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TERM PAPER

WORKING CAPITAL ANALYSIS OF

AGRICULTURAL MARKETING CO. LTD.

UNIVERSITY OF DHAKA

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Agricultural Marketing Company Limited (AMCL) was incorporated in Bangladesh on

15th May 1985 as Private Limited Company under the Companies Act, 1913 and
subsequently on 22nd June, 1993 the company was converted into Public Limited
Company (PLC). The shares are listed in the Dhaka and Chittagong Stock Exchange.
The principal activities of the company throughout the year continued to be trading,
processing of fruits, vegetables and other agro products and the activities of the company
segmented into different units as shown below:
Unit
Unit 1 & 3
Unit 2
Unit 4

Activities
Processing & Marketing of Agro & Non Agro
Products
Farming / Horticulture Discontinued
Mineral Water, Fruit Drinks & Fruit Juice
Processing

AMCL (PRAN) is the largest grower and processor of fruits and vegetables in the
country. It is marketing its products throughout the years with consistent quality home
and abroad. It has adopted ISO: 9001 certificate as the model for their quality
management system.
Financial Performance:
Year

Earning
per share

Net Asset
Value Per
Share
2000
42.20
258.39
2001
52.48
284.60
2002
54.26
312.82
2003
55.48
343.39
2004
50.39
362.27
2005
50.96
386.55
2006
36.18
396.11
All figures in BDT (Bangladeshi Taka)

Net Profit
After Tax
(mn)
33.76
41.99
43.41
44.39
40.31
40.77
28.95

Price
Earning
Ratio
9.87
7.05
6.91
7.67
13.31
7.86
10.67

% Dividend

% Dividend
Yield

20
20
25
24
24.00
26.00
26.00

4.80
5.41
6.67
5.64
3.87
6.49
7.00

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CHAPTER

1
Cash & Liquidity Management

Our focus on:

Fund Analysis
Cash Balance Model (Miller-Orr)
Measurement of Liquidity

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Cash and Liquidity Management

Fund Analysis:
A fund analysis enables to take a total view of the financial structure of an enterprise. The
fundamental distinction between funds and cash is that the former is a liability and the
latter is an asset. In the ultimate analysis, fund is nominal in nature; it has no physical
existence- it is a pool of promises made by the enterprise to various parties including the
shareholders who deliver certain assets including cash to the enterprise. Of course, the
promises include agreement to return the assets or their cash equivalents with or without
interest (profit) on a specified or unspecified date. So there shall be a funds inflow
whenever there is an increase in liability or decrease in assets. These phenomena can be
captured in the following diagram:
Sources
Liabilities ()

Uses
Liabilities ()

Assets ()

Assets ()

Sources

Uses

Figure: Sources and uses of fund

A finance manager, who is concerned with the management of liquidity of the business,
would like to see how the funds flow during the year has affected its working capital
position. This is predominantly focused by making a funds flow presentation of the
balance sheets of the AMCL in the Exhibit 1.
One of the principles of financial management is that the long-term funds would not only
finance entire long term assets, it should also contribute reasonably towards financing the
working capital requirement of the enterprise. This contribution is located in the funds
statement of AMCL (Exhibit1) as net working capital (E) which is the corresponding part
of net current assets (H).
Balance Sheet of AMCL (Funds flow concept)

[Exhibit 1]

30.06.2007

30.06.2006

30.06.2005

30.06.2004

30.06.2003

80000000
40000000
187127749
20800000
327927749
18790827

80000000
40000000
179012885
20800000
319812885
18378860

80000000
40000000
189237953
20800000
330037953

80000000
40000000
169815238
19200000
309015238

80000000
40000000
154713711
19200000
293913711

Capital and long term funds

Share capital
Share premium
Reserve and surplus
Proposed dividend
A. Shareholders fund
Deferred tax liability

