Page 13 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 10. Price Level Changes: Changes in the price level also effect the working capital requirement.
Generally the rising prices will require the firm to maintain larger amount of working
capital as more funds will be required to maintain the same current assets.

Case Study Mysore Lamps Limited

ysore Lamps Limited is a company specializing in the production of fluorescent
lamps. The company has been maintaining the quality of its products and due
Mto the efforts of its marketing manager; the company has been able to capture a
sizeable share of the product market in the recent past. The company is planning to expand
in the same product line. Mr. Mysore, the Managing Director of the company, is confronted
with the problem of increasing working capital due to the expansion plans of the company.

Mysore Lamps Limited was set up in 1991 with an authorized capital of ` 110 crore and
faced heavy competition in the initial years of commencement of business. During 2006,
the company could make a dent in the fluorescent lamps market and its position as on
December 31, 2006, was as shown in Exhibit 1.
Exhibit 1: Balance Sheet

(` in lakh)
Liabilities ` Assets `
Capital 1500 Fixed assets 1000
Reserves 762 Current assets 1862
Long-term loan 400 Raw materials 200
Current liabilities 200 Work-in-progress 287
Finished goods 450 Accounts receivables 675
Bank overdraft 962 Cash 250
Total 4274 Total 4274

During the year 2006, the company was able to sell 50 lakh pieces of fluorescent lamps a
` 60 with a profit margin of 10 per cent. The raw material comprised about 50 per cent of
the selling price; while wages and overheads accounted for 12 and 18 per cent, respectively.
As a policy, the company keeps raw material stock for two months of its requirements. In
order to make prompt supply to customers on orders received, finished goods stock for
two months requirements is maintained, and sales credit of three months is given to
customers. Due to the standing of the company in the market, the company is able to enjoy
2 months from its suppliers. The production process is of 30 days duration.
Mr. Mysore is seriously considering the proposal for expansion by installing an automatic
plant costing ` 30 crore. The expansion will bring in an additional capacity of 100 lakh
units per annum. Mr. Mysore is not worried about the financing of this plant as the same
would be done for the retained earnings supplemented by finances from Mr. Mysore’s
personal sources. He expects that the company would be able to increase its sale from
50 lakh pieces after the expansion scheme.
Questions
1. As a manager, what steps would you take to effectively manage the working capital
in an inflationary situation?
Contd...

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