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COOLAID PRIVATE

LIMITED CASE
ANALYSIS
BY: GROUP 9
SIDDHARTH SAXENA
2016PGP183
SUMAN SOURAV
UDAY SHANKAR
2016PGP185

SECTION 3
2016PGP179
2016PGP180
2016PGP181

RAVITEJ VENKAT
VINAY GUNDECHA
VIVEK KHAMBRA

2016PGP184

Company Background

Radhemohan Gupta and Manmohan Gupta, two brothers, promoted


CoolAid Private Limited (CAPL) near Delhi in 1995

They owned about 60 per cent of the capital and are solely responsible
for running the business

manufactured all the components of an aircooler in their factory

Evaluate the margin costs and


benefits of offering a cash discount
(All figures are in lakhs)
Average collection period existing
Average collection period new
Bad debt % existing
Bad debt % new

First year Second Year


90(historical data has been considered)
22.5
2%
2.50%

Sales revenue

357.1

428.52

Cost of goods sold

285.1

342.816

Less:Variable cost 40%of COGS

114.04

137.1264

Contribution

243.06

291.39

1.02

2.410425

additional collection expenses

0.5

Bad Debt

dicount given before 10 days

2%

cost of discount

credit sales % of total sales

90%

other expenses

increase in total sales

20%

Net contribution

6.4278
10.61

11.4588

242.04

282.56

Variable cost
COGS

80%
Difference in contribution

40.52

Given:
Rate of interest

15%

Recommendations

Since there is a considerable increase in the benefits to the company


even after the discount is offered so the company may go ahead with its
new credit policy

The cost of investments in accounts receivables also decreases


substantially be 8.43 lacs thus reducing the finance cost of the company

The average days receivables also decreases from 90 days to 22.5 days
even after taking into account the marginal new customers, thus
decreasing the receivables turnover period

Since the company takes in a number of new employees, so it is


necessary to take more stringent measures to ensure regular collection of
recievables

What if interest rates decline in future years?


How would this affect your recommendation

The rate of interest is a determinant of the investments in accounts


receivables

So, if the interest rate decreases, then the investment in account


receivables will decrease

Here the collection period decreases significantly from 90 days to 22.4


days

So unless there is a drastic decrease in the reduction in the decrease of


interest rates, there shall be no change in the recommendations

Implications of these changes

the collection period decreases from 90 days to 22.5 days

The bad debts increased from 1.02 to 2.14 but this increase is more
than compensated by the increase in sales

The total cost of investment in the receivables has decreased from 12


lacs to 3.6 lacs

The total benefit from the new policy is expected to be 3980935.5

Recommendations

Use proper debtor Scheduling

Use seasonal dating

Extend line of credit to the debtors

Adopt stricter norms with respect to collection and decrease float

Implications of Policy changes

There would be level production through out the year

The inventory holding costs of the company would be reduced

Decrease in float

Incentivise buyers to order early

Possible reasons for the slowdown


in accounts receivable collections
2006

2007

2008

Debtors turnover

6.213244

4.20839

3.334267

Average collection period

57.94074

85.54339

107.9698

0.274%

0.303%

0.286%

%of bed debt to sales

Average collection period is increasing at a higher rate than sales revenue


Credit information and evaluation and scoring is very poor, as we seek no
collateral and average collection period has increased alarmingly as compared
to historical trend
Short term goals of the company is to prepare a contingency plan to stem the
increasing average collection period which is way higher than the historical
collection period of 40 days

What are the primary elements of a firms credit policy?


Is CoolAid Company focusing on
the appropriate element of its credit policy revision?

Term of sale

Credit analysis

Collection policy

Yes, Cool-aid is focusing on the appropriate element of its credit policy


revision.

THANK YOU!