Working Capital Policies
A case study on Shaadi Mubarak
Working Capital Policies
Conservative
Moderate
Aggresive
Shaadi Mubarak!
Because matches are made in Heaven
Shubhaarambh
-
Received seed funding of $ 500k from an international investor
- Considering its WC position for each of the 3 years, one by one
Humble Beginnings
Year 1
-
Yearly sales and EBIT dependent on investment.
-
Sales = 2.7 * Investment (In lakh)
-
EBIT = 15% of sales
-
Tax rate = 40%
-
Average cost of financing current asset = 12.5%
Conservative
Estimated Fixed assets = INR 80 lakh
Current assets = INR 80 lakh
Sales = 2.7 * 80 = INR 2.16 crore
EBIT = 15/100 * Sales = INR 32.4 lakhs
Cost of financing CA = 12.5*80/100 = INR 10 lakh
EBIT final = INR 22.4 lakh
Tax = 40%* EBIT final =INR 8.96 lakh
Earning after tax = INR 13.44 lakh
Total assets = INR 160 lakh
Return = Earning after tax / total assets * 100 = 8.4%
Aggressive
Estimated Fixed assets = INR 80 lakh
Current assets = INR 70 lakh
Sales = 2.7 * 70 = INR 1.89 crore
EBIT = 15/100 * Sales = INR 28.35 lakhs
Cost of financing CA = 12.5*70/100 = INR 8.75 lakh
EBIT final = INR 19.6 lakh
Tax = 40% of EBIT final = INR 7.84 lakh
Earning after tax = INR 11.76 lakh
Total assets = INR 130 lakh
Return = Earning after tax / total assets * 100 = 9.04%
What else do we need?
How about a pink obnoxious truck?
Year 2
-
Yearly sales and EBIT dependent on investment.
-
Sales are a function of investment (current assets)
-
EBIT = 15% of sales
-
Tax rate = 40%
-
Average cost of financing current asset = 12.5%
Conservative
Estimated Fixed assets = INR 1 crore
Current assets = INR 1.5 crore
Sales = INR 4 crore
EBIT = 15/100 * Sales = INR 60 lakh
Cost of financing CA = 12.5*150/100 = 18.75 Lakh INR
EBIT final = 67.5 lakh- 18.75 lakh = 41.25 Lakh
Tax = 40%* EBIT final
Earning after tax = 24.75 Lakh
Total assets = INR 2.5 crore
Return = Earning after tax / total assets * 100 = 9.9 %
Aggressive
Estimated Fixed assets = INR 1 crore
Current assets = INR 1 crore
Sales = INR 3.5 crore
EBIT = 15/100 * Sales = INR 52.5 lakh
Cost of financing CA = 12.5 * 100/ 100 = INR 12.5 lakh
EBIT final = 52.5 lakh - 12.5 lakh = INR 40 Lakh
Tax = 40%* EBIT final
Earning after tax = INR 24 Lakh
Total assets = INR 2 crore
Return = Earning after tax / total assets * 100 = 12 %
What now?
Returns are getting higher and costs lower
Year 3
-
Yearly sales and EBIT dependent on investment.
-
Sales are a function of investment (current assets)
-
EBIT = 15% of sales
-
Tax rate = 40%
-
Average cost of financing current asset = 10%
Conservative
Estimated Fixed assets = INR 1.2 crore
Current assets = INR 2 crore
Sales = INR 6.5 crore
EBIT = 15/100 * Sales = INR 97.5 lakh
Cost of financing CA = 10*200/100 = INR 20 lakh
EBIT final = INR 77.5 lakh
Tax = 40* EBIT final
Earning after tax = INR 46.5 lakh
Total assets = INR 320 lakh
Return = Earning after tax / total assets * 100 =
14.53%
Aggressive
Estimated Fixed assets = INR 1.2 crore
Current assets = INR 1.2 crore
Sales = INR 5.5 crore
EBIT = 15/100 * Sales = INR 82.5 lakh
Cost of financing CA = 10*120/100 = INR 12 lakh
EBIT final = INR 70.5 lakh
Tax = 40* EBIT final
Earning after tax = INR 42.3 lakh
Total assets = INR 240 lakh
Return = Earning after tax / total assets * 100 =
17.625%
Conclusion
EAT in all cases is greater for conservative policy
Return is highest for aggressive
Aggressive Shaadi mubarak ho.
The Matchmakers
-
Deeksha Tandon
-
Harsh Tanwar
-
Md. Zurez tuba
-
Shreya Khurana
-
Shubham Goel
-
Swapandeep Kaur
Thank you!
deck
By Shreya Khurana