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Long term debt

B. Long term loan fund
C. Total long term fund (A+B)

113999905
132790732
460718481

152592058
170970918
490783803

165941504
165941504
495979457

156153798
156153798
465169036

185979959
185979959
479893670

265240679
15280000
280520679
180197802

300381409
16480000
316861409
173922394

316812646
18210000
335022646
160956811

327236429
18880000
346116429
119052607

344755402
18680000
363435402
116458268

483346039
59711981

496023771
45504079

491608049
42501462

493278897
29956569

456605572
15220740

100749301
32660159
676467480

92771180
39484215
673783245

93291132
33184149
660584792

76235298
22781135
622251899

90619101
18026597
580472010

50102521
413406543
12723372
7339692
15850
817653
3534006
6519324
1810717
496269678
180197802

44209923
424111655
12891489
6304038
169468
4471647
2582715
3539686
1580230
499860851
173922394

46533312
418762505
13055263
8413189
76119
5210687

41875000
417645508
13609529
20263963
109713
3443926

45625000
386748095
8276626
16246147
1645449

4870216
2706690
499627981
160956811

5027030
1224623
503199292
119052607

4468825
1003600
464013742
116458268

0.27

0.26

0.24

0.19

0.20

Application of long term funds

Property, plant and equipment
Investments
D. Total long term assets
E. Net working capital (C-D)

Short term assets

Inventory
Trade debtors
Advance, deposits and
prepayments
Cash and cash equivalents
F. Total short term assets

Short term resources

Current portion of long term loan
Short term loan from bank
Liabilities for goods
Liabilities for expenses
Liabilities for other finance
Interest payable
Worker's profit participation fund
Income tax payable
Unclaimed dividend
G. Total short term resources
H. Net current assets (F-G)
Net Working Capital Ratio

Major source of liquidity problem is the mismatch between current payments and current
receipts. This mismatch is not unlikely to happen in any business payment of accounts
receivable on due date. Net working capital provides that important cushion in the event
of such an eventuality. It protects the enterprise against liquidity crisis on an ongoing
basis. A decrease in NWC indicates depletion of such protection.
To calculate the net working capital ratio, the following formula is usedNWCR = Net working capital / Gross current assets
Fundamental analysis of AMCL reveals some important facts about it-- There is an increasing trend of net working capital of AMCL over the five years. In
2005 the NWC increased about 35% from year 2004. And in year 2007 the rate of
increase is 3.61%.
Current assets in 2007 increased .40% from year 2006 whereas current liabilities
decreased about .71% from the previous year. These two together pushed up the
NWC to the present level.

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How far the company is from facing the impending liquidity crisis can be judged by
making a comparison of the net working capital ratio. NWCR have been increasing
from the last three years. This is a good notion about cushioning the companys
liquidity crisis.
Approach in Determining Optimum Cash Balance:
We use Miller-Orr model to ascertain the desired level of cash for AMCL.

Miller-Orr Model
We also found out that the cash flow relationship can also be explained through MillerOrr model. The basic assumptions on the other hand for the Miller-Orr model are as
follows-

(a) Yield curve is flat i.e. no apparent change in investment rate of return.
(b) Fixed transaction cost irrespective of size.
(c) Investment and divestment can be made any time or point of time.
(d) The cash flow under this model has a normally distributed pattern with a
zero mean and that the standard deviation does not very across the time.
(e) The firm sets its minimum cash balance which is exogenous to the model
but is added to the required volume of the cash flow which according to
this model will maximize profit or minimize cost of holding cash.

In this regard the cost of cash management is determined with the help of three variables
namely(a) Transaction cost for investment (deposit) and disinvestment (withdrawal)
which is denoted by b
(b) Opportunity cost of holding cash balance which is denoted by i
(c) Variability in cash flow which is denoted by s

The model operates in terms of upper and lower control limits and a target cash balance.
AMCL allows its cash balance to wander randomly within the lower and the upper limits.
As long as the cash balance is between higher limit and lower limit, the firm makes no
transaction. When the cash balance reaches higher limit, the firm buys H-Z units of (or

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dollars) of marketable securities. This action will decrease the cash balance to Z. In the
same way, when cash balance fall to L (Lower limit), the firm should replenish the cash
balance to Z by selling Z-L units (Dollars) of marketable securities. Trading cost per
period is dependent on the expected umber of transactions in marketable securities during
the period. Similarly, the opportunity costs of holding cash are a function of the expected
cash balance of the period.

