ASSESSMENT OF WORKING

CAPITAL AND COST ANALYSIS

SUMMER INTERNSHIP
PRESENTATION


SUBMITTED BY-
Shikha Agrawal
IMI Delhi

CONTENT
Study of Franchise Management
Working Capital Analysis
Analysis of Marketing Cost
Assessment of Cost of Capital
ACKNOWLEDGEMENT


I take this opportunity to express my profound gratitude and deep regards
to my Mentor Mr. Rupin Chudgar for his exemplary guidance, monitoring
and constant encouragement throughout the duration of this project. The
learning, help and guidance given by him shall be carried by me a long
way.
I am obliged to all employees of Baskin Robbins (Graviss Group) who took
the pain to take time out of their busy schedule to provide me with the
valuable information. I am grateful for their cooperation during the period
of my Summer Internship.

STUDY OF FRANCHISE
MANAGEMENT
Project-1
Objectives-
To gain insight of business model of Graviss
Group
To understand procedure of selection monitoring
and termination of franchisees
Basis for setting minimum investment requirement

SELECTION PROCESS
Stage-1
Invitation to prospective franchisees
Upon receipt of Request, it is forwarded to region head
BD sends PPT containing necessary requirements to the other party
Stage-2
Field investigation after accent of other party
Site survey report and Sales estimation
An document calculating CAPEX, Break-even point , Other expenses and stating projected sale is prepared and
send to the other party
Stage-3
If positive response then predefined franchisee application form is send
Transfer of document to finance department who bifurcates the lfranchisee fee into different heads and files tax
And legal team prepares agreement to be signed for 5 years
Stage-4
BR team provides Layout plan for the interior & exterior of the store to the franchisee t
Average period of 30 days to fit out of store simultaneously training for 2 to 3 weeks conducted for at an existing
BR store
Finally a store opening plan is devised and finalized by BR team and Franchisee and the store is opened.
MONOTORING OF FRANCHISEE
The franchisees are constantly monitored by the operations
team
It makes daily stores visits , collects requirements and data such
as sales revenue and maintain it in the MIS
Evaluates the performance on weekly basis to keep a track of
performance of franchisees
On the basis of this evaluation the requirement for each store is
estimated and also other assistance is provided
SUPPORT FUNCTIONS
Business Model is based on the principle of maximizing profits to the
franchisee the agreement provides terms regarding following support
to the franchisees


TERMINATION OF FRANCHISEE
A loss making franchisee requests for
closure, Graviss Group generally do
not ask for a closure
It even offers the different incentive and
subsidy to the loss making franchisee to
avoid closure
Only in case where the franchise has
indulged any activity prohibited by the
contract, firm decides to terminate
However in case of termination
legal team fulfills all the formalities
BASIS OF MINIMUM INVESTMENT
Minimum investment is arrived by taking various expenses into account that
has to be incurred when opening a store or kiosk




Franchisee Fee
Rs.400,000 +
12.36%Tax
Rs.400,000 +
12.36% Taxes
Security deposits
(Refundable) Rs.50000 Rs.50000
Interiors Rs.400,000 Rs.250000
Equipment Rs.350,000 Rs.225,000
Branding Rs.100000 Rs.75000
Furniture and accessories Rs.50,000 -
Miscellaneous Purchase Rs.50,000 Rs.30,000
POS Fee Rs. 30000 Rs.30,000
Estimated investment Rs.14,80,000 Rs.1,110,000
CONTINUED..
These are three payments that franchisee need to pay Baskin Robbins at
the time of signing contract -Franchisee fee
-Security deposits
-POS fee
Rest of the expenses is incurred by franchisees during the project
development period
This minimum required investment is subject to change in accordance
with the changing price level and discretion of the management
It frequently changes, generally once in year
However the renewal fee of 1.5 lac is fix for a long time and do not change

CONCLUSION
It was an insightful study which gave me an idea about documents to be
prepared for accessing feasibility of an prospective franchisee and very useful
understanding of the technique used for sales estimation

However on the monitoring front I could not get into details of MIS
maintained but so far my observation suggest that this is an area which can
be improved by implementing an ERP system for fetching franchisee data
instead of manual data process on daily basis , the ERP system will save time
& effort, provide accuracy to data and platform where regular and detailed
evaluation can be done
CONTINUED.

