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

1. Deeksha Tandon

2. Harsh Tanwar

3. Md. Zurez tuba

4. Shreya Khurana

5. Shubham Goel

6. Swapandeep Kaur

Thank you!