The cash manager has to follow the following steps to effectively use the Miller-Orr
model. These steps are as follows-

1. Set the lower limit: We assumed the lower limit Tk. 185969 based on the
operating cash flow of year 2007.We divided the cash flow by 365 to get daily
average cash flow.

2. Estimate the standard deviation of daily cash flows: We analyzed the cash
flows for the year 2007 and calculated the variance of the cash flows. The
calculation of variance of cash flows is given belowDay

1
2
3
4
5
6
7
8
9
10
11

190458
259875
-114520
147348
184528
-497865
-278596
567813
296374
168598
192736

12

187635

13

185428

14

-378142

15

216376

cash flow (x)

7438753

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3. Determine the daily interest rate:

We determined the daily interest rate

.0002307. It is the daily interest rate of 1 year maturity t-bill rate which rate is
8.42% annually. We considered it as the return of holding marketable securities.
4. Estimate the trading cost of buying and selling marketable securities: We
assume the trading cost of selling marketable securities Tk 120 per transaction.

Determination of Optimum Cash Balance

Determination of desirable cash balance depends on the opportunity cost of capital,
variance of daily cash flow and fixed cost of trading. We calculated those factors earlier.
Now the formulae for the optimum cash flow is as follows
2

Z* = 3 (3bs /3i) +L
Where,
Z* = Optimum cash balance
b = Fixed cost of transaction
i = Daily rate of opportunity cost of capital

s2 = Variance of daily cash flows

L = Lower limit of the cash balance
fgggggggggggggggg
Therefore, desired cash balance of AMCL
is
2

Z* = 3 (3bs /4i) +L
= 3 (3*120*7438753 /4*0.0002307) + 185969
=Tk. 658943

Higher limit of the cash balance H= 3Z*+L

H = 3*658943 + 185969
H = 2162798

According to the cash flows of AMCL the figure of Miller-Orr model will be as follows

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Cash

Tk. 2162798

Tk. 658943

Tk.185969
Time
Figure: Miller-Orr model Applied to the cash flow of AMCL

Measurement of Liquidity:
Name of measurement criterion
Current ratio
Quick ratio
Accounts receivable turnover ratio
Inventory turnover ratio
Accounts payable turnover ratio
Cash conversion cycle
Net liquid balance
Uncertainty factor (Lambda)

30.6.2007
1.36
0.39
15.50
1.48
46.65
256
0.03
12.95

30.6.2006
1.35
0.36
19.05
1.35
43.74
276
0.04
13.87

30.6.2005
1.32
0.34
18.77
1.21
36.90
305
0.03
15.01

30.6.2004
1.24
0.26
25.88
1.16
36.17
302
0.02
14.02

PRAN AMCL Ltd.

Level of Aggregate Liquidity
Every firm is concerned with the effects of the uncertainty on the management of the
firms current assets and liabilities. The gross hedge is important because it occurs via the
relationship between total short-term assets and total short-term liabilities. The overall
relationship between current assets (which produce cash inflows) and current liabilities
(which require cash outflows) will determine the size of the gross hedge. If current assets
provide much cash than is needed for current liabilities then the chance of a cash stock

30.6.2003
1.25
0.27
49.45
1.22
65.37
287
0.02
12.79

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out is lessened we call this overall relationship between a firms potentially available
cash and its potential cash needs the firms aggregate liquidity position.
Why measure and manage aggregate liquidity?
-

The management of aggregate liquidity starts with the measurement of the size of
the hedge for various potential financial strategies.
The measurement of liquidity can be applied to make credit granting decision.
Aggregate liquidity is an important determinant of the probability of default.