This ERP System will fetch
data of sales on real time
basis for all franchisees,
the data obtained by ERP
will actually suggest the
timing, amount, order
no. of sale and reliance
on operations team data
will be reduced and the
operations team will have
more time to concentrate
on other important issues
of stores such as layout
and other subjective
efficiency
The system shows that
by installing ERP system
the reports can be
prepared merging
online data obtained by
it and other offline data
maintained in business
intelligence, this will
help in reduction in work
load and will provide
greater accuracy
WORKING CAPITAL
ANALYSIS
Project-2
Objectives-

To Understand the Liquidity position & working
capital utilization of Company
Identifying the factor leading to blockage of cash
Suggestions to reduce the cash conversion cycle.

CURRENT AND QUICK RATIO
1.58
1.68
1.65 1.64
2.06
1.97
2.41
1.99
2.46
2.10
2.18
2.10
1.17
1.22
1.24
1.18
1.56 1.57
1.93
1.52
1.93
1.65
1.82
1.67
-
0.50
1.00
1.50
2.00
2.50
3.00
1
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J
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currnt ratio
quick ratio
ANALYSIS

In 2010-11 current ratio of the company below the ideal 2:1
Gained current ratio of more than 1:1 in the year starting 2011 and later
on with occasional incident of below that so we can say that firm has
enough current assets to cover its current liabilities
In the duration of these three years the quick ratio has always been above
the required quick ratio, moreover has increased year by year so it
suggest that firms ability to pay its short term obligation as and when they
become due
In year 2011-2012 liquidity has increased as the current and quick ratio
shows
This is mainly because the Current Asset (trade receivables) has increased
in 2012 due to increase in sales by nearly 20%

WORKING CAPITAL AND REVENUE
1,255
1,746
1418
1394
1424
2017
1591
1558
1646
2058
600
940
853
1,132
942
1,212
1,072
1,223 1,226
1,413
48%
54%
60%
81%
66%
60%
67%
78%
75%
69%
10%
100%
-
300
600
900
1,200
1,500
1,800
2,100
2,400
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
R
s
.
i
n

L
a
c
s

Working capital
Revenue - Qtrly Working capital Working capital as % of sales
ANALYSIS

Most of incremental sales was made on credit basis increased
blockage in debtors increase in working capital as a percentage of
sales
so, Increase in sales(2012) increased working capital
Increase In working capital means now more working capital is required to
generate same amount of sales


Creditors and sales
0%
10%
20%
30%
40%
50%
60%
3
0
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J
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Creditors as % 0f sales
Creditors and working capital

140%
115%
121%
94%
58%
50%
38%
66%
36%
46%
32%
46%
0%
20%
40%
60%
80%
100%
120%
140%
160%
-
200
400
600
800
1,000
1,200
1,400
Working capital Sundry Creditors creditors as % of working capital
ANALYSIS
The creditors as a percentage of sales show the extent to which we
generate sales from credit Purchases
decreasing % from year to year shows that the firm requires more working
capital for generating the same amount of sale as the raw material can not
be availed on credit
Also, the creditors share in the working capital is decreasing which shows
that the is firm less on credit than before
firm is not availing credit for other overhead expenditures also
A negative sign as company has to arrange more cash to operate

DEBTORS AND SALES

0%
10%
20%
30%
40%
50%
60%
70%
3
0
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Debtors as % sales
DEBTORS AND WORKING CAPITAL

82%
75%
67%
59%
57%
65%
53%
75%
59%
71% 71%
82%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
200
400
600
800
1,000
1,200
1,400
Working capital Sundry debtors
ANALYSIS
Debtors as a percentage of sales of the company has increased in year
2012-13, which shows that increased sales are on the credit basis
The debtors have always been a high percentage of working capital
It has declined a little in year 2011-12 and is a good sign as it suggest a
lesser portion of working capital is blocked in debtors which is a relatively
lesser liquid asset
however it again starts increasing in the year starting 2012-2013 it
suggest that more of working capital is not in much liquid form

INVENTORY AND SALES

0%
5%
10%
15%
20%
25%
30%
35%
3
0
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Inventory as
% of sales
INVENTORY AND WORKING CAPITAL
70%
68%
63%
72%
48%
42%
34%
48%
36%
41%
31%
39%
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
200
400
600
800
1,000
1,200
1,400
Inventories Working capital inventory as % of working capital
ANALYSIS
Inventory as % of sales has been fluctuating throughout the period but has
definitely reduced so positive sign as it shows inventory is not blocked but
converts into sales
Inventory as a component of the working capital is decreasing, which is
good for the firm as it suggest that less of working capital is invested in
inventory which is the least liquid current asset

