The Jewelry Industry of Jaipur

The Jewelry Industry of

Jaipur

Research Question: Which promotional and business

strategies should retail jewelry showrooms adopt to

prevent a liquidity crunch during the unstable market

conditions?

A Detailed Report by

- Pranay Kothari

Contents Page:

The Jewelry Industry of Jaipur – By Pranay Kothari

Acknowledgements:............................................................................................................3

Executive Summary:............................................................................................................4

Research Proposal:...............................................................................................................5

Introduction:........................................................................................................................8

Research Methodology:.......................................................................................................9

Research and Findings:......................................................................................................10

(A) Primary Research Findings:.....................................................................................10

(B) Secondary Research Findings:.................................................................................10

Company XYZ (Pvt. Ltd): Financial Position...................................................................11

I. Analysis of Market Share and Profit Margins:..........................................................11

II. Analysis of Financial Ratios:....................................................................................12

Discussion & Evaluation:..................................................................................................13

(A) Position Mapping:...................................................................................................13

(B) Promotional Mix:....................................................................................................14

Conclusion:........................................................................................................................16

Recommendations:........................................................................................................16

Limitations:....................................................................................................................16

Unresolved Questions:...................................................................................................16

Bibliography and References.............................................................................................17

Appendices:.......................................................................................................................18

Appendix 1: Interview with the Director of XYZ ........................................................18

Appendix 2: Interview with the Finance Head of XYZ................................................20

Appendix 3:...................................................................................................................22

(i) Detailed Cash Flow Forecast....................................................................................22

(ii) Summary of Cash Flow Forecast:............................................................................23

Appendix 4: S.W.O.T Analysis.....................................................................................24

Appendix 5: Balance Sheet of XYZ (Pvt.)....................................................................25

Appendix 6: Profit and Loss Account for XYZ (Pvt.)...................................................26

2


Acknowledgements:

I wish to acknowledge and thank:

The Director of XYZ (Pvt. Ltd), for his time and key opinion regarding the

business and its long-term objectives. His input in terms of explaining the market

and industry was essential to reach relevant solutions to reduce the problem faced

by the business.

The Head of Finance Department of XYZ (Pvt. Ltd), who devoted an ample

amount of time and gave very precious insight into the firm’s financial position.

Through him I learnt about the challenges faced by the business. He facilitated me

to examine the financial accounts that were necessary to create a realistic and

pragmatic report.

3


Executive Summary:

Research Question: Which promotional and business strategies should retail jewelry

showrooms adopt to prevent a liquidity crunch during the unstable market conditions?

To simply the report and maintain the promised confidentiality, my research and its

evidence is based on true data collected from real experts and a real firm that will be

referred to as company XYZ in the research and analysis. XYZ is a firm producing high-

end exclusive jewelry. It faces cash flow difficulties just like most other firms in the

industry face. To overcome this difficulty the firm previously took loans from banks and

other financial institutions. Over the years this liability has proved to be a rising cost in

terms of the interest paid on the loans. Thus, the research question focuses on the

promotional strategies that can be used to increase the sales and reduce this cash flow

difficulty and help XYZ and other companies such as it to avoid a state of a liquidity

crunch.

The research is supported by the primary and the secondary data. The primary data is

gathered by interviewing both the Director and the Finance head of XYZ. Whereas, to

gather secondary data several credible business journals and articles have been referred

to. Apart from this the annual reports of XYZ have been studied to understand the

business and its financial position.

The data collected through these methods has been analyzed using tools such as a few

financial ratios, SWOT analysis, Position mapping and Porter’s generic strategies. These

tools helped conclude the below-the-line strategies such as sponsorships; private viewing;

and cash discounts, could be used to improve sales, without compromising on quality and

brand image.

4


Research Proposal:

Research Question:

Which promotional and business strategies should retail jewelry showrooms adopt to

prevent a liquidity crunch during the unstable market conditions?

Rationale:

XYZ sells precious ornaments in the city of Jaipur. The gemstones industry often deals

with uncertain market conditions throughout the year, as sales are seasonal and highly

volatile1. This often results in liquidity problems. In recent years, due to fluctuating

Indian Rupee and increasing competitiveness in the industry, XYZ and other firms in the

industry have faced a situation of low sales and increasing cash flow problems.