Traditional measures of the aggregate liquidity of the firm:

Liquidity can be thought of as the firms ability to quickly generate cash versus the firms
need for cash on short notice. Several financial ratios can be used as a measure of
liquidity. Commonly used ratios include:
Current Ratio:
This is the ratio of current assets to current liabilities. The higher the ratio, the more the
liquid the firm is said to be. This ratio is widely used by practitioners. The problem of
current ratio is that it mixes assets and liabilities that are in reality, quite different in
terms of their nearness to cash.
Current Ratio = Current Assets / Current Liabilities
The current ratio of the company is increasing over the years. It means the over all
liquidity position of the company is increasing. As the company expands its business
sales is increasing so as the accounts receivable. Accounts receivable has become double
in four years.
Current Ratio
1.40
1.35
1.30
1.25

Series1

1.20
1.15
1

Year

Quick Ratio:
This is also called the acid test ratio. Here, inventories are deducted from the current
assets account and the result is divided by current liabilities. The interpretation of quick
ratio is similar to the current ratio.

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Quick Ratio = (Current Assets Inventories) / Current Liabilities

The quick ratio or the acid test ratio of the company is increasing over the years. It
indicates that the short-term cash-generating ability of the firm is in balanced situation.
Quick ratio
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00

Series1

year

Accounts Receivable Turnover Ratio:

This ratio is usually calculated by sales divided by accounts receivable. The higher the
turnover (and the lower the average collection period) the quicker is a receivable turned
into cash and the more liquid is the firm said to be.
Accounts Receivables Turnover Ratio = Sales / Accounts Receivables
Accounts receivable turnover ratio is decreasing over the years. As it is decreasing over
the years, it will take more time to convert accounts receivable into cash. The liquidity in
this regard is decreasing for the company.
A/R turnover ratio
50.00
40.00
30.00
20.00

Series1

10.00
0.00
1

year

Inventory Turnover Ratio:

This ratio is usually computed as cost of sales divided by inventory. The basic difficulty
with the inventory turnover ratio as liquidity measures is that it focuses on only one

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assets nearness to cash. So it does not tell much about the firms overall liquidity
position.
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
Inventory turnover ratio of the company is increasing on an average. It is indicating that
the companys ability to convert inventory into cash has increased. Though the ratio
decreased slightly in year 2004 and 2005.
Inventory turnover ratio
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

Series1

year

Accounts Payable Turnover Ratio:

This ratio is usually computed as purchase divided by accounts payables. The higher the
turnover ratio the more the company is being financed by the creditors.
Accounts Payable Turnover Ratio = Purchase / Accounts Payable
In 2003, accounts payable turnover ratio was 65.37. But it became 36.37 and 36.90 in the
next two years. It increased in 2006 and stood at 43.74 and 46.65 in 2007. It means that
the company now has to pay its liability earlier than the previous years.
Improved Indices for measuring Aggregate Liquidity:
Cash Conversion Cycle (CCC):
The cash conversion cycle (CCC) is the net time interval between the expenditure of cash
in paying the liabilities and the receipt of cash from the collection of receivables. The
lower the cash conversion cycle the more the firm is said to be. It is calculated as the
firms average collection period plus its inventory conversion period minus the payment
deferral period.
Cash Conversion Cycle (CCC) = Operating Cycle + Payment Deferral Period

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An average situation is found in cash conversion cycle. In 2003, it was 287 days. But in
the next two years it increased by 15 and 18 days. As it lowered in 2006 and 2007 the
more liquid the company is said to be.
Comprehensive Liquidity Index:
In calculating the comprehensive liquidity index, the dollar amount of each current asset
or liability is multiplied by one minus the inverse of the asset or liabilitys turnover ratio.
Net Liquid Balance:
This measures center on the firms balance of cash and marketable securities. This
balance represents the firms true reserve against unanticipated cash needs, since other
remedies for cash shortages can be very costly. If net liquid balance is negative it
indicates depending on outside financing and indicative of minimum borrowing line
required.
Net Liquid Balance (NLB) = (Cash + Mkt. Securities Notes Payable) / Total Assets
The net liquid balance of the company was increasing for consecutive four years and it
represents the companys true reserve against unanticipated cash needs is in good
situation. It decreased slightly in 2007.

