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BAM101 Business Administration

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BAM101 Business Administration

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Course Code: BAM101
University: Seneca College

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Country: Canada

Identify the problem and not the symptom of a problem. For example, a decline in sales is a symptom of a problem; you must identify the actual cause of the decline in sales.

Problem definition:
BBC Private Limited was a chemical-based organisation situated in India and it was founded in 2004. The managing director of the organisation was in a rush to obtain additional funds for ensuring a contract with the Indian Railways. The manufactured products of BBC were of inferior quality due to the use of cheaper cost-effective production techniques. However, this has helped the organisation in obtaining cost advantage in maintaining its market position (Ross et al., 2016).
The primary issue of the organisation is that it used a conservative and conventional method in approaching towards working capital management. The organisation made debt repayments to its creditors before the credit term had arrived. The overall assets of BBC were nearly 10 times compared to its liabilities. Moreover, the approach of the organisation was casual in relation to credit management. It allowed credit extension to its customers for greater amount of time and the large inventory base of the organisation, which were in the forms of raw material and finished goods, would lead to additional blockage of working capital (Damodaran, 2016). 
Case analysis:
Working capital policy:
This policy was not a successful one for BBC due to the adopted conservative approach. The approach depicted in the year 2010/11 at an increased level of net working capital was found to be more than 4.2 million INR. Although assets are way too higher than liabilities, a significant portion of assets was in the form of accounts receivable and inventory. Moreover, the organisation was too fast to repay debts to its creditors, which adversely affected its liquidity position. It has been identified from the case study that the organisation had maintained cash credit limit of above 2 million INR with UBI.
The Indian Railways’ structure could cost one-time expense of 200,000 INR and due to this; the administrative department of BBC would rise. In addition, a cost of nearly 500,000 INR is needed for warehouse building and this mandates the need for a workshop as well. The primary reason that the working capital policy of BBC would not be successful is because of the credit limit with UBI. Moreover, it is essential for BBC to maintain considerable cash reserves for meeting the loan payments without interference in production operations (Ehrhardt & Brigham, 2016). The managing director of BBC was considering that the credit limit of above 2 million INR had reached due to which the receivables had been blocked.
Inventory turnover ratio: 
According to the above table, it could be seen that the inventory turnover ratio of BBC declined from 9.67 in 2009 to 7.15 in 2010 after which it increased to 21.13 in 2011. The reason behind such decrease is the lack of efficiency in inventory management leading to liquidity crisis in the organisation for obliging the contract of Indian Railways. Another difficulty was the exponential rise in the inventory holdings of BBC. The increase was deemed to be one of the reasons that the organisation had encountered a lower inventory turnover ratio within the stipulated time. Hence, BBC needed to emphasise on minimising inventory level to the maximum possible limit (Fracassi, 2016).
Cash position of BBC:
BBC Private Limited encountered a sharp decline in its cash holdings, which was depicted with negative 18% between 2009 and 2011. The balance sheet of the organisation represents cash balance including a fixed deposit with UBI. However, this deposit could not be used in the working capital management of the organisation despite of sustainable interest. The conservative approach towards the payments of the creditors as well as trade credit policy is believed to be the main reason behind sharp decline in creditors. These creditors were deemed to be the backbone of working capital management and the financing source of current assets. This validates the reason behind the serious issue of a liquidity crisis in BBC. Thus, the cash position of the organisation was worsening over time; however, the liberal policy in terms of trade credit terms assisted in increasing the sales revenue of the organisation (Vernimmen et al., 2014). 
Areas of improvement in BBC:
After evaluating the cash position of BBC, it could be inferred that the organisation was not in growth stage. In addition, it had developed a reputation in the market. However, there were certain challenges confronting the organisation, which need improvements for assuring future growth (Vishny & Zingales, 2017). One of the significant areas requiring improvement was the placing order of the organisation. It is necessary for BBC to place its order with the correct source to acquire best quality and quantity. Moreover, it should consider the time and pricing of the orders placed. The production of BBC needs to be facilitated by restricting interruptions and maintaining supplies of raw materials. Along with this, the organisation requires ensuring adequate stock of raw material when there would be supply shortage. Furthermore, the finished goods inventory needs to be available adequately for assuring smooth selling services to the customers. Finally, some guideline factors are required to be followed by BBC for effective management of its credit sales. These include credit time, collection policy, optimum credit policy and discount policy. 
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.
Fracassi, C. (2016). Corporate finance policies and social networks. Management Science, 63(8), 2420-2438.
Ross, S. A., Westerfield, R. W., Jordan, B. D., & Roberts, G. S. (2016). Fundamentals of corporate finance (9th Canadian ed.). Whitby, Canada: McGraw Hill Ryerson Ltd.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.
Vishny, R., & Zingales, L. (2017). Corporate Finance. Journal of Political Economy, 125(6), 1805-1812.

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