Working Capital Case Study

Topics: Balance sheet, Inventory, Generally Accepted Accounting Principles Pages: 8 (2118 words) Published: August 29, 2012
CASE 27.1:

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.


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.

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, the company could generate net sales ofRs 191.131akh, and incurred a net loss ofRs 57.11 lakh. The acute power shortage was the dominant reason, besides the initial teething troubles, for the poor beginning of the company. RTL has since been able to increase its sales to Rs 973.321akh in 2006-07, and to Rs 1,203.611akh in 2007-08 as against the estimated sales of Rs 1,767.55 lakh. It produced 1,315 tonnes of yarn in 2007-08 against 1,182 tonnes during the previous year. The management ofRTL has attributed the lower actual sales to the sluggish market conditions that prevailed during the second half of the year 2007-08, forcing the company to keep its production at a low level, and also to a certain extent due to the company manufacturing substantial quantity of yarn of lesser counts and blends of lower value to suit the market conditions. After incurring a loss in the first year (the company operated for seven months only), the company made a net profit ofRs 24.481akh in 2006-07. The company showed a net profit before depreciation ofRs 32.421akh in 2007-08. Power cuts, high input costs and increased administrative expenses on account of expansion resulted in poor profitability. RTL has not so far paid any tax and dividends. Its tax liability is expected to be nil for quite some time as it enjoys tax benefits being a new unit located in an industrially less' developed area. The actual and estimated balance sheets and the profit and loss account of the coinpany are given in Tables 27.1.1, 27.1.2 and 27.1.3.

The company's end products cater to the needs of large and medium scale manufacturers of fabrics and also handlooms and power looms. The major buyers, accounting for 80 to 85 per cent of sales, include reputed firms. The remaining 15-20 per cent is sold to small dealers and traders. RTL faces a fair amount of competition from a number of companies. In spite of the stiff competition, the synthetic blended...
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