Aahan Foods: Decoding Distributors Financial Metrics

Presented by:
Group 8, Division A
What is overratrading, undertrading and its relevance in the context of distribution?
Overtrading
• Company despite limited resources tries
to increase sales volume of business
beyond limits which it can achieve
Impact:
• Heavy price cuts to push stock
• Unauthorized or unhealthy borrowing
• Insufficient inventory – not enough
working capital
• Unable to meet retailers demand
Indicators of over trading:
• Low current ratio and high turnover ratio
Undertrading
• Company does not use the funds and assets
properly, i.e under utilization of assets
Impact:
• Sales are much lower than expected
• Low return on capital that is employed
• Excess inventory
• Replenishment cycle is poor
Indicators of under trading:
• High current ratio and low turnover ratio
 Analyze the “Baked Products” business of HSC. What could be its implications on Aahan and
recommend the remedial action to prevent the same. What would be ideal process to
implement the correction?

HSC Performance Indicators

Implications on Aahan food:
Baked Products 1. Working capital turnover ratio is lower than
expected performance indicators because
Working Capital turnover ratio 9.11 20
the company is not generating enough
Gross Margin 4.20 4 revenue with respect. This can be due to
undercutting
Operating (Profit) Ratio 1.01 3
2. A lower operating ratio indicated
Return on equity 16.28 30
production efficiencies and process
improvements
Leverage Ratio 39.87 30 3. Return on equity is lesser than the KPI
Avg stock level 9.5 12
because it may not be efficiently deploying
the shareholders capital.
Avg credit to retailer 6.8 7
Remedial Action:

1. Regular meet-ups with the distributor to maintain relationships and reduce under trading practice.
Standard sing process will help to maintain a quality and quantity check.
2. Can set up own distribution channels for exclusive products. Cost reductions and higher control over
the channel. Closer connect to the market
3. Centralised monitoring system to track the distributors everyday workings. Distributors will also
benefit from understanding where they are lacking and how they can come closer to KPI’s.
Implementation:
1. Selection and deployment of monitoring systems for smooth functioning of the internal processes.
2. Analyses of products to be distributed by own channels to avoid channel conflict and greater access
to wholesalers directly
3. Training of DSR’s from the company’s point of view to align the salespersons and DSR’s in terms of
their objectives
Analyse the “Oil products” business of HSC. What could be its implication on Aahan and recommend the
remedial action to prevent the same. What would be ideal process to implement the correction?
Oil Business:

• Oil products were introduced by Aahan Foods after 15 years of introduction of Baked Products.
• Higher margin for distributors
Aahan Foods leveraged its distributor network to market the oil portfolio.
Healthy consumer demand for Aahan goods
• 30% Return on Equity

IMPLICATION FOR AAHAN FOOD: RECOMMENDATIONS:

• Gross Margin on oil products ( 4.53%) much
lower than company’s gross margin (9.20%) ,
implying distributors inability to sell oil products
at healthy prices.
• Selling oil products at lower prices – lower
overall yield for Aahan Foods
• High Ration of Own Capital/total Capital
Employed (34.8) – lower bank borrowings.
• Deploying incentives for distributors and retailers
and promoting the oil product line , so that it can
be sold at healthy prices.
• Selling oil products at healthy prices will improve
overall yield for Aahan Foods.
• Felxible Credit Period Policy – can attract more
channel members, hence improving the sales for
oil products
Analyse the “Baked products business of KSS”. What could be its implication on aahan and recommend the
remedial action to prevent the same. What would be ideal process to implement the correction?

Indicators Standard Actual • Low Working Capital Turnover Ratio implies inefficient
usage of working capital due to low sales or high
Working working capital. Too much investment in current assets
capital and smaller amount of current liabilities results in
turnover ratio 20 4.73 under-trading.
Gross margin 4% 4.13% The implications of under-trading on Aahan Foods:
Operating i. Loss of goodwill
ratio 3% 4.16% ii. Reduction in the rates of return on capital
Return on employed (Here, Return on equity is on the lower
equity side implying slow return on own capital employed)
30% 8.33%
Leverage ratio • High operating ratio implies lower operational
efficiency since the company’s costs are on the higher
30% 20.00% side while generating revenue or sales.
• Low leverage ratio implies high dependency on the
other two sources of capital (borrowed bank and other
sources)
REMEDIAL ACTION:

 The condition of under-trading is set in because of under-utilisation of firm’s resources.

 It can be remedied by adopting a more dynamic and result-oriented approach.

 The firm may go for diversification and undertaking new profitable jibs, projects, etc. resulting in a
better and efficient utilization of the firm’s resources.

IDEAL PROCESS TO IMPLEMENT THE CORRECTION:

 To reduce the operating expenses, the delivery cost can be saved by using the same delivery vehicles
for both the lines of the products. This will help in utilising economies of scope for better operational
efficiency.

 To ensure tighter control, database for wholesalers and retailers can be maintained using CRM for
tracking the daily activities and profitability at the levels of both the wholesalers and retailers.

 Dedicated marketing team to map the strategic growth of Aahan Baked products
Analyse the “Oil products” business of KSS. What could be its implication on aahan and recommend the
remedial action to prevent the same. What would be ideal process to implement the correction?

Oil Business: Implications for Aahan Food:

• KSS operates on a greater scale than HSC
in Ahmedabad
• KSS plays on sales volume but has a higher
COGS and greater profit than HSC
• Greater credit period of KSS implies it is
not so well established and hence gives
such an offer to increase demand
• Gross margin for oil is 4.08% which is lesser than the
overall margin of around 11.4%
• .Inventory turnover ratio is 6.66(>HSC’s 6.02), which
implies the company would take almost 6 months and 20
days to sell and replace all inventories
• Ratio of 0.25 in case of Own capital employed/Total
capital employed, which is decent. But the bank
borrowings stand at 45% which is demoralizing
Recommendations: Ideal Process of Correction:

• Aggressive promotion of Oil products line

• Save delivery cost by using the same delivery vehicles
To increase its brand equity and hence in turn
for both lines of the products
the product could be sold at a higher price
• Maintain CRM Database for wholesalers and retailers
which would directly affect the gross margin for
for tracking the retailers and wholesalers and also
the company
tracking their profitability at each level
• Flexible credit period
• Dedicated marketing team to map the strategic
It should depend on the customer size or credit
growth of Aahan Oil products
rating so as to attract more customers,
resulting in increasing the sale
• Low own capital/total capital employed
Their own capital can be used in expanding the
oil product network
 What is the possible use of data on the source of capital?

• The given source of capital are: Bank, Own and Other Sources
Interest on bank borrowings: 16% pa
Interest on other sources: 24% pa

• The source of capital allows the company to gauge the actual potential of a particular
distributor. HSC KSS

• By the use of data, one can judge if the distributor is overtrading or undertrading.
Gross Profit 9.2 11.43
• Ratio of Capital from other sources to owned for HSC is 47:52
Margin (%)
• Similarly, Ratio of Capital from other sources to owned for KSS is 128:32 (More than 3
times borrowed) Net Profit 1.28 0.71
Margin (%)
• Interest paid by KSS is very high and as a result, the net profit margin is very low.
• As seen in the table, Due to the high interest rates paid by KSS, their net profit margin
is less than that of HSC

• KSS may resort to wrong practices and ask for higher discounts.

• Distributors should use their own source of capital because both the other source of
interest charge heavy interest which will negatively impact the Net Profit for the
distributor.