BBC Pvt Ltd and working Challengesq Harvard Case Solution & Analysis

BBC Pvt Ltd and working Challenges Case Study Solution


To: Arpit Agarwal& Mukesh Kumar

From: Financial Advisor

Subject: Financial Evaluation of BBCs working capital and contract with Indian Railway

Under the case,BBC a Chemical manufacturing company established in 2004, with its registered office located in Bangalore, managed  by Agarwal and Mukesh, had an opportunity to establish contracts with Indian Railways was present to the company. Which would enable them to expand its reach to other industries available in the Indian market. However, it was evaluated that, to successfully gain the contract with IR, BBC would need to perform certain modification in its business processes.Such as establishing an onsite IR office, along with establishing a Warehouse, workshop.By developing appropriate cash reserves to meet and continues its daily production activities.Hence, it can be evaluated that, these developments conducted, to meet the criteria of gaining the contract would expose the organization to significant costs amounting to INR2,400,000. Additionally, the cash flow valuation model is conducted, under certain Assumptions illustrated in the Exhibit below. Which help us to determine the appropriate cash flows that, would be generated, if BBC operated under the Contract with IR. It was assumed that, the contract expected life was assumed to be 10 years and by the year 2012, the sales of BBC would increase by 30%.From the average sales over the previous three year period, with an annual sales growth rate of 2.5%.Moreover, it was assumed that, the cost of Sales would increase by 12.5 in 2012, and would remain constant over the 10 year period and the initial investment of INR 1.2 million would be acquired on loan incurring a 14.85% amounting to 148,850.While the discount rate would be 10%. Additionally, the cash reserve required would need to be maintain over the 10 year period.Which, in turn, would help us to estimate the cash flows over the 10-year period, as illustrated in the excel file. Then the cash flow generated would be discounted at 10% rate of return, to estimate the present values of cash flows and in turn, the net present value of the potential contract amount to a positive 7,988,401.

In addition to this, a common size income statement along with trend & ratio analysis was used to assess that, BBC was facing certain working capital challenges, which could be caused by its decreasing sales revenues from 2009 to 2011. Which meant that, due to the decline in its sales revenues generation caused the organization, to register higher raw material turnover ratios in days. As BBC was unable to efficiently convert in raw material purchased on credit in to finished products, causing it to incur significant costs in terms of raw material inventory holding costs and significantly increase its inventory turnover ratios in days. Furthermore, it can be evaluated that, BBC had been able to decrease its finished goods inventory turnover in days from 2010 at 20.8 to 2011 at 13.47, while it had shown a consideration increase from the 2009 at 4.87. Which meant that, in the year 2009, BBC was most efficient in converting its finished goods in to sales revenues compared to its two subsequent years. Additionally, it can be assessed that, BBC had significant decreased its account payable turnover ratios in days from the year 2009 onwards. Which could have contributed towards evaluation the enterprise value of the organization, further enhancing the challenges in its working capital. The receivable turnover in days has been significantly decreased from the years 2010 at 15.26 to 9.64 in 2011 whereas, the receivable turnover was at 7.92 in 2009.Which meant that, the company was more efficient in converting its receivables from sales into cash in 2011 compared to 2010, but less efficient compared to the year 2009.Moreover, it can be evaluated that, the net profit margins of BBC has declined over the years,  which could comprise the ability of BBC to payoff it's liabilities, while maintaining sufficient working capital to spend the amount of investment needed to successfully avail or gain the contracts with IR. Hence, an imbalance between BBCs  ratios was identified such as, raw material turnover were to high,  while the finished goods turnover were appropriate in the year 2011 and the

Therefore, it can be recommended to Agarwal that, he should improve the working capital situation of BCC by incorporating effective and efficient strategies and policies in term of credit of credit policies given to its clients or borrowers, while exhibiting stern controls over their policies developed. Which would significantly decrease its receivable turnover in days, enhancing its working capital situation better enabling BBC to payoff its liabilities, while effectively fulfilling the criteria for the contract of IR by spending capital investment from its working capital generated. Furthermore, under the assumption to estimate the NPV of the proposed contract, would further enable BBC to better its Working capital Requirement though the generation of positive NPV.......................

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