Hello Motu Patlu how We are ok.

are you,

Yes, we are
It seems that you facing lots of
guys are not ok, Is problem in our
there any problem business
Ok, lets come to
my bakery, we
will discuss your
problem there
Sure
 Thanks a lot
Wow, Motu Patlu
Adam you
have a
nice bakery

Last year I
have started
When & how my bakery
did you, business
started your
bakery business
 First of all I
have purchased
land of Rs.20
lakh for my
business Oh
 Then I have
constructed
Building on it.
Cost of
construction of
building was Rs. Oh
15 lakh
 Then I have
Invested in
given assets

Furniture : Rs.1,00,000 Oven : Rs.50,000

Vehicle : Rs.5,00,000 Refrigerator : Rs.2,00,000

 Land: Rs.20,00,000

Building: Rs.15,00,000

Furniture : Rs.1,00,000

Vehicle : Rs.5,00,000
OMG, you have
invested
Rs.43,50,000
Yes
Refrigerator : Rs.2,00,000

Bakery : Rs.43,50,000

Oven : Rs.50,000
 Land: Rs.20,00,000

Building: Rs.15,00,000

Furniture : Rs.1,00,000 Capital Expenditure:

Are those expenditure which are not incurred for
retail operations.
These expenditures are incurred for an asset that
is expected to provide utility and increases the
Vehicle : Rs.5,00,000 efficiency of a business for more than one
reporting period (>1 year)

Refrigerator : Rs.2,00,000

Bakery : Rs.43,50,000

Oven : Rs.50,000
Such a huge Investment,
then you are bound to
make good profit
Its very simple.
Improve your
How do you manage that?
income.
Control your costs

For increasing
sales, I offer
credit and as I
sale quality
That’s true but products I charge
how……what are premium price
your strategies
 As you know
I bake cake For
preparation
of cake, I
need

MILK SUGAR

CHOCLATE SYRUP WHEAT FLOUR

 Oh, what are your
strategies regarding See, as I told
purchase of raw you that I follow
material zero stock
policy, So I don’t
keep huge stock
of raw material

MILK SUGAR

CHOCLATE SYRUP WHEAT FLOUR

 Using just in time
its possible, I have
tie ups with the
suppliers
But how is it
possible

Just in time is a inventory

management system where
inventory is acquired just a few
hours before they are put to use
What is just
in time
 We don’t get
any credit Rather they give
But then you must me credit of 5
be paying them daily days
No…noo…nooo
…

Our business takes

Because raw material
Why don’t 10 days to convert
raw material into required for cake, Is
you finished goods having very short shelf
maintain
life and if I keep stock,
stock
there will be loss of stock
 No, I have
adopted best
Ok what manufacturing
about baking practice, plus my
process, labour is like the
does it take best in the world
long time
 So whole
production process
is completed within
1 day

Oh
 I pay them everyday so if
and how do you you see, I invest
maintain your approximately for 3 days
employees
motivated
 Once cake is
prepared then on
very next day I
sale these cakes
in market
Sale Sale

Customer

Ok, so Both in
you sale cash and
these credit,
cakes in
cash or
credit
 We provide
credit for 25
days
For how many
days you
provide credit 2 days
to your
customers
And your supplier invest in you
for 5 days, this is too good.
Your are great Adam
Hope we can emulate you
Thanks,
Definitely, you also come
out of your difficult times

Yes, we got it Oh, where you guys

where we are are making mistakes
making mistakes
in our business
 In various places, like
Oh so you are unable to
a) You provide credit to
manage your working
customers for 2 days, but
capital and working capital
we provide credit of 25
cycle
days,
b) You maintain Zero stock
policy, and we maintain
stock for 100 days. Etc….

Oh, you don’t know

what is working
No capital,
What is
working capital Don’t worry I will
and working explain you.
capital cycle
 a)
Day 0
Purchase of
Raw
material in
credit
Given diagram is
going to explain
business cycle of
my bakery
business
d) b)
Day 5 Day 1
Payment Preparation
made to and sale of
creditors cake and
cookies

c)
Day 3
Money
received from
debtors
 ADAM’S BUSINESS CYCLE

Day 0 Day 1 Day 2 Day 3 Day 4 Day 5

Purchase Conversion and Money received Money paid to

Raw Material for sale of cake in credit from customer supplier for credit
Rs.10000 for Rs.24000. for credit sale purchase
In credit of 5days
“Cash In”

“Cash Out”

Oh Wow
From above you can see that on day-3, I receive cash (Rs. 24000)
and on day-5 I pay to my creditors (Rs.10000).

That’s why I never face any cash crunch in my business

 MOTU PATLU’S BUSINESS CYCLE

Day 0 Day 10 Day 35

Purchase Conversion and Money received

Raw Material for sale of cookies in credit from customer
Rs.20000 in “cash” for Rs.35000 for credit sale

Cash In

But in your business you purchase Raw material in “cash” (in

beginning itself there is a outflow of cash) of
Rs.20000,then it takes 10 days to convert your raw material in
finished goods and then you sale it for credit of 25 days.
Yes, you are
After 25days (from date of sale) you get your money from debtors correct
So your fund gets block and you guys face problem of liquidity in
your business
 The working capital cycle (WCC) is the amount of time it takes to
turn the net current assets and current liabilities into cash.

