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Dataware Computer LTD.: Case Study

This document presents a case study analyzing different credit policy options for Dataware Computer Ltd. to address tight liquidity and increase sales. Tables show how net 30, 2/10 net 30, net 60 and 2/10 net 60 policies impact sales, costs, surplus and more. An evaluation table compares the policies' financial impacts. It recommends adopting a net 30 policy without cash discounts to maximize surplus, though a small discount could also be offered. It suggests making credit terms more stringent initially to improve liquidity.

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Gaurang singh
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55 views16 pages

Dataware Computer LTD.: Case Study

This document presents a case study analyzing different credit policy options for Dataware Computer Ltd. to address tight liquidity and increase sales. Tables show how net 30, 2/10 net 30, net 60 and 2/10 net 60 policies impact sales, costs, surplus and more. An evaluation table compares the policies' financial impacts. It recommends adopting a net 30 policy without cash discounts to maximize surplus, though a small discount could also be offered. It suggests making credit terms more stringent initially to improve liquidity.

Uploaded by

Gaurang singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CASE STUDY

Dataware Computer Ltd.


Working Capital Management
Presentation
PRESENTED By
GAURAV TRIPATHI
&
GAURANG SINGH
1
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)

2
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. 3
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.
Credit period Sales
 Marketingpresent
Dept. 20 cr.
30 days 30cr.
60days 35cr.

(TABLE NO. 1)

Credit period
 Administration Dept. Administration cost
30 days 1cr.
60days 2.2cr.
5
(TABLE NO. 2)
 Production Dept.

Credit period SALES COGS


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

6
 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

7
 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

8
Now the question arises-

should the credit policy be adopted?


If yes… which option is the best?

9
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.”

10
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 - 60,00,000 60,00,000 1,40,00,000 1,40,00,000


(2)

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
at SP
(300000000/360 )* 50 = 41666667
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

16

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