CONCLUSION
Looking at the current and quick ratio of the firm it can be concluded that
liquidity position of the company is moderately sound but increasing share
of debtors in sale and working capital questions the actual liquidity of the
firm
Working capital is increasing this might lead to unnecessary blockage of
cash in short term unproductive assets and unavailability of facility of
current liability which might be available to competitors
Also the decreasing creditors as a percentage of sales exerts that the firm
has to spend more in cash to generate sale similarly small proportion of it
in working capital in recent year signifies limited liquidity
Above mentioned statistics about debtors, inventory and creditors also
gives evidence that increasing working capital does not add liquidity
absolutely but partially as it is mainly on account of increased debtor and
inventory and not cash
According to an analysis by Forbes, the best
stock returns over the past five years were
generated by the (retail) firms that manage their
cash conversion cycle the most efficiently
OPERATING AND CASH CONVERSION
CYCLE

25
28
36 39 45
32
44
51
56 56
63
50
50
59
63
45
60
50
61
50
(82)
(61) (60)
(66)
(87)
(44)
(68)
(52)
(72)
(58)
7
16
27
33
21
33
36
49
45
49
-100
-75
-50
-25
0
25
50
75
100
125
(100)
(75)
(50)
(25)
0
25
50
75
100
125
150
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
DPO [only creditors] DIO - Inventory DSO - Debtors Cash conversion cycle
ANNUAL OPERATING AND CONVERSION
CYCLE


31-Mar-11 31-Mar-12 31-Mar-13
Inventory conversion period
66 60 59
Receivables conversion period
25 43 54
Operating cycle
91 103 113
Payables conversion period
-85 -84 -69
Cash conversion cycle
-6 19
44

ANALYSIS
Negative point- Rise in the receivables conversion period from 25 day to
54 days so, money is blocked for longer without earning anything
A positive point - Now firm has to engage its investment for a shorter
time in inventory (a combined result of increase in the efficiency of
production and an increased sale)
However the fact that even now 60 days as inventory holding time is a
considerably long time
With above two factors the operating cycle of the company has increased
from 91 to 113 days
Negative point-Payment period has decreased drastically , so it suggest
that now it needs cash early to pay its creditors


CONTINUED..

Initially the cash conversion period was negative that is the time in which
firm pays its creditors is longer than the time its money is with its debtors
so, actually the firm was operating with the creditors money

But the overall effect of - Increasing collection period (- sign)
- Marginally decreasing holding period (+ sign)
- Decreasing payment period (-sign)
Is stretched positive cash conversion cycle so, Firm has to block its own
money in the business

Also the increasing trend of this period means the firm takes longer to
get its money back is a matter of concern for the firm and requires
immediate action to control it to avoid any kind of loss both in real terms
and opportunity cost due to blockage of money
COMPETITORS CASH CONVERSION
CYCLE (VADILAL IND.)
31-Mar-11 31-Mar-12 31-Mar-13
Inventory's conversion
period
70 87 99
Receivable's conversion
period
53 44 28
Operating cycle
123 131 127
Payable's conversion
period
-83 -125 -116
Cash conversion cycle
40 6 10
ANALYSIS WITH REFERENCE TO
COMPARABLE COMPANY VADILAL IND.
The data shows that Vadilals Ind. has managed to reduce its operating
cycle in this duration of 2011-2013 even with increasing inventory
conversion period this it is because it could bring its receivables period
has reduced nearly to half while in the same duration Graviss Groups
operating period has increased because of long receivables period
instead of shorter inventory conversion period
Even with the increased operating period Graviss Groups operating
period cycle is shorter than Vadilal Inds by 14 days in 2013 but the
reason that still Vadilal Ind. has shorter cash conversion cycle which is
has reduced from 40 days to 10 day is its longer payment period

So, here I observe an inverse trend in the payment period of both the
company for Graviss Group it is decreasing every year while for
Vadilal Ind. It is increasing every year
CONCLUSION
So, Firms current situation - already has considerably long holding period
now confronting two sided problem that is one hand collection period is
increasing and on the second hand payment period is decreasing

The data shows that the with increasing collection period companys
revenue has increased over the time and also the debtors as % of it, we
can derive a relation that the increased collection period and liberal credit
policy of the company has attracted customers and revenue has increased
in this period so, a sudden change in the credit policy may adversely affect
the revenue of the company

Hence the firm should primarily focus on other side that is on the
creditors, as the company has lesser creditors and further the decreased
payment period suggest it has to pay the debt early
ACTON PLAN FOR SUPPLIERS


find out the reason of the increase in
payment period
Competitors position and take on it
look for price and terms alternative
suppliers and detailed analysis


Then the firm needs to develop good
relations with few major suppliers,
invest in them and derive profit from
them
This type of approach will work only if
the firms business is substantially
larger than its suppliers' and they are
heavily dependent upon firms
business, so it should also be criteria
while choosing a supplier




