DHRUVALokanandha Reddy Irala Value, Business & Operating Cycles --A premier Bayer CropScience Limited Oct 20, 2004 Lokanandha Reddy Irala Associate Professor – Finance Area Director – Administration Dhruva College of Management Kachiguda, Hyderabad –

DHRUVALokanandha Reddy Irala The firm & its Objective function Sales Maximization Of two actions will you always choose the one that results in higher sales Profit Maximization Of two actions will you always choose the one that results in higher profit Value Maximization Of two actions will you always choose the one that results in higher Value

DHRUVALokanandha Reddy Irala Value & its measurement Which do you choose: A or B ? EOY012 A B

DHRUVALokanandha Reddy Irala Value & its measurement Which do you choose: A or B ? EOY012Net Return A (= ) B (= ) PV of Benefits of A = Rs PV of Benefits of B = Rs Xls

DHRUVALokanandha Reddy Irala Value & its measurement Value : The discounting principle

DHRUVALokanandha Reddy Irala The sales dilemma revisited ABC. Ltd manufactures telephone instruments and credit sales are constant throughout the year averaging 200 units per day While the selling price of each instrument is Rs. 500 it costs Rs. 425 to produce one. Under the present credit policy, the dealers are given 40 days credit. The average bad debt loss is 2% The Marketing research team estimated that the sales can be improved to 230 units per day if the credit period is extended to 50 days. However this would also raise the bad debt loss to 3% besides an Net Working Capital increase of Rs. 150 per day Should the cost of capital of firm be 0.05% per day would you recommend increasing the credit period to 50 days

DHRUVALokanandha Reddy Irala Solving the Sales dilemma Present PolicyNew Policy Sales Selling priceRs. 500 CostRs. 425 Credit Period40 days50 days Bad debts2%3% Inc. in NWC-Rs. 150 a day Cost of capital of firm : 0.05% per day What to Value?

DHRUVALokanandha Reddy Irala Factors affecting receivables  Default or bad debt losses  Investigation & collection cost  Amounts tied up in receivables. RECIVEBLES MANAGEMENT –Value drivers

DHRUVALokanandha Reddy Irala Understating a Business cycle: Eg. A Trader Cash Start the business with some cash

DHRUVALokanandha Reddy Irala Buy a Building & a truck Cash Understating a Business cycle: Eg. A Trader Start the business with some cash

DHRUVALokanandha Reddy Irala Cash Start the business with some cash Buy a Building & a truck Buy Goods Understating a Business cycle: Eg. A Trader

DHRUVALokanandha Reddy Irala Cash Buy a Building & a truck Buy Goods Sell Goods Understating a Business cycle: Eg. A Trader Start the business with some cash

DHRUVALokanandha Reddy Irala Cash Building & a truck I II III Sell Goods Goods Business cycle: Transactions Start business with some cash

DHRUVALokanandha Reddy Irala RCP INVENTORY CONVERSION PERIOD PDP Purchase of Raw Materials Payment of cash to raw materials Sale of finished goods Cash received for Sales GROSS OPERATING CYCLE (GOC) NET OPERATING CYCLE (NOC) TIME CONTINUUM NOC = GOC - PDP OPERATING CYCLE NOV 15 NOV 20NOV 26 NOV 10

DHRUVALokanandha Reddy Irala Thank You Lokanandha Reddy Irala Assoc Professor – Finance Area Director – Administration Dhruva College of Management Kachiguda, Hyderabad –