Sunita's Uniform Order and the 60-Day Payment Gap
Sunita, 34, runs a two-machine tailoring unit in a rented room in Nashik. She took a loan of Rs 1,20,000 at 12% per annum on a reducing balance for 24 months; the EMI is Rs 5,650. Last month she billed Rs 48,000. Materials cost Rs 14,000, rent Rs 6,000, electricity Rs 1,800, the part-time helper is paid Rs 8,000, and Sunita draws Rs 8,000 for household expenses. A school supplier now offers her an order for 300 uniforms worth Rs 87,000: Rs 35,000 of fabric must be paid upfront, stitching will take about five weeks, and payment will come 60 days after delivery. Sunita has Rs 9,000 in her savings account. She keeps her accounts in a notebook with some entries missing and does not separate household cash from shop cash.
1. Work out Sunita's monthly surplus after all costs and the EMI. What does the number tell her about accepting the uniform order on the supplier's terms?
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The arithmetic
- Billing: Rs 48,000
- Running costs: 14,000 + 6,000 + 1,800 + 8,000 + 8,000 = Rs 37,800
- Surplus before loan: Rs 10,200
- After EMI of Rs 5,650: Rs 4,550 per month
What the number means The EMI already takes about 12% of billing and more than half (55%) of her pre-EMI surplus. The buffer of Rs 4,550 is thin: one slow month or one machine breakdown and the EMI is at risk. Her savings of Rs 9,000 cover less than two EMIs.
Against the order The order needs Rs 35,000 of fabric paid now. She has Rs 9,000, so the gap is Rs 26,000 - roughly six months of her entire monthly surplus. Cash also goes out for five weeks of stitching before any money comes back, and the supplier pays 60 days after delivery. So she would be out of pocket for about 95 days before a single rupee returns.
Conclusion On the supplier's terms the order is not affordable from her own funds. It becomes affordable only if the upfront exposure falls: an advance of 40-50% of order value (about Rs 35,000-43,000), fabric supplied on credit by the supplier, or staged delivery with part payment at 30 days. Without one of these, she should not sign.
2. The supplier refuses any advance but offers a written order. Give Sunita's decision with reasoning, and two alternatives that keep the order alive without breaking her cash flow.
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Decision She should decline the order on the present terms, and say so in writing with a counter-offer. The reasoning is not that the order is unprofitable - Rs 87,000 against roughly Rs 35,000 of fabric is attractive - but that she cannot fund it. Taking a bridging loan of about Rs 26,000 at, say, 18-24% for three months would add interest and, more importantly, would put the EMI at risk if the school paid late. A missed EMI damages her credit record for years; one lost order does not.
Two alternatives that keep the order alive
- Split the order. Take 100 uniforms first, delivered in three weeks, paid within 15 days of delivery; then repeat. Her exposure falls to about Rs 12,000 of fabric, close to her savings, and she proves quality to the supplier.
- Fabric on the supplier's account. Ask the supplier to issue the fabric to her against the order, with the cost deducted from the final payment. Her cash outlay becomes near zero, and the supplier carries the material risk it is better placed to carry.
A third route worth mentioning: get the 60-day term reduced to 30 days in exchange for a small discount, since the delay, not the price, is the real problem. Whatever is agreed, she should confirm the advance, delivery schedule and payment date on paper before cutting the first piece.
3. Name three bookkeeping changes Sunita should make this month and explain how each would have changed the decision above.
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1. Separate shop cash from household cash Open a separate account or at least a separate cash box, and pay herself a fixed monthly drawing. At present the Rs 8,000 drawing is mixed with purchases, so she cannot see the true surplus. With separation she would know on any date how much cash belongs to the business, which is exactly the number the uniform order needed.
2. Record every sale, purchase and credit The notebook has missing entries. A simple daily sheet - date, customer, amount received, amount due, material bought - turns her billing figure from an estimate into a fact. It would also show her how much is stuck in unpaid customer bills, which may be an easier source of the Rs 26,000 than a new loan.
3. Prepare a monthly cash-flow statement, not just a profit figure Profit and cash are different. A one-page statement showing money in, money out and closing balance for the next three months would have shown the 95-day gap in the uniform order before she agreed to it. This is the single most useful document for a unit that extends credit.
Add a fourth if space allows: a fixed-asset and stock list, so that fabric bought for one order is not quietly used for another.