The Order That Eats Its Own Cash
Simran Kaur, 34, runs an FSSAI-licensed pickle and murabba unit in Amritsar, set up three years ago with PMEGP support. Installed capacity is 6,000 jars a month; she currently sells 3,200 jars a month at an average net realisation of ₹95, at a gross margin of 38%. All sales are local, on cash or 20-day credit. A distributor now offers to buy 2,400 jars a month for three months, which fits her spare capacity, but wants a 12% price discount and 75-day credit from each delivery. Mangoes and other raw material must be bought in the harvest window: ₹3.6 lakh spent now covers the full three-month requirement, while buying later will cost about 20% more. Simran has ₹1.4 lakh cash, a ₹2 lakh cash-credit limit of which ₹1.2 lakh is undrawn, a term-loan EMI of ₹18,000 a month, and no receivable finance arranged. Her single 900 sq ft shed has no cold storage. She is excited about the order and has already promised the distributor a start date.
1. Estimate the peak working-capital requirement created by the distributor order and state whether she can fund it as things stand. Show the arithmetic.
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Step 1 - price and margin on the new order
- Discounted price: ₹95 × 0.88 = ₹83.60 per jar
- Variable cost per jar (fixed at 62% of ₹95): about ₹58.90
- Contribution: ₹83.60 − ₹58.90 = ₹24.70 per jar, so the order is profitable per unit - the problem is cash, not margin.
Step 2 - monthly cash outflow on the order
- Billing: 2,400 × ₹83.60 ≈ ₹2.01 lakh a month
- Cash paid out for material and labour: 2,400 × ₹58.90 ≈ ₹1.41 lakh a month
Step 3 - receivable build-up
At 75 days' credit, roughly 2.5 months of billing is outstanding before the first rupee comes back:
2.5 × ₹2.01 lakh ≈ ₹5.0 lakh locked in receivables
Step 4 - add the harvest purchase
₹3.6 lakh must go out now, in one shot, whether or not the order is accepted - but the order is what makes the extra volume worth processing.
Step 5 - resources available
₹1.4 lakh cash + ₹1.2 lakh undrawn cash credit = ₹2.6 lakh, and ₹18,000 of that cushion is spoken for by the EMI.
Conclusion
Peak requirement is roughly ₹8.6 lakh of committed cash against ₹2.6 lakh available. She cannot fund this as things stand. The order also ends on day 90 while the last payment lands around day 165 - the cash comes back after the order is over, which is the trap she has not seen.
2. What financing or structuring options would you rank before her, and what single condition would you attach to accepting the order?
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Ranked options
- Negotiate the terms, not the price. Ask for 45-day credit or a 2% early-payment discount. Every 15 days cut from the credit period releases roughly ₹1 lakh. Cheapest money available, and it costs one conversation.
- Invoice discounting / receivable finance against accepted invoices. The distributor's accepted invoices are bankable. Check eligibility for TReDS (it works where the buyer is large enough to be on the platform); otherwise a bank's bill-discounting line against the cash-credit limit. This converts a 75-day wait into near-cash for a discount of roughly 9-12% a year - far cheaper than losing the order.
- Reduce the order size. 1,200 jars a month instead of 2,400 halves the receivable lock-up to about ₹2.5 lakh, which she can just about survive on her own resources. A part-order that survives beats a full order that stops the plant.
- Credit insurance or an LC if the distributor is new to her and unrated. Protects against the buyer simply not paying at day 75.
Do not fund a 75-day receivable out of a cash-credit limit meant for working capital swings; the limit will be exhausted in month two and she will miss the EMI.
The single condition
She dispatches nothing until a receivable line is sanctioned and a written purchase order with a delivery schedule and acceptance clause is in hand. She has already promised a start date on a verbal basis - that promise is the real risk in the file.
3. The order also creates a concentration risk and a storage problem. Which would you address first, and how?
Read the worked answer
Address the storage and raw-material risk first.
Reasoning: rank risks by whether the loss is reversible. The concentration risk can be unwound - she can cap the distributor at a share of output, or drop back to local sales - and it shows up gradually, as a slow squeeze on bargaining power. A spoilage loss does not negotiate. She has ₹1.4 lakh of cash and is about to buy ₹3.6 lakh of raw material into a 900 sq ft shed with no cold storage, in Amritsar, in mango season. A single bad batch destroys more cash than she holds, and destroys it before any distributor payment is due. Irreversible first, gradual second.
Storage actions
- Buy the harvest stock in tranches against confirmed processing dates rather than all at once, even at a 20% later-price penalty. Compare the penalty to the spoilage exposure, not to zero.
- Rent third-party cold storage for the raw material only; it is a fraction of the cost of the stock itself.
- Process in batches tied to the distributor's dispatch schedule, so finished goods, not raw material, sit in the shed.
Concentration actions
- Cap the distributor at no more than about 40% of monthly output (roughly 2,400 of 5,600) and hold there; do not let a good quarter become a dependency.
- Keep every local retail account alive during the order. Volume that is dropped is much harder to win back than it is to keep.
- Put a written exit clause on both sides so the relationship is not 100% one-sided.
If forced to choose one action only: secure cold storage for the harvest stock before the first mango is bought.