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36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
36711831 virgin-soft-drinks-working-capital-management
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  • 1. Virgin Soft Drinks:Working Capital Management
  • 2. UNIVERSITY OF DHAKADEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMSVirgin Soft Drinks: Working Capital ManagementSubmitted to:Mr. Md. Amirus SalatAssistant ProfessorDepartment of Accounting and Information SystemsUniversity of DhakaSubmitted by:Shah KamalDepartment of Accounting & Information SystemsUniversity of Dhaka
  • 3. Table of ContentsExecutive Summary1. Introduction 012. Objectives of the Study 023. Methodology 024. Limitations of the Study 035. Working Capital Management 045.1. Defining Working Capital 045.2. Working Capital Policies 055.3. Working Capital Cycle 075.3.1. Cash Management 085.3.2. Inventory Management 195.3.3. Managing Accounts Receivable (Debtors) 225.3.4. Managing Accounts Payable (Creditors) 266. Overview of Virgin Group 297. Overview of Virgin Soft Drinks 318. Finding of Working Capital Management Maintained by Virgin SoftDrinks in Bangladesh 328.1. Cash Management 328.2. Inventory Management 388.3. Managing Accounts Receivable (Debtors) 408.4. Managing Accounts Payable (Creditors) 439. Recommendation 4310. Conclusion 44BibliographyAnnexure
  • 4. EXECUTIVE SUMMARYWorking capital is basically an expression of how many in liquid assets the companycurrently has to build its business, fund its growth and produce value for the owner.The faster a business expands the more cash it will need for working capital andinvestment. The cheapest and best sources of cash exist as working capital rightwithin the business. Good management of working capital will generate cash andhelp improve profits and reduce risks. My study is based on the comparison betweentheoretical and practical aspects of working capital management. For this purpose,Ive collected some information regarding working capital, its cycle and itsmanagement from Virgin Soft Drinks. It has been found that their major transactionsare handled in cash. But one of its major weaknesses is that it keeps its surplus fundsin banks rather than investing in marketable securities. Therefore they can earnoptimum profit by implementing effective mechanism which will help to gainoptimum working capital.
  • 5. Virgin Soft Drinks: Working Capital Management1. INTRODUCTION:Working capital is the life blood of any business big or small. However, smallerbusinesses might find it more trying to maintain a comfortable level of capital.Managing working capital is an important factor for them. Working capitalmanagement is important because maintaining a balance of income to debt can bedifficult and owners must be diligent to assure that it is kept. Sometimes it takes alittle assistance to maintain levels of fluidity or make major purchases. If workingcapital dips too low, a business risks running out of cash. Even very profitablebusinesses can run into trouble if they lose the ability to meet their short-termobligations. Working capital financing can be used as a fast cash option to cushionthe periods when the flow is not ideal or readily available. Even when owners aremeticulous in managing working capital, finding the right levels to remaincomfortable and competitive can be difficult.The analogy has often been made that cash is the lifeblood of any business. Atransfusion will miraculously bring the patient back from the brink of death, but onlyif:The blood is of the right kind;The problem causing the leakage is attended to.In other words, the financial requirements of any business must be tailored to suitthat businesss own particular needs. For example, fixed assets should be financed bylong term loans and capital. Working capital requirements should be attended to byshort term finance, e.g., overdrafts.Page 1 of 46It goes without saying that before capital is injected into the business it should first beascertained whether all unnecessary leakages have been plugged. Otherwise, in time,the transfusion will follow the same route. To control and exploit the cash cyclethrough any business so that it can continue to function on a day-to-day basis, istherefore, the hub of working capital management. The fundamental principle of
  • 6. Virgin Soft Drinks: Working Capital Managementworking capital management is having just the right amount of money availablewhen needed. Every rand in the business should be earning its maximum returnwherever employed.2. OBJECTIVES OF THE STUDY:The study has been undertaken with the following objectives:To know the fundamentals of working capital management;To gather practical knowledge about the implementation of working capitalmanagement by Virgin Soft Drinks;To understand the efficiency of Virgin Soft Drinks in managing workingcapital.3. METHODOLOGY:In this paper, the following methods are used:a) Sources and Data Collection:The major part of this paper is collected from the primary and secondary datacollection method.Conducted formal interview and focus observation and intensive practicalwork to collect information;Page 2 of 46Collected information from companys profiles;
  • 7. Virgin Soft Drinks: Working Capital ManagementCollected current information from website.b) Segregation of Data:Necessary data were segregated from the source material for the purpose of preparingthe report.c) Processing of Data:Collected data were compiled and processed for the purpose of preparing the report.d) Presentation of Data:Collected data were presented in charts and tables.4. LIMITATIONS OF THE STUDY:On the way of my study, I have faced a number of problems, which may be turnedas the limitation of report:Many personnel of the organization due to their pressure of the work werereluctant to provide much useful information;Sufficient records, publications, facts and figures are not available. Theseconstraints narrowed the scope of real analysis;Due to time constraint, I could not spend sufficient time, which wasnecessary to make this report more representative of the fact;Page 3 of 46Lack of experience has also acted as constraint for the exploration of thetopic.
  • 8. Virgin Soft Drinks: Working Capital Management5. WORKING CAPITAL MANAGEMENT:5.1. DEFINING WORKING CAPITAL:The term working capital refers to the amount of capital which is readily available toan organization. That is, working capital is the difference between resources in cashor readily convertible into cash (Current Assets) and organizational commitments forwhich cash will soon be required (Current Liabilities).Current Assets are resources which are in cash or will soon be converted into cash inthe ordinary course of business.Current Liabilities are commitments which will soon require cash settlement in theordinary course of business.Thus –WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIESIn a firms Statement of Financial position, these components of working capital arereported under the following headings:Current Assets:Liquid Assets (cash and bank deposits);Inventory;Debtors and Receivables.Current Liabilities:Bank Overdraft;Creditors and Payables;Other Short Term Liabilities.Page 4 of 46
  • 9. Virgin Soft Drinks: Working Capital ManagementWorking capital management involves the relationship between a firms short-termassets and its short-term liabilities. The goal of working capital management is toensure that a firm is able to continue its operations and that it has sufficient ability tosatisfy both maturing short-term debt and upcoming operational expenses. Themanagement of working capital involves managing inventories, accounts receivableand payable, and cash.5.2. WORKING CAPITAL POLICIES:The aim of working capital policy is to balance having too little working capital,which can lead to an inability to pay debts as they fall due or the need for expensiveshort term borrowings, and too much which is wasteful in terms of lost opportunitiesfor the funds tied up. The crucial role of working capital is that it finances the goodsinwards, production and sales activities.A firm’s working capital policy has two components:1. Policies regarding the appropriate level of current assets (Current Asset Investment Policy);2. Policies regarding the use of short-term financing (Current Asset Financing Policy)Alternative Current Asset Investment Policies:These policies are general strategies that firms may follow with regard to their overalllevel of current assets investment or holdings. There are three types:1. Relaxed Current Asset Investment Policy –Relatively large amounts of cash, marketable securities and inventories are carriedand sales are stimulated by a liberal (generous) trade credit policy resulting in highlevels of receivables. This is a low risk strategy because the firm always has plenty ofcash and inventory on hand. The return is low because more money is invested inlow yielding assets.Page 5 of 46
