FINANCIAL MANAGEMENT

ASSIGNMENT
ON
BULBS

INSTITUTE FOR TECHNOLOGY & MANAGEMENT

SUBMITTED BY: -
ANKUR JYOTI CHOUDHURY
ROLL NO. 38

SUBMITTED TO: -
PROFESSOR PRITI BAKHSHI
INSTITUTE FOR TECHNOLOGY & MANAGEMENT
1. ELEMENTS OF COST/RAW MATERIAL: The following cost elements are used
in the perfumery as well as in cosmetics sector.
a) Perfumes Oil such as Castor oil is used in perfumes as well as in
lipsticks.
b) Alcohol is used in Body Deodorants.
c) Fragrance is used in Body Deodorants and in perfumes to give fragrance
to them.
d) Chemicals such as Aluminum Chloride, Butane etc. are used in the Body
Deodorants.
e) Food dyes to give flavour to the cosmetics such as chocolate or
strawberry shades to the lipsticks etc.
f) Glass Bottles, Plastic tubes etc. required for the purpose of packaging is
also a part of cost of production for cosmetics.

2. MANUFACTURING PROCESS: Following are the steps followed in the process

of making perfumes and cosmetics etc.

a) Collection: Firstly all the items and raw materials required in

manufacturing are collected and are assembled at one place i.e.
laboratory.
b) Extraction: Secondly we extract the perfume oil from the various plants
required for manufacturing. For this purpose we can use several
techniques such as solvent extraction, expression etc.
c) Blending: After the extraction of perfume oils, they are then blended
together as per the formula set for that particular perfume. Afterwards
we also mix alcohol in it desired as per the formula.
d) Testing: Now the perfumes go under the process of testing. Testing is
done in two contexts. Firstly it is tested whether it is suitable for the
human body under the various temperatures. Secondly as we know that
the perfume bottles are used for many years it is tested to look whether
it will be suitable to use it even after many years.
e) Packaging: It is the last step in the manufacturing cycle of perfumes.
Perfumes are poured into bottles and are made available for sale
purposes. Similarly cosmetics such as sun creams, face wash etc. are
packed in the plastic tubes for the sales.
formula:
ti
s
e
T
4
g
n MANUFACTURING PROCESS

3. OPERATING CYCLE: Operating cycle is defined as the time period involved in

purchasing of raw material, converting it into finished product and realizing
cash from the sale of the product.

In order to calculate the operating cycle we will be applying the following

Operating Cycle = Inventory Holding Period + Average Collection Period

Where
Inventory Holding Period = 365/Inventory Turnover Ratio
&
Inventory Turnover Ratio = Sales/Average Inventory

Average Collection Period = (Accounts Receivable x 365)/Credit Sales

4. CASH CYCLE: Cash cycle is almost similar to that of operating cycle but the
main difference is that cash cycle is considered to be net operating cycle
wherein we will subtract the average payment period from the above formula.

In order to calculate the cash cycle we will be applying the following formula:

Cash Cycle = Inventory Holding Period + Average Collection Period –

Average Payment Period
 Or
Operating cycle – Average payment period
Where
Inventory Holding Period = 365/Inventory Turnover Ratio
&

Inventory Turnover Ratio = Sales/Average Inventory

Average Collection Period = (Accounts Receivable x 365)/Credit Sales

Average Payment Period = (Accounts Payable x 365)/Credit Purchase

5. DETERMINATION OF OPTIMUM CASH BALANCE: Optimum cash balance is

used to determine what optimum amount of cash a company should maintain
with itself and what fraction of the cash realized should be invested in
marketable securities. We have two methods of determining optimal cash
balance to be maintained: -

1. Baumol’s Method = √2 2 cT /k
3
2. Miller – Orr Method =
√
3

4
x c (σ x σ )/i

Note: We use Baumol’s Cash Method in case of steady cash flows where
there is certainty. Since we are not provided with the annual cash
requirement we will work on hypothetical data. We will employ Baumol’s
method only assuming that there are steady cash flows in the company.

6. DETERMINATION OF ECONOMIC ORDER QUANTITY: Also known as

economic lot size is that level of inventory that minimizes the total cost
associated with inventory management. It is a technique in order to determine
the optimum quantity that minimizes the total cost of carrying and holding
inventory.

