Spice Packager's Working-Capital Squeeze
Sunita runs a three-year-old spice-packaging business in Nashik. Annual sales are ₹72 lakh, and net profit margin is 6%. Her receivables average 75 days, inventory 60 days, and payables 30 days. She has just won an order that requires ₹18 lakh of additional working capital. Her bank has sanctioned a ₹12 lakh cash-credit limit at 11.5% a year with a 1% processing fee and a personal guarantee; interest is charged on utilisation. A large supplier has offered terms of 2/10 net 60 on ₹10 lakh of purchases a year. An angel investor has offered ₹25 lakh for 20% equity. Sunita's monthly fixed costs are ₹2.4 lakh, and her variable cost is 68% of sales. She has ₹1.5 lakh cash and a ₹3 lakh fixed deposit pledged as collateral. She is unsure whether the new order is profitable after financing costs.
1. Calculate Sunita's operating cycle and working-capital requirement. Is the ₹12 lakh cash-credit limit sufficient for the new order? Show your reasoning.
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Operating cycle: receivables 75 days + inventory 60 days − payables 30 days = 105 days.
Working-capital requirement: daily sales = ₹72,00,000 ÷ 365 = ₹19,726. Requirement = 105 × ₹19,726 = ₹20.71 lakh.
The new order needs ₹18 lakh of additional working capital. Available financing: cash credit ₹12 lakh + cash ₹1.5 lakh + fixed deposit ₹3 lakh = ₹16.5 lakh, and the fixed deposit is pledged as collateral, so using it may weaken the bank position. A bank usually expects a margin: if it finances 75% of the requirement, ₹18 lakh needs ₹4.5 lakh of own funds and ₹13.5 lakh of bank finance. Her ₹12 lakh limit is below that, and her own cash is only ₹1.5 lakh.
Conclusion: the ₹12 lakh limit is not sufficient. She is short by roughly ₹2–4.5 lakh depending on margin terms, and the 75-day receivable cycle will make the gap appear before cash comes in. She should seek a ₹16 lakh limit or a customer advance before accepting the full order.
2. Calculate the contribution and net benefit of the new ₹18 lakh order after financing costs. What is the minimum revenue at which the order is still worthwhile?
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Order economics: revenue ₹18 lakh. Variable cost at 68% = ₹12.24 lakh. Contribution = ₹5.76 lakh (32%).
Financing cost: average working capital tied up for 105 days = ₹18 lakh × 105/365 = ₹5.18 lakh. Interest at 11.5% = ₹5.18 lakh × 0.115 = ₹59,500. Processing fee at 1% of ₹12 lakh = ₹12,000. Total financing cost = ₹71,500.
Net benefit: ₹5,76,000 − ₹71,500 = ₹5,04,500, assuming fixed costs do not increase and the order is within capacity.
Minimum revenue: the order must cover variable cost plus financing cost. Break-even revenue R satisfies 0.32R = 71,500 + fixed incremental cost. With no incremental fixed cost, R = ₹71,500 ÷ 0.32 = ₹2.23 lakh. In practice, she should also require a cushion for wastage, freight, and payment delays; an order below about ₹3 lakh would not be worth the cash strain. At ₹18 lakh, the order is profitable, but only if receivables are collected and the variable cost stays at 68%.
3. Evaluate the supplier's 2/10 net 60 terms and recommend a financing mix. Should Sunita accept the angel offer?
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Supplier terms 2/10 net 60: purchases are ₹10 lakh a year. Taking the discount saves 2% = ₹20,000. To take it, she pays 50 days earlier on about ₹9.8 lakh. Borrowing that amount at 11.5% for 50 days costs ₹9,80,000 × 0.115 × 50/365 = ₹15,438. Saving ₹20,000 is greater than the cost ₹15,438, so she should take the discount if the cash credit has headroom. The effective annual cost of giving up the discount is (2/98) × (365/50) = 14.9%, which is above the bank rate, confirming the same conclusion.
Financing mix: use the cash credit for the order, take the supplier discount, and negotiate a 30% advance or progress payment from the customer. Ask the bank to raise the limit to ₹16 lakh against receivables. Keep the fixed deposit as a last-resort cushion, not as working capital.
Angel offer: ₹25 lakh for 20% implies a ₹1.25 crore post-money valuation, about 29 times the ₹4.32 lakh net profit. That is expensive dilution for a temporary working-capital need. Decline for now; revisit equity only if a larger contract requires permanent capital and the valuation reflects growth. Debt preserves ownership, but the personal guarantee means she must stress-test a 30-day collection delay.