CASE ANALYSIS: FINE TOYS LIMITED

The case talks about financial performance of Fine Toys Limited in which Mr. D D Narang,
Chairman and Managing Director prepares the operating plan to obtain loan from banks of Rs.
50 Lakhs but he faoled to get so then he analysed the reasons for the same. In this case
various things are considered for analyisng the working capital requirements.

Before incorporating policy changes by the chairman , the working capital requirement of the
company for the period of 4 months is as follows:

Current Assets Rs. In Lakhs

Cash 03
Average Inventory Stock= (Opening Stock+ Closing Stock)/2= (50+40.8)/2= 45.4
Average Receivable = (Total Credit Sales*Average Collection Period)/365
=164*50/365 22.46
Total Currents Assets 70.86
Less : Current Liabilities
Average Creditors = (Credit Purchases* Average Payment Period)/365
= 40*60/365= 6.57
Working Capital Requirement 64.29

The above calculation shows that the working capital requirement for the 4 month period is
Rs. 64.29 Lakhs. Before incorporating policy changes the company is making payment to the
creditors in 60 days and also receiving payment from debtors on an average 50 days and
company is currently maintaining Rs. 3 Lakhs as cash . We have also assumed that the above
inventory consists of all of the raw material.

The company actually has allowed debtors credit terms of 30 days whereas debtors take 50
days on an average to pay the money which leads to the inaccurate carrying out of operation
plans so the operating plans does not depict the actual funds requirement by the company
and also company pay money to the creditors in 60 days instead of 30 days credit limit which
also creates the problem at the time of devising the operating plan. The company should try
to reduce the debtor turnover ratio by reducing the amount of credit sales and make some
cash sales. Through this company can reduce working capital requirements and also company
can increase creditors turnover ratio by making full use of credit limits allowed to them .

Policy Changes being contemplated by Mr. Narang

Mr. Narang is contemplating to reduce the purchases by Rs. 3 lakhs each month so as to
better manage working capital requirement, increase the minimum cash requirement to Rs.
4.60 Lakhs and also at the same time continue to make payment of creditors after 60 days.
All these will lead to increase on working capital and also reduce the working capital
requirement.

Revised Plan after incorporating Policy Changes

Current Assets Rs. In Lakhs
Cash 04.60
Average Inventory Stock= (Opening Stock+ Closing Stock)/2= (50+28.8)/2= 39.40
Average Receivable = (Total Credit Sales*Average Collection Period)/365
=164*30/365 13.47
Total Currents Assets 57.47
Less : Current Liabilties
Average Creditors = (Credit Purchases* Average Payment Period)/365
= 28*60/365= 4.60
Working Capital Requirement 52.87

There is reduction of working capital from Rs. 64.29 Lakhs to Rs. 52.87 Lakhs due to
incorporating policy changes but at the same time it could create problem of stock out of raw
material and it may create dissatisfaction among the creditors due to late payment of money
by the company regarding the raw material.