Therefore, it is important to address this issue by researching on the promotional and

business strategies that may help increase sales without compromising on profitability.

The firms need to execute credit control policies alongside to ease its financial position.

Key areas of Study:

Sources of Finance

Cash Flow and Forecasting

Final Accounts

Ratio Analysis

Promotion

Theoretical Framework:

Ratio Analysis (Gearing ratio. Acid test ratio, Liquidity ratio) – will help

understand the financial position of the business.

Cash Flow Forecast – will help understand the flow of money essential to execute

the right promotional strategies at the appropriate time of the year.

1 Appendix 4: SWOT Analysis (Threats)

5


Position Mapping – shows the nature of the business and its position in the

market.

Porter’s Generic Strategies – helps figure out the potential of the business in terms

of its product and market development.

Promotional Strategies – to identify the appropriate above the line/below the line

strategies for improving sales.

Methodology:

A. Primary Research:

Interview with the Director of Company to achieve detailed knowledge

about the industry, business, and its activities.

Interview with Head of Finance Department to gather information

regarding the financial position of the business and its cash flow.

B. Secondary Research:

Study the annual reports of XYZ (Pvt.) to understand its financial position

and liquidity. This is important, as it will allow us to use Ratio Analysis to

derive a concrete conclusion based on financial data.

Referring to credible business journals to get an insight of the jewelry

industry.

Anticipated Difficulties:

Problems likely to arise Possible solution

The company may be reluctant to share financial data.

Sign a confidentiality agreement and explain the need for data to reach relevant solutions.

Scheduled interviews with company heads may get delayed.

Be prepared with other substances that can be worked upon in the mean time.

6


Action Plan:

Date Stage Action Modification

16-February-2014

Planning

Decide the company for the project.

22-February-2014 Meet the company director for approval.

Completed on 1st

March because the director was out of

town.

27-February-2014 Decide the research question

Decided on 3rd

March.

1-11 March-2014 Make research proposal

15-22 March-2014Collection of information

Conduct primary research.

24-31 March-2014 Conduct secondary research.

1-14 April-2014

Formulating the report

Write first draft. First draft completed on 23-August-2014

18-30 April-2014Write second draft including business

tools.

3-May-2014 Produce final report.

Introduction:

7


XYZ is a retail and manufacturing business with its operations set in the city of Jaipur,

India2. The firm produces precious ornaments and sells it directly to the customers

through its retail showroom - situated in a commercially central location of the city.

XYZ’s products are highly specialized hand crafted jewelry found only in a few cities in

India3. XYZ is a well-established company and continues to expand its operations.

Therefore, the firm is gaining reputation as a highly innovative company in the

competitive market.

Attracted by the high potential for growth in the industry, several new firms have started

to emerge. Consequently, to remain competitive and increase customer loyalty, XYZ

allows its regular customers to purchase on credit. This has allowed XYZ to maintain

sales. However, as several of the competitors are also offering similar credit facilities, the

Company has started facing stagnation in sales, as XYZ fails to attract new customers.

Further due to this, the firm has started to suffer from cash flow problems since the sales

have become more unpredictable and the cash inflow is delayed by several weeks4.

These cash flow problems add to operational inefficiency, dissatisfied suppliers due to

late payments, and extra expenses in the form of interests on loans5. Apart from the poor

credit control other factors such as the nature of the industry also add on to the cash flow

difficulties; the sale of jewelry is highly seasonal and volatile due to which a firm has to

constantly manage the flow of money in and out of the business6. Failing to do so leads to

a situation of a liquidity crunch hampering the business and its operations. Consequently

it is important to adopt strategies, which will enhance its sales without adversely affecting

profitability or the exclusivity of the product range. The research question is therefore

framed as: “Which promotional and business strategies should retail jewelry showrooms

adopt to prevent a liquidity crunch during the unstable market conditions?”