  • 10. Virgin Soft Drinks: Working Capital Management2. Restricted Current Asset Investment Policy –Holdings of cash securities, inventories, and receivables are minimized. This is ahigh risk strategy because the firm tries to keep the bare minimum of cash andinventory. The potential return is high because less money is invested in lowyielding assets.3. Moderate Current Asset Policy –Balance between relaxed and restricted current asset investment policies (moderaterisk - moderate potential return).Alternative Current Asset Financing Policies:These policies are general strategies that firms may follow with regard to how currentassets are to be financed. Current assets can be classified as permanent or temporary.Permanent current assets are the current assets that the company needs to maintainthroughout the entire year. Temporary current assets are those that are due toseasonal fluctuations. With respect to the current asset financing policy, the questionis how the permanent current assets will and temporary current assets are financed(long-term or short-term financing).Page 6 of 46Aggressive Moderate ConservativeCash Minimum holding Prepared to holdsome precautionarybalancesPrepared to hold idlecash balancesDebtors andstockMinimumconsistent withbusiness needsModerate levels High stock anddebtor levels tomaximize salesCreditors Maximumavailable withoutcompromisingbusiness needsModerate level Low level seekingdiscounts andreputation for goodpayment
  • 11. Virgin Soft Drinks: Working Capital ManagementFuture cashflowsPredictable ReasonablypredictableUnpredictableAttitude toRiskAccepting Neutral RejectingTotal assets = Fixed Assets + Permanent Current Assets + Fluctuating Current Assets5.3. WORKING CAPITAL CYCLE:Cash flows in a cycle into, around and out of a business. It is the businesss life bloodand every managers primary task is to help keep it flowing and to use the cash flowto generate profits. If a business is operating profitably, then it should, in theory,generate cash surpluses. If it doesnt generate surpluses, the business will eventuallyrun out of cash and expire.The faster a business expands the more cash it will need for working capital andinvestment. The cheapest and best sources of cash exist as working capital rightwithin business. Good management of working capital will generate cash will helpimprove profits and reduce risks.Working capital can be broken down into the following major components: cash (orbank overdraft), stock, debtors, creditors. Each of these items can have a majorinfluence on the working capital (or simply cash) that any business requires on anongoing basis. For example, when a business starts up, the owner may inject acertain amount of cash into the business which will enable him to purchase his initialstock, pay his workers their first months wages and cover other overheads such asrent. He then sells his product and this income may be utilized to purchase morestock, pay more wages and overheads and perhaps even have a surplus over for hisown use. The quicker he can turn his stock over to receive payment, the sooner theworking capital cycle will be completed.Page 7 of 46
  • 12. Virgin Soft Drinks: Working Capital ManagementFigure: Working Capital CycleThese major components of working capital are discussed below:5.3.1. CASH MANAGEMENT:The term cash management refers to the management of cash from the time it startsits transit to the firm until it leaves the firm in payments. Cash managementencompasses the design of collection and disbursement systems for cash and thetemporary investment of cash while it resides with the firm. Widely used moneymarket instruments are-Treasury bill;Commercial paper;Certificate of deposits;Banker’s acceptance;Page 8 of 46Repurchase agreement.
  • 13. Virgin Soft Drinks: Working Capital Management5.3.1.1. Motives for Holding Cash:Despite the seemingly low returns, there are several good reasons why firms holdcash and marketable securities. These reasons are –Cash for transactions;Cash and near cash assets as hedges;Temporary investment; andCompensating balances.5.3.1.2. Components of Cash Management:A Cash Flow Statement shows the sources and uses of cash and is typically dividedinto three components:Operating Cash Flow:Operating cash flow, often referred to as working capital, is the cash flow generatedfrom internal operations. It comes from sales of the product or service of yourbusiness, and because it is generated internally, it is under your control.Investing Cash Flow:Investing cash flow is generated internally from non-operating activities. Thisincludes investments in plant and equipment or other fixed assets, nonrecurring gainsor losses, or other sources and uses of cash outside of normal operations.Financing Cash Flow:Financing cash flow is the cash to and from external sources, such as lenders,investors and shareholders.Page 9 of 46
  • 14. Virgin Soft Drinks: Working Capital Management5.3.1.3. Tools for Cash Management:Flotation and Check Clearing:Management of cash; when it is not in the firm’s hands, that is, in transit to and fromthe firm is on important function in the area of finance. Transit times for the checktakes in three stages. These are mail float, at firm float, and clearing float. Normallymail float takes 1 to 5 days, at firm float takes 0.25 to 1 day, and clearing float takes 0to 2 days .The firm should care about this process because every delay in the receiptof money by the firm lowers the firm’s returns and therefore its shareholders’ wealth.There are several strategies that firm can use to reduce the delay in receiving funds.Each of these strategies addresses one or more of the three float times (mail floattime, at time float time and clearing float time) that make up the total transit time offund from one firm to another.Other Cash Management Tools:When the economy is strong, companies can lapse into sloppy cash-managementpractices. Firm should try exploring these options:1. Sweep accounts:These bank accounts are the easiest way to generate some income from companysspare funds; however, they make sense only if the money youll earn will be greaterthan the fees your bank will charge. Business owners have two types of sweepaccounts to choose between:Page 10 of 46Controlled-investment accounts: These are the most profitable form ofsweep account, but they wont work for company if the firm has anyelectronic payments or wire transfers, since those may be submitted forpayment later in the day and the account wont have enough cash in it tocover them.
  • 15. Virgin Soft Drinks: Working Capital ManagementPage 11 of 46End-of-day sweep accounts: A safer bet for most small-business owners,these accounts wait until a late-hour cutoff to determine how much tosweep into the firms overnight investments. Typically their investmentyields are 10 to 20 basis points (.1% to .2% of the investment) lower thanthose offered with controlled investments.2. Lock-box accounts:A lock box is a cash-management system that helps the firm collect funds quickly.Generally set up with the assistance of a big money center or regional bank, lockboxes provide the firm with a special zip code and, usually, quicker deliveries fromregional post offices. They are especially important if the firm has clusters ofcustomers in out-of-state locations and dont want to lose days waiting for theirchecks to arrive by long-distance mail.5.3.1.4. Cash Concentration and Cash Disbursement:Once the remittances from the firm’s customers have been received and cleared theresulting cash balances is available in the firm’s lockbox (depository) banks. It isuseful for the firm to gather these balances from the lockbox banks into the centralbank account. The process of collecting funds is called cash concentration.Several concentration mechanism are available for the firm to use in transferringfunds from its collection banks to regional concentration banks, and from there to thecentral concentration bank. These mechanisms differ in cost and in the availability offunds that they provide. These are –a) Depository Transfer Check:It is the cheapest transfer mechanism. This document instructs one bank tosend funds to another, and is treated the same as any other check.
