CASE STUDY

Dataware Computer Ltd.

Working Capital
Management
Presentation
PRESENTED By
GAURAV TRIPATHI
&
GAURANG SINGH
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 About the company
 Dataware computer ltd. Is a 25 yr old co. which has is headquarter in
Bangalore.
 President- Mr. Mukesh Wadhavan
 Executive vice president - Mr. Abhay kejriwal (Charge of sales &
marketing dept)
 CFO of company – Mr. Ashok Bajpai
 Promoter – Mr. R.K. Kejriwal (father of mr. Abhay kejriwal)

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 Problem in company
 Mr. Abhay is not happy with the sales policy of the company because the co.
is engaged only in cash sales not the credit sales.
 He wants to increase the sales volume i.e. he wants to Liberalize the trade.
because as sales increases , profit also increases which will trade off the
increase in cost of maintaining the receivables.
BUT
• CFO does not agree with him because –
 liquidity of the firm is already very tight.
Additional bank credit is available @ 17%.
which will lead to increase in cost of financing or total cost of financing.
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 Analysis of
problem through
statements and
working notes
 (Suggestions from various dept.)
He decides to work on four alternative of credit policy.
(i) net 30, (ii) 2/10 net 30, (iii) net60, and(iv) 2/10 net 60.
 Marketing Dept.
Credit Sales
period
present 20 cr.
(TABLE NO. 1)
30 days 30cr.
60days 35cr.
 Administration Dept.

Credit Administrat
period ion cost(TABLE NO. 2)
30 days 1cr.
60days 2.2cr.
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 Production Dept.

Credit SALES COGS

period
present 20cr. 60%
30 days 30cr. 55%
60days 35cr. 60% (overtime and
maintenance cost)

(Working note:1)
Present Net 30 2/10 net 30 Net 60 2/10 net 60

COGS 1200 1650 1650 2100 2100

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 Marketing Dept.

Credit period Bad debt

30 days 2%
60days 4%

(Working note:2)

Present Net 30 2/10 net 30 Net 60 2/10 net 60

BAD - 60 60 140 140

DEBTS

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 Apart from this the relationship between the credit term and actual
collection period-

Credit term Actual collection period

2/10 net 30 27 to 33 days
Net 30 46 to 54 days
2/10 net 60 60 to 70 days
Net 60 75 to 95 days

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 Now the question arises-

should the credit policy be

adopted?
If yes… which option is the best?

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For this we need to analysis the various aspects of credit policy and this is what is
known as RECEIVABLE MANAGEMENT.

“ Receivable management is basically concerned with matching the cost of

increasing sales (credit sales) with the benefit arising out of increased sales with
the objective of maximizing the return on investment of the firm.”

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Evaluation of
credit policy
 present Net 30 2/10 net 30 net 60 2/10 net 60

sales 20,00,00,000 30,00,00,000 30,00,00,000 3,50,00,00,000 35,00,00,000

Less: COGS(1) 12,00,00,000 16,50,00,000 16,50,00,000 21,00,00,000 21,00,00,000

SURPLUS 8,00,00,000 13,50,00,000 13,50,00,000 14,00,00,000 14,00,00,000

LESS:
COLLECTION
- 1,00,00,000 1,00,00,000 2,20,00,000 2,20,00,000
COST(TABLE
NO.2 )

LESS:BAD DEBTS
(2)
- 60,00,000 60,00,000 1,40,00,000 1,40,00,000

LESS: CASH
DISCOUNT(w.n. - - 42,00,000 - 35,00,000
no.3)

LESS: COST OF
FINANCING @ - 39,10,000 23,37,500 84,32,000 64,60,000
17%( w.n no. 4)

NET SURPLUS 8,00,00,000 11,50,90,000 11,24,62,500 9,55,68,000 9,40,40,000

From the table we can conclude that the max surplus can be earned from ‘ net 30
policy without cash discount offer is best’
Cost of CASH DISCOUNT (WORKING NOTE:3 )
(i) 2/10 net 30-
Total discount amt= 30,00,00,000 *(70/100) * (2/100)
= 42,00,000

Similarly, (ii) 2/10 net 60

Total discount amt= 35,00,00,000 *(50/100) * (2/100)
= 35,00,000
 Cost of financing (working note no: 4)
 cost of finance= Avg debtor * rate of finance
 Avg debtor= (total cost of sales/360) * credit period
(i) net 30 Debtor
(300000000/360 )* 50 = 41666667 at SP
Now it be noted that in accounting record the debtor are shown at SP, but for credit policy
evaluation, the debtor have been taken at cost because cost of financing is payable only on
funds which are blocked.
Debtor at cost= sales- surplus
41666667 – (1350/360)*50 = 22916667 or 23000000
(or we can simply calculate it directly on cost of COGS )
Thus,
policy Avg credit Debtor at SP Debtor at Annual cost
period cost of
financing(@
17%)
Net 30 50 days 4,16,66,667 2,30,00,000 39,10,000
2/10 net 30 30 days 2,50,00,000 1,37,50,000 23,37,500
Net 60 85 days 8,26,38,888 4,95,83,333 84,32,000
2/10 net 60 65 days 6,31,94,444 3,79,16,667 64,60,000
 Recommendation / suggestions
• The co should accept the proposal of “ net 30”
policy without cash discount.
• However on the bases of above analysis, even cash
discount can be offered. Because there is only a
marginal difference in profit.
• On the other hand, the company should make its
policy more and more stringent (short run) so that
its liquidity may increase.
So this all about
THANKthe
YOU
case study

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