CORPORATE FINANCE CASE STUDY ON WORKING CAPITAL MANAGEMENT

SUBMITTED BY: GROUP #11

OPERATING CYCLE:

The time that elapses between the purchase of raw material and the collection of the cash for the sales is referred to as the operating cycle. OPERATING CYCLE = INVETORY PERIOB+A/C RECEIVABLE PERIOD. CASH CYCLE: The length between the payment for raw material purchases and the collection of cash for sales is referred to as the cash cycle. CASH CYCLE=OPERATING CYCLE-A/C PAYABLE PERIOD

OPERATING AND CASH CYCLE:PURCHASE OF RAW MATERIAL FINISHED GOODS CASH RECEIVABLE PERIOD

INVENTORY PERIOD

ACCOUNTS RECEIVABLE PERIOD

ACCOUNTS PAYABLE PERIOD CASH PAID FOR MATERIALS

OPERATING CYCLE

CASH CYCLE

INVENTORY PERIOD = (AVERAGE INVETORY) / (ANNUAL COGS/365)

ACCOUNTS RECEIVABLE PERIOD = (AVERAGE DEBTORS) /(ANNUAL SALES/365)

ACCOUNTS PAYABLE PERIOD = (AVERAGE CREDITORS) /(ANNUAL COGS/365)

OPERATING CYCLE = INVENTORY PERIOD+A/C RECEIVABLES PERIOD CASH CYCLE =OPERATING CYCLE-A/C PAYABLE PERIOD

CASE 1:FINANCIAL INFORMATION FOR ZENITH Ltd.PROFIT &LOSS A/C SALES 500 BALANCE SHEET DATA BEGINNING OF 20X0 END OF 20X0 64

INVENTORY 60

COST OF GOODS SOLD

360

A/C RECEIVABL E A/C PAYABLE

80

88

40

46

INVENTORY HOLDING PERIOD = (AVERAGE INVENTORY)/ (COGS/365) = 62.86 DAYS A/C RECEIVABLE PERIOD = (AVERAGE A/C RECEIVABLE)/(SALES/365) = 61.32 DAYS A/C PAYABLE PERIOD =(AVERAGE A/C PAYABLE)/(COGS/365) =43.59 DAYS =INVENTORY PERIOB+A/C RECEIVABLE =124.18 =OPERATING CYCLE-A/C PAYABLE PERIOD =80.58 DAYS

OPERATING CYCLE

CASH CYCLE

CASE 2:FINANCIAL INFORMATION FOR APEX Ltd.PROFIT &LOSS A/C SALES 1000 BALANCE SHEET DATA BEGINNING OF 20X0 END OF 20X0 120

INVENTORY 110

COST OF GOODS SOLD

750

A/C RECEIVABL E A/C PAYABLE

140

150

60

66

INVENTORY HOLDING PERIOD = (AVERAGE INVENTORY)/ (COGS/365) = 59.96 DAYS A/C RECEIVABLE PERIOD = (AVERAGE A/C RECEIVABLE)/(SALES/365) = 52.93 DAYS A/C PAYABLE PERIOD =(AVERAGE A/C PAYABLE)/(COGS/365) =30.66 DAYS =INVENTORY PERIOB+A/C RECEIVABLE =108.89 DAYS =OPERATING CYCLE-A/C PAYABLE PERIOD =78.23 DAYS

OPERATING CYCLE

CASH CYCLE

CASE 3: Sales(at two months credit) Materials consumed(two months credit) Wages paid(monthly in arrear) Manufacturing expenses outstanding (cash expenses paid one month in arrear) Total administrative exp. Paid as incurred Sales promotion exp., paid quarterly in Advance.

(in Rs.) 3600,000 900,000 720,000

80,000 240,000

120,000

25% gross profit Depreciation as a part of cogs. One months stock of raw material and finished goods Cash balance of rs. 100,000 20% as a safety margin Calculate working capital requirement on the basis of cash cost.

CURRENT ASSETS:

(in Rs.)

1) STOCK OF RAW MATERIALS (Material cost*(time span/12) 2)STOCK OF FINISHED GOODS (Cash manufacturing cost*(time span/12) 3)DEBTORS AT COST (Total cash cost*(time span/12) 4)ADVANCE PAYMENT OF SALES PROMOTION EXPESE (Paid quarterly in advance) 5)CASH BALANCE TOTAL CURRENT ASSET (A)

75,000

215,000

490,000

30,000

100,000 910,000

CURRENT LIABILITY:

(in Rs.)

1) CREDITORS (Material cost*time span/12) 2)WAGES OUTSTANDING (One month in arrear) 3)MANUFACTURING EXPENSE OUTSTANDING (One month in arrears)

150,000

60,000

80,000

TOTAL CURRENT LIABILITY (B) WORKING CAPITAL(A-B) ADD: 20% Safety margin WORKING CAPITAL REQUIREMENT

290,000 620,000 124,000 744,000