2 “Jaipur Jewlery”. N.p., N.d. Web. 25 Mar. 2014. <http://www.pinkcity.com/shopping/jaipur-jewelry/>.3 “Jewelry.” Shopping in Jaipur. N.p., n.d. Web. 26 Mar. 2014. <http://www.jaipur.org.uk/shopping/jewellry-gems.html>.4 Appendix 4: SWOT Analysis (Weaknesses)5 Appendix 2: Interview of the Finance Director (Question 4)6 Appendix 1: Interview of the Director (Question 3)

8


Research Methodology:

Primary Research - To understand about the company and its operations, I propose to use

the method of interviews. Firstly, the director of XYZ will be interviewed to gain an

insight about the company and its short and long-term motives. To gain a more

financially based insight, another interview of the Finance Head of the firm will be

conducted. This interview will help to summarize the basic financial performance and

difficulties faced by the business, and help make the solution more concrete and

pragmatic.

Secondary Research - As a method of secondary research I would study the annual

reports of XYZ. This will help me understand the liquidity position and profitability of

the firm. Using this data I could execute a few ratio analysis to get a more realistic picture

of the liquidity of XYZ. Apart from this, by referring to credible business journals I plan

to gather data about the jewelry industry and its audience. This would help me in

checking the promotional strategies prevalent in the industry and assess their cost

implications.

9


Research and Findings:

(A) Primary Research Findings:

XYZ has been able to increase profitability. However, due to excessive loans

taken from banks, it has started to face a cash flow difficulty.7

The market for jewelry is very volatile and faces a huge off-season period of

about six months, from April to September.8

Most of the money earned through sales has to be reinvested in the business to

maintain the product line and range. Therefore, the cash in hand for the business

remains low mostly throughout the year.9

To promote sales, XYZ gives an 8-week credit period to customers.10

XYZ gross profit margin and net profit margin after tax is 29% and 9%

respectively.11

(B) Secondary Research Findings:

The jewelry market has great potential and has been able to grow at a rapid rate in

the past few years.12

India is amongst the fastest growing markets for diamonds in the world. It is

already amongst the largest 3 markets for diamond trade in the world along with

China and USA.13

The city of Jaipur, alone, exports jewelry worth Rs 2000 crores (330 million US

dollars) annually.14

7 Appendix 28 Appendix 19 Appendix 110 Appendix 211 Appendix 212 “Jewelry.” Shopping in Jaipur. N.p., n.d. Web. 26 Mar. 2014. <http://www.jaipur.org.uk/shopping/jewellry-gems.html>.13 N.p., n.d. Web. 27 Mar. 2014. <http://www.bain.com/publications/articles/global-diamond-report-2014.aspx>.14 “Jaipur Turns into ‘gem’ of a City.” Times Of India. N.p., n.d. Web. 29 Mar. 2014. <http://timesofindia.indiatimes.com/city/jaipur/Jaipur-turns-into-gem-of-a-city/articleshow/8933375.cms>.

10


XYZ (Pvt. Ltd): Financial Position

I. Analysis of Market Share and Profit Margins:

According to the annual reports of XYZ, the company had total sales of around Rs.

180,000,000 (3 million USD) for the year 2013. The firm was able to maintain a high

GPM of around 29% and a NPM of 9%.15 These margins are considered to be very

healthy according to the industry norms and imply that the business is profitable and

should seek to expand its operations. However, XYZ despite earning healthy profits has

been troubled by the cash management. The firm tries to increase the variety of its

product range and so very often they rely of external finance for the funding.

Company XYZ, 180,000,000, (1%)

Other Jewelry Businesses, 20,000,000,000, (99%)

Jewlery Sales in Jaipur (in Indian Rupees)

15 Figures Derived from Appendix 6

11


II. Analysis of Financial Ratios:

1. Gearing Ratio = (External finance/Total capital employed)*100

(200,060,210/300,112,411)*100 = 66.7%

The Gearing Ratio of 66.7%16 implies that XYZ is operating at a very high risk. Anything

over a 50% is said to be a potential risk for a business and XYZ’s gearing ratio is

exceeding this margin greatly. The business should take measures to try to decrease this

ratio to ease the cost in terms of interests and achieve higher profits. This may be done

initially by trying to increase sales and use that money to reduce the level of loans taken.