The firm can negotiate with the
supplier for longer credit period by
offering them that if they allow a
longer period time they will be
made the exclusive supplier
credit period the firm will be liable
to pay high interest rate on the
amount outstanding, provided the
firm can maintain a strong
mechanism to make timely
payment
BENEFIT


Developing good relations with
supplier will also help them to cut
on the long inventory holding
period. If the firm has a trusted
supplier it need not have to
maintain large stock as safety stock
and block money in inventory and
also in storage. Increasing payment
period should be at most priority of
the company right now
LOOKING AT DISTRIBUTORS
Next focus should be on collection period, although it has increased
revenue but liquidity cannot be sacrificed that much, the company need
to gradually stringent its credit policy as the collection period has
increased more than twice in a period of two years, this increased
collection period can also lead to increased chances of bad debt



Firm can also entice
customer to pay faster by
offering them some type
of incentive to pay
sooner rather than later
and can also get its bills
out to its customers
sooner to help speed up
the pay process
The collection period
should be reminded to
the concerned debtor
sometime before the
time of payment actually
fall to give him sufficient
time to arrange the
money so that he does
not run insufficient of
cash on the payment day
The existing relationship
with distributors can be
used to eliminate the
time between cash flow
cycles that is by
understanding when they
are paid, for example, the
firm can time its billing
procedures to coincide
with its distributors'
regular pay cycle
To make distributors
more cautious there
should be more
competition among
them, if they will see
competition as threat
then they will make
payment soon to obtain
other order. increasing
the number of
distributors can give the
firm a upper hand
EFFICIENCY FRONT
The firm also need to look at the efficiency of its production unit to
reduce the production timing Review purchase and shipping processes
to identify ways to minimize onsite inventory holdings and any type of
time lag in transmission as the raw material mainly consist of perishable
item it will not only help to reduce inventory conversion period but also
reduce any type loss due to damage
The firm needs an efficiency solution that can provide assistance
throughout the whole cash conversion cycle
WAY TO BRING EFFICIENCY
Implementation of ERP platform which integrates technology with
available document management systems that digitally scan, store and
retrieve all paperwork associated with a purchase or sale

ANALYSIS OF MARKETING
COST
Project-3
OBJECTIVES-
To gauge the trend of marketing expenditure and its
component
Description of impact of marketing spend on
business
MARKETING EXPENDITURE

4%
10%
16%
21%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
2010-11 2011-12 2012-13 2013-14 2014-15(
Planned)
Marketing Expenditure
Growth rate of Expenditure
MAJOR COMPONENT OF MARKETING
COST
11%
15%
14% 60%
2011-12
35%
8%
12%
45%
2012-13

15%
21%
26%
38%
2010-11
Advertisement
Store Improvement
Franchise Subsidy &
Incentive
Sales Promotion
MAJOR COMPONENT OF MARKETING
COST


37%
4%
19%
40%
2013-14
Advertisement
Store Improvement
Franchise Subsidy &
Incentive
Sales Promotion
30%
4%
16%
50%
2014-15(planned)
MOVEMENT OF EXPENDITURE ON
COMPONENT YEAR BY YEAR


0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
Store Improvement
Store Improvement
0
2000000
4000000
6000000
8000000
10000000
12000000
Franchise Subsidy & Incentive
Franchise Subsidy &
Incentive
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
Sales Promotion
Sales Promotion
0
5000000
10000000
15000000
20000000
Advertisement
Advertisement
CHANGE IN COMPONENTS BY MAKING
2010-11 AS BASE

Heads
2010-11 2011-12 2012-13 2013-14
2014-15
(planned)
Advertisement
100 73.5% 267.6% 324.5% 322.8%
Store Improvement
100 75.2% 44.2% 27.8% 31.6%
Franchise Subsidy &
Incentive 100 59.0% 55.0% 98.1% 98.2%
Sales Promotion
100 162.1% 134% 139% 210%
TOTAL
100 104% 115% 133% 161%
ANALYSIS
2010-11
expenditure was little evenly distributed with 47% expenditure towards
store improvement and franchise subsidy and rest divided in 2:1 ratio
between sales promotion activity and advertisement, sales promotion
being prominent

2011-12
The data suggests that the earlier even distribution is changed completely
here, sales promotion proportion was increased to more than 1.5times
while all other components proportion was shrunk to 2/3
rd
resulting 60%
expenditure in one single activity of sales promotion, rest divided
between other three and advertisement remained having least
proportion as in the previous year
PS- Sales promotion was the only area in which expenditure was
increased in rupee terms