Economic Order Quantity = √2 2 AO / H

Where: A = Annual Requirement
 O = Ordering Cost

H = Holding Cost

7. USING ABC COSTING: In this method we classify various inventories and on

the basis of their cost and turn out we decide the degree of control for each.
On the basis of the cost we classify the inventory as A, B & C. The item in group
A will require maximum amount of investment and C the minimum.

In order to calculate the operating cycle for the perfumery and cosmetic
sector, a company “AVON ORGANICS PVT. LTD.” from this sector has been
chosen. It is one the leading cosmetic companies around the globe with the
revenues of around Rs. 48,000 crores.

CALCULATION OF OPERATING CYCLE

Inventory Turnover Ratio = 779320000/406200000 = 1.91856

Inventory Holding Period = 365/1.91856 = 190 days

Average Collection Period = (158150000 x 365)/779320000 = 74 days

Therefore Operating Cycle Period = 190 + 74 = 264 days Answer

Comment:
Operating Cycle Period for the Avon Organics Pvt. Ltd. is 264 days which is very
high. It is approximate 9 Months. This is probably because the Inventory
holding period for the company is too high of around 190 days that is half year
which states that the company is not able to convert its finished product into
cash very quickly. Although the sales of the company are very high but all the
efforts of company for generating revenues goes to vain since its inventory
holding period is high. Moreover the company is performing well in the market
but it has to reduce its operating cycle period too much shorter duration so
that adequate liquidity in the company can be maintained. This will further
reduce the company’s short term loans as well as borrowings, therefore
providing an opportunity to the company to increase its profitability.

CALCULATION OF CASH CYCLE

Inventory Turnover Ratio = 779320000/406200000 = 1.91856

Inventory Holding Period = 365/1.91856 = 190 days

Average Collection Period = (158150000 x 365)/779320000 = 74 days

Average Payment Period = (83600000 x 365)678750000 = 45 days

Therefore Cash Cycle Period = 190 + 74 - 45 = 219 days Answer

Comment:
Cash Cycle Period for the Avon Organics Pvt. Ltd. is 219 days which is again
very high. Moreover the payment period of the company is less than the
average collection period which indicates that the company is in practice of
paying early than collecting again leading to slow operating cycle.

DETERMINATION OF OPTIMUM CASH BALANCE

Using Baumol’s Method: -

Assume that the total cash requirement for the company is Rs. 25 Crores.
Opportunity cost for the company is 15% and transaction cost is Rs. 3000.
Where T= Total cash requirement = 25 crores

c = Transaction cost

k = opportunity cost

C = Optimum cash balance = √2 2 cT /k

= √2 (2 x 250000000 x 3000)/.15
 = Rs. 3162277.

Therefore total cash requirement is Rs. 3162300.

Total cost involved in maintaining cash balance: -

Total Cost: = k(C/2) + c(T/C)

Therefore total cost: = .15(3162277/2) + 3000(250000000/3162277)

= 237170 + 237170

Total Cost = Rs. 4, 74,340

No. of deposits the company needs to make i.e. to convert securities in cash:

250000000/3162277 = 79 deposits Answer.

DETERMINATION OF ECONOMIC ORDER QUANTITY

We will determine the E.O.Q. for each and every raw material of production.

1. Perfumes Oil: Assume that the company requires 8000 liters of oil. Ordering
cost involved is Rs. 120 and holding cost is Rs. 2.40

Therefore E.O.Q. = √2 (2 x 8000 x 120)/2.4

= 894 units Answer.

Therefore the EOQ is 900 units approx.

Since it is highly perishable element of cost therefore we should have

concern that we should not hold it in more quantity.

Also the number of deposit that the company needs to make in the year will
be: = 8000/894 = 9 orders approx.

Total cost involved in Inventory ordering: -

Total Cost: = (E.O.Q./2) x H + (A/E.O.Q.) x O

Therefore total cost: = (894/2) x 2.4 + (8,000/894) x 120

 = 1073 + 1073

Total Cost = Rs. 2146 Answer.

2. Alcohol: Assume that the company requires 5000 liters of oil. Ordering cost
involved is Rs. 90 and holding cost is Rs. 1.80

E.O.Q. = √2 (2 x 5000 x 90) /1.80

= 223 units Answer.