  • 16. Virgin Soft Drinks: Working Capital Managementb) Automated Clearing House (ACH) Electronic Transfer:This vehicle is essentially an electronic version of the depository transfercheck, and can be used between banks that participate in the automatedclearing house system.c) Wire Transfer:These are electronic message between banks.Decisions regarding concentration mechanism usually hinge on the size andspread of the firm’s deposits. Firms with small deposits spread over asubstantial number of banks will tend to have more extensive concentrationsystems and will transfer among accounts using low-cost transfer vehicles thatoffer only delayed availability (such as depository transfer checks). Firms withlarger deposits will have fewer accounts (since a local deposit for transfer toan upstream bank is not needed) and will use more expensive and more rapidtransfer mechanisms (such as wire transfers). The concentration systems ofmajor chemical companies for example, tend to be structured in this way –Depository/Lockbox BanksRegional Concentration BanksCentral Concentrated BankFigure: A typical Cash Concentration System(Arrows indicate transfers of collected funds)Page 12 of 46
  • 17. Virgin Soft Drinks: Working Capital ManagementDisbursement management addresses the efficient payout out of this cash once it isconcentrated. The firm’s objective in disbursement management is to retain the cashfor as long as possible. In this way, the firm will have the maximum amount of fundsavailable for investment and transactional purposes. Certainly this managementmeans making disbursement only when they are due and not before. The firm hasseveral available set of techniques for disbursement management. Included amongthese are –a) Management of Disbursement Float:In this set of techniques, the disbursing firm attempts to increase the length oftime between the mailing of its checks and the eventual withdrawal of fundsfrom the banks. This involves strategies for increasing mail float, at firm float,and clearing float on its outgoing checks. For example, the disbursing firmmay intentionally address checks to the firm’s office address rather than itslockbox, creating at firm float.b) Zero-Balance Accounts:Here the firm holds the cash until the check arrive (or expected to arrive) atthe disbursement bank. In this strategy, an account for disbursement is firstestablished at a bank. For the zero-balance system to be effective, theparticipating bank must be one on which most disbursement are made via theBangladesh Bank’s clearance system (which presents disbursements to banksearly in the morning), and not a bank where disbursements occur throughoutthe day (as with a major money-center bank). Consequently, the banks usedin zero-balance strategies are usually branches of major banks and not theirmain locations.Page 13 of 46c) Controlled Disbursing:In this system, the firm projects the amount of checks to arrive each day at thedisbursement bank (based on the checks written in previous days and historic
  • 18. Virgin Soft Drinks: Working Capital Managementstatistics on disbursement float) and transfers the amount of the expectedchecks to the account on that day or just before.5.3.1.5. Cash Forecasting:Defining Cash Forecasting:The cash forecast is an estimation of the flows in and out of the firm’s cash accountover a particular period of time, usually a quarter, month, week or day. The cashforecast is primarily intended to produce a very useful piece of information: anestimation of the firm’s borrowing and lending needs and uncertainties regardingthese needs during various future periods. Cash forecasting is very crucial to mostfirms. It enables them to anticipate periods of surplus cash and periods wherefinancing will be necessary. This anticipation is the reason that cash forecasts aregenerated. Anticipation enables the firm to plan much more effectively forinvestment and financing, and via this planning, produce superior return.Types of Cash Forecasts:The types of cash forecasts generated by firms can be differentiated along twodimensions: the length of the periods included within the cash forecast and the approachto cash flows used in the cash forecast. The length of the period refers to the units oftime into which the cash forecast is divided. Firms may make cash flow forecastsover periods of various lengths: yearly flows, quarterly flows, monthly flows, weeklyflows, or even daily flows. The most popular forecast involves monthly flows, butmost firms do not confine themselves to a single forecast. Instead they use severalforecasts with periods of various lengths. When the firm makes forecasts involvingmultiple and overlapping period lengths, one forecast relates to another. Startingwith data on relatively long periods and breaking it down into smaller periods iscalled distribution; starting with data on relatively short periods and aggregating intolonger periods is called scheduling.Page 14 of 46
  • 19. Virgin Soft Drinks: Working Capital ManagementFirms use two common approaches to cash flows in generating the cash forecast: thereceipts and disbursements approach and the adjusted net income approach. The receiptsand disbursements approach use the amounts of cash expected to be received anddisbursed by the firm over the periods chosen for forecast. The adjusted incomestatement approach is sometimes called the sources and use approach. Here, theforecaster starts with projected net income on an accrual basis and adjusts to a cashbasis. This method provides a representation of changes in asset and liabilityaccounts; since the level of these accounts are of interest to the firm, this aspect of theadjusted income statement is an advantage over the receipts and disbursementsmethod.Items to Be Forecast:In the receipt and disbursements cash forecasting method, estimates need to be madeof the numerous major and minor items that the firm collects (receipts) and that itpays (disbursements). The more individual categories of items the firm includes in itsforecast procedure, the more accurate the forecast may be, but the more costly interms of time and effort it will be to generate.Some Possible Types of Cash Receipts and Cash DisbursementsCash Disbursements Cash ReceiptsCash Purchases of Materials PayrollTaxesMaturing Accounts PayableMaturing Notes PayableMiscellaneous DisbursementsAccounts ReceivableNotes ReceivableRental IncomeInterest IncomeMiscellaneous ReceiptsMethods of Financial Forecasting:Page 15 of 46Financial forecasting is the estimation of the future level of a financial variable, oftena cash flow, asset level or liability level. It is usually assumed that the relationshipbetween the financial variable and other variable is linear. The general linear modelcan then be used:
  • 20. Virgin Soft Drinks: Working Capital Managementnnt xa........xaxaaY 22110 ++=Here,= Financial variable (Y) to be forecast in period t.tYx = Explanatory variable; it is assumed to cause the level of Y in period t.0a = Represents a constant unaffected by the x.The other terms are the estimated coefficients of the explanatory x variables.There are n terms with x’s in them.There are four common approaches to forecasting financial variables, but theyare all special cases of the general linear model. These are – spot method, proportionto another account, compounded growth and multiple dependencies.Using Cash Forecast:The estimate of available funds for investment and needed financing enables the firmto plan so as to obtain the most advantages borrowing terms for deficits and achievethe greatest interest income on surplus. A useful chart for this planning purpose is abar chart. e.g.,Figure: Bar Chart of Cash Surpluses and Deficits from hypothetical dataPage 16 of 467550-6030100-20-80-60-40-20020406080100120DeficitSurplusJanuary February March April May June
  • 21. Virgin Soft Drinks: Working Capital ManagementSources of Uncertainty in Cash Forecasting and Hedging Uncertainties:There are numerous sources of risk in cash forecasting. Among the sources are salesuncertainty, collection rate uncertainty, production cost uncertainty and capitaloutflow uncertainty.5.3.1.6. Models for the Management of Cash and Temporary Investments:There are different models for the management of cash and temporary investments.Among these the most popular methods are – Baumol model, Beranek model,Miller-Orr model, and Stone model.Baumol and Beranek use the same model. The formula is cited below –Interest Income = iYnn⎥⎦⎤⎢⎣⎡ −21Profit = naiYnn−⎥⎦⎤⎢⎣⎡ −21Optimum number of transactions = ⎟⎠⎞⎜⎝⎛aiY2Where, n = Optimum number of transactionsi = Interest rate per perioda = Transaction costY = Total inflow for the periodPage 17 of 46Miller-Orr and Stone use the same model, i.e., R-Statistic. The model is –3143/iavR ⎟⎠⎞⎜⎝⎛=Optimum Control Limit = R + LUpper Control Limit = 3R + LWhere, a = Transaction Cost
  • 22. Virgin Soft Drinks: Working Capital Managementv = Variance of daily cash flowsi = Daily interest rate5.3.1.7. Administration:Cash receipts should be processed and banked as quickly as possible because:They cannot earn interest or reduce overdraft until they are banked;information about the existence and amounts of cash receipts is usually notavailable until they are processed.Where possible, cash floats (mainly petty cash and advances) should be avoided. If,on review, the only reason that can be put forward for their existence is that "wevealways had them", they should be discontinued. There may be situations where theyare useful, however. For example, it may be desirable for peripheral parts ofdepartments to meet urgent local needs from cash floats rather than local bankaccounts.5.3.1.8. Internal Control:Cash and cash management is part of a firms overall internal control system. Themain internal cash control is invariably the bank reconciliation. This providesassurance that the cash balances recorded in the accounting systems are consistentwith the actual bank balances. It requires regular clearing of reconciling items.5.3.1.9. Practicing Good Cash Flow Management:Good cash management is simple. It involves:Knowing when, where, and how firms cash needs will occur;Page 18 of 46Knowing the best sources for meeting additional cash needs;