2. Current Ratio = (Current Assets/Current Liabilities)*100

Current Assets (Stock + Debtors + Cash) = Rs. 150,045,805

Current Liabilities17 = Rs 72,511,604

Therefore, Current Ratio = (150,045,805/72,511,604) = 2.07

The Current Ratio of 2.07 is more than satisfactory as this suggests that the business can

quite easily pay off its short-term debts/liabilities. However, this does not ensure that the

firm is operating efficiently in terms of cash flow management since much of its Current

Assets are in the form of unsold stock/inventory. If the firm fails to rotate its stock over

an accounting year the designs may become out of fashion and can cause further stock

blockage.

3. Acid Test Ratio = {(Current Assets – Stock)/Current Liabilities}*100

Therefore, Acid Test Ratio = {(150,045,805-120,469,000)/72,511,604}*100

= (29,576,805/72,511,604)*100

= 0.41

Acid test ratio is a more apt indicator of XYZ’s liquidity position. If we analyze the ratio

of 0.41 we can see that XYZ has a very high level of unsold stocks. This is necessary

because the industry’s competitiveness requires firms such as XYZ to maintain a wide

and exclusive stock range to differentiate itself and maintain brand image.18

16 Figures Derived from Appendix 517 Figures Derived from Appendix 518 Appendix 1 (Question 1)

12


Discussion & Evaluation:

(A) Position Mapping:

13

High Price

High Quality

Low Price

Low Quality

Premium Product Range

Cowboy Product Range (Overpriced)

Bargain Product Range (Under-priced)

Economy Product Range (Value for money)

XYZ and its product range


The product range offered by XYZ is considered to be of high price and quality19.

However, it can be understood that in a market of over INR20 2000 crores (320 million

USD)21 alone in the city of Jaipur, XYZ’s annual sales of approximately INR 18 crores (3

million USD) is less than 1% of the total market. Since XYZ’s products are considered to

be amongst the premium goods, XYZ cannot hamper the uniqueness of its product range

by creating a more basic line of products to increase sales. It therefore needs to alter the

other elements of the marketing mix that does not affect its image such as promotional

strategies in particular.

(B) Promotional Mix:

Porter’s Generic Model for XYZ

Competitive Advantage

Cost Uniqueness

Scop

e Mass Cost Leadership Differentiation

Narrow Focus (Cost Focus) Focus (Differentiation Focus)

Since XYZ is operating in a specialist industry the firm has a narrow scope of increasing

market share. The firm has a competitive advantage over others as it is amongst the very

few firms that offer exclusive jewelry. Therefore, to maintain the brand image and

exclusivity of its product range, XYZ should emphasize on below the line promotion

techniques. It should organize exclusive private shows by only inviting loyal and

potential customers of the business. This could be a helpful as the new range could be

presented as a private view for the select few, which increases its aspirational value. This

would also help in increasing sales without increasing costs substantially.

19 Appendix 1 (Question 1)20 USD 1=INR 60 (approximately)21“Jaipur Turns into ‘gem’ of a City.” Times Of India. N.p., n.d. Web. 26 Mar. 2014. <http://timesofindia.indiatimes.com/city/jaipur/Jaipur-turns-into-gem-of-a-city/articleshow/8933375.cms>.

14


Making the option of EMI available to customers - The option of EMI is another method

that could help attract those customers that do not have the ability to pay the complete

money upfront. Hence, paying in monthly installments would end the price burden. This

way the firm will increase its monthly inflow without losing the customers. However by

making the product available to a larger market, the Company may lose its customer

following amongst the elite of Jaipur.

Sponsorship of Exclusive Cultural Events - Jaipur is home to several cultural fests, the

Company can choose to sponsor specific parts in the Jaipur Literature Festival (JLF),

which would increase its visibility in the target market, without compromising on the

kind of customers that get access to the Company’s jewelry. The cost of sponsoring a

pavilion or an evening at JLF is estimated to be around INR 10,00,000 (USD 15,000) for

five days.22 While the cost may appear to be high in the short terms, the visibility it can

create will help XYZ to increase sales substantially. This is primarily because it would

get access to the target market. As most of the people visiting the event are affluent and

JLF attracts people from across the world, it would create an opportunity to showcase its

collection and forge new customer relations. Therefore if the Company purchases the

space, it would require the sale of only a couple of pieces to recover its costs.