Lambda Index: It is another measure of liquidity where the measure of uncertainty of

cash flow is used. Lambda can be interpreted as a measure of the probability of having
insufficient resources to cover operating cash outflows. The formula for Lambda Index is
as follows-

Uncertainty factor (Lambda) = (Initial reserve + Expected cash flow) /

Where,
Initial reserve = cash + marketable securities + credit line
Expected cash flow = EAT + depreciation
= uncertainty of operating cash flow (standard deviation)
Assumptions for calculating Lambda index for AMCL:
We consider only cash and cash equivalents as the initial reserve as there are no
marketable securities in their balance sheet. We found no information regarding
AMCLs credit line in their financial statements.

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The calculations are given below

Year
30.6.2007
30.6.2006
30.6.2005
30.6.2004
30.6.2003

EAT
29331413
27119354
40771757
40309136
44386931

Depreciation

OCF
(EAT+Dep)

38547306

67878719

41026308

68145662

42554329

83326086

45739954

86049090

36898232

81285163

Uncertainty factor (Lambda)

12.95

Avg. OCF

13.87

77336944

15.01

(OCF-Avg.OCF)

89458020150625
84479664803524
35869821896164
75901487925316
15588433271961
301297428047590
14.02 12.79

SD ()

7762698

Interpretation: From the five years Lambda index of AMCL, we can derive in the
decision that the index is much higher and it indicates the probability of AMCL of
running out of cash is much lower. This index measure provides significant basis of the
companys strong liquidity position.

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CHAPTER

2
Inventory Management

Our focus on:

Overview of Inventory
Inventory Projection

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Inventory Management
Five year inventory of AMCL is shown in the table below:
Year

Inventory

2003
2004
2005
2006
2007

456605572
493278897
491608049
496023771
483346039

Current
Asset
580472010
622251899
660584794
673783245
676467480

% of current
assets
.79
.79
.74
.74
.71

From the above table it can be clearly seen that the inventory level for AMCL is
decreasing over the year. This indicates that the firms sale is increasing and less finished
goods are kept idle.
Inventories are carried at the lower of cost and net realization value. Cost is determined
on a weighted average cost basis. This method corrects the distortion of the simple
average by considering the number of units purchased in each lot. It is calculated by first
multiplying the unit cost with each lot size, i.e. the number of units in each lot and then
dividing the resultant figure by the total number of units purchased. This is superior to
simple average method because price fluctuations are evenly distributed and, if the period
under consideration is not very lengthy then both the cost of goods sold and the periodend inventory will be closer to the market.
Inventory projection:
year
03
Inventory
456605572
% of sales
-

04
493278897
8.03%

05
491608049
-.34%

06
496023771
.90%

07
483346039

Mean growth rate, R =.611

Table: probability distribution of various levels of possible growth in inventory in 2008
and computations of standard deviation.
Expected
Chances of Weighted
growth in
occurring(in inventory
Ri- R)
Ri-R)2
Pi(Ri-R)2
inventory (%)
decimal
(1*2)
(4)
(5)
(6)
(1)
points)(pi)
R
(2)
(3)
-2.9
.05
-.145
-3.511
12.33
.6165
-.57
.10
-.057
-1.181
1.39
.139
-.15
.20
-.03
-.761
.579
.1158
-1.67
.30
-.186
-2.231
4.977
1.493
3.7
.20
.74
3.089
9.542
1.908.357
2.5
.10
.25
1.889
3.568
.357
.78
.05
.039
.169
.029
.0015

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=.611
SD=

=4.63

Pi(Ri-R)2

= 4.632
= 2.15
Table: Inventory projection for AMCL in 2008

Scenario
Best
Most likely
Worst

Growth rate
-1.539%
.611%
2.761%

Inventory(in taka)
475902510
486299283
49669128

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CHAPTER

3
Accounts Payable Management

Our focus on:

Disbursement Float Management

Principles of Managing Accounts Payable

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Accounts Payable Management

Management of Disbursement float

Management of disbursement float is necessary because a firm can earn a lot of money
by effectively managing the disbursement. We could not collect any information about
disbursement float management from AMCL They did not disclose any kind of internal
information in this respect. But in this report, we suggested some recommendation about
effective disbursement management.

Delay in payment process can earn a lot of money if the opportunity cost is too high and
the size of payment is bigger. AMCL can follow the following recommendations in
managing the disbursement float.