  • 23. Virgin Soft Drinks: Working Capital ManagementPage 19 of 46Being prepared to meet these needs when they occur, by keeping goodrelationships with bankers and other creditors.5.3.2. INVENTORY MANAGEMENT:Inventory management is necessary for owners who want to maintain a stockingservice for quick turnaround to help ensure total customer satisfaction. The fill rateof an item on a managed inventory list must be maintained to avoid shortages offrequently used items. Even when utilizing an inventory management system,occasional shortages will still occur. Inventories are lists of stocks-raw materials,work in progress or finished goods-waiting to be consumed in production or to besold. The total balance of inventory is the sum of the value of each individual stockline.Basically, firms hold stocks for the following reasons:To act as a buffer in times of unusually high demand;To ensure continuity of production;Avoid high costs of emergency orders;To take advantage of quantity discounts by ordering more at a time;To reduce ordering costs by ordering more items on fewer;As part of the production process, e.g., maturing whisky or keeping oil inpipelines;Seasonality of demand (e.g., firework) or supplies;Suppliers insist on minimum order quantities.The key issue for a business is to identify the fast and slow stock movers with theobjectives of establishing optimum stock levels for each category and, thereby,minimize the cash tied up in stocks. Factors to be considered when determiningoptimum stock levels include:
  • 24. Virgin Soft Drinks: Working Capital ManagementPage 20 of 46What are the projected sales of each product?How widely available are raw materials, components etc.?How long does it take for delivery by suppliers?Can the firm remove slow movers from its product range withoutcompromising best sellers?Inventory management is an important aspect of working capital managementbecause inventories themselves do not earn any revenue. Holding either too little ortoo much inventory incurs costs.Costs of carrying too much inventory are:Opportunity cost of foregone interest;Warehousing costs;Damage and pilferage;Obsolescence;Insurance.Costs of carrying too little inventory are:Stock out costs:Lost sales;Delayed service.Ordering costs:Freight;on;Order administratints.Loss of quantity discou
  • 25. Virgin Soft Drinks: Working Capital ManagementCarrying costs can be minimized by making frequent small orders but this increaseordering costs and the risk of stock outs. Risk of stock-outs can be reduced bycarrying safety stocks (at a cost) and re-ordering ahead of time.The best ordering strategy requires balancing the various cost factors to ensure thefirm incurs minimum inventory costs. The optimum inventory position is known asthe Economic Reorder Quantity (ERQ).Nowadays, many large manufacturers operate on a just-in-time (JIT) basis wherebyall the components to be assembled on a particular today, arrive at the factory earlythat morning, no earlier - no later. This helps to minimize manufacturing costs as JITstocks take up little space, minimize stock-holding and virtually eliminate the risks ofobsolete or damaged stock. Because JIT manufacturers hold stock for a very shorttime, they are able to conserve substantial cash. JIT is a good model to strive for as itembraces all the principles of prudent stock management. For better stock control,firm may try the following:Review the effectiveness of existing purchasing and inventory systems;Know the stock turn for all major items of inventory;Apply tight controls to the significant few items and simplify controls for thetrivial many;Sell off outdated or slow moving merchandise - it gets more difficult to sell thelonger the firm keeps it;Consider having part of its product outsourced to another manufacturer ratherthan make it itself;Review its security procedures to ensure that no stock "is going out the backdoor!"Higher than necessary stock levels tie up cash and cost more in insurance,accommodation costs and interest charges.Page 21 of 46
  • 26. Virgin Soft Drinks: Working Capital ManagementHowever, it is important to keep an overall perspective. It is not cost-effective toclosely manage a large number of low value inventory lines, nor is it necessary. Ausual feature of inventories is that a small number of high value lines account for alarge proportion of inventory value. The "80/20" rule (PARETO) predicts that 80%of the total value of inventory is represented by only 20% of the number of inventoryitems. Those high value lines need reasonably close management. The remaining80% of inventory lines can be managed using "broad-brush" strategies.5.3.3. MANAGING ACCOUNTS RECEIVABLE (DEBTORS):Cash flow can be significantly enhanced if the amounts owing to a business arecollected faster. Every business needs to know.... who owes them money.... how much isowed.... how long it is owing.... for what it is owed.Debtors (Accounts Receivable) are customers who have not yet made payment forgoods or services which the department has provided. The objective of debtormanagement is to minimize the time-lapse between completion of sales and receiptof payment. The costs of having debtors are:Opportunity costs (cash is not available for other purposes);Bad debts.If firm doesnt manage debtors, they will begin to manage business as the firm will graduallylose control due to reduced cash flow and, of course, it could experience an increasedincidence of bad debt. The following measures will help manage debtors:Having the right mental attitude to the control of credit and make sure that itgets the priority it deserves;Establishing clear credit practices as a matter of company policy;Page 22 of 46Making sure that these practices are clearly understood by staff, suppliers andcustomers;
  • 27. Virgin Soft Drinks: Working Capital ManagementPage 23 of 46Being professional when accepting new accounts, and especially larger ones;Checking out each customer thoroughly before the firm offers credit. Usecredit agencies, bank references, industry sources etc.;Establishing credit limits for each customer... and sticking to them;Continuously reviewing these limits when it suspects tough times are comingor if operating in a volatile sector;Keeping very close to the firms larger customers;Invoicing promptly and clearly;Considering charging penalties on overdue accounts;Considering accepting credit /debit cards as a payment option;Monitoring its debtor balances and ageing schedules, and dont let any debtsget too large or too old.Debtor management includes both pre-sale and debt collection strategies.Pre-sale strategies include:Offering cash discounts for early payment and/or imposing penalties for latepayment;Agreeing payment terms in advance;Requiring cash before delivery;Setting credit limits;ning credit;Setting criteria for obtaiBilling as early as possible;rogress payments.ost-sale strategies include:for collecting the debt upon the center that made the sale;Requiring deposits and/or pPPlacing the responsibilityIdentifying long overdue balances and doubtful debts by regular analytical reviews;Having an established procedure for late collections, such asA reminder;A letter;
  • 28. Virgin Soft Drinks: Working Capital ManagementPage 24 of 46ion of further credit;CancellatTelephone calls;n agency;Use of a collectiohe firm should recognize that the longer someone owes firm, the greater the chanceLegal action.Tit will never get paid. If the average age of debtors is getting longer, or is already verylong, it may need to look for the following possible defects:Weak credit judgment;res;Poor collection procedums;Lax enforcement of credit terSlow issue of invoices or statements;Errors in invoices or statements;Customer dissatisfaction.Debtors due over 90 days (unless within agreed credit terms) should generallydemand immediate attention. For example, warning signs of a future bad debt –Longer credit terms taken with approval, particularly for smaller orders;Use of post-dated checks by debtors who normally settle within agreed terms;Evidence of customers switching to additional suppliers for the same goods;New customers who are reluctant to give credit references;Cre GReceiving part payments from debtors.dit ranting to Marginal Accounts:Traditional Approach:In the traditional approach to the credit granting decision, it is the credit analysts jobrmation that has been collected and reach a judgmentregarding the applicants creditworthiness. One traditional way of organizing thisto synthesize all the info
  • 29. Virgin Soft Drinks: Working Capital Managementinformation is by characterizing the applicant along five dimensions. Thesedimensions are called the Five Cs of credit –Capital;Character;Collateral;andCapacityConditions.Net Present Value (NPV) Approach:Once a firm has assessed the creditworthiness of a customer, it has to decide whetherr not credit should be granted. The firm should use the NPV rule to make theld be granted.Figureodecision. If NPV is positive, credit shouCredit GrantingDecision: Credit Granting Decisionhe act of collecting money is one which most people dislike for many reasons andtherefore put on the long f selves there is somethingore urgent or important that demands their attention now. There is nothing moreTinger because they convince themmimportant than getting paid for firms product or service. A customer who does notPage 25 of 46Grand CreditPayment received Payment not receivedBenefit of present valueof future net cash flowCost of present valuementof lost investNet Payoff. PV ofbenefit-costNo CreditNo Payoff
  • 30. Virgin Soft Drinks: Working Capital Managementpay is not a customer. Here are a few ideas that may help the firm in collectingmoney from debtors:Firm should develop appropriate procedures for handling late payments;It should track and pursue late payers;It might get external help if its own efforts fail;or money.... its firms and it is entitledCompany shouldnt feel guilty asking fto it;ction;Firm must make that call now. And it should keep asking until it gets somesatisfalessens the problem;In difficult circumstances, take what the firm can now and agree terms for theremainder. Itpaying;When asking for money, be hard on the issue - but soft on the person. It shouldntgive the debtor any excuses for not5.3.4. BLE (CREDITORS):ices for goods or services haveeen paid. Organizations often regard thenotto delay all payments until the latest possible date., Regular weekly orThe firm make it its objective is to get the money - not to score points or geteven.MANAGING ACCOUNTS PAYACreditors (Accounts Payable) are suppliers whose invobeen processed but who have not yet bamount owing to creditors as a source of free credit. However, creditoradministration systems are expensive and time-consuming to run. The over-ridingconcern in this area should be to minimize costs with simple procedures.While it is unnecessary to pay accounts before they fall due, it is usuallyworthwhilePage 26 of 46fortnightly payment of all due accounts is the simplest technique for creditormanagement.