In short we can say:

Account Receivable Period + Inventory Conversion Period – Account
Payable Period Ok
In my case
 I get credit for 5-days and
 I provide credit for 2-days
 Inventory conversion (time taken to convert
raw material into cake) period is 1 day Ok, so if
 WC Cycle is (+) tive = Funds
So working capital cycle of my business is: 2 + are blocked
1 – 5 = -2-days  WC cycle is (–) tive = early
recovery of funds and enough
liquidity in business.

But in your case:

 You purchase RM in cash (which means you
get 0 day credit)
 You take 10 days to convert your RM into
finished goods
 And then you sale it in credit of 25-days

So working capital cycle of your business is:

25 + 30 – 0 = 55-days

Which means that your cash is blocked for 55

days
Now I will explain
you, what is
working capital,
with the help of
my bakery Okay
business
 PURCHASE PROCESS

Ok, so total
available stock
with you is going
to be of Rs.12000
(Rs.10000 +
In my godown, I
2000)
always keep
stock of
Rs.2000.

Correct

Purchase RM of Rs.10000
in credit 0f 5 day

Supplier
 BAKING PROCESS

Electricity Bill: Rs.1000

Salary : Rs.2000

RM Consumed : Rs.9000
Other Expenses: Rs.3000

So for baking of cake

and cookies you
incurred total
Daily I bake 20kg cake and expenditure of
for baking above expenses Rs.15000
(Rs.9000+1000+2000+3000)
are incurred

Correct
 SALE PROCESS
Ok, your
total sale
is of
Rs.24000
I sale these cake and cookies in market:

 20 Kg cake to Customer (in credit of 2days) of

Rs.24000.

Absolutely
correct
Sale Sale

Customer
 TRANSACTIONS RELATED TO WORKING CAPITAL

OUTFLOW OF CASH
Now tell me the
transactions
where there will
be regular inflow
or outflow of Purchase of RM Salary Other Expenses Electricity Creditor
Cash in my
business?

Very good, the INFLOW OF CASH

difference
between inflow
and outflow of
cash is working
capital
Customer

Transactions
are :
 Available Cash Cash Paid
+ +
Cash to be received (within 1 year) Cash to be paid (within 1 year)

*Current Assets: Cash and other assets that are *Current Liabilities: Liabilities which are
expected to be converted to cash within a year. Examples expected to be paid within a year. Examples
are are:

Debtor Available Cash Closing Stock Creditor

 Current Assets

In my
business
there
are: Closing Stock
Debtor Available Cash

Rs.14000 Cash Rec./ Cash Sales Rs,10000 Opening Stock Rs.2000

Less: Salary Rs.2000 Add: Purchased Rs.10000
Electricity Rs.1000 Less: Material Con. Rs.9000
Other Expenses Rs.3000 Closing Stock Rs.3000
Available Cash Rs.4000

Current Liabilities

Creditor ST Loans

Rs.10000 Rs.0
 Working Capital

Debtor Available Cash Closing Stock Creditor

Rs.14000 Rs.4000 Rs.3000 Rs.10000 Rs.11000

So, Thanks a lot Adam,

working finally we got the
capital is concept of working
going be: capital
Lastly I will explain you
some ratios, which will Liquidity Oh,
be helpful for ratio which
management of your ratios
business
 C
A
S
H
Cash
A OBLIGATIONS/DEBT
Liquidity ratio
Whether business is N
having enough D
liquid cash and
assets which can be
converted to cash Stock L
easily in order to I Creditor
meet debt/short
term financial Q
obligations U
I
D
Working Capital Loan

Debtor A
S
S
E
T
Short Term Investment
S
 Liquidity ratio are.
a) Current Ratio.
b) Quick Ratio
c) Cash Ratio
Lets start with Current
ratio,
Current ratio measures,
whether business has Formula for current
sufficient current ratio is:
assets to meets its Current Assets
current liabilities Current Liabilities
 Current Assets
Debtor Available Cash Closing Stock

Current Ratio = Rs.21000

Rs.10000 Rs.14000 Rs.4000 Rs.3000 Rs.21000
= 2.1 : 1
Standard Current Ratio = 2 : 1

Current Liabilities
So it means
your business
has enough
Correct current assets

Creditor

Rs.10000
 QUICK ASSET
CASH GOLD DEBTORS STOCK PP EXPENSES

PREPAID
EXPENSES

Formula for Quick ratio Stock, gold, investment

is: securities, debtors are
Now we will discuss quick ratio,
Quick assets quick assets.
It is same as current ratio but
it excludes stock and prepaid Current Liabilities
Stock & prepaid
expenses for calculation.
expenses are excluded
from quick assets
Yes
 QUICK ASSET CURRENT LIABILITY
CASH DEBTORS CREDITOR

Quick Ratio = Rs.18000 Rs.4000 Rs.14000 Rs.18000 Rs.10000

Rs.10000
= 1.8 : 1
Standard Quick Ratio = 1 : 1 So, it means your
business has enough
liquid funds to pay of the
current liability
Yes
 CURRENT ASSETS FOR CASH RATIO
CASH GOLD DEBTORS STOCK PP EXPENSES

PREPAID
EXPENSES

Now we will discuss cash ratio, Formula for Cash ratio is:
By name (cash), we can
understand that in this ratio Cash + Marketable Securities
only cash and marketable Current Liabilities
securities are considered for
calculation of ratio
Ok
Yes
 CURRENT LIABILITY
CASH
CREDITOR

Cash Ratio = Rs.4000

Rs.10000 Rs.4000 Rs.4000
Rs.10000

= 0.4 : 1

Ok

Yes