FUNDAMENTALS OF FINANCIAL ACCOUNTING

CASE STUDY – 5
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SUMMARY
Introduction
Anandam Manufacturing Company was established in the year 2012 and was founded by
Agarwal. The company had been started by Agarwal who used his own finances of around
1.2 million Indian rupees to establish a small firm. The only shareholders of the company
were Agarwal’s wife and himself and they had gained most of the finances by mortgaging
their property for starting the business in which they were able to obtain 25 million Indian
rupees.
Due to Agarwal’s past experience, he was able to turn this company successful as he had
gained a number of customers and was able to gain better revenues by specializing on the
dresses for girls who are of the age up to 12. Although Agarwal ran into a problem as he
needed finance to further invest in the business by replacing the old machinery, hiring more
skilled labours and relocating the business to a larger area.
Background
Anandam Manufacturing Company was one Indian garment factory which was established in
the year 2012. India is considered as the second largest garment manufacturer in the world.
The company had specialized in making address for girls who were up to the age of 12 and
those dresses were of formal for parties. The company was founded by Agarwal who worked
in textile engineering department who had gained the experience needed for running the
textile. He had the references for recruiting the desired skilled labours which would be used
for making both small- and large-scale manufacturing units.
As he had vast knowledge about the textiles, he knew that there was a huge opportunity for
making high-quality dresses for girls. He started his business with the capital of 1.2 million
Indian rupees. He was able to set up a small factory consisting of the machinery and
procuring raw materials. He was also able to hire skilled labours, however, faced problems in
recruiting a stylish design.
Issues
Agarwal had the experience in manufacturing the garments, running the machinery and
information on the market. However, he lacked the experience for dealing with the financial
dynamics of the company which has led the company to financial troubles. The company no
longer had the capital for further investments in the business, purchasing raw materials and
hiring more skilled labours. The main reason was that most of the customers bought the
products on credit which led to the low generation of revenues and also the stocks were piling
on the inventory as they were not being dispatched or the customer was postponing the
delivery.
ANSWER 1)
“Common size the Income statement (p & l statement)

Figures are in thousand

2013 2014 2015 2013 2014 2015
                                   
Sales 10%
   200 480    800 10% 10%
                               
Cash Credit 90% 90%
1,800 4320 7,200 90%
                               
Total sales 100% 100%
2,000 4800 8,000 100%
                               
Cost of goods sold 62% 60%
1,240 2832 4,800 60%
                                 
Gross profit 38% 40%
   760 1963 3,200 40%
Operating expenses:
General, administration. and
                                 
selling expenses Depreciation 1109 12% 12.5% 25%
   240 2,000
Interest expenses (on
borrowings)
                                 
Profit before tax (PST) 26% 15%
   520 960 1,200 15%
                                   
Tax 30% 8% 5%
   156 288    360 4.50%
                                   
Profit after tax (PAT) 18% 11%
   364 672    840 10,5%

Analysis”
The Income statement shows that majority of the sales, around 90% are derived through
credit sales for the company. The cost of sales as a percentage of sales declined for the
company however, all the operating expenses such as interest expense, selling, general and
admin expense have all increased for the firm. The operating and net profit percentage of the
total sales is also following a negative trend which is quite alarming for the management of
the company. This is not a positive sign about the profitability of the company. Its shows that
cash as a percentage of the total assets has decreased and similar is the situation with
accounts receivables. However, the latter is a positive trend for the company. The inventories
are also decreasing as a percentage of total assets and this suggests that the conservative
working capital policy is working in the favour of the company. On the other hand, the long-
term debt has increased as a percentage of total assets for the company and the current
liabilities have slightly decreased. The cash position of Anandam has reached to INR 106,000
from INR 40,000 which shows a significant increase of165% in two years. While comparing
the performance of 2014 with 2015, there is only increase of INR 6,000 at FY2015, but there
is significant movement in cash inflows and outflows during the year. It looks like Anandam
constantly focuses on improving his cash earnings from operations yearly as there is extreme
change among revenues in each of the year. Anandam has invested the high amount in
property plant and equipment in two years which have to increase the fixed assets by
approximately 150%. However, Agarwal still needs the new machines which will
in future take into effect the graph of investment. Agarwal have already unfavourable ratio of
return on fixed asset, fixed asset turnover and total asset turnover in comparison with the
industry’ saverage of key ratios, therefore, it is possible that Agarwal may have a right
motive or the machines are not effective. Since the Anandam not only invested significantly
on fixed assets but also faced high operational charges and three times higher creditor limit
compared to last year due to which the company is facing financial liquidity and funding
problem which eventually result in amplified long-term liability.

ANSWER 2)
As the business extended and the quantity of clients expanded, his monetary issues had
likewise expanded. Agarwal's validity in the market was great, so he had no issue securing
the essential unrefined substances, yet he dealt with an issue while attempting to gather cash
from his clients since he had no organized framework for monitoring expansions of credit
periods. He had additionally started to notice storing up in his manufacturing plant, as the
orders were either not dispatched or the clients postponed conveyance. His machines were
additionally going downhill, and he felt that the opportunity had arrived to supplant them
with new ones that were present day and more proficient. The processing plant space was not
adequate, and a bigger area was fundamental. New talented workers and some extra staff
individuals were additionally expected to help his development plans. All things considered,
Agarwal confronted a serious requirement for extra supporting of 50 million at least to go on
with smooth tasks and to extend his business. Anxiously anticipating the choice of the bank,
which he was expecting would be good, Agarwal sat in his office and visualized taking
Anandam higher than ever.
The best course of action for the company would be to first getting rid of the stock which had
been piling up through dispatching it and making the necessary agreements with its customer
for freeing up space in the factory. Agarwal should also gain more knowledge about the
market such as the demand for customers and latest fashion and use that information for
capturing the market which would help the company in generating better revenues. Lastly,
Agarwal should sell the product on cash rather than on credit as most of its customers are
delaying their payments which is generally creating more financial troubles