  • 31. Virgin Soft Drinks: Working Capital ManagementElectronic payments (direct credits) are cheaper than check payments, consideringthat transaction fees and overheads more than balance the advantage of delayedpresentation. Some suppliers are reluctant to receive payments by this method, but inview of the substantial cost advantage (and the advantages to the suppliersthemselves) departments may wish to encourage suppliers to accept this option.However, electronic payments are likely to be used in conjunction with, rather thanas a replacement for, check payments.Applying Best Practices in Managing Accounts Payable:f course, simply deferring payments to suppliers could have adverse consequencesOthat more than offset the benefits of this additional cash flow. Therefore, it isimportant to develop a holistic approach. The firm should consider the followingbest practices for payables management:Managing payment dates and terms to maximize cash flow –y reporting onreceivable andid penalty charges and taking advantage ofwer vendors and negotiate for moreto buying consortia with others, evenvoices forpayment based on receipt of goods or receipt of invoice, whichevercomes later.Calculating and setting performance targets. RegularlA/P performance measures, such as days in payables;Coordinating the A/P processes with accountsinventory management to ensure that the company is collecting morecash than it is paying out;Paying bills on time to avoprompt-payment discounts where the discounts exceed the company’scost of working capital;Consolidating purchases with fefavorable payment terms;Considering entering inPage 27 of 46competitors, to obtain favorable supplier pricing and terms;Unless contract terms specify otherwise, setting up in
  • 32. Virgin Soft Drinks: Working Capital ManagementPage 28 of 46Emprocess-time payments with Electronic Funds Transfer (EFT);uraging vendors to utilize electronic invoice presentment;andancies and moreploying technology to automate the accounts payable transactiones –Making just-inUsing an electronic invoice-matching application;EncoFor companies with multiple locations or business units, employingshared service approach for A/P to eliminate reduquickly implement process improvements.MaintavendorCommunicating accounts payable requirements to suppliers at them key suppliers;for suggestions on how to improve theEfficient aand making th ’s cash is just good business.ining open communications and building strong relationships withs to access valuable trade credit –beginning of transactions;Requesting summary invoicing froRequiring suppliers to send invoices directly to accounts payable;Asking tier-one supplierspayment process.nd effective management of accounts payable helps improve cash flow –e most of company
  • 33. Virgin Soft Drinks: Working Capital Management6. OVERVIEW OF VIRGIN GROUP:Virgin - one of the most respected brands in Britain - is now becoming the first globalbrand name of the 21stcentury. Virgin is involved in planes, trains, finance, softdrinks, music, mobile phones, holidays, cars, wines, publishing, bridal wear - the lot!What tie all these businesses together are the values of its brand and the attitude of itspeople. Virgin has created over 200 companies worldwide, employing over 25,000people. Its total revenues around the world in 2002 exceeded £4 billion (US $7.2billion).In 1970, Richard Branson founded Virgin as a mail order record retailer, and notlong after he opened a record shop in Oxford Street, London. During 1972 arecording studio was built in Oxfordshire, and the first Virgin artist, Mike Oldfield,recorded "Tubular Bells" which was released in 1973.This album went on to sell over 5 million copies! Since then many household names,including Belinda Carlisle, Genesis, Phil Collins, Janet Jackson and The RollingStones have helped to make Virgin Music one of the top six record companies in theworld. The equity of Virgin Music Group - record labels, music publishing, andrecording studios was sold to THORN EMI in 1992 in a US$1billion deal.Page 29 of 46The Virgin Group has now expanded into international music Mega stores, airtravel, mobile, financial, retail, music, internet, drinks, rail, hotels and leisure, witharound 200 companies in over 30 countries.
  • 34. Virgin Soft Drinks: Working Capital ManagementIn Virgins customers eyes, Virgin stands for value for money, quality, innovation,fun and a sense of competitive challenge. It delivers a quality service by empoweringits employees and facilitates and monitors customer feedback to continually improvethe customers experience through innovation.When they start a new venture, Virgin bases it on hard research and analysis.Typically, they review the industry and put themselves in the customers shoes to seewhat could make it better. Virgin asks fundamental questions:Is this an opportunity for restructuring a market and creating competitiveadvantage? What are the competitors doing?Is the customer confused or badly served?Is this an opportunity for building the Virgin brand?Can we add value?Will it interact with its other businesses?Is there an appropriate trade-off between risk and reward?Page 30 of 46Virgin is also able to draw on talented people from throughout the group. Newventures are often steered by people seconded from other parts of Virgin, who bring
  • 35. Virgin Soft Drinks: Working Capital Managementwith them the trademark management style, skills and experience. Virgin frequentlycreates partnerships with others to combine skills, knowledge, and market presenceand so on. Contrary to what some people may think, their constantly expanding andeclectic empire is neither random nor reckless. Each successive venture demonstratesits skill in picking the right market and the right opportunity.7. OVERVIEW OF VIRGIN SOFT DRINKS:The Virgin Drinks Group first launched as the Virgin Cola Company in 1994 withVirgin Cola in the UK. Since then the company has ventured across the carbonatedsoft drinks arena and beyond into energy drinks, tea and flavored Colas. Thisexpansion has lead to the evolution of the Virgin Drinks Company, a companywhose aim is to put the excitement back into the world of soft drinks. It launched inBangladesh in 1999. Virgin Soft Drinks is monitored by Global Beverage Co. Ltd. inBangladesh.Brief history of Virgin Drinks is given below:Page 31 of 461994 November: Virgin Cola launched in the UK1996 March: Virgin Cola launched in France1998 June: Virgin Cola launched in BelgiumApril: Virgin Cola launched in the French West Indies
  • 36. Virgin Soft Drinks: Working Capital ManagementAugust: Virgin Cola launched in Switzerland1999 March: Virgin Colours launched in ItalyMarch: Virgin Cola launched in JapanJuly: Virgin Colours launched in South AfricaDecember: Virgin Colours launched in Bangladesh2001 January: Sweden launched Virgin ColoursNovember: Singapore launched Virgin Colours2002 February: Croatia launched Virgin ColoursJune: Russia launched Virgin ColoursJune: Tunisia launched Virgin Colours2003 May: Israel launched Virgin Colours8. FINDINGS OF WORKING CAPITAL MANAGEMENT MAINTAINED BYVIRGIN SOFT DRINKS IN BANGLADESH:8.1. CASH MANAGEMENT:8.1.1. Holding Cash and Marketable Securities:Although there are many good reasons why firm hold cash and marketablesecurities, Virgin Drinks holds cash and marketable securities for two reasons –i) Cash for transactions;ii) Cash as hedges.This indicates that the firm does not hold cash and marketable securities for someimportant reasons, such as –i) Near cash assets as hedges;Page 32 of 46
