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Receivables and working capital

management

Rahul MukundanS2 MBA

RECEIVABLE MANAGEMENT

PROBLEM NO 1A company plans to extend credit facilities to the following

categories of customers, (A) customers with a 10% risk on non- payment and (B) customers with a 30% risk of non –payment.The incremental sales expected in the case of category (A) are

Rs40,000 while in the case of category (B) they are Rs 50,000.The cost of production and selling cost are 60% of sales while

collection cost amounts to 5% of sales in the case of category (A) and 10% of sales in the case of category (B).

You are required to advise the firm about extending credit facilities to each of the above category of customers.

PROBLEM NO 2

Sun star Ltd propose to liberalize its credit facilities and also to increase the sales . The liberalized credit policy will bring additional sales of Rs 3,00,000. the variable cost will be 60% of sales and there will be 10%risk for non payment and 5% collection cost .will the company benefit from the credit policy ?or not?

PROBLEM 3MNC Ltd has a present annual sales volume of 10,000units and at sales

value of Rs 30,00,000. the variable cost is Rs 200 p.u.and the fixed costs amount to Rs 3,00,000 p.a. The present credit period allowed by the company is 1 month. The company is considering a proposal to increase the credit period to 2 months to 3 months and has made the following estimates:

Particulars Credit policy existing proposed 1 month 2 month 3monthIncreased sales - 15% 30%% of bad debts 1% 3% 5%There will be an increase in fixed costs by Rs.50,000 on acount of increase

in sales beyond 25% of the present level.the company plans on a pre-tax return of 20% on investment in receivable.

You are required to calculate the most paying credit policy for the company.

PROBLEM 4Maruthi Ltd sells 40,000 units of product per year at Rs

35p.u.the average cost p.u. is Rs 31 out of which variable cost p.u. is Rs 28 . The average collection period is 60 days.Bad debts losses are 3% on sales and the collection charges amount to Rs 15,000 .the company is considering the proposal to follow strict collection policy which would bring down the losses on account of bad debts to 1% of sales and average collection period to 45 days.it would however , reduce the sales volume by 1,000 units and increase the collection expenses to Rs.25,000.

The company requires a rate of return of 25%.assume 360days in a year ,would you recommend the adoption of new credit policy? Or not?

WORKING CAPITAL

Methods of estimating working capital requirement

The following methods are normally employed by the organisation in order to determine the forcasting working capital requirements.(1) Conventional method or cash cycle method or cash forecasting methods

According to this method ,cash inflows and outflows are matched with each other. The working capital is to be determined on the basis of the closing cash balance. The closing balance is arrived at after considering receipts and payments of cash made during that period.

(2) Operating cycle method According to this method ,the working capital is determined as in the operating cycle approach. In an manufacturing organisation the operating cycle starts from the purchase of raw materials and ends with the conversion of cash. It indicates time required to convert the cash into raw materials ,raw materials to work in progress,work in progress to finished goods, finished goods to debtors and debtors back to cash. This continuous process is called operating cycle. Each stage of this cycle will require some relevant days for their activity and also requires certain amount of investment. The summation of stage wise investments is called the working capital of the organisation.

formula for computation of operating cycle

T=(r –c) + w + f + d T=duration of operating cycle in number of days r=raw materials and stores storage period c=creditors payment period w=work in progress period d=debtors collection period f=finished stock storage period

(3)Percentage of sales approach According to this method working capital is calculated on the basis of certain percentage as against the forecasted sales . Normally ,it must be determined on the basis of past experiences.(4)Balance sheet method Under this method working capital is determined with the help of the two year balance sheets. Specifically current assets and current liabilities are considered for calculating working capital . Here an excess current assets over the current liabilities is known as working capital.

PROCEDURE FOR WORKOUT THE PROBLEMStatement showing working capitalCurrent assets: RsRaw materials **Work in progress **Finished goods **Debtors **Cash **Total current assets **Less current liabilities:Creditors **Wages **Other expenses **Total current liabilities **Working capital(TCA-TCL) **Add:contingencies if any **Total working capital required **

(1)First of all we have to find out number of units.it is the basis for computation of cost of various element .(2)Computation of following elements of cost: raw materials cost ** labour cost ** overhead cost ** cost of finished goods ** cost of work in progress ** cost of debtors **(3)Computation of finished goods: raw material costs ** labour cost ** overhead cost ** cost of finished goods **

(4)Computation of work in progress: raw material cost ** labour cost ** overhead cost ** work in progress **(5)Cost of debtors: Value of debtors should be calculated either including profit element or excluding profit element .

PROBLEM 1Peerless Ltd. is engaged in customer retailing. You are required to forecast their working capital requirements from the following information. Projected annual sales : 6,50,000 % of N.P to cost of sales : 25% Average credit allowed to debtors : 10 weeks Average credit allowed by creditors: 4 weeks Average stock carrying(in terms of sales requirements): 8weekAdd 20% to allow for contingencies

Problem 2Sathyam industries Ltd. Gives the following adjusted profit and loss accounts.To materials used 1,20,000To wages 20,000To manufacturing expense (including depreciationRs10000) 30,000To office expenses 14,000To selling expense 12,000To net profit 2,50,000 By sales 2,50,000 2,50,000It is the company’s policy to maintain the following stocks:a) Finished goods 11/2 month’s salesb) Raw materials 1 months consumption c) Work in progress is equal to 1 month’s production in terms of materials and ½ months

wages and manufacturing expense d) Credit allowed to customers 3 month and credit allowed by suppliers 2monthe) All expenses and wages one month in arrear but selling expenses are paid 2 months in

advance .f) A safety margin of 10% on total current assets is desirable . Estimate the working capital

requirements for the company.

PROBLEM 5

Godrej company sells goods in the home market and earns a gross profit of 20% on sales . Its annual figures are as follows:

Additional information Credit given by suppliers 2months Credit allowed to customers 1 month Lag in payment of wages ½ month Lag in payment of administrative expenses 1 month Selling expenses are paid quarterly in advance Raw materials and finished goods are in stock for 1 month Cash balance estimed to be maintained at Rs 30,000

sales 3,00,000Material used 1,08000Wages 96000Manufacturing expense 1,20,000Administrative expenses 30,000Depreciation 12,000Selling expenses 18,000Income tax payable in 2 mon instalments of which one falls in the next year

30,000

THANK YOU