Working Capital Management Ratios of Coca Cola

Huda Abdi Noor

Abu Dhabi University,
Email: [email protected]

Supervised by:

Professor Haitham Nobanee

Abstract

This research aims to examine the working capital management ratio of Coca Cola company
from the years 2016 to 2016. Working capital plays a big role in the business's continuous
operation and survival in the market. This research will determine if the company has good
working capital management by using the ratios analysis like Operation Cycle, Cash
Conversion Cycle, and Net Trade Cycle.
Introduction
The Coca Cola company is one the biggest international beverage companies in the world, it
was founded in 1892 in America by John Stith Pemberton. The Company’s main product is
syrup concentrated Coca-Cola, the company is responsible for the manufacturing and
promoting sales for the products produced (Zeidan, 2020). Nowadays the company has grown
to be the worldwide industry leader, it is considered now the largest non-alcoholic soda
beverage company in the world. The Coca Cola company was founded on the idea of one
simple product and now the company manufacture generally around 500 beverages grouped
in different categories. Beverages made by the company range from soft carbonated drinks,
energy drinks, sugar free juices and many more, the range of beverages the company
produced received welcoming from the consumers. However, the company rapid growth
made it possible for the products it makes to look unique and desired by all the retailers, the
Coca Cola company continued to spread internationally and by 1970 it was the first cold
beverage company in India (Nganga, 2012).

One of the many reasons that made Coca Cola company to became one of the most known
brands around the globe is their working capital management. according to Al Breiki &
Nobanee (2019) Financial management is important for a business financial strength and
performance while and working capital management ensures the efficiency of the daily
operation. Now a days, majority of business started to invest in working capital management
due its significant importance.

Working capital is a scale used by companies to know their short term efficiency and
satiability. Working capital refers to the assets used in order to cover the day to day activities.
Therefore, working capital management is applied to guarantee the continuous of the
company’s daily operations (Alnuaimi & Nobanee, 2020). Working capital is the difference
between assets and liabilities so any change in assets or liabilities affects the working capital
directly.

Working capital management is important for businesses survival. Managing the capital is
substantial factor in shareholders wealth, and it also helps to ensure the company’s liquidity.
Furthermore, working capital management creates an effective flow of the capital in the
company (Ashworth, 2016).

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According to Ashworth (2016) the main two purposes of working capital management are to
increase liquidity and profitability. Low working capital means low liquidity and vis versa;
this means the company will be incapable of paying current debt like employees salaries and
suppliers on time which well have a direct negative impact on their relationship. Furthermore,
high working capital means low profitability and vis versa; which means the company will
have extra cash in hand instead of investing it to earn more returns. Therefore, to determine
the appropriate level of working capital a company should have trade off concept is used.

One way to manage the working capital is by managing the cash conversion cycle. Cash
conversion cycle involves managing inventories, accounts receivable, accounts payable. Cash
Conversion Cycle equals the Operating cycle minus the Payable period (Al Muhairi and
Nobanee, 2019). The operating cycle measure the company efficiency in turning the row
materials to cash; it’s made up of time period from buying the row material, producing the
good, selling the finished good and then collecting the cash from receivables. (P, 2020).
While the Payable period measures the how long it takes the company to pay back its
suppliers.

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Data and methodology

The data used in this study was collected from Yahoo Finance. The financial date belongs to
Coca Cola Company from 2016 to 2019 in order to analyze the working capital of the
company by using the liquidity ratios such as Inventory Period, Receivable Period, Payable
Period, Operating Cycle, Cash Conversion Cycle and Net Trade Cycle.

Item/Year 2019 2018 2017 2016

Inventories 3,379,000 2,766,000 2,655,000 2,675,000

Receivables 3,971,000 3,396,000 3,667,000 3,856,000

Accounts 3,804,000 2,498,000 2,288,000 2,682,000

Payables

Sales 37,266,000 31,856,000 35,410,000 41,863,000

Cost of Goods 14,619,000 11,770,000 13,256,000 16,465,000

Sold

*All numbers in thousands

Table 2: Liquidity Ratios of Coca Cola Company.

Ratio/Year 2019 2018 2017 2016
Inventory Period 84.37 85.78 73.10 59.30
Receivable Period 38.89 38.91 37.80 33.62
Payable Period 94.98 77.47 63.00 59.46
Operating Cycle 2.17 2.20 1.93 1.76
Cash Conversion
-92.81 -75.26 -61.07 -57.69
Cycle
Net Trade Cycle 34.73 41.98 41.58 33.56

Figure 1: Inventory Period of Coca Cola Company

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 Inventory Period
100.00
90.00
84.37 85.78
80.00
73.10
70.00
60.00 59.30
50.00
40.00
30.00
20.00
10.00
0.00
2019 2018 2017 2016

Inventory period represents the number days the inventory is held before its sold. The shorter
the period the better as it shows the efficiency of the company selling process. In the above
graph, Coca Cola’s inventory period was 59.50 days in 2016, 73.10 days in 2017 and 85.87
days in 2018. The increase in the inventory period shows that Coca Cola was taking longer to
sell it product in the last 3 years which lead to a decrease in the inventory turnover ratio.
However, there was a slight decrease in 2019 to 84.37 days.