Offer Cash Discounts - The organization can introduce cash discounts, or as a means to

improve inflows the business should reduce the 8-week credit period to a 4-week credit

period for the regular customers. This may however create poor relationship with the

loyal customers. Which is why, XYZ should let its loyal customers reap the benefits of a

slight extension in the credit policy as this will make them feel valued and protect the

business-customer relation. However offering cash discounts may help resolve the issue,

even if it affects the profitability marginally.

22 N.p., n.d. Web. 28 Mar. 2014. <http://www.jaipurliteraturefestival.org>.

15


Conclusion:

Thus, the research concluded that XYZ is a part of an industry that usually faces cash

flow difficulties due to highly volatile demand, and so it cannot compromise its

reputation by decreasing the variety of products or prices. As ascertained through ratio

analysis it has a good profitability compared to the industry average but it lacks liquidity.

To maintain its image and exclusivity, it has to continue making new product range to

keep maintain a large product display. Therefore, increasing sales throughout the year by

implementing new promotional strategies could solve the problem of cash flow.

Recommendations:

The promotional strategies recommended for XYZ should be largely based on below the

line techniques to ensure they emphasize on the exclusivity of the product.

It is therefore recommended that the Company arrange private viewing of their new

collection to encourage customer loyalty and sales. Further sponsorship of events is

required to create more visibility.

Limitations:

The interviews conducted may be biased towards the firm. They may not have

been completely honest and wanted only the good of the business and its

operations to come across.

The financial data including the cash flow forecast and the business accounts may

not be very accurate. The predictions could be different from what actually

happens in the next accounting year due to changes in domestic or national

policies.

Unresolved Questions:

As companies in the industry already have and suffer from liquidity problems, will they

be able to fund the promotion techniques stated?

16


Bibliography and References

Print Sources:

Hoang, Paul. Business & Management. 2nd ed. [Melton, Vic.]: IBID, 2007.

Borrington, Karen, and Peter Stimpson. IGCSE Business Studies. 3rd ed. N.p.:

Hodder Arnold, 2006. Print.

Websites:

“Jewelry.” Shopping in Jaipur. N.p., n.d. Web. 26 Mar. 2014.

<http://www.jaipur.org.uk/shopping/jewellry-gems.html>.

N.p., n.d. Web. 29 Mar. 2014.

<https://www.dnb.co.in/IndianGemsandJewellerySector/issues.asp>.

N.p., n.d. Web. 29 Mar. 2014. <http://www.jaipurliteraturefestival.org>.

“Jaipur Turns into ‘gem’ of a City.” Times Of India. N.p., n.d. Web. 26 Mar.

2014. <http://timesofindia.indiatimes.com/city/jaipur/Jaipur-turns-into-gem-of-a-

city/articleshow/8933375.cms>.

N.p., n.d. Web. 28 Mar. 2014. <http://www.bain.com/publications/articles/global-

diamond-report-2014.aspx>.

“Jaipur Jewlery”. N.p., N.d. Web. 27 Mar. 2014.

<http://www.pinkcity.com/shopping/jaipur-jewelry/>.

17


Appendices:Appendix 1: Interview with the Director of XYZ

Q1 - Sir, please tell me something about the company and its operations?

XYZ is a private limited company situated in Jaipur that sells precious and semi-precious

jewelry. The firm has expanded its production scale by over 700% in the past decade. It

began its operations with a very limited stock range, and in the past few years has been

able to improve the product range and its exclusivity along with its brand image. After

several years of stability, today, XYZ and its products are recognized as a symbol of

quality and trust. This has led XYZ to be able to charge slightly higher prices for its

products compared to other firms with weaker reputations.

Q2 - What is the most challenging problem that arises for firms in the jewelry

industry?

Since jewelry is a very high end product, the general population of the country would

look up to buying the product once their basic needs and wants are fulfilled. Since buying

jewelry means that a person is spending a major proportion of their income they tend to

take a longer period to make the full payment of the product. Hence, firms tend to suffer

from cash flow problems the most.

