Question

The CFO reports followings

*Sales Last year were Rs 53.25 Mln

*The accounts showed followings.

Days Receivable 63

Days Inventory 57

Days Payable 51

*Net Operating cash flow margin is 4.5%

*Projecting to increase sales by 25.3% next year

*Bank charges 8% p.a for working capital funding.

A. How much funds currently tied up in Working capital?

B.If the company achieve the projected growth level,but nothing changes,how much extra working capital will be needed next year?

C.How much will the extra working capital funding cost of the company?

D.What can company do about this funding cost,other than reducing sales?

Answer 1

Sol (a) Sales last year is Rs. 53.25 mn and with operating cash flow margin given as 4.5% the COGS should be Rs. 50.85 mn (i.e. 95.5% of Sales). With the two information now we can compute the Debtor Level for 63 days by comparing it with Sales (assuming 100% sales as Credit Sales). We can compute Inventory level by comparing COGS amount with Inventory Receivable days and Creditors amount comparing COGS (assuming it as Credit purchases) to Days payable. The amount will be as under for Debtors: Rs.9.19 mn; for Inventory: Rs. 7.94 mn; for Creditors: Rs. 7.11 crs. We would accordingly add Debtors and Inventory level and subtract it with Creditors level (as it is external funding) thus we are left with Working Capital Requirement as Rs. 10.03 mn.

Sol (b) The extra Working Capital required next year will be Rs. 2.54 mn (this is 25.30% increase over previous year Rs. 10.03 mn as other things remain same).

Sol (c) Extra Working Capital will cost Rs. 2.54 mn * 8% p.a. which comes to Rs. 0.203 mn

Sol (d) Company should look into the ways to improve the recovery of receivables and bring it down by at least 10% from the current level of 63 days. Similarly company should also look into ways to improve rotation of its inventory by implementing sound operations management techniques in consultation with the production department.