Ateneo de Zamboanga University

School of Management and Accountancy

Graduate School

“BBC PVT. LTD. AND WORKING CAPITAL

CHALLENGES”
Written Analysis of the Case (WAC)

Submitted to
MR. JOHN CARLO S. WEE
Professor
 Submitted by
NARIMIN, Rima S.
BORONGAN, Rowin O.
MICUBO, Adrianne Fritz B.

In Partial Fulfilment of the Requirements in BA 564

Financial Management

July 8, 2017
 Case Study: BBC PVT. LTD. And Working Capital
Challenges

Summary/Background of the Case:

BBV Pvt. Ltd. is a small-scale Indian manufacturing company that produces and sells
stable bleaching powder. The company uses liquid chlorine as the raw material which has a wide
price range due to its tendency to fluctuate erratically. Stable bleaching powder could be
manufactured through one of two techniques: absorption or adsorption in which the latter is
being use by BBC despite its inferior quality than products made from absorption. Due to
adsorption BBC was able to lower their operating costs thus offering a more affordable price to
their customers. The majority of their customer base is comprised of private accounts as well as
some government accounts.
The company’s management had been very conservative and traditional with respect to
repaying loans before credit period having a liquid-asset-to-total-asset ratio of 62-66%.
Additionally, the company sold the product chiefly on credit and was consequently a preferable
alternative for buyers. It expanded credit sales in the type of raw material for substantial periods
and its sizeable stock and finished goods resulted in excessive blockage of working capital. In
this event, BBC had the chance to continue a promising contract that would necessitate
substantial investment instantly. The managing director of the company’s needed to make a
decision about the best way to acquire and administer sufficient funds for the necessary upgrades
in order to procure its contract that BBC needed.

Statement of the Problem:

What should the management do to secure the finances required for the upgrade of BBC in order
to seal the contract with Indian Railways (IR)?
Objective/s:

 Find alternative measures to finance the necessary upgrade of the company.

 Increase the company’s liquidity and introduce a cash-focused culture.
 Assess the company’s working capital improvement potential.

Areas of Consideration:

BBC’s customers:
1. Government accounts
2. Private accounts (majority of BBC’s customer base)

BBC’s inventories:
1. Raw materials (valued at cost on FIFO basis)
2. Packing materials (valued at cost on FIFO basis)
3. Finished goods (cost value or net realizable value whichever is lower)

IR Contract requirements:
1. Professional team (manager and floor supervisor)
2. An Onsite office *
3. A Warehouse *
4. A Workshop *
5. Quarterly onsite inspections
*all within the BBC factory premises

Total amount required for BBC upgrade is INR2,1 million

Cash credit limit is INR2.5 million (fully utilized already)

(See Exhibit 1 & 2)

Strengths
 Affordability of their products (due to lower operating costs)
 Have a favorable market share (due to cost advantage passable to BBC’s customers)
 Enjoyed a credible position with its bankers
 Net working capital has always remained positive
 Their assets are greater than their liabilities
 Product cost is much lower than its competitors

Weaknesses
 Insufficient liquidity of funds (due to extending of liberal credits to customers and
repaying debts too quickly)
 Cash credit limit had been fully utilized
 Most of their assets are in the form of inventories and accounts receivables
 Trade credit of the firm had become a major liability
 BBC had been following a conservative approach to working capital
 Company’s management has been conservative and traditional (with respect to repaying
loans before the credit period)
 Liquid-asset-to-total-asset ratio of 62-66% (whereas industry’s benchmark is only 30%)
 Increasing inventory holding
 Lack the required professional team to make BBC eligible for big contracts (IR contract)
 BBC did not have any warehouse that met the required safety norms

Opportunities
 Seal the contract with the Indian Railways (IR)
 Become the preferred supplier of bleaching powder for other big players in the industry

Threats
 Main competitors are industry giants (Aditya Birla Group, DCM Group, Grasim
Industries Lt., etc.)
 IR contract may be given to other company
Alternative Courses of Action:

1. Increase the company’s finances by selling shares of stocks to potential investors or to the
public.
Advantages:
 Acquire money without needing a bank loan.
 Have an influx of huge amount of cash to finance the upgrades needed.
 Reduce the risk as well as additional expenses (interests)
Disadvantages:
 Not enough investors to fund the IR contract.
 Lose part ownership of BBC to outside parties.
 Decrease in stock prices may affect the company’s viability to investors

2. Try borrowing from a commercial bank instead and exchange fixed assets as collateral.
Advantages:
 May be granted a loan.
 Another bank in association to potentially finance business’ future operations.
Disadvantages:
 Additional liabilities and mounting interests and mortgage to pay.
 Collaterals might already be committed to other bank (Union Bank of India)
 May not be granted big borrowings due to unfamiliarity between bank and BBC.

3. Restructuring the company’s working capital management to establish a more cash

focused culture that is able to sustain the higher levels of performance and drive
continuous improvement by implementing the ff.:

 Ask assistance from principal bank (Union Bank of India) to finance the
company’s payables, to assist with the funding of production costs and buy
BBC’s receivables.
  Formalized collections strategy with tailored and proactive collections approach.
Intensify collection activities to reduce accounts receivables and convert it to cash
by at least 85% of overall A/R.
 Supplier payment terms standardization and optimization programs. Avoid early
payments of accounts payable.
 Balance cash, cost and services.
 Demand management and forecasting techniques (sales forecasting, inventory
management)
 Accurate tracking of inventory quantities and collaborative replenishment
strategy.
Advantages:
 Efficient working capital management strengthens the company’s balance sheets
 Sufficient funds available to finance its investments and operations.
 Implement an effective payment terms to both suppliers and customers.
 Reduce wastage in inventories and raw materials still in storage.
 Decrease company’s expenses for storage and insurance of products in warehouse.
Disadvantages:
 Others maybe resistant to the change.
 Loss of loyal customers due to stricter credit standards.
 Insufficient experience in implementing a modern approach of working capital
management.

Recommendation:

All of the recommendations above are possible yet we concluded that to answer the case
problem and achieve the set objectives, the most prudent course of action to take is ACA no. 3.
It is recommended for the immediate restructuring of the company’s working capital
management to establish a more cash focused culture. From the case it is plain to see that BBC
Pvt. Ltd. is a traditional type of company when dealing with their working capital however it is
necessary to change the management for the continuity growth of the company. A more modern
style of managing the company’s working capital is best suited to accommodate the huge
demand of the IR contract compared to the traditional approach. In addition, if the
implementation of the new working capital management will be a success it is possible to collect
up to 85% of the insurmountable amount of accounts receivables the company has. The money
that can be collected will be enough for the necessary upgrades to win the IR contract moreover
an optimize inventory processing will be a boost to the company’s profitability by reducing costs
and increasing sales. With proper management, BBC can pursue another investment, or new
market acquisition or decrease the necessary loans from the bank.

Potential Problem Analysis:

Due to the conservative and traditional management approach of BBC, a change in the
management may be a conflict even up to future.