JK BUSINESS SCHOOL

JK Chawk, 1200 meters on Damdama Lake Road, Off Sohna Expressway,

Gurugram, Haryana 122102

Subject
Financial Management 2

Submitted To- Prof. Kuber Sharma

Submitted By – Hunny (42)

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 Case Study
Business Diversification: A Dilemma of Sri Anal Fireworks

Q.1 What problems SAF is facing? What are all the problems SAF may face when
they work towards their future challenges?
Ans. After the year 2011 Fireworks industry was start facing the issue of decrease in sales
because the mindset of the customer was changing towards environment friendliness at
that time and due to this their product demand reducing year by year.
Lots of the small manufacturers have shut down their business and entered into other
businesses. On the other hand, company also has a separate department to hire skilled
labour which is few in the market and very costly also.
Unwanted happenings and intrusion of Chinese products in local markets are continuously
affecting the demand and supply in the market. They also facing the problem of purchase
of raw material because the big firms purchase their raw materials direct in bulk quantity
at a concessional price with cash discount and rebate. While the medium fireworks owners
could not have capacity to buy beyond required quantity. Due to unskilled labour high
wastage and low production growth company leads the increase cost of production.
Future Challenges
SAP Board members wants to raise capital from financial results of fireworks business and
start a new venture. In previous fireworks business they needed the bank loan of Rs.
1,50,00,000 to meet its requirement every year. But now in a new business they require the
loan of Rs. 2,00,00,000 to start.

Q.2 What are all the key factors, bank is likely to consider while evaluating capital
needs of SAF?
Ans. The key factors that bank would likely to be consider at the time of evaluation of
capital for your business –
1. Debt/Equity – Any capital that you would receive from someone is either going to be
debt or equity. Equity represents a business ownership in company and Debt does not
represent any ownership in the majority of cases. For the most part, banks and businesses
deal with debt, and investors deal with equity, in this case SBI gave loan to board members
at debt and the members are equity holders. The loan amount that they use in their
business will gives a percentage of future profits. Bank ensure that what amount of total
debt/equity is receivable/outstanding is in the business before pass the loan.
2. Control – Bank know that in a company your control on investors or partners will less.
If a lender may request financial oversight or independent audits. You must need to be
aware of what you are giving up.

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 3. Security – Bank wants to know how is the lender or investor securing the money? Are
they have personally guaranteeing it? Are there any hidden assets? If you default, then who
are responsible for repayment?
4. Transferability – Bank eager to know that can you transfer your capital to the next
business owner? In simple words, is the capital is only for you or is it for your business? It
won't do you much good to sell a business if all the working capital is still tied to you.
5. Ease of Attainment – How easy is it to get payment from you? How much time will
you need to invest in your project in order to secure the capital that you need?
6. Team – Are you adding any or few players to your team that are interested to invested in
your success? Sometimes bringing on investors and surrendering control is exactly what
you need to do and in other cases is the furthest from where your business needs to be.

Q.3 How would you evaluate credit worthiness of SAF?

Ans. There are few steps to evaluate credit worthiness of SAF
1. Ratio of Assets to Liabilities – Examine the ratio of assets to liabilities and Divide
the value of assets by the value of liabilities. A ratio of 2 shows that the company is
handling its liabilities well and their assets are able to produce enough income to
cover debts and produce profits. If a company has an almost 1 to 1 ratio of assets to
liabilities that means it may be carrying too much debt and could default on an
enterprise with your company. And if apply this theory in this case we get this ratio of
assets over the liabilities. 53200000/58000000 = 0.91

2. Calculate days in receivables – This calculation will tell you how long receivables
go unpaid for the company. If we divide the accounts receivable balance by average
monthly sales and then multiply that number by 30 which is the number of days in a
month to get the average number of days receivables go unpaid. Example: if we have
100,000 in accounts receivable then divided by 30,000 in monthly sales equals 3.3.
Now multiply this number by 30 to find that the average account is going for 99 days
unpaid. You want a lower number here, so that you know the company has cash to pay
debt service if you enter a business. In receivables less than 45 days for the number of
days tells you the company is taking cash regularly.

3. Assign a score to the product base – If company wants to more likely to maintain
profitability if it has diversified products it sells to a wide variety of customers. If a
company has only one main product, assign it a score of 1 and continue up the scale to
5 for a company that has a broad product offering. There is no exact formula for this it
is a judgment call.

4. Figure the amount of debt – The you want to evaluate the company then add that
figure to the company's current indebtedness and calculate the assets-to-liabilities
ratio using the new debt figure. This ratio will tell you how well the company could
handle the new indebtedness if your venture failed. We do not want this to be below 1

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 to 1 as in this case. A score that low would indicate you could get stuck paying off the
loans if your venture does not work.

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