  • 37. Virgin Soft Drinks: Working Capital Managementii) Temporary investment and compensating balances.Virgin Soft Drinks does not invest in money market securities such as Treasury bill,commercial paper, certificate of deposits, banker’s acceptance, and repurchaseagreement. This firm deposits its money in bank as currant A/C or fixed A/C. Theysay that they do not have enough money to invest in money market instrument.They also say that if they have enough money, they will invest it in money marketshort term securities. We know that near cash, interest earning assets can besubstituted for cash when motivation for holding these assets is the hedging of cashflow uncertainties or is the temporary investment of surplus funds. In this point,Virgins position is not good as there is no significant hedging against uncertainty ofcash.8.1.2. Floatation and Check Clearing:Virgin is very smart in handling the problem of transit time for checks. Here mailfloat takes 2 to 3 days, at firm takes 0.25 day and clearing float takes 1-3 days. Virginuses most of the strategies available for reducing the delay in receiving funds. It(Virgin) has linked Islami Bank, which posses an accelerated clearing facility. It useselectronic collection process which ensures faster collection and its at the firm checkprocessing is satisfactory. But Virgin does not use lockbox. The reason behind this isthat it is not cost-effective for Virgin to set lockboxes. At this point, we can say thatVirgins check clearing mechanism is much good.8.1.3. Cash Concentration and Disbursement Management:Page 33 of 46Virgin Soft Drinks takes the matter of cash concentration very seriously. They use allthe available cash concentration mechanism. Virgin is a firm with small depositsspread over a substantial number of banks and this is why the firm tends to use
  • 38. Virgin Soft Drinks: Working Capital Managementdepository transfer checks extensively. If is less costly. Virgin also uses automatedclearing house and wire transfer. To Virgin, wire transfer seems too costly.Like other firm Virgin tries to retain the cash for as long as possible. But Virginalways performs it in an ethical manner. Virgin does not try to defeat the receivingfirm’s attempts to reduce the float on incoming checks. It does not take any strategyfor increasing mail float, at firm float, and clearing float on its outgoing checks. ToVirgin, it is deemed to be unethical. It thinks that maximization of disbursement floatwill not go unnoticed by sophisticated creditors for very long. When it is noticed itwill negatively affect relations with these creditors, reducing the firm’s bargainingpower with them. This may ultimately cost Virgin dearly when future prices anddelivery schedules for goods and services purchased from trade creditors arenegotiated. Virgin follows “Zero-Balance Accounts” methods for managingdisbursement. It thinks that in this method the coordination of funds inflows todisbursement banks with the presentation of checks does not work to the detrimentof creditors since the firm’s checks to them are honored as presented and this strategydoes not affect float significantly. Controlled disbursing method is less attractive toVirgin because zero-balance system is already feasible.8.1.4. Cash Forecasting:Cash Forecasting and Its Types:Page 34 of 46Virgin forecasts the future cash inflows and outflows. To Virgin, cash forecast is animportant part of the firm’s cash control system and is one of the forecasts that arepart of the Virgin’s financial plan. Virgin forecasts cash on monthly basis and onyearly basis. Virgin does not forecast on daily basis assuming that the temporaryshortage of funds within these periods can be covered without value cost, e.g.,advance receipts from customers. Virgin’s cash forecasting system involves acombination of distribution and scheduling. The receipts and disbursementsapproach of cash forecasting is used in virgin. This method is used because itminutely traces the movement of cash and very close control of cash is possible.
  • 39. Virgin Soft Drinks: Working Capital ManagementVirgin does not use adjusted net income approach on two grounds. First, it does notpermit the tracing of the individual types of cash inflows and outflows for any givenperiod, which is often useful information for virgin. Second, it is not simple to use.Items to be Forecast:Virgin does not forecast all the items. It forecasts only major items, e.g., accountsreceivable, notes receivable, payroll, cash purchases of raw materials. In this regard,virgin trade off between cost and benefit.Methods of Financial Forecasting:Virgin forecasts the future level of financial variable such as cash level, asset level orliability level. We know, in short term forecasts many things will result from plansand events that are already in place (contracts, capital budgets, long-range financingplans, and so forth). But in the long run, most things can vary and are dependent onoutside influences such as the firm’s long-term growth rate. Since Virgin’s cashforecasting deals mostly with near future, many of the items on the cash forecasts areestimated by some variation of the spot method and remaining estimates are mostlyon a “proportion of another account” basis with this “other account” often being aparticular period’s sales. Virgin uses the other two methods less frequently.Using Cash Forecast:Virgin forecasts cash for meeting general objectives (i.e., to know the available fundsfor investment and need financing) and for meeting some special objectives (e.g., toknow whether the firm will fulfill its out of debt requirement). But it is matter to notethat Virgin does not make any short term investment of its surplus cash but only keepthis surplus in Bank Account.Page 35 of 46
  • 40. Virgin Soft Drinks: Working Capital ManagementSources of Uncertainty in Cash Forecasting and Hedging Uncertainties:Virgin faces uncertainty in cash forecasting mainly from two sources. These are –sales and production cost. In peak season (hot season like autumn, summer) salesincreases but in dull season (e.g., in winter) sales decreases drastically. Productioncost may be increased because of increase of price of sugar, chemicals, aluminumcan. Virgin follows two methods for hedging cash balance uncertainties. These are –i) Holding a stock of extra cash; andii) Extra borrowing capacity.8.1.5. Modes for the Management of Cash and Temporary Investments:Virgin does not follow any of these methods wholly. Virgin receives cashcontinuously and pays salary at steady rate and pays continuously for otherexpenses. So it neither follows Baumol model nor Beranek model. It has no uppercontrol limit, lower control limit, return point in case cash management. So it neitherfollows Miller-Orr model nor Stone model.In Summary:Page 36 of 46Standard Compliance by Virgin Soft DrinksGenerally all firms hold cash andmarketable securities.Virgin holds only cash.Firms hold cash and marketablesecurities for some reasons like• Cash for transactions;• Cash and near-cash assets ashedges;• Temporary investments;• Compensating balances.Virgin holds cash only fortwo reasons –• Cash for transactions;• Cash as hedges.Available money market instruments Virgin does not invest in any such
  • 41. Virgin Soft Drinks: Working Capital Management(short term securities) are –Treasury Bills;Commercial Paper;Certificates of Deposit;Banker’s Acceptance;Repurch menase Agree ts.instruments. They only keep cash inBank Account.Mail Float(1 to 5 days)At FirmFloat(0.25 to 1day)ClearingFloat(0 to2 days)Mail Float(2 to 3 days)At firmFloat(0.25day)ClearingFloat(1 to 3days)Figure: Transit time for a typical check Figure:Transit time for a check forVirginStrategies that firms can use to reducethe delay in receiving funds are –☯ Selecting of Banks withaccelerated clearing capabilities;☯ of check processingAccelerationat the firm;☯ ectronic collectionUse of elprocedures;☯ Use of lockboxes.Virgin follows the first three strategiesbut does not use lockboxes.Available cash concentrationmechanisms are –Depository transfer check;ouseAutomated Clearing H(ACH) electronic transfer);Wire transfer.Virgin uses all these mechanisms ofcash concentration.Available sets of techniques for cashdisbursement management are –ement of disbursementPage 37 of 46Managfloat;Virgin uses zero-balance accountstechnique.
