Case 4:

1. Was Ganesh correct in the first instance with his numbers?

No, Ganesh was wrong in his first instance. He has taken into
consideration only the reduction in interest cost. This being the scenario of
a loss, variable costs have already been incurred. The same is for
advertising and other overhead costs. Those costs d not reduce. So, his
numbers are higher than what they actually are. A reduction in sales (loss
of 12.5 cr) along with same costs will lead to lower profit margins (7% vs
17%)
2. Is there a magic solution of cutting market inventory without losing sales?
There is no magic solution as all cuts will affect the overall balance sheet.
As seen in the excel file, one option is reducing the advertising and
promotion budget by 10 cr to achieve the same percentage of EBITDA and
Net profit before tax. However, reducing the advertising budget will also
have an effect on the Annual sales, which we are not capturing in this
case.
Another solution involves completely reducing the production and sales by
the value of 12.5 cr. In this case, we see that maintaining the same
percentage of variable cost (since we are producing less, the variable cost
will be lower too) changes the EBITDA and Net profit before tax but not by
a very large margin.
The option we would recommend is to ensure that the 12.5 cr worth
material is now shifted to a Cash and Carry model. This ensures that this
money will not add to the interest to be paid. The unpaid amount reduces
by 12.5 cr and the interest cost reduces by 1.5 cr. However, we see that
the EBITDA and Net profit before tax remains the same as before (27%
and 18%). This is a tough job to convince the distributor but they will be
able to pay the distributors more once this model takes effect.