Q3 - Are cash flow difficulties a constant problem throughout the year?

The market for jewelry is highly volatile and constantly changing with changes in gold

prices and the value of local currency. Around half of the year the sales tend to remain

very low. These months are often referred to as off-season in the industry. During these

months from May to October, the sales tend to be the lowest. Therefore, the money

flowing out of the firm may be greater than the money flowing in, which can be a major

issue in the operations of a firm.

18


Q4 - What actions have previously been taken to reduce this problem?

The very first thing any business should do is asking the debtors to make the previous

clearances as soon as they can. This is what our firm does at first to begin the flow of

money into the firm. Simultaneously, several times the need for bank overdraft or short-

term loans also comes up, as the production cannot be jeopardized due to lack of

operational funds. But to avoid the scenario of the extra cost in terms of interests, XYZ

tries to keep a surplus of funds and reserves from previous sales.

Q5 - What proportion of money that flows into the firm through sales is put back

into business in the form of more production?

Since the business needs to maintain its stock range to maintain brand image, around

90% of the money flowing in through sales is put back in the production cycle. The other

10% is used to cover the direct and indirect costs of the firm. If any of the money remains

after all the costs that is then added to the company’s reserves and could be used at the

times of poor liquidity in off season.

19


Appendix 2: Interview with the Head of Finance of XYZ

Q1 - Sir, please give me some brief about the company’s financial position?

Over the past few years the cash flow difficulties have risen to a greater extent since most

of the money earned by the business was put in the expansion of its production scale;

tying up the financial resources into the inventory of the firm. Over the past three years

XYZ has been able to successfully rotate its inventory over 2 times, (more than the

industrial average of approximately 1.5 times).

Therefore, the firm successfully has been able to sell of its inventory at a very fast rate.

But with this the firm also developed greater cash flow difficulties, as the money earned

from sales had to be tied in the form of larger new inventory. However by doing so, XYZ

has opened several expansion opportunities for itself maintaining the brand image and

reputation in the market.

Q2 - To overcome short-term cash flow problems what policies and methods has the

business adapted?

To promote the sale of the products, the firm has a credit policy that allows a customer to

make the full payment within an 8-week period. During off season we tend also tend to

give discount offers and if a product doesn’t seem to be moving around the market the

firm melts the product to create new designs with the gold and gem stones released from

the piece. Despite these internal methods to increase inflow, several times the situations

demands a bank overdraft to fund the operational expenses.

Q3 - Apart from taking bank loans, does the firm use any different policy to attract

customers that its competitors do not?

No, at the most the firm has the provision of credit and allows its customers to make half

payment during the month of purchase and the remaining has to be paid in the following

month.

20


Q4 - What should the firm do to reduce the amount of bank loans?

Firstly, the firm should be focused on increasing sales throughout the year. The

performance should always be improving and never deteriorating when compared to the

previous year. The GPM may decrease but the net profit after tax should always be

increasing. Also, at the time of on season, the money earned by the business should be

used to pay off the debts to avoid costs in the form of interests.

Q5 - Can you please tell me what was the company’s performance in the previous

year in terms of profitability?

Generally the retailers in the industry tend to have a net profit markup of around 8-12%.

Last year XYZ had a GP Margin of around 29% and the NP margin after tax was around

9%. The NPM is relatively lower due to the high interests paid by the firm on bank loans.

21


Appendix 3:

(i) Detailed Cash Flow Forecast

Apr May June July Aug SeptInflowsTotal Sales 60,00,000 45,00,000 45,00,000 40,00,000 60,00,000 90,00,000Sales in cash (50%) 30,00,000 22,50,000 22,50,000 20,00,000 30,00,000 45,00,000Debtor' Realization (50% of sales of previous month)

