Case on Assessment of Working Capital Finance

XYZ Pvt. Ltd. submitted Profit and Loss Statement and Balance Sheet (including projections) for the financial years 2014, 2015 and 2016. Please undertake the following tasks:

1. Compute the following: current ratio, net working capital, debt-equity ratio, TOL / TNW, holding period of i) debtors, ii) creditors, iii) inventories (raw materials, semi-finished goods and finished goods) and iv) receivables. Compute Operating Cycle and Cash Cycle of XYZ (P) Ltd.

2. Compute the Working Capital Credit limits by applying Maximum Permissible Bank Finance (MPBF) method.

3. Assess LC limit for the company by assuming aggregate tenor of the LC in line with the company’s operating cycle.

4. Prepare a funds flow statement of the company for the FY 2015-16 and comment. (Rs. in Million)

Profit and Loss Account for the period Mar, 2014 Mar, 2015 Mar, 2016Gross Sales 6144 7128 12400less Production Duties and Sales Taxes 692 766 1488Net Sales 5452 6362 10912Expenses:Consumption of Raw Materials 3118 3692 6540Direct labour expenses 275 298 607Power and Fuel expenses 233 351 645Other Manufacturing Overheads 118 167 373Depreciation 629 648 800Add: Opening Semi- Finished goods 173 184 210Less: Closing Semi- Finished goods 184 210 350Cost of Production 4362 5130 8825Add: Opening Finished goods 355 321 407Less: Closing Finished goods 321 407 550Cost of Goods sold 4396 5044 8682Interest expenses 245 258 450Sales and Administrative expenses 178 257 400Operating Expenses 4819 5559 9532Operating Profit before Tax (Net Sales – Operating Expenses)

633 803 1380

Add: Non-Operating Income (from Investments)

21 53 36

Less: Non-Operating expenses (Write off) 10 10 20Profit Before Tax 644 846 1396Less Provision for Tax 222 254 420Profit after Tax 422 592 976Less: Provision for Dividends 60 180 100Retained Profit 362 412 876

Balance Sheet of XYZ Pvt. Ltd. (Rs. in Million) Liabilities as on Mar 31, 14 Mar 31, 15 Mar 31, 16

Current Liabilities:WC loans from Banks 1304 1375 1470Provision for Tax 222 254 420Interest accrued on liabilities 22 21 40Provision for dividends 60 180 100Unpaid Wages 11 43 50Unpaid Commission on sales 0 227 100Trade Creditors 1063 842 600Dues against Job work 37 26 0Advances from customers 695 387 300Total Current Liabilities 3414 3355 3080Term Liabilities:Loan from SFC 428 443 0Fixed Deposits from the Public 41 33 30Unsecured loans 238 373 300Bank Term loan 0 0 500Total Long Term Liabilities 707 849 830Net Worth:Equity Capital 200 200 200Reserves 2198 2610 3486Total Net Worth 2398 2810 3686Total Liabilities 6519 7014 7596

Assets as on Mar 31, 14 Mar 31, 15 Mar 31, 16Current Assets:Cash and Bank balances 133 178 100Investment in liquid securities 32 62 50Margin Money against LC for (RM) 147 218 300Raw Materials & Consumables 1138 1205 1850Semi- Finished Goods 184 210 350Advance Paid against RM & Consumables 217 83 100Finished goods 321 407 550Receivables 533 416 700Total Current Assets 2705 2779 4000Fixed Assets:Fixed Assets (Gross Block) 4338 5194 6000Add: Capital Work –In-Progress 240 140 0Less: Accumulated Depreciation 1677 2325 3125Net Block of Fixed Assets 2901 3009 2875Non-Current Assets:Investment in shares/ debentures 22 105 25Security Deposits with Govt. Dept. 663 792 490Loans to subsidiaries 81 168 64Investment in Subsidiaries 105 139 140Total Non-Current Assets 871 1204 719Intangible AssetsTechnical Know- how fee 22 12 2Other Promotional expenses 20 10 0Total Intangible Assets 42 22 2Total Assets 6519 7014 7596

ASSESSMENT OF CC LIMIT OF XYZ (P) Ltd. (INR Million)

Particulars2013-14

(Audited)2014-15

(Projected)2015-16

(Projected)1. Total Current Assets (TCA) of XYZ2. Current Liabilities (Other than Bank Borrowings and TL installments due within one year)3. Working Capital Gap (1-2)4. Minimum Stipulated NWC (25 per cent of TCA excluding Export receivables)5. Actual / Projected NWC of XYZ6. Item 3 Minus Item 47. Item 3 Minus Item 58. CC Limit (lower of 6 or 7)

Assessment of Non Fund Based Limits of XYZ (P) Ltd. – Letters of Credit:(INR Million)

Particulars Amount 1. Total projected cost of raw materials during FY 2015/162. Purchase on Documents against Acceptance (DA) basis (90% of item 1)3. Usance period plus lead period (---months)4. Required limit of LCs for purchase of RM on DA basis = item 2* item 3/12 --- (A)5. Purchase of raw materials on Documents against Payment (DP) basis (10% of item 1)6. Lead period for purchase of raw materials on DP basis (--- months)7. Required limit of LC for purchase on DP basis (item 5 * (item 6/12) ------- (B)8. Total (A+B)

FORMULAE OF VARIOUS RATIOS

1. Raw material holding level (in days)= (Closing stock of raw material / Consumption of raw materials during the year) * 365

2. Stock-in-Process holding level (in days)= (Closing stock in process / Cost of production) * 365

3. Finished Goods holding level (in days)= (Closing stock of finished goods / Cost of sales) * 365

4. Debtors holding level (in days)= (Closing balance of domestic receivables / gross domestic sales) * 365

5. Creditors holding level (in days)= (Closing balance of creditors / purchases of raw materials) * 365

6. Operating Cycle = Holding period of inventories + Debtors’ collection period

7. TOL / TNW = (Total current liabilities + Total long term liabilities) / (Tangible Net Worth)

8. Current Ratio = Current Assets / Current Liabilities

9. Net Working Capital = Current Assets – Current Liabilities

10. Debt-Equity Ratio = Debt / Equity