  • 42. Virgin Soft Drinks: Working Capital ManagementZero-Balance Accounts;Controlled disbursing.Firms may make cash flow forecastsover periods of various lengths: yearlyflows, quarterly flows, monthly flows,weekly flows or even daily flows.Virgin forecasts cash on yearly basis andmonthly basis.Cash forecasting system may involve –Distribution;Scheduling.Virgin’s cash forecasting systeminvolves a combination of distributionand scheduling.Two common approaches to cash flowin generating the cash forecast:and disbursementReceiptsapproach;Adjusted net income approach.Virgin uses the receipts anddisbursement approach.There are many items to forecast. Virgin forecasts only major items likeA/R, payroll etc.Four common approach to forecastingfina i –nc al variables areSpot method;Proportion to another account;Compounded growth;Multiple dependencies.Virgin uses spot method for forecastingcash. It uses proportion to anotheraccount method for other variables andremaining two methods are frequentlyused.Sources of uncertainty in cashforecasting are –Sales uncertainty;Collection rate uncertainty;Production cost uncertainty;Capital outflow uncertainty.Virgin faces uncertainty mainly fromsales and production cost.Methods for hedging cash balanceunc aPage 38 of 46ert inties are –i) Holding a stock of extra cash;Virgin two available methods forhedging cash balance uncertainties.These are –
  • 43. Virgin Soft Drinks: Working Capital Managementii) stock of near-cashHolding aassets;iii) Extra borrowing capacity;iv) ary surpluses inInvesting tempornear-cash assets.i) Holding a stock of extra cash;ii) Extra borrowing capacity(advance receipt fromcustomers).Models for the management of cash andtemporary investments are – Baumolmodel, Beranek model, Miller-Orrmodel, and Stone model.Virgin does not follow any methodwholly but a combination of Baumolmodel and Beranek model is occurred.8.2. INVENTORY MANAGEMENT:.2.1. Certainty Approach:isnt used inirgin because it thinks it is not possible to implement in Bangladesh.d time is one to three days. Itoes not use ABC system of inventory management.8Main item of inventory of Virgin is Can, pet chip, sugar, label, chemical, artificialsweet etc. Virgin maintains a minimum level of inventory but it does not have to faceproblems because inventory is managed efficiently. just-in-time (JIT)VVirgin maintains buffer stock because of the shortage of work-in-process (WIP)inventory. Its production process may also be hampered. Thats why it maintainssafety stock to avoid stock out cost. In case of imported goods, normal lead time isabout one month and within the country, normal leadPage 39 of 46Inventory Model:In reality, Virgin does not use any of models of EOQ, ordering and holding strategy,and safety stock strategy. They maintain inventory based on their prior experience.
  • 44. Virgin Soft Drinks: Working Capital Management8.2.2 Uncertainty Approach:Virgin does not use any model for handling inventory uncertainty. It says that suchdecision depends on business cycle and market situation. Long before Eid festival,they bought large amount of sugar because of price increase on the occasion of Eid.In summary:Standard Compliance by Virgin Soft DrinksFirms maintain inventory to guardagainst several problems.Virgin maintains a minimum level ofinventory which is managed efficiently.Some firms use JIT to avoid inventorycost.JIT is not used by Virgin as it thinks it isimpossible to implement in Bangladesh.Firms maintain buffer stock. Virgin maintains buffer stock too.Firms maintain safety stock to avoidshortage cost.Virgin also maintains safety stock.Firms use ABC system to monitorinventory.Virgin doesnt use ABC system.EOQ model is an appropriate methodfor measuring quantity that has to beordered per order.Virgin does not use EOQ model rathermakes order based on experience andmarket demand.8.3. MANAGING ACCOUNTS RECEIVABLE (DEBTORS):8.3.1. Terms of Sale Decision:Page 40 of 46Virgin offers the term 2/10, net 30, enables the customers to deduct 2 percent from theface value of the bill when paying within the first 10 days, but if the discount is nottaken, the customer must remit the full amount within 30 days. But Virgin does not
  • 45. Virgin Soft Drinks: Working Capital Managementoffer the same terms of sale to all customers. For prime customers, it offers specialterms of sale. In setting an appropriate term of sale, it costs and benefits regardingthis are compared. It uses the standard approach of terms of sale decision as it issimple to use.8.3.2. Credit Granting Decisions:In case of Virgin, the Capital and Character of Five Cs get more importance.Although, there are many problems with the traditional approach, Virgin uses itbecause of its simplicity. Virgin does not use Net Present Value (NPV) method incredit granting decision. It thinks that NPV is an appropriate method and should beused next time. It does not face any severe problem because of bad debts. The reasonis that notes receivable is used when credit is granted.8.3.3. Monitoring Accounts Receivable:Virgin monitors its accounts receivable. Virgin believes that in any case, both positiveand negative durations in accounts signal differences from the results thatmanagement believe to be the most advantageous for the firm.Tools for Monitoring Accounts Receivable:Page 41 of 46For monitoring accounts receivable, there are several tools such as aging schedule,the ratios of receivable outstanding to original sales, customers payment proportion,and sales weighted DSO (Days Sales Outstanding). For monitoring accountsreceivable, Virgin uses aging schedule fractions and traditional DSO statisticsbecause of their simplicity in use. Although payment proportions, ratios ofreceivables outstanding and sales weighted DSO methods are free from inherent bias.None of these is used because all these are complex to maintain.
  • 46. Virgin Soft Drinks: Working Capital ManagementIn summary:Page 42 of 46Standard Compliance by Virgin Soft DrinksGenerals terms of sale is 2/10, net 30. Normally, Virgin also use general termsof sale, i.e., 2/10, net 30.Firms do not offer the same terms ofsale to all customers.Yes. For prime customers, Virgin offersspecial terms of sale.Approaches of terms of sale decisionsare –• Standard approach;• Multi period approachVirgin uses standard approach of termsof sale decision as it is simple to use andunderstand.Source of credit information are –Sellers prior experience with thecustomer;Credit agency ratings andreports;Personal contact with theapplicants bank and othercreditors;Analysis of applicants financialstatements;Customer visit.Main source of credit information toVirgin is its prior experience with thecustomer. All other sources are not cost-effective for Virgin.Approaches of credit granting tomarginal accounts are –Traditional approach;Net Present Value (NPV)approachIt uses traditional approach still now butthinks that NPV should be used for thenext periods.Firms monitor accounts receivablebecause deviations from the expectedlevels of turnover and of bad debt canVirgin also monitors its accountsreceivable.
