Page 19 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 14. The three most common forms of business organization are sole proprietorship,
partnership and the ………………. .
15. The ………………. method of cash management is considered a better method of managing
liquid resources of the firm.
16. The dividend and bonus policies framed have a direct bearing on the ………………. .



Case Study Bhatt Industries – Basic Planning

T his case will help the reader, develop an approach to structuring a case solution. It
requires a logical approach to solving a general financial problem.

Bhatt Industries has been manufacturing fireworks at a small facility just outside
Greensboro, North Carolina. The firm is known for the high level of quality control in its
production process and is generally respected by distributors in the states, where fireworks
are legalized. Its selling market is fairly well defined; it has the capacity to produce
800,000 cases annually, with peak consumption in the summer. The firm is fairly confident,
that the whole of next year's production can be sold for 25 a case.
On September 7, the company has 8,000,000 in cash. The firm has a policy against
borrowing, to finance its production, a policy first established by William Bhatt, the
owner of the firm. Mr. Bhatt keeps a tight rein on the firm's cash and invests any excess
cash in treasury bonds, that pays a 12 per cent return and involve no risk of default.
The firm's production cycle revolves around the seasonal nature of the fireworks business.
Production begins right after Labour Day and runs through May. The firms sales occur in
February through May; the firm closes from June 1 to Labour Day, when its employees
return to farming. During this time, Mr. Bhatt visits his grandchildren in New York and
Pennsylvania. As a result of this scheduling, the firm pays all its expenses during September
and in May receives, all its revenues from its distributors within 6 weeks after the 4th of
July. The customers send their checks directly to Kenmy National Bank, where the money
is deposited in Bhatt's account.
Mr. Bhatt is the only full-time employee of his company and he and his family hold all the
common stock. Thus, the company's only costs are directly related to the production of
fireworks. The costs are affected by the law of variable proportions, depending on the
production level. The first 100,000 cases cost 16 each; the second 100,000 cases, 17 each;
the third 100,000 cases, 18 each and the fourth 100,000 cases, 19 each; the fifth 100,000
cases, 20 each; the sixth 100,000 cases, 21 each. As an example, the total of 200,000 cases
would be 1,600,000 plus 1,700,000 or 3,300,000.
BHATT INDUSTRIES - INCOME STATEMENT
(August 31, fiscal year just ended)

Revenues from operations 50,00,000
Revenues from interest on government bonds 9,20,000
Total revenues 59,20,000
Operating expenses 40,50,000
Earnings before taxes 18,70,000
Taxes 9,48,400
Net income after taxes 9,21,600

Contd...

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