Working Capital Case Study
CASE 27.1:
RELIABLE TEXAMILL LIMITED17 components would assume greater importance. The company would need more working capital funds to support the expanding sales. Mr Shyam Lal knew that it may not be easy to get funds from banks. He was wondering how he could reduce the working capital funds requirement of his company without affecting the sales.
In the beginning of 2009, Mr Shyam Lal, Chairman and Managing Director of Reliable Texamill Limited (RTL)was concerned about the company's working capital management. As the company was expecting its net sales to increase from Rs 1,208.61 lakh in 2008 to Rs 2,185.94 lakh in 2009, the management of working capital
17. This case is an adapted version of the original case written by the author and published in Pandey, LM. and Bhat, Ramesh, Cases in Financial Management, Tata McGraw Hill, 2002.
670
FinancialManagement materials and stores at the current market prices from suppliers. Because of the frequent power cuts, the company built up adequate captive power generating capacity by installing one more set of 860 kVA diesel power generator. RTL is now planning to replace two sets of 250 kVAby the purchase of one imported SKODA set of 869 kVA at a cost of Rs 47.70. The new set is expected to be more economicalI from the point of view of diesel consumption and usage for longer period.
Background
RTL commenced commercial production in 2005. It manufactures synthetic blended yarn which is a raw material for other textile weaving mills and also for handloom and power looms. The company's mills are situated in an industrially less developed area in a northern state. The company has a licensed capacity of 80,000 spindles and existing installed capacity of 26,390 spindles (this includes 6, 210 spindles added during 2007-08). The average capacity utilization of the company was 81 per cent during 2006-07 and 85 per cent during 2007-08. It expects to use 87 per cent of the installed capacity during 2008-09. In the year 2005-06,
RELIABLE TEXAMILL LIMITED17 components would assume greater importance. The company would need more working capital funds to support the expanding sales. Mr Shyam Lal knew that it may not be easy to get funds from banks. He was wondering how he could reduce the working capital funds requirement of his company without affecting the sales.
In the beginning of 2009, Mr Shyam Lal, Chairman and Managing Director of Reliable Texamill Limited (RTL)was concerned about the company's working capital management. As the company was expecting its net sales to increase from Rs 1,208.61 lakh in 2008 to Rs 2,185.94 lakh in 2009, the management of working capital
17. This case is an adapted version of the original case written by the author and published in Pandey, LM. and Bhat, Ramesh, Cases in Financial Management, Tata McGraw Hill, 2002.
670
FinancialManagement materials and stores at the current market prices from suppliers. Because of the frequent power cuts, the company built up adequate captive power generating capacity by installing one more set of 860 kVA diesel power generator. RTL is now planning to replace two sets of 250 kVAby the purchase of one imported SKODA set of 869 kVA at a cost of Rs 47.70. The new set is expected to be more economicalI from the point of view of diesel consumption and usage for longer period.
Background
RTL commenced commercial production in 2005. It manufactures synthetic blended yarn which is a raw material for other textile weaving mills and also for handloom and power looms. The company's mills are situated in an industrially less developed area in a northern state. The company has a licensed capacity of 80,000 spindles and existing installed capacity of 26,390 spindles (this includes 6, 210 spindles added during 2007-08). The average capacity utilization of the company was 81 per cent during 2006-07 and 85 per cent during 2007-08. It expects to use 87 per cent of the installed capacity during 2008-09. In the year 2005-06,