Subject Code: IMT-07

Subject Name : WORKING CAPITAL MANAGEMENT

Notes:
a. Write answers in your own words as far as possible and refrain from copying from the text books/handouts.
b. Answers of Ist Set (Part-A), IInd Set (Part-B), IIIrd Set (Part – C) and Set-IV (Case Study) must be sent
together.
c. Mail the answer sheets alongwith the copy of assignments for evaluation & return.
d. Only hand written assignments shall be accepted.
A. First Set of Assignments: 5 Questions, each question carries 1 marks.
B. Second Set of Assignments: 5 Questions, each question carries 1 marks.
C. Third Set of Assignments: 5 Questions, each question carries 1 marks. Confine your answers to 150
to 200 Words.
D. Forth Set of Assignments: Two Case Studies : 5 Marks. Each case study carries 2.5 marks.

ASSIGNMENTS
PART– A
1) ‘Uncertainty makes it difficult for a financial manager to predict company’s requirements for short term
funds.’Discuss. What steps can the financial manager take to minimize the resulting risks to the company?

2) What is conservative approach to financing firm’s funds requirement? What kind of profitability-risk-tradeoff
is involved?

3) Differentiate between:
a. Gross operating cycle and net operating cycle
b. Gross working capital and net working capital

4) What is credit control? What is the role of credit control department?

5) The Divya Paints ltd. is currently following a centralized collection system. Most of it customers are located
in the cities of Northen India. The remittances mailed by customers to the central location take four days to
reach. Before depositing the remittances in the bank the firm loses two days in processing them. The daily
average collection of the firm is Rs. 1,00,000.

The company is thanking of establishing a lock-box system. It is expected that such a system will reduce
mailing time by one day and processing time by one day.

I) Find out the reduction in cash balances expected to result from the adoption of the lock-box
system.
II) Determine the opportunity cost of the present centralized collection system if the interest
rate is assumed to be 18 per cent.
Should the lock-box system be established if its annual cost is Rs. 24500 ?

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 PART– B
1) ‘Efficient cash management will aim at maximizing the availability of cash inflows by decentralizing
collections and decelerating cash outflows by centralizing disbursements. ’Discuss

2) Explain the concept of ABC analysis as a technique of inventory control.

3) Define the following:

a. Treasury Bills
b. Commercial Papers

4) ‘Current assets are those which are turned over and at least partially replaced within the operating cycle of
the company. What are the differences you will usually find between the holding of current assets of a
manufacturer who sells on credit and a retailer who sells only on cash basis?

Q 5. Performa cost sheet of ABC Company provides the following data:

Costs (Per Unit) Rs.

Raw Material 52.00
Direct labour 19.50
Overheads 39.00
Total cost P.U. 110.50
Profit 19.50
Selling Price 130.00

Following additional information is also available:

Average raw material in stock : One month

Average material in process : Half a month
Credit allowed by suppliers : One month
Credit allowed to customers : Two months
Time lag in payments of wages : One and half week
Overheads : One month

1/4th of sales are on cash basis, cash balance is expected to be Rs. 1,20,000/-

Question

Prepare a statement showing the working capital needed to finance a level of activity of 70,000 units of
output. Assume that production is carried on evenly throughout the year and wages and overheads accrue
similarly

PART – C
1) What is factoring? What are the types of factoring? Explain how factoring is different from bill
discounting?

2) How bank credit and trade credit plays vital role in financing the working capital ? Describe the methods
suggested by Tandon Committee for financing the working capital.

3) Define the following:

a. Public Deposits
b. Objectives of money market

4) Define Working capital. What are the factors affecting the working capital management ?
5) ABC and company buys and uses a component at Rs. 10/- per unit. The annual requirement is 2000
units. Carrying cost of inventory is 10% per annum and ordering cost is Rs. 40 per order. The purchase

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 manager argues that as ordering cost is high, it is advantageous to place a single order for the entire
annual requirement. He also says that if the order of 2000 units place at a time, there is a 3% discount
from supplier. Evaluate the proposal and make your recommendation.

CASE STUDY-1
Better deals ltd. having an annual turnover of Rs. 80 lacs, 25% of which are cash sales. Normal credit allowed
to debtors is 30 days. To increase the market share from present level, the marketing manager proposed to
liberalise the credit policy which is as under :-

Proposal Credit Period Expected credit sales

Plan – I 60 days Rs. 70 lacs
Plan – II 90 days Rs. 75 lacs

The product yield an average contribution of 25% on sales. The fixed cost amount to Rs. 5,00,000 per annum.
The company expects a pre-tax return of 20% on capital employed. The bad debts of the company has been
from 1% to 1.5% in case of proposal I and 2% in case of Proposal II. As a finance manager, you are requested
to evaluate the proposal and comment.

CASE STUDY-2

RMT ltd are on verge of commencing commercial production for which the following projections are available for
first 12 months of operations.

I) Sales and production 1 machine per month

II) Average selling price: Basic price Rs. 40,00,000
Excise duty at 10%
Value Added tax (VAT) at 5%
III. Material cost 60% of basic sales price
IV. Employment cost: Category Number Monthly Cost

Manager 8 Rs. 10,000 each

Supervisor 10 Rs. 6,500 each
Worker 50 Rs. 4,000 each

V) Power and Fuel: Rs. 6, 00,000 per month

VI) Factory Overheads: Rs. 75,000 per month
VII) Selling Overheads: Rs: 1, 00,000 per month
VIII) Sales Collection 30 days
IX) Material cost payment: 70% in the same month and balance in next month.
X) Production time: 30 days
XI) Entire work force is engaged from day 1 of the commercial production and payment to employees is
made in the next month. For other expenses the company has a credit of 1 month. VAT is payable in
the next month of sales.
XII) The Bank has allowed the company a borrowing limit of Rs. 45,00,000 on which interest at the rate of
15% is charged every, quarter, which is calculated based on average drawing of each quarter and is
payable at the beginning of the next quarter.

Questions:

A) Prepare a cash budge for the 5 months (Jan to May) and give your comment. You may make relevant
assumptions if any.
B) What are the motives of an organization for holding cash?

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