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 Figure 2: Receivable Period of Coca Cola Company

Receivable Period
40.00
39.00 38.89 38.91
38.00 37.80
37.00
36.00
35.00
34.00
33.62
33.00
32.00
31.00
30.00
2019 2018 2017 2016

Receivable period stands for the number of days it takes to collect account receivables from
customers or buyers. The graph shows that Coca Cola receivable period kept on increasing
gradually from 33.62 days in 2016 to 38.89 days in 2019. Despite the increase of the period
Coca Cola still have a good collection period. The shorter the receivables period the better as
it will increase liquidity by increasing the available cash and reducing the need for debt to
finance the daily operation. Moreover, the increase in Coca Cola receivable period lead to a
decrease in their receivable turnover ratio. There is an obvious increase in Coca Cola sales
the in 2019 which can be linked to the increase in the receivable period as customers had
more time to make their payments.

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 Figure 3: Payable Period of Coca Cola Company

Payable Period
100.00
94.98
90.00
80.00 77.47
70.00
63.00
60.00 59.46
50.00
40.00
30.00
20.00
10.00
0.00
2019 2018 2017 2016

The payable period measures how long it takes the company to pay for the supplier. Its
favorable by most business to have a longer time to cover the account payables which means
they don’t have to take loans in order to settle the payables, and it also increases the liquidity
of the company. The graph illustrates that Coca Colas payable period rose in the last 4 years
from 59.46 in 2016 to 94.98 in 2019.

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 Figure 4: Operating Cycle of Coca Cola Company

Operating Cycle
2.50

2.17 2.20
2.00 1.93
1.76
1.50

1.00

0.50

0.00
2019 2018 2017 2016

Operating cycle consist of inventory and receivable period. Operating cycle means the
process of converting the raw materials to finished good to account payable then to cash (P,
2020). Moreover, the cycle helps on estimating the amount of working capital needed for
smoother operation. The shorter the cycle the more efficient the company’s operation. The
graph shows that Coca Cola operation cycle of 1.76 in 2016, 1.93 in 2017, 2.20 in 2018 and
2.17 in 2019. The cycle increased 0.42 in the last 4 years; the slight increase was due to
increase in inventory and receivable period.

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 Figure 5: Cash Conversion Cycle of Coca Cola Company

Cash Conversion Cycle

0.00
2019 2018 2017 2016
-10.00
-20.00
-30.00
-40.00
-50.00
-60.00 -57.69
-61.07
-70.00
-75.26
-80.00
-90.00
-92.81
-100.00

The Cash Conversion Cycle measures how long a company takes to turn the inventory into a
cash. The graph above shows that Coca Cola have a negative CCC and it kept on decreasing
over the years 2016 to 2019 from -57.69 to -92.81 which indicate that they have an effective
operating cycle that increases the liquidity and profitably of the company. Negative CCC
means the payable period is longer than the operating cycle which means Coca Cola is
relying on their supplier to finance the daily operation as they gave them longer time to pay.
The cash from sales is collected before paying the supplier and this benefit Coca Cola to
reduce the outside funding.

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 Figure 6: Net Trade Cycle of Coca Cola Company

Net Trade Cycle

45.00
41.98 41.58
40.00
35.00 34.73 33.56
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2019 2018 2017 2016

The Net Trade Cycle measures how long the capital take to go through the cycle and come
back as cash again. The shorter net trade cycle the more profitability as money is not locked
up in the working capital (Net Trade Cycle, 2020). Coca Cola company net trade cycle ratio
was 33.56 in 2019 and it increased to 42.58 in 2017 and 42.98 in 2018 due to an increase in
the operation cycle. The increase in the inventory and receivable period decreases the
available cash which spikes up the operation cycle. There was a slight decrease in the net
trade cycle from 2018 to 2019 which was caused by a decrease in the operation cycle.

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Conclusion

Working capital management is a crucial factor in competitive business environment as it

ensures effective daily operations. However, it’s difficult for firms in the underdeveloped
economies to manage the working capital due to lack of resources (Wang, Akbar, &
Akbar,2020) Furthermore, it’s not easy to balance between profitability and liquidity in
managing the working capital as they have a negative relationship. High liquidity means
having significant amount cash available which can be invested to earn profit. (Rimo &
Panbunyuen, 2010)

In working capital management it’s important to monitor and manage the cash conversion
cycle, therefore, it’s important for business to focus in reducing receivable and inventory
period and increase the payable period. (Rimo & Panbunyuen, 2010)

This paper examined the working capital management of Coca Cola Company by looking
into Company’s Operation Cycle, Cash Conversion Cycle and Net Trade Cycle. The shorter
the operation cycle the better and for Coca Cola the operation cycle increased from 2016 to
2019 by 0.42 due to an increase in the inventory and receivable period. Moreover, Coca Cola
recorded a negative cash conversion cycle for the last 4 years which indicates that the
company have an effective operation management. Furthermore, the net trade cycle for Coca
Cola increased from 2016 to 2018 due to an increase in the operation cycle but decrease in
2019 due to decrease in the operation cycle as they have negative relationship.

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