PRINCIPLES OF WORKING CAPITAL MANAGEMENT

CASE OF RELIABLE TEXAMILL LIMITED

Here the profitability ratios show a slightly increasing trend.  The ratio shows an increasing trend. creditors & Owners are also interested in Profitability of the firm.1-CRITICALLY EVALUATE RTL·S PERFORMANCE AND FINANCING OF ITS OPERATION? ‡ TABLE ‡ Profitability ratio:-The profitability ratios are calculated to measure the operating efficiency of the company. which is although not good but better than the losses.Q. ‡ Leverage Ratio:-To judge the long term financial position.  There should be an appropriate mix of debt and owner s equity in financing the firm s assets.  To measure the financial risk and the firm s ability of using debt for the benefit of shareholders. .

will result in : Bad credit image  Loss of Creditor s confidence  Litigations resulting in the closure of the company. to meet its current obligations due to lack of sufficient liquidity.2-HOW THE COMPANY MANAGED ITS WORKING CAPITAL IN THE PAST? ILLUSTRATE WITH APPROPRIATE CALCULATION? ‡ Table ‡ Liquidity ratio:-measure the ability of the firm to meet its current obligations. idle assets earn nothing. A very high degree of liquidity is also bad.Q. The overall liquidity ratios have declined from those in 2007 to those in 2009 . The failure of co.

Q-3-WHAT ARE RTL·S PLANS TO IMPROVE ITS WORKING CAPITAL MANAGEMENT? SHOW THE CALCULATION OF OPERATING CYCLE TO JUSTIFY YOUR ANSWER? ‡ Table ‡ Operating cycle:. Operating cycle of a manufacturing firm .Operating cycle is the time duration required to convert sales. after the conversion of resources into inventories. into cash.

ICP RMCP WIPCP FGCP 2. GOC 4.OPERATING CYCLE CALCULATION 2007 1. CDP NOC 119 85 23 11 136 255 105 151 2008 163 78 22 63 105 268 92 177 2009 111 60 16 35 58 169 15 154 . DCP 3.

4-DO YOU ACCEPT FINANCIAL PLAN PREPARED BY RTL? WHAT MODIFICATIONS WOULD YOU SUGGEST IN THE PLAN AND WHY? Yes I accept the financial plan the plan is somehow fine as the position of the company is improving.and should increase the credit period for itself to 60 days . . Also the finished goods inventory period is increasing which implies that finished goods are lying idle. It should reduce the credit period allowed to customers to 45 days .Q. But there are some modifications Firstly the company should manage its borrowings which is increasing as a new firm it s acceptable to a certain extent but it should be monitored.Through this step the capital would be there in business for much longer time which can be used by company for other investment.