Show the facts common to all parts of Q. 1
Komal is a third-generation businesswomen in the dairy business “Bharat Ghee & Co.”. The business is run under the brand “Pure Ghee”. The company prepares milk-based products and is known for good quality in the market. The sales are made through self-owned stores, other retailers at locations where self-owned stores are not present and online.
The business is run by Komal’s family on a strategic and operational basis. However, now the business is growing at a rapid pace. There is a need to get in professional management to run the business. “Bharat Ghee & Co.” hires a new CEO - Garima, who has three decades of experience in the dairy industry. Komal will now be Executive Chairman and provide a guiding role in the business. The first task that Garima has on hand is to identify issues that are hindering business growth.
Komal asks Garima to list major concerns that the business is facing :
l Lower margins where sales are made through other retailers and online. Online platforms are charging a big commission for making sales.
l High chance of spoilage due to perishable nature of the raw material. Due to perishable nature of material - inventories are kept at a negligible level.
l Capacity increase may be necessitated in the near future for which capital will have to be raised.
Garima requests the Accounts Head - Naina for key financial metrics of “Bharat Ghee & Co”. Naina provides the following details to Garima :
Key Financials of Bharat Ghee & Co :
| Credit Revenue (₹) | 80,00,00,000/- |
| Cash Revenue | 20% of total sales |
| Gross Profit ratio | 30% |
| Indirect expenses (₹) | 10,00,00,000/- |
| Tax rate | 25% |
| Interest on debt | 12% |
| Interest amount (?) | 12,00,00,000/- |
| Debt to equity ratio | 2 : 1 |
Garima does some quick calculations to derive Return on Equity and Return on Capital Employed. Komal indicates willingness to contribute fresh equity in the business and payoff the loans. However, Garima is not in favour of repayment of loans.
Garima has made a business plan to change the strategy to decrease dependence from third party vendors. The new plan recommends creation of infrastructure to enable sales at locations which are serviced by channel partners. A new strategic business unit is to be created for implementation of the business plan.
The following infrastructure facilities need to be created :
| Items | (₹) |
| Cold chain warehousing facility | 15,00,00,000 |
| New trucks | 5,00,00,000 |
| Office premises | 3,00,00,000 |
| Furniture and computers | 1,00,00,000 |
l The aforementioned infrastructure will be set up using debt and equity in the ratio of 2 : 1. The new debt will be raised at a rate of 14%.
l The average depreciation will be 30%.
l The above investment and raising of debt will be done on October 1. The organization follows an April to March financial year.
l The average receivables at the end of the financial year from the new business will be ₹ 10,80,00,000/-. The receivables turnover days will be 45 days. Assume 180 days to calculate receivables turnover ratio.
l The gross profit margin will be 20%.
l Indirect expenses other than depreciation will be ₹ 2,00,00,000/-.
l lncome tax rate is 25%.
Komal asks for the projected P&L before approving the required investment amount :