Aahan Foods

SUBMITTED BY: GROUP 9

F006 LAKSHIT BAHETI F009 DEEPIKA CHAUHAN
F023 ABBAS JAMIL F026 VAIBHAV JINDAL
F043 SANCHITA PANCH F063 AARZU WADHWA
What is overtrading and under trading and its relevance to distribution?

Overtrading: Transacting more business Undertrading: It is keeping funds idle and

the an the firms working capital can not using them properly. It is due to under
normally sustain employment of assets of the business

Unhealthy Borrowing Practices

Sales are too low

Heavy Price Cutting

Stock levels are too high

Inadequate inventory cover and
unauthorized movement of stock

Underutilization of the resources

Irregular services to Retailers
 Performance of HSC Distributor
HSC
Evaluation Parameters Baked Desired Oil Desired Overall Desired
Working Capital ratio 36.44 20 13.83 12 20.20
Gross margin 4.19 4 4.53 5 9.20
Operating ratio 3.18 3 2.58 3 2.50
Return on equity 65.11 30 40.50 30 49.23 40
Ratio of the equity / total capital employed 39.88 30 34.78 30 52.53 20
Average stock level 6.09 12 15.15 15
Average credit to retailer 4.36 7 12.50 15
Analyze the “Baked products” business of HSC. What could be its implication on Aahan and recommend
remedial action to prevent the same. What would be the ideal process to implement the correction?

• Working Capital Turnover Ratio = Sales/ working capital = 148.5 *4/16.3= 36.44>20
• Turnover ratio for baked products of HSC is quite high. So working capital employed by HSC is less for
baked products. By increasing working capital, HSC may improve its service to retailers and hence
achieve higher sales.

• Gross Margin = Gross profit / sales = 6.22/148.5 = 4.19> 4%

• Although the gross margin of KSS in “Baked Products” is as per the standard norms, the overall gross
margin of HSC is 9.2%. This means that the distributor is focusing on other high margin products.

• Return on Equity = Net profit / owner’s capital = (1.058/6.5)*400% = 65.1% > 30%
• Return on own capital is very high. The sales team should convince the distributors to employ higher
working capital. The distributor should pass on this excess profit to the channel and to the final customer.
This will result in better sales and better reputation

• Average Stock Level = 365 * average inventory / yearly sales = 365 * 9.5 / (142.2*4) = 6.09
• It is half of the expected norm. The distributor is having fast sales and may be facing stockouts due to
irregular delivery.
Analyze the “Oil ” business of HSC. What could be its implication on Aahan and recommend remedial acti
on to prevent the same. What would be the ideal process to implement the correction?

• Working Capital Turnover Ratio = Sales/ working capital = 148.5 *4/16.3= 13.83>12
• Turnover ratio for baked products of HSC is quite high. So working capital employed by HSC is less for
baked products. By increasing working capital, HSC may improve its service to retailers and hence
achieve higher sales.

• Gross Margin = Gross profit / sales = 3.60/75.9 = 4.53 < 5%

• Although the gross margin of KSS in “Baked Products” is below as per the standard norms, the overall
gross margin of HSC is 9.2%. This means that the distributor is focusing on other high margin products.
And also the more discounts are been given to retailer for this category

• Return on Equity = Net profit / owner’s capital = (0.81*4/8)*400% = 40.50% > 30%
• Return on own capital is very high. The sales team should convince the distributors to employ higher
working capital. The distributor should pass on this excess profit to the channel and to the final customer.
This will result in better sales and better reputation

• Average Stock Level = 365 * average inventory / yearly sales = 365 * 9.5 / (142.2*4) = 15.15 ~ 15
• It is as per the expected norm.
 Performance of KSS Distributor
KSS
Evaluation Parameters Baked Desired Oil Desired Overall Desired
Working Capital ratio 18.91 20 12.50 12 20.12
Gross margin 4.13 4 4.08 5 11.46
Operating ratio 4.16 3 2.48 3 2.62
Return on equity 33.33 30 64.00 30 49.23 40
Ratio of the equity / total capital employed 20.00 30 25.00 30 52.53 20
Average stock level 13.42 12 13.70 15
Average credit to retailer 8.05 7 9.13 15
 Analyze the “Baked Products” business of KSS. What could be its implication on Aahan and
recommend remedial action to prevent the same. What would be the ideal process to
implement the correction?

• Working Capital Turnover Ratio = Sales/ working capital = 125 * 4/ 40 = 18.91 < 20

It may be concluded that working capital employed by KSS is more. It can reduce its working capital which
is spent in the form of services to retailers.

• Gross Margin = Gross profit / sales = 5.85/141.8 = 4.13% > 4%

Although the gross margin of KSS in “Baked Products” is as per the standard norms, the overall gross
margin of KSS is 11.46%. This means that the distributor is focusing on other high margin products.

• Return on Equity = Net profit / owner’s capital = (0.5/6)*400% = 33.3% > 30%

As reflected above in Working Capital turnover ratio also, KSS can increase its working capital employed to
provide more services to retailers.

• Average Stock Level = 365 * average inventory / yearly sales = 365 * 20/ (135.95*4) = 13.42 ~ 12
The average stock level can be reduced from 13.42 to 12 by increasing service frequency to retailers.
 Analyze the “Oils” business of KSS. What could be its implication on Aahan and
recommend remedial action to prevent the same. What would be the ideal process to
implement the correction?

• Working Capital Turnover Ratio = Sales/ working capital = 125 * 4/ 40 = 12.5 > 12

It may be concluded that working capital employed by KSS is more. It can reduce its working capital which
is spent in the form of services to retailers.

• Gross Margin = Gross profit / sales = 5.85/141.8 = 4.1% > 4%

Although the gross margin of KSS in “Baked Products” is as per the standard norms, the overall gross
margin of KSS is 11.46%. This means that the distributor is focusing on other high margin products.

• Return on Equity = Net profit / owner’s capital = (1.6/10)*400% = 64% > 30%

As reflected above in Working Capital turnover ratio also, KSS can increase its working capital employed to
provide more services to retailers.

• Average Stock Level = 365 * average inventory / yearly sales = 365 * 18/ (119.4*4) = 13.70 < 15
The average stock level can be increased from 13.70 to 15 .The distributor is having fast sales and may be
facing stock outs due to irregular delivery.
 What is the possible use of the data on the source of capital?
Sources of Capital available are
1) Equity
2) Debt (Bank borrowing and other sources)

• By analysing the data , we can gain an understanding of who among HSC and KSS are involved
in under trading or overtrading
• Debt/Equity Ratio of HSC is 0.90 while that of KSS is 3.28, which signifies that KSS follows a high
risk model and in turn involved in over trading
• Also, average receivables of KSS in both(baked products and Oils) business is almost twice that
of HSC. This implies that the distributor may create unhealthy practices of giving goods on an
extended credit period
• Overall, sales of HSC is less and it is not generating optimum return for the business. This may
suggest that HSC is involved in under trading
• KSS borrows more from other sources at higher rate of interest i.e. 24% p.a., instead of borrowing
from bank at 6% p.a. There is a possibility that the distributor does not have enough liquidity in
form of cash.
• Also, banks may be more sceptical in giving loan to KSS owning to its high D/E ratio.
 RECOMMENDATIONS

• Introduce systems to persuade distributors to maintain a certain level of working

capital, stock level and credit period

• ERP systems can be implemented to track the sales and distributor data

• Decide which market to enter for further business ventures based on performance
in the current business lines

• Modify norms for margins based on location and product

Thank you