1.Was BBC working capital policy successful? why or why not?

2. BBCs inventory turnover ratio (ITR) decreases from 2009-2011. Calculate ITR and
analyze the efficiency of companys inventory management.

3. Is BBC a growing company ? which areas should be improved in the company for
future growth?

1.

BBC Private Limited's working capital policy proved successful. One of the
reasons is the company's capacity to keep a currency and credit point
with the Union Bank of India in the amount of 2.5 million rupees. Since the
credit limit had been reached, the contract structure with the Indian
Railways could not be changed. Another explanation is that the
corporation has dealt with its operating capital in a conservative manner
and hence has not considered redesigning over a lengthy period of time.
Furthermore, the organization's resources, such as receivables and
inventories, are higher than the liabilities, limiting recover-ability.
According to an agreement with the Indian Railways, a center for product
distribution, a field office, and a workshop will be located within the BBC
Private Limited office building. The IR office is expected to cost
200,000INR, while the storage will cost 500,000INR, as authoritative
expenses rise. A total of 1.2 million Indian rupees will be required for the
redesign (Kapoor & Goel, 2012). Due to the credit limit being surpassed
and the recoverable amount being frozen, this amount put a lot of
pressure on Agarwal. As a result, Agarwal determined that the company
was unable to provide free credit to its clients owing to constraints, and
that the loan repayment period was also shorter than the business
requirements.
2.

3. The BBC Private Limited is a company that has been operational for long periods . However , the
firm can not be considered to be growing . This is because of the issues of cash shortages that it
experiences , thereby leading to a rapid decline in its transactions and the operations it undertakes
( Kapoor & Goel , 2012 ) . Ideally , the main area in which the company should focus on to boost its
future growth would involve shortening of credit periods , which it grants to the end consumers . The
company would also need to take proper care of the loan boss prior to the period of development
after which payment will be made in instalments . The company should also improve how it manages
its inventory to enable it meet the long - term obligations .
1. Was BBC's working capital policy successful? Why or why not?
No. BBC's working capital policy was not successful. BBC had
been following a conservative approach to working capital,
which is reflected in its high level of net working capital - more
than INR 4.2 million in financial year 2010/2011. BBC's assets
were more than its liabilities. These assets were mostly in the
form of inventories and receivables. However, Trade Credit of
the firm had become a major liability. The company's
management had been very conservative and traditional with
respect to repaying loans before the credit period. This meant
that BBC had been too quick in paying back its creditors. This
had affected the company's liquidity: the longer the repayment
period, the lower the Net Present Value of the payment and the
higher the value of the firm. The company also maintained a
cash credit limit of INR 2.5 million with Union Bank of India.

BBC's current assets are mainly in the form of inventories,

sundry debtors, cash and bank balance and loans and
advances. The company's levels of current assets are very
high, as represented by high current ratio and quick ratio. The
current asset as a percentage of total asset is around 65 per
cent for BBC, whereas the average ratio in the manufacturing
sector is 30 per cent.
Excessive working capital may prove disadvantageous to the
company for a variety of reasons, such as:
1. Excessive working capital means idle funds which yield no returns for the business.
2. It may lead to theft, waste and losses.
3. It can result in excess debtors/receivables and poor credit policy.
4. It may lead to decline in the value of the company's shares because of low return on
capital employed (ROCE).

2. No , BBC 's Working Capital Policy was not successful . BBC 's
assets were way more than its liabilities . These assets were mostly
in the form of inventories and receivables . BBC 's levels of current
assets are very high and this led to an unproductive use of funds .
Upon checking the ratio of its current assets vs its total assets , it is
at 62 to 66 which indicates high operating risk . Benchmark for
manufacturing sector is only 30 % . On the other hand , the trade
credit of the firm had become a major liability . The company 's
management had been very conservative and traditional with
respect to repaying loans before credit period which mean that they
had been to quick in paying back its creditors . BBC 's credit policy
was too lenient with customers who had the potential of repaying . If
they were not repaying their own debt so quick , they could have a
potential balance with working capital . Unfortunately , their credit
policy will be one that needs to be reviewed to raise capital .
Specifically , to mediate their immediate needs of funds to secure
the IR contract . All in all , this poor liquidity management affected
the company 's liquidity - the longer the repayment period , the lower
the NPV of the payment , and the higher the value to the firm . The
company is also maintaining a cash credit limit of INR2.5 Mn with
Union Bank of India .

