Working Capital Management - Sri Ramakripa Firewood Depot Case

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WORKING CAPITAL MANAGEMENT

SRI RAMAKRIPA FIREWOOD DEPOT CASE

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                     1. CASH BUDGET OF SRI RAMAKRIPA FIREWOOD DEPOT        

FOR THE YEARS OCT 90 to MARCH 91

Yes there is a major possibility of the depot starting to lose money. The problem is that the enterprise is reaching to a phase called "Over Capitalization", which means that the company in the course of business, is rapidly losing its liquidity        i.e. its ability to generate and manage cash.

As can be seen in the above cash budget, there is a growing need for a short term loan or overdraft. The money requires to break even would be Rs 69865.

Short-term finance

Short-term sources of finance include overdrafts, short-term bank loans and trade credit.

An overdraft is an agreement by a bank to allow a company to borrow up to a certain limit without the need for further discussion. The company will borrow as much or as little as it needs up to the overdraft limit and the bank will charge daily interest at a variable rate on the debt outstanding. The bank may also require security or collateral as protection against the risk of non-payment by the company. An overdraft is a flexible source of finance in that a company only uses it when the need arises. However, an overdraft is technically repayable on demand, even though a bank is likely in practice to give warning of its intention to withdraw agreed overdraft facilities.

1. The conceptual anchors that can be associated to the case are

• Accounts Receivable Policy

Initially the enterprise had a very good credit rating with all its suppliers and could be counted to pay on time. Ramadasan refused to spot payment on purchases, but would provide token payment to cover diesel expenses and worker charges. Suppliers and creditors were so confident that they would dump their delivery and come back for payment at the agreed time.

The initial agreement was 15 -20 days, but after purchasing his friends enterprise, the credit rating started to decline, which resulted in a suppliers ultimatum that he pay 50% in the same month and the remaining 50% in the next month.

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