As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.
As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.
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Finance Management
CASE : 2
M/S HI-TECH ELECTRONICS
M/s. Hi – tech Electronics, a consumer electronics outlet, was opened two years ago in Dwarka, New Delhi. Hard work and personal attention shown by the proprietor, Mr. Sony, has brought success. However, because of insufficient funds to finance credit sales, the outlet accepted only cash and bank credit cards. Mr. Sony is now considering a new policy of offering installment sales on terms of 25 per cent down payment and 25 per cent per month for three months as well as continuing to accept cash and bank credit cards.
Mr. Sony feels this policy will boost sales by 50 percent. All the increases in sales will be credit sales. But to follow through a new policy, he will need a bank loan at the rate of 12 percent. The sales projections for this year without the new policy are given in Exhibit 1.
Exhibit 1 Sales Projections and Fixed costs
Month |
Projected sales without instalment option |
Projected sales with instalment option |
January |
Rs. 6,00,000 |
Rs. 9,00,000 |
February |
4,00,000 |
6,00,000 |
March |
3,00,000 |
4,50,000 |
April |
2,00,000 |
3,00,000 |
May |
2,00,000 |
3,00,000 |
June |
1,50,000 |
2,25,000 |
July |
1,50,000 |
2,25,000 |
August |
2,00,000 |
3,00,000 |
September |
3,00,000 |
4,50,000 |
October |
5,00,000 |
7,50,000 |
November |
5,00,000 |
15,00,000 |
December |
8,00,000 |
12,00,000 |
Total Sales |
48,00,000 |
72,00,000 |
Fixed cost |
2,40,000 |
2,40,000 |
He further expects 26.67 per cent of the sales to be cash, 40 per cent bank credit card sales on which a 2 per cent fee is paid, and 33.33 per cent on instalment sales. Also, for short term seasonal requirements, the film takes loan from chit fund to which Mr. Sony subscribes @ 1.8 per cent per month.
Their success has been due to their policy of selling at discount price. The purchase per unit is 90 per cent of selling price. The fixed costs are Rs. 20,000 per month. The proprietor believes that the new policy will increase miscellaneous cost by Rs. 25,000.
The business being cyclical in nature, the working capital finance is done on trade – off basis. The proprietor feels that the new policy will lead to bad debts of 1 per cent.
(a) As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.
(b) Also prepare cash budget for one year of operation of the firm, ignoring interest. The minimum desired cash balance & Rs. 30,000, which is also the amount the firm has on January 1. Borrowings are possible which are made at the beginning of a month and repaid at the end when cash is available.
