Assignment Code: MMPF-001 / TMA / JULY / 2022-23

Course Code: MMPF-001

Assignment Name: Working Capital Management

Year: 2022 - 2023

Verification Status: Verified by Professor

Note: Attempt all the questions.

Q 1. What are the major changes made by Reserve Bank of India (RBI), in the Bi-monthly Monetary Policy statement, of 30th September 2022?

Ans) On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (February 8, 2023) decided to: Increase the policy repo rate under the liquidity adjustment facility (LAF) by twenty-five basis points to 6.50 per cent with immediate effect.

Monetary Policy Statement, 2022-23 - Resolution of the Monetary Policy Committee:

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (August 5, 2022) decided to:

1. Increase the policy repo rate under the liquidity adjustment facility (LAF) by fifty basis points to 5.40 per cent with immediate effect.

2. Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent.

3. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) met on September 28- 30, 2022, and released the 4th RBI's bi-monthly monetary policy of FY23 which decreased India’s Gross Domestic Product (GDP) growth for FY23 to 7% from 7.2% with FY23’s Q2 at 6.3%; Q3 at 4.6%; and O4 at 4.6%. The reason behind this downward revision is geopolitical tensions, tightening global financial conditions and slowing external demand.

1. The stance is to focus on withdrawal of accommodations.

2. The GDP growth for QiFY24 is projected at 7.2%.

3. RBI has now raised rates by a total of 190 basis points since its first unscheduled mid-meeting hike in May 2022.

Inflation:

Inflation is projected at 6.7% in FY23, with Q2 at 7.1%; Q3 at 6.5%: and Q4 at 5.8%, and

risks are evenly balanced.

CPI inflation for Q1FY24 is projected at 5%.

RBI's Policy Rates:

The MPC raised the repo rate for the 4th consecutive time by 50 basis points to 5.90% from

5.40%. Consequently, the Standing Deposit Facility (SDF) Rate adjusted to 5.65% from

5.15%; and Marginal Standing Facility (MSF) rate and Bank Rate to 6.15% from 5.65%.

Domestic Economy:

1. India’s real GDP grew year-on-year (y-o-y) by 13.5% in Q1:2022-25.

2. Gross Value Added (GVA) rose by 12.7% in Q1:2022-23, with all constituents recording y-o-y growth and most notably, services.

3. CPI (Consumer Price Index) inflation rose to 7% (y-o-y) in August 2022 from 6.7% in July as food inflation increased.

4. Overall system liquidity remained in surplus, with the average daily absorption under the liquidity adjustment facility (LAF) easing to Rs 2.3 lakh crore during August-September 2022 from Rs 3.8 lakh crore in June-July 202.

5. As on September 9, 2022, money supply (M3) expanded y-o-y by 8.9%, with aggregate deposits of commercial banks growing by 9.5% and bank credit by 16.2%.

6. The Current Account Deficit (CAD) for Q1FY23 is placed at 2.8% of GDP with trade deficit at 8.1% of GDP.

In FY22, the CAD had stood at 1.2% of the GDP.

External Financing:

1. The “expected loss’ approach i.e. to make provisions or set aside money on the probable

2. losses are a globally accepted prudent norm.

3. At present, larger non-bank lenders have already been using the expected loss approach for provisioning since 2018.RBI may adopt ‘Expected Loss’ approach for Banks’ Loan Provisioning

4. RBI may consider the ‘expected loss’ approach for loan provisioning by banks as compared to

the present ‘incurred loss’ approach, where money is set aside after a loss from an asset.

Key Points:

1. The “expected loss’ approach i.e., to make provisions or set aside money on the probable losses is a globally accepted prudent norm.

2. At present, larger non-bank lenders have already been using the expected loss approach for provisioning since 2018.

Q 2. Explain the Inventory Models that are used to address the issue of uncertainty in demand while deciding optimum level of inventory.

Ans) Inventory management is an important aspect of supply chain management that involves determining the optimal level of inventory to be maintained by a company. However, there is always uncertainty associated with demand, which makes it difficult to determine the optimal inventory level. To address this issue, various inventory models have been developed that take into account the uncertainty in demand.

Some of the commonly used inventory models are:

Economic Order Quantity (EOQ) Model: The EOQ model is a widely used inventory model that assumes a constant demand rate and a fixed ordering cost. The objective of this model is to determine the optimal order quantity that minimizes the total inventory cost, which includes the ordering cost and the holding cost. This model is used to determine the optimal order quantity that minimizes the total inventory cost, which includes the ordering cost and the holding cost. The model assumes a constant demand rate and a fixed ordering cost. The formula for calculating the EOQ is:  EOQ = sqrt((2DS)/H) where D is the annual demand, S is the ordering cost per order, and H is the holding cost per unit per year. By using this formula, companies can determine the optimal order quantity that minimizes the total inventory cost.

Reorder Point (ROP) Model: The ROP model is used to