1. Hold payment for several days after postmarked in office.

2. Call suppliers to verify statement accuracy for large amounts.
3. Mail from post office that requires huge handling.

We only consider the disbursement float management. There may be other policies to
delay the payment such as zero balance account, use of promissory notes in payment
procedure etc. But that may be too technological inconsistency in payment procedure in a
country like Bangladesh.

AMCL follows the following rules in managing its accounts payable:

-

AMCL has a clear, consistent policy that it pays bills in accordance with the
contract.

The purchase and finance department are both aware of this policy and adhere to
it.

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Agree payment terms at the outset of a deal and stick to them.

Not extend or alter payment terms without prior agreement.

Provide suppliers with clear guidance on payment procedure.

AMCL has a system for dealing quickly with complaints and disputes and advice
suppliers without delay when invoices or parts of invoices are contested.

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CHAPTER

4
Accounts Receivable Management

Our focus on:

Collection Cost Analysis

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In this part, we tried to track out the policy and procedure followed by AMCL to organize
their accounts receivables. We also showed an evaluation model of different collection
programs to arrive at an optimal solution for AMCL.
Collection Cost Analysis:
There is always a monetary cost involved in running collection machinery. But there is
also an indirect (opportunity) cost associated with collection activities. Due to stricter
collection efforts, sales might be lost, and hence the profitability. As against these costs,
the benefits of a well organized collection department are reduction of bad-debt losses
and shorter collection period that results into reduction in the average holding of
receivables- both adding to the profitability of the enterprise. The goal of a collection
policy is therefore, to strike a balance between costs and benefits, or in other words, to
search for an optimal solution to the problem.
We have evaluated different collection programs to arrive at an optimal solution for
AMCL. We generated three alternative programs of AMCLs collection policy. The
features of the present status and the proposed programs are given below--Present Status Average collection period is 23 days
Monthly average accounts receivable is Tk. 4975998
Bad debt loss is 3% of sales
There is no cash discount given by AMCL
We assume 389532 Tk. as monthly collection expenditure
Program I Average collection period is 20 days
Monthly average accounts receivable = (77124903/365)*20 = Tk. 4226022
2% cash discount is given
2.75% of bad debt loss
1.5% increase in the collection cost
Program II Average collection period is 18 days
Monthly average accounts receivable = (77124903/365)*18 = Tk. 3803420
2.5% cash discount is given
2.5% of bad debt loss
1.57% increase in the collection cost
Program III Average collection period is 15 days
Monthly average accounts receivable = (77124903/365)*15 = Tk. 3169517
3% cash discount is given
2% of bad debt loss

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1.65% increase in the collection cost

The general assumptions for all these four conditions are We consider monthly sales of year 2007 which is Tk. 77124903.
We also assumed that despite the increasing intensity in collection efforts in the
three programs, AMCL will be able to hold on to the existing level of sales. So
sales are constant in present status in all the three programs.
Return on sales is 22.65% which is the gross profit margin of year 2007.
Evaluation of Alternative Collection Program [Exhibit 2]

Present
Status

Programme
I

Programme
II

Programme
III

1. Sales (2007 monthly)

2.Collection period
3.Monthly accounts receivable

77124903
23
4859925

77124903
20
4226022

77124903
18
3803420

77124903
15
3169517

4.Cost of carrying receivables

5. Cash discount
6. Bad debt loss
7. Collection Expenditure
A. Total Cost (4 to 7)

419974
2313747
389532
3123253

356676
1542498
2120935
584298
4604407

321009
1928123
1928123
611565
4788819

267507
2313747
1542498
642728
4766480

17468791
14345538

17468791
12864383

17468791
12679972

17468791
12702310

B.Return on Sales@22.65%
Profit (B - A)

The analysis made in exhibit 2 clearly indicates that the present status of AMCLs
collection procedure is the optimal solution where the resultant profit is highest. It may
also be seen from the exhibit that total cost of the alternative program raises with the
intensity in collection efforts. Optimal solution lies where profit is maximized.

BBA 10th batch