Working Capital Management Case Study

Submitted by Ketan Dhanania

Case Study I Current Ratio of the two firms. Ratio Current Ratio (CA/CL) Computation of PAT Particulars PBIT Less: Int. on Investment for inventory PBT Less: Tax @ 34% PAT HIT Ltd Amt. in Rs. (in lakhs) 200 17.25 182.75 62.135 120.615 FIT Ltd Amt. in Rs. (in lakhs) 200 2.8125 197.1875 67.04375 130.14375 Hit Ltd. 5:1 Fit Ltd. 5:1

i)

ii)

The ideal current ratio as we know is 2:1 and both firms have a 5:1 current ratio. But the Profit after Tax for Hit Ltd. has proved costlier because of long term financing at 11.5% whereas FIT Ltd. has played it smart with very short term source of finance at 7.5% p.a. for 3 months causing a considerable difference of profits close to 10 lakhs. No single working capital financing policy is necessarily optimal for all firms because of the following: a. b. c. d. e. f. type of products manufactured length of the operating cycle sales Inventory policies Credit policies Nature of business

iii)

HIT ltd has used long term source of finance which has resulted in higher interest costs which has directly affected its profitability. This case shows us that two firms with similar balance sheet structure but different working capital policies will change the profit abilities for the organisation.

Working Capital Management Case Study

Submitted by Ketan Dhanania

Case Study II Working Capital Statement Particulars Current Assets Raw Materials (UnitxAmtxTime) 10x4x3/12 WIP (UxAxT) 10x8x2/12 Finished Goods (UxAxT) 10x8x3/12 Debtors (UxAxT) 10x8x3/12 Cash Total Current Assets Current Liabilities Creditors (UnitxAmtxTime) 10x4x4/12 Wages (UxAxT) 10x2x.5/12 Total Current Liabilities CA-CL 10% for contingency provision Working Capital Requirement Amt in Rs(in lakhs) 10 13.33 20 20 1.5 64.83 13.33 0.83 14.16 50.67 5.067 55.737

i)

The size and nature of a firms investment in Working capital is a function of a number of different factors, including the following: a. b. c. d. e. f. type of products manufactured length of the operating cycle sales Inventory policies Credit policies Nature of business

ii)

Factors to be considered while establishing a policy are: a. Types of working capital b. Sources of Finance available c. Other Types of working capital Permanent Working Capital - required to support operations of the firm and financed by long term sources like equity share capital, debenture etc. Temporary Working Capital - for operations and has short-term sources of finance and is very variable. Sources of Finance There are different sources of finance such as long term and short term source of finance.

Working Capital Management Case Study

Submitted by Ketan Dhanania

Long term- Equity share capital, debentures and bonds and long term loans etc. Short term- Cash credit, Overdraft, commercial paper etc

Others Nature of the business Scale of operation Credit policy Inventory policy