BBC Pvt Ltd and working capital Challenges Case Solution
To: Arpit Agarwal& Mukesh Kumar
From: Financial Advisor
Subject: Financial Evaluation of BBCs working capital and contract with Indian Railway
Under the case,BBC a Chemical manufacturing company established in 2004 with its registered office located in Bangalore, managed by Agarwal and Mukesh. They had an opportunity present to establish contracts with Indian Railways. Which would enable it to expand its reach to other industries available in the Indian market. However, it was evaluated that, they were successful to gain the contract with IR. BBC would need to perform certain modification in its business processes such as establishing an onsite IR office, along with establishing a Warehouse, workshop and developing appropriate cash reserves to meet and continues its daily production activities.Hence, it can be evaluated that, these developments conducted, to meet the criteria of gaining the contract,would expose the organization to significant costs amounting to INR2,400,000.
On the other hand, it was assessed that, BBC was facing certain working capital challenges, which could be caused by its decreasing sales revenues from 2009 to 2011. Which meant that, due to the decline in sales revenues generation. It caused the organization to register higher raw material turnover ratios in days. As BBC was unable to efficiently convert in raw material purchased on credit into finished products, causing it to incur significant costs, in terms of raw material inventory holding costs and significantly increase its inventory turnover ratios in days. Furthermore, it can be evaluated that, BBC had been able to decrease its finished goods inventory turnover in daysfrom 2010 at 20.8 to 2011 at 13.47, while it had shown a consideration increase from the 2009 at 4.87. Which meant that, in the year 2009, BBC was most efficient in converting its finished goods in to sales revenues, compared to its two subsequent years. Additionally, it can be assessed that, BBC had significant decreased its account payable turnover ratios in days from the year 2009 onwards.Which could have contributed towardsdevaluation the enterprise value of the organization, further enhancing the challenges in its working capital. The receivable turnover in days has been significantly decreased from the years 2010 at 15.26 to 9.64 in 2011 whereas, the receivable turnover was at 7.92 in 2009.Which meant that, the company was more efficient in converting its receivables from sales into cash in 2011 compared to 2010, but less efficient compared to the year 2009.Moreover, it can be evaluated that, the net profit margins of BBC has declined over the years, which could comprisetheability of BBC to payoff it’s liabilities, while maintaining sufficient working capital.To spend the amount of investment needed, to successfully avail or gain the contracts with IR. Hence, an imbalance between BBCs ratioswas identified such as, raw material turnover were to high, while the finishedgoods turnover were appropriate in the year 2011end.
Therefore, it can be recommended to Agarwal that, he should improve the working capital situation of BCC, by incorporating effective and efficient strategiesand policies in term of credit policiesgiven to its clients or borrowers.While exhibiting stern controls over their policies developed. Which would significantly decrease its receivable turnover in days, enhancing its working capital situation better enabling BBC to payoff its liabilities.While effectively fulfilling the criteria for the contract of IR,by spending capital investment from its working capital generated.
|Inventories Turnover (In days)||32.04||30.21||9.48|
|Raw Materials Turnover (In days)||31.65||19.95||10.25|
|Finished Goods Turnover (In days)||13.47||20.80||4.87|
|A/c Payable Turnover (In days)||9.54||14.48||24.84|
|A/c Receivable Turnover (In days)||9.64||15.26||7.92|
|Return on Assets||2.08%||1.83%||4.27%|
|Return On Shareholders’ Equity||10.53%||9.85%||23.54%|
|Net Working Capital||4,237,493||4,588,684||3,970,146|
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