Therefore the EOQ is 225 units approx.

Since again alcohol is a highly perishable element of cost and involves a lot of
risk of breakage and damage therefore we should have concern that we
should not hold it in more quantity.

Also the number of deposit that the company needs to make in the year will
be: = 5000/223 = 23 orders approx.

Total cost involved in Inventory ordering: -

Total Cost: = (E.O.Q./2) x H + (A/E.O.Q.) x O

Therefore total cost: = (223/2) x 1.8 + (5,000/223) x 90

= 200 + 200

Total Cost = Rs. 400 Answer.

3. Chemicals: E.O.Q. for chemicals such as aluminum chloride, butane etc. is

to be determined. Assume that the company requires 9000 kgs of chemicals.
Ordering cost involved is Rs. 180 and holding cost is Rs. 3

Therefore E.O.Q. = √2 (2 x 9000 x 180)/¿ 3 ¿

= 1039 units Answer.

Therefore the EOQ is 1040 units approx.

Also the number of deposit that the company needs to make in the year will
be: = 9000/1039 = 9 orders approx.
Total cost involved in Inventory ordering: -

Total Cost: = (E.O.Q./2) x H + (A/E.O.Q.) x O

Therefore total cost: = (1040/2) x 3 + (9,000/1040) x 180

= 1560 + 1560

Total Cost = Rs. 3120 Answer.

4. Food Dyes: E.O.Q. for food dyes is to be determined which gives flavor to
the lipsticks etc. Assume that the company requires 800 kgs of food dyes.
Ordering cost involved is Rs. 65 and holding cost is Rs. 0.30

Therefore E.O.Q. = √2 (2 x 800 x 65) /¿ .30 ¿

= 588 units Answer.

Therefore the EOQ is 590 units approx.

Also the number of deposit that the company needs to make in the year will
be: = 800/588 = 1.36 orders.

Total cost involved in Inventory ordering: -

Total Cost: = (E.O.Q./2) x H + (A/E.O.Q.) x O

Therefore total cost: = (588/2) x 0.30 + (800/588) x 65

= 88 + 88

Total Cost = Rs. 176 Answer.

USING ABC COSTING METHOD

Here we have 4 types of inventories with different costs and different number
of units. We will categorize the inventories on the basis of number of units and
costs as follows: -

Item Number Average number of units Average cost per unit

 Perfume Oil 894 2146
Alcohol 225 400
Chemicals 1040 3120
Food Dyes 590 176

Item Units % of Unit Total Cost % of Total Category

Number 1 Unit Cost 1x2 Cost
2
Chemicals 1040 37.81 3120 3244800 60.51 A
Perfume Oil 894 32.56 2146 1918524 35.81 B
Food Dyes 590 21.45 176 103840 1.97 C
Alcohol 225 8.18 400 90000 1.71 C
2750 100 5842 5357164 100

Comment:
Chemicals are consuming the maximum part of total cost thus they should be
categorized in “A” category. Perfume Oil stands between mid way having a
significant total cost but less than that of chemicals therefore it will lie under
the category “B”. Both the food dyes and alcohol are having very low
proportion to cost and as well as both of them is easily available too therefore
they will lie in category “C”.

PREPARING CASH BUDGET

Six Months Cash Budget
Particulars April May June July August September
Inflows: - In Millions
Cash Sales 5.4 5.7 6.0 6.3 6.6 6.9
Receivable 18 19.7 21.4 23.1
s
Int. Receive 1 1.5
Dividend 2 2
Total (A) 7.4 23 25 28 29.5 30
Outflows: -
Purchases 2.3 2.1 2.8 3 3.1 3.3
Manu. Exp. 7 8 9 7 9 8
Selling Exp. 3 2 6 3 5 6
 Int. Paid 1.75 1.25
Dividend 1 1.5
Total (B) 12.3 13.1 19.55 13 18.6 18.55
Net Receipt (5.1) 9.9 6.45 15 10.9 11.45
(A - B)

Comment:
As we can see that in the very first month of operation the cash receipt of the
company is in negative which shows that company desperately needs
temporary financing for its activities that will be repaid from the subsequent
months as we can see that the cash surplus starts increasing after the month of
April.

Data Source for calculating Operating Cycle and Cash Cycle: www.myiris.com