75,00,000 30,00,000 22,50,000 22,50,000 20,00,000 30,00,000

Bank Loans 2,50,00,000 25,00,000Unsecured loans 2,50,00,000Total Cash Inflows 6,05,00,000 52,50,000 45,00,000 42,50,000 50,00,000 1,00,00,000OutflowsIndirect Expenses 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000Purchases 3,50,00,000 40,00,000 30,00,000 40,00,000 70,00,000 1,50,00,000Fixed assets 50,00,000Interests on loans 5,00,000 4,75,000 4,75,000 4,75,000 4,75,000 5,00,000Loan repayment 25,00,000TaxTotal Cash outflow 4,50,00,000 64,75,000 54,75,000 64,75,000 94,75,000 1,75,00,000Net cash flow 1,55,00,000 (12,25,000) (9,75,000) (22,25,000) (44,75,000) (75,00,000)Opening balance 0 1,55,00,000 1,42,75,000 1,33,00,000 1,10,75,000 66,00,000Closing balance 1,55,00,000 1,42,75,000 1,33,00,000 1,10,75,000 66,00,000 (9,00,000)

Oct Nov Dec Jan Feb MarInflowsTotal Sales 1,50,00,000 2,50,00,000 3,50,00,000 4,00,00,000 2,50,00,000 1,50,00,000Sales in cash (50%) 75,00,000 1,25,00,000 1,75,00,000 2,00,00,000 1,25,00,000 75,00,000Debtor' Realization (50% of sales of previous month)

45,00,000 75,00,000 1,25,00,000 1,75,00,000 2,00,00,000 1,25,00,000

Bank Loan 50,00,000Unsecured loan 1,00,00,000 50,00,000Total Cash Inflows 1,70,00,000 3,00,00,000 3,50,00,000 3,75,00,000 3,25,00,000 2,00,00,000OutflowsIndirect Expenses 25,00,000 25,00,000 25,00,000 25,00,000 25,00,000 25,00,000Purchases 2,00,00,000 2,50,00,000 3,00,00,000 2,00,00,000 1,00,00,000 40,00,000Fixed assets 10,00,000Interests on loans 5,50,000 6,50,000 7,00,000 7,00,000 6,00,000 5,50,000Loan repayment 1,00,00,000 2,00,00,000 1,50,00,000Tax 1,00,00,000Total outflow 2,40,50,000 2,81,50,000 3,32,00,000 3,32,00,000 3,31,00,000 3,20,50,000

Net cash flow (70,50,000) 18,50,000 18,00,000 43,00,000 (6,00,000) (1,20,50,000)

Opening balance (9,00,000) (79,50,000) (61,00,000) (43,00,000) 0 (6,00,000)Closing balance (79,50,000) (61,00,000) (43,00,000) 0 (6,00,000)

22


(1,26,50,000)

(ii) Summary of Cash Flow Forecast:

Year 2015-16 Apr May June July Aug Sept

Total Cash Inflows 6,05,00,000 52,50,000 45,00,000 42,50,000 50,00,000 1,00,00,000

Total Cash outflow 4,50,00,000 64,75,000 54,75,000 64,75,000 94,75,000 1,75,00,000

Net cash flow 1,55,00,000 (12,25,000) (9,75,000) (22,25,000) (44,75,000) (75,00,000)

Opening balance 0 1,55,00,000 1,42,75,000 1,33,00,000 1,10,75,000 66,00,000

Closing balance 1,55,00,000 1,42,75,000 1,33,00,000 1,10,75,000 66,00,000 (9,00,000)

Year 2015-16 Oct Nov Dec Jan Feb Mar

Total Cash Inflows 1,70,00,000 3,00,00,000 3,50,00,000 3,75,00,000 3,25,00,000 2,00,00,000

Total Cash outflow 2,40,50,000 2,81,50,000 3,32,00,000 3,32,00,000 3,31,00,000 3,20,50,000

Net cash flow (70,50,000) 18,50,000 18,00,000 43,00,000 (6,00,000) (1,20,50,000)

Opening balance (9,00,000) (79,50,000) (61,00,000) (43,00,000) 0 (6,00,000)

Closing balance (79,50,000) (61,00,000) (43,00,000) 0 (6,00,000) (1,26,50,000)

According to the forecast above we can see that the business begins the accounting year

with a healthy amount of disposable cash achieved through bank loans and loans from

other unsecured financial sources. For the first 6 months, from April to September, the

market does not show great sales and demand for the product. As a result the sales tend to

be low and the outflow of money in the form of purchases also remains restricted.