2.The sharp change in inventory turnover ratio As discussed earlier ,

a large amount of BBC 's working capital is blocked in the form of
inventories , as it reflects a massive increase from 10.97 on 2009 to
38.84 on 2011 which clearly depicts that the inventory management
of BBC has not been that efficient which led to BBC finding itself
short of liquidity in order to oblige the Indian Railways contract .
Their inventory can be categorized into three groups : raw
materials , finished goods , and packing materials . As we can see
from the case , all these increased significantly from 2009 to 2011 .
This can actually be a good thing in a manufacturing , to eliminate
the possibility of disruptions due to stockout , however , this high
inventory led to wastage and blockage of BBC 's working capital . As
we recall the case , BBC was unable to efficiently convert in raw
material purchased on credit into finished products , causing it to
incur significant costs , in terms of raw material inventory holding
costs and significantly increase its inventory turnover ratios in
days . What they can do is to observe just - in - time system which
basically is about only ordering sufficient materials or inventory as
needed , when they are needed . Following this , their inventory will
be managed and decreased , and will eliminate them stocking up
inventory , saving storage and other related costs . Furthermore , it
can be evaluated that , BBC had been able to decrease its finished
goods inventory turnover in days from 2010 at 20.8 to 2011 at 13.47 ,
while it had shown a consideration increase from the 2009 at 4.87 .
Which meant that , in the year 2009 , BBC was most efficient in
converting its finished goods in to sales revenues , compared to its
 two subsequent years . Additionally , it can be assessed that , BBC
had significant decreased its account payable turnover ratios in
days from the year 2009 onwards . Which could have contributed
towards evaluation the enterprise value of the organization , further
enhancing the challenges in its working capital .

3. Is BBC a growing company? Which areas are you recommending that they improve?
BBC cannot be called a growing company. The company's gross
block has been continuously decreasing
at a significant rate. This means that instead of growing, the
company is actually shrinking — and at a
rapid rate. There are many areas that require improvement if
the company aspires for a turnaround.

The company needs to put extensive work into areas of

inventory and receivables management in order to
see a turnaround. Its sales have not grown from 2009 -2011.
Significant efforts are required to convert the
finished goods into sales. This will not only reduce BBC's
inventory levels but will also help the
company in growing further.

BBC should take full advantage of the 'grace' periods offered by

its suppliers and try to reduce its credit
periods to customers for better liquidity. Due to wide
fluctuations in the price of raw materials, the
company is unable to predict suppliers' cost and the actual
funds required. This has been another major
hindrance in BBC's credit management. In terms of debtors' and
suppliers' management, the company's
credit management is not very sound and needs continued
improvement.

Operating cost is a major factor for working capital. BBC has

the advantage of low fixed and operating
costs due to its adsorption technique of production, which
allows the company to pass on this cost
advantage to its consumers. It should build further on this for
long-term viability.
The orders from private accounts are smaller than those from
the government. Accordingly, BBC should
try to secure more government orders in the long term, as it is
doing. If BBC succeeds in winning the
current IR contract, this may bring the company back to the
growth trajectory.

The company should try to convince its bank manger to grant

loans at a lower rate of interest and softer
terms due to past tie-ups for infusing the sorely needed capital
into the business (and for the IR contract in
particular). Industry giants like the Aditya Birla Group, the DCM
Group, Grasim Industries Limited, etc.
are BBC's suppliers of raw materials as well as the company's
major competitors. Survival in this
atmosphere is a struggle for BBC and will depend upon a sound
working capital.

As part of a hazardous industry, BBC must be very careful about

environmental issues. Extra safety
measures are required for this, which in turn depend upon
availability of funds. This will need to be
included in the company's plan for long-term growth.

3. No , BBC is not a " growing company " because they are already
developed . In fact , after analyzing the case , I could say that they
are a struggling or maybe in critical stage because of all the factors
that we have discussed . To improve their position , I think they
should work on the following : 1 . Inventory management - as we
mentioned , they may observe just - in - time concept to lower their
inventory storage and other related costs . 2 . Receivables
management - they should improve their collection processes 3 .
Repayment method - we can say it will look good on their credit
status but in reality is not helpful to do quick payments because
there are better ways to utilize their funds . They should take
advantage of the payment terms of their creditors . 4 . Another
factor is the unpredictable changes in their suppliers ' costs - raw
materials could fluctuate wildly from as low as INR10 per ton to as
high as INR10k per ton . Because of this they can never be certain
on how much the raw materials costs would be .