I have decided to write my commentary on the WORKING CAPITAL MANAGEMENT INEFFICIENCIES faced by Bhilwara Sabun Utpadak S.S Ltd.
Bhilwara Sabun, was set up in the year of 1985 as a soap manufacturing unit. The Founder, Mr. D.L Somani , has made some serious efforts towards the expansion of company wherein initially the production was based out in home. Gradually, Mr. D.L Somani acquired industrial land, set up basic production facilities, focused on product marketing, and established a prominent name in market and establishing world class production facilities. Today, Bhilwara Sabun is a reputable name in soap industry, in India and abroad.
After having climbed the ladder of success, Bhilwara Sabun is facing some liquidity crisis which is majorly attributed to inappropriate working capital management. Being a manufacturing unit, Bhilwara Sabun has larger requirements for working capital as compared to any trading firm. And its inability to keep in line with its working capital requirements on daily basis is challenging for Bhilwara Sabun.
In layman’s term, working capital can be defined as funds required for day-to-day business operations such as cash purchases and payments. It is nothing more than current assets less current liabilities.
Currents assets comprises of items that can easily be converted into cash within one year such as cash, accounts receivables, inventories etc. On the other hand, Current liabilities are short term liabilities that can be paid off within one year such as accounts payables, short term debt, accrued expenses, etc.
Working capital management is about practicing a tight control on cash conversion cycles of any firm. Talking about cash conversion cycle, it is the time taken for converting resource inputs into monetary flows.
A standard cash conversion cycle can be depicted as:
Factors affecting Working Capital Management:
1. Accounts Receivables
2. Accounts Payables
3. Inventory Management
Accounts receivables basically means cash that debtors owes to the company. These arise due to sales made on credit. It comprises a part of current assets in balance sheet . There can be two types of Receivables:
1. Trade: These arise on the account of consumers buying goods produced by the firm.
2. Non-Trade: These are persons other than buyers, such as government and employees.
How can Bhilwara Sabun Optimize and Transform its Accounts Receivable to have an efficient Working Capital Management framework at place?
1. Receive order or request for quote: Bhilwara Sabun should make productions based on purchase orders and not on verbal commitments of buyers. Later, the buyer may refuse to accept the entire consignment or make delays in making payments.
2. Credit Authorization: BSUSS should be sure of credit reliability of the customer to escape the chance of creating unwanted bad debts.
3. Order Entry: BSUSS should be cautious of...