Therefore, the off-season is actually the time when the business is relatively stable in

terms of net cash flow.

In an attempt to make huger profits the firm actually appears to begin with overtrading. It

produces more product line then what is needed just so that it is able to capture as much

sales as it can from the customers. By looking at the cash flow forecast above we can see

that most of the money flowing into the business through sales is flowing out in the

following month in the form of purchases of raw material. This is something that cannot

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be changed, as the business needs the product line to show to the customers to make any

sales.

Appendix 4: S.W.O.T Analysis

S.W.O.T Analysis for XYZ (Pvt.)

Strengths:

It is a well-established business with a

reputed name.

It has a diverse range of products and

designs for customers to choose from.

The firm produces specialized jewelry and

has specialized workers that meet the skills

required. Hence, the productivity is very

high.

Weaknesses:

The relationship with suppliers is not ideal due

to late payments.

The bank loans taken by the company add on the

costs in the form of interests.

The company has a very high gearing ratio and

not a very healthy and ideal liquidity ratio.

Opportunities:

To increase sales by executing new

policies that can help attract new

customers.

To decrease bank loans and avoid the cost

of interests on them.

To expand the operations into different

locations of the city by opening more retail

showrooms.

Threats:

Increasing competition due to higher demands of

diamond jewelry.

The political condition of India is highly

unstable since the ruling party changes in almost

every 5 years.

The Indian economy may face a fluctuating

currency in the times ahead due to external

reasons. Due to this the prices of gold fluctuate

and the customers become reluctant to purchase

jewelry in this time period.

According to the S.W.O.T analysis above, we can see that there are high expansion

opportunities for the business and that its profitability is not being hampered by the cash

flow difficulties. However, for a business to run easily and efficiently this problem must

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be curbed. This liquidity problem is occurring due to the high outflows in the form of

interests and purchases of raw material that needs to be improvised on by the firm.

Appendix 5: Balance Sheet of XYZ (Pvt.)

XYZ (Pvt.)Balance Sheet as at 31st March 2013

(In Indian Rupees)Fixed Assets [A]Premises 200,155,098Machinery and Equipment 22,423,112

222,578,210Current Assets [B]Stocks 120,469,000Debtors 17,211,500Cash in hand 12,365,305

150,045,805Current Liabilities [C]Trade Creditors 21,988,600Short-Term Borrowings 41,089,455Taxation 8,933,549Dividends 500,000

72,511,604

Net Current Assets (Working Capital) [B-C] 77,534,201

Net Assets [Working Capital + Fixed Assets] 300,112,411

Financed by:Long-Term Liabilities [L]Mortgages 32,530,100Debentures 27,510,005Bank Loans 140,020,105

200,060,210

Capital and Reserves [R]Ordinary Share Capital (10,000 shares at Rs 5,000) 50,000,000Retained Profits 50,052,201

100,052,201

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Capital Employed [L+R] 300,112,411

Appendix 6: Profit and Loss Account for XYZ (Pvt.)

XYZ (Pvt.)

Profit and Loss Account for year ended 31st March 2013

(In Indian Rupees)Sales Revenue 180,202,342Cost of Sales 127,911,267

Gross Profit 52,291,075

Less Expenses 27,098,033Plus Non-operating income 17,023,230

Net Profit before interest and tax 42,216,272

Less Interest 16,455,677Less Tax 9,745,662

Net Profit after interest and tax 16,014,933

Dividends (10%) 1,601,493Retained Profit 14,413,440

The P&L Account above helps us see how the business has a high Gross Profit Margin of

roughly around 29% whereas only a Net Profit Margin of around 9%. This gap is mainly

due to the high amounts of interests paid by XYZ due to having a high amount of loans

taken. To increase the NPM and increase profitability, XYZ should focus on reducing the

amount of bank loans so that the money going away in the form of interests can be

retained and yield the owners with a greater profit level.

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The Jewelry Industry of Jaipur

Business

Transcript of The Jewelry Industry of Jaipur