CONTINUED.
2012-13
The major change in the marketing expenditure proportion took place in
this year that is Advertisement which was contributing least to till now
got the second largest proportion of 35% just 10% less than sales
promotion and has nearly tripled in real rupee terms as compared to
previous year and the expenditure on sales promotion has decreased in
rupee terms its proportion is reduced a little, so 80% expenditure was in
these two areas and rest 20% on other. Among them also proportion of
sales improvement is reduced to half and also the expenditure on it
reduced significantly.
PS- Advertisement was the only area in which expenditure was increased
in rupee terms in this year
CONTINUED..
2013-14
Similar trend was followed in this year major expenditure of 77% being
made on sales promotion and advertisement but in almost equal
proportion, expenditure in both areas has also increased in rupee term.
expenditure on store improvement again reduced to half both in
proportion and rupee terms as compared to previous year and
expenditure on franchisee subsidy increased by nearly 33% in both ways
PS- Store improvement is the only area where expenditure was reduced
and sales promotion saw just a marginal increase in rupee terms
CONTINUED
2014-15(Planned)
Again it is planned that 80% of the expenditure to be made on marketing will
be spend on advertisement and sales promotion but this time more on sales
promotion and less on advertisement (in 5:3 ratio) .same expenditure will
incurred on advertisement, store improvement and franchise subsidy as the
previous year however their proportion is reduced a little as expenditure on
sales promotion is planned to increase both in proportion and rupees.
PS- Expenditure on Sales promotion is planned to increased by 50% as
compared to previous year in value terms and it is the only area where
expenditure is planned to increase this year all other are not reduced but
kept almost constant as previous year
CONCLUSION
Marketing expenditure has become 1.33 times in 2014 since 2011 and is
planned to reach 1.61 times in 2015, It has been increasing but now at a
faster pace this shows that the firm is moving to aggressive marketing
endeavor with Sales promotion remained the largest component of
whole expenditure being the predominant marketing function and
advertisement catching speed with highest hike in the period (these two
function contributing 80% to total marketing expenditure)
Apart from this continuous effort is made to reduce expenditure on store
improvement rather franchisees are encouraged to bear this expense on
themselves

MARKETING EXPENDITURE AND
BUSINESS IMPACT
ASSESSMENT OF COST OF
CAPITAL
PROJECT -4
CAPITAL STRUCTURE
COST OF DEBT
Interest rate at which the firm gets bank loan is used as interest cost for
the firm

CAPM MODEL

BETA ESTIMATION OF COMPARABLE
COMPANIES
y = 0.8818x - 0.0161
R = 0.1229
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2
Yield of BSE SMALLCAP and
Kwality

UNLEVERED BETA OF COMPARABLE
COMPANIES
COMPARABLE COMPANY
KWALITY VADILAL
Equity 273.84 115.11
Debt 862.83
149.31
Levered beta 0.8849 0.2552
Unlevered beta 0.290316 0.138461
WEIGHTED AVERAGE OF THE TWO UNLEVERED BETA
(KWALITY - weight 2 and VADILAL-weight 4) is 0.1890
Beta measures the volatility of stock with reference to market return
The above mentioned unlevered beta suggest that if we do not take capital
structure into account then a fluctuation of 1% in market return affects these
companys return just by 0.1890 %
COST OF EQUITY OF GRAVISS GROUP
BASKIN ROBBINS (GRAVISS GROUP)
Debt 57182707
Equity 120938960
Unlevered beta 0.189
Levered beta 0.2493666
Risk free rate (Rf) 8.50%
Market premium (Rm-Rf) 7%
COST OF EQUITY 10.246%
Interest rate on 10 year treasury bill is taken as Risk Free Rate and Market
premium is taken from a research paper by PWC
WEIGHTED AVERAGE COST OF
CAPITAL
WACC
Source Book Value Proportion Cost

Proportionate
cost
Equity 120938960 0.68 10.25% 6.96%
Debt 57182707 0.32 8.75% 2.81%
Total 178121667 1.00 9.76%
COST OF CAPITAL IS 9.76%
OPERATING AND FINANACIAL
LEVERAGE

Revenue from operations 703547857
Less: Variable Cost 560748728
Contribution 142799129
Less: Fixed Cost 83067040
EBIT 59732089
Less: Interest Cost 10682083
PBT 49050006

OPERATING LEVERAGE 2.39

FINANCIAL LEVERAGE 1.22
Operating leverage of 2.39 suggest that a change of 1% in sales will lead to
2.39% change in EBIT and Financial leverage of 1.22 suggest a change of 1% in
EBIT will lead to change of 1.22% in EPS