Most of the inputs are imported which causes high volume of inventory and lower number of orders. The market is characterized with having huge diversified products, higher level of inventory and aggregate liquidity requirement. To sustain in this highly competitive environment firms engage in sophisticated and efficient working capital management.

The firms engage in global level software tools with traditional methodologies to be in their optimum level. Firms with better working capital management gain better competitive advantage.