  • 47. Virgin Soft Drinks: Working Capital Managementsignal several different problems.Different tools for monitoring accountsreceivable are –Aging schedule;Ratios of receivablesoutstanding to original sales;Customers paymentproportions;Sales-weighted DSO.For monitoring accounts receivable,Virgin uses aging schedule andtraditional sales outstanding statistics.8.4. MANAGING ACCOUNTS PAYABLE (CREDITORS):Virgin has almost accounts payable of Tk. 8,000,000. But most of its liabilities are tothe banks rather than suppliers. But we dont have any clear information aboutVirgins accounts payable.9. RECOMMENDATION:Virgin should invest its surplus cash in short term marketable securitiesbecause it is suitable hedging against cash uncertainties and will also givesome returns (interest income);Virgin should publish its own annual report which will satisfy informationneeds of stakeholders and also increase the credibility of information providedby Virgin;Page 43 of 46Virgin should use multi period approach in terms of sale decision becausestandard approach which is already exists in Virgin has some inherentproblems;
  • 48. Virgin Soft Drinks: Working Capital ManagementIt should stop using traditional approach from now. It should use NPVmethod in credit granting to marginal accounts;In monitoring accounts receivable, Virgin should use sales-weighted DSOmethod because it has least limitation compared to the others;It should be more flexible in granting credit, which will ultimately increase itssales;To get the appropriate number of quantity to be ordered per order, it shoulduse DSO model;It should be ABC system for proper monitoring of inventory.10. CONCLUSION:The use of other peoples money in business is usually an expensive resource. Beforelooking outside for finance, a firm should examine its own working capital cycle tomake sure that every rand of its own internal funds is being fully utilized. Goodmanagement of working capital is part of good financial management. Effective useof working capital will contribute to the operational efficiency of the wholeorganization; optimum use will help to generate maximum returns. Furthermore,working capital management is not an end in itself. It is an integral part of the firmsoverall management. The needs of efficient working capital management must beconsidered in relation to other aspects of the Virgins financial and non-financialperformance. Thats why, when planning the development of a business, it is criticalthat the impact of working capital be fully assessed.Page 44 of 46
  • 49. Virgin Soft Drinks: Working Capital ManagementBIBLIOGRAPHYScherr, F.C., (1989), International Edition, Prentice-Hall International, Inc. "ModernWorking Capital Management Text and Cases"Hussain, Riaz, (2002) "Working Capital Management"Robertson, Lonnie, (July 1998) "Inventory Management"http://www.asashop.org/ visited on March 13, 2006"The Art of Cash Management"http://www.inc.com/ visited on March 13, 2006"Working Capital Management"http://www.studyfinance.com/ visited on March 13, 2006"White Paper – Managing Working Capital"http://www.planware.org/ visited on March 13, 2006"Management of Working Capital"http://www.businesscentral.co.za/ visited on March 13, 2006"Cash Management"http://www.sba.gov/ visited on March 13, 2006"Working Capital Management Objectives"http://wps.prenhall.com/ visited on March 13, 2006"Working Capital Management"Page 45 of 46http://www.advanceme.com/ visited on March 13, 2006
  • 50. Virgin Soft Drinks: Working Capital Management"Business Receivables Financing"http://www.bbt.com/ visited on March 13, 2006"Working Capital Finance"http:// www.fnb.co.za/ visited on March 13, 2006"Tips to manage your working capital"http://smallbusiness.ninemsn.com.au/ visited on March 13, 2006"Inventory Financing"http://www.franklincapitalnetwork.com/ visited on March 13, 2006"Accounts Receivable Management"http://www.franklincapitalnetwork.com/ visited on March 13, 2006"Working Capital Management"http://www.treasury.govt.nz/ visited on March 13, 2006"Working Capital Management"http://www.treasurystrategies.com/ visited on March 13, 2006"Working Capital Works"http://www.investopedia.com/ visited on March 13, 2006"Treasury Services"http://www.jpmorganchase.com/ visited on March 13, 2006"what were about"Page 46 of 46http://www.virgin.com/ visited on March 13, 2006
  • 51. AnnexureAnnexureInterview with YASEER RIZVIMr. Yaseer Rizvi, the DMD of Global Beverage Co. Ltd., obtained his MBA degreefrom a reputed university. He had been the Director of Ocean Container Ltd. beforejoining in Global Beverage Co. Ltd. He possesses a nice personality.I interviewed Yaseer Rizvi. Excerpts from his interview are as follows –Shah Kamal: Sir, would you please tell me do you invest in short term marketablesecurities?Yaseer Rizvi: Basically, we do not invest our surplus cash in short term marketablesecurities like T-Bill, commercial paper, certificate of deposit etc. But we keep oursurplus cash in Bank.Shah Kamal: Would you tell me something about transit time for a typical check?Yaseer Rizvi: Well, in Virgin, the transit time for a typical check is –For mail float 2 to 3 daysAt firm float 6 hoursClearing float 1 to 3 daysShah Kamal: Do you maintain any cash concentration mechanism like depositorytransfer check, automated clearing house and wire transfer?i
  • 52. AnnexureYaseer Rizvi: Our position in this case is very strong as we use all the mechanismsyou mentioned. As Virgin is a firm with small deposits spread over a substantialnumber of banks, so we tend to use depository transfer checks extensively. It is lesscostly. We also use automated clearing house and wire transfer but later is used in aless extent.Shah Kamal: Sir, what techniques of disbursement management is used by your firm?Yaseer Rizvi: Like other firms, Virgin tries to retain the cash for as long as possible.But we always perform it in an ethical manner. We do not use management ofdisbursement float as it seems unethical. We follow Zero-Balance Accounts methodfor managing disbursement. We do not prefer Controlled Disbursing method sinceZero-Balance system is already practiced in Virgin.Shah Kamal: How do you hedge cash balance uncertainties?Yaseer Rizvi: Well, you may say that we do not invest in short term securities but forfacing cash difficulties, we keep our surplus cash in bank.Shah Kamal: Sir, would you please tell me the general terms of sale of Virgin?Yaseer Rizvi: Though it is difficult to maintain a fixed terms of sale, our general termsof sale is 2/10, n/30. But for prime customers, we offer special terms of sale.Shah Kamal: What are the sources of credit information in case of your firm?Yaseer Rizvi: We grant credit on the basis of prior experience with the customers. Incase of a new customer, personal contact is weighted.Shah Kamal: Does your firm consider 5 Cs in granting credit?ii
  • 53. AnnexureYaseer Rizvi: In case of Virgin, Capital and Character get more importance than theothers. Mind one thing, personal relationship is the main measure in granting credit.Shah Kamal: Do you use NPV method in credit granting decisions?Yaseer Rizvi: We do not use NPV method. But we think that NPV is a suitablemethod and we have to use it from the next period.Shah Kamal: Sir, how do you handle the problem of bad debt?Yaseer Rizvi: Well, in this case, our position is very strong. Yet we do not face anyproblem because of bad debt. Just note that we make more than 80% of sales in cashand we monitor accounts receivable very carefully.Shah Kamal: What level of inventory is maintained by Virgin?Yaseer Rizvi: We maintain a minimum level of inventory but do not have to facestock out problems because inventory is managed efficiently.Shah Kamal: What is the normal lead time?Yaseer Rizvi: In case of imported goods, normal lead time is about 1 month and whenwe purchase raw materials from inside the country, lead time is 1 to 3 days.Shah Kamal: What method do you use for managing inventory?Yaseer Rizvi: We do not use any method particularly rather inventory decisiondepends on business cycle and market situation. Long before the Eid festival, webought large amount of sugar because price of sugar was increased on the occasionof Eid.iii
  • 54. AnnexureShah Kamal: What are the main items of inventory of your firm?Yaseer Rizvi: Well, these are – aluminum can, pet chip, sugar, label, chemical andartificial sweet.Shah Kamal: What are the uncertainties in maintaining appropriate level of stock?Yaseer Rizvi: These are –• Increase in price of raw materials;• Sales uncertainty;• Market trends etc.Shah Kamal: Thank you for your kind cooperation.Yaseer Rizvi: Most Welcome.iv
  • 55. Global Beverage Company Limited::

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