BBC PVT. LTD.

AND
WORKING CAPITAL
CHALLENGES
Financial Management 2 : Assignment 2

Group 1
Divya Negi MS19A008 | Priyanka Tambe MS19A060
 What is the business of BBC Pvt. Ltd?
● BBC Pvt. Ltd. is an Indian chemical manufacturing company
established in 2004 with its registered office in Bangalore and
manufacturing plant in Lucknow.
● Categorized as a small scale industry under the domain of
chemical manufacturing which sells stable bleaching powder using
the raw material liquid Chlorine.
● Classified as hazardous Industry which requires a license from
Govt. of India’s Dept. of Industrial Policy and Promotion due to its
raw material and end product being highly toxic.
 What is the uniqueness of the company in
relation to its competitors in the industry?
● BBC uses adsorption technique to manufacture stable bleaching
powder as opposed to the absorption technique.
● This makes the end product of inferior quality compared to
products of its competitors (Aditya Birla Group, the DCM Group,
Grasim Industries Limited).
● Due to use of the more affordable adsorption technique, the
company had much lesser operating costs (installation of
equipment, maintenance and electricity expenditure).
● This allowed BBC to give its customers a cheaper product.
● BBC enjoyed a favorable market share despite of the inferior
quality of the product.
Compute the operating cycle of business and comment on
the company’s efficiency in managing its operating cycle.
Operating cycle time duration required to convert sales into cash.
Gross operating Cycle = Inventory conversion period + Debtors conversion period
Inventory Conversion period = Raw Material Conversion period + Finished Goods Conversion period
Raw Material Conversion Period = RM Inventory/ (RM consumption/360)= 432071/(4982486/360) =
31.22
Finished Goods conversion period = FG Inventory/ (CoGS/360) = 438075.2/(8824250.8/360) = 17.87
Inventory Conversion period = 31.22+17.87 = 49.09
Debtors (receivables) conversion period = Debtors/(Credit Sales/360) = 2948850/(9544409/360) =
111.23
Creditors Deferral period = Creditors/(Credit purchases/360) = 130166/(5247984/360) = 8.93
Gross Operating Cycle = 49.09 + 111.23 = 160.32
Similarly, on performing calculations for all the years, we get the operating cycles as follows:
Compute the operating cycle of business and comment on
the company’s efficiency in managing its operating cycle.
Compute the operating cycle of business and comment on
the company’s efficiency in managing its operating cycle.
● As the raw material conversion period is growing, BBC is unable to convert
the raw material purchased on credit into FGs, which further incurs costs for
holding inventory, thus increasing inventory conversion period.
● The FG conversion period has decreased from 19.83 in 2010 to 12.97 in
2011, while there was a considerable increase in 2010 from 4.91 in 2009.
BBC was most efficient in converting its FGs to revenues in 2009.
● The Operating Cycle for 2011 has decreased as compared to 2010 because
of reduction in Debtors conversion period as debtors are repaying the credit
sooner.
 How is the company managing its working capital
requirements?
• The company has been keeping a high
current ratio (current asset/current liability),
i.e. 15.78.
• The high current ratio implies high number
of assets as compared to liabilities. BBC is
not effectively utilizing its assets to increase
revenues as the profit margin is also
decreasing.
• The company had also been maintaining a
high cash ratio ( cash and cash
equivalents/liabilities).
• This enabled BBC to fulfil its working capital
requirements.
 What are the challenges in signing the contract with
Indian Railways?
• IR is demanding an offsite office, a warehouse and a workshop within the
BBC factory premises.
• Establishing an onsite office, a warehouse and a workshop will cost INR
200000. INR 500000 and INR 500000 respectively. Also there will be some
additional administrative costs involved.
• Onsite inspections will be conducted at the factory premises before any lot of
dispatched to IR.
• The contract between BBC and Indian Railways requires professional team
working to make BBC eligible. So the company desperately needs a manager
who could handle the administration and official correspondence of this
account efficiently, as well as monitor operations along with the floor
supervisor.
 How will the company finance its fund requirement
for upgrading the company?
● Total amount needed for the upgrade in INR 1.2 million. In order to meet this
fund requirement, BBC needs to maintain adequate cash and it should
improve its sources of revenue. To do this:

○ Invest funds in short term investments that can generate cash flows
○ Reduce the inventory levels of both raw materials and finished goods by
following various inventory management techniques
○ Reduce the credit period for the debtors which will help them to maintain
enough cash for its operations
○ Try to boost its sales as it will be key for improving cash position
○ Try to convince the banks and get loans using their past tie ups
○ Delay the repayments of debt as it can reduce the net present value and
this money can be used in various operating activities that can generate
revenues
 Should Agarwal seek to improve BBC working capital
management or pursue complete financial policy
restructuring?
● Agarwal should focus on improving the working capital situation of BBC.
● The credit policies for the customers should be revised in such a way that
the receivable turnover ratio will be less.
● Since BBC’s sales are decreasing from the past 3 years, it will be difficult for
the company to pay off its liabilities in the future.
● The company should not pay off its debt quickly as it can increase the net
working capital.
● Agarwal should also make some changes to the financial policy as it is too
conservative.
● BBC should invest the excess cash in short term investments, which can
increase its sources of revenue.
Calculation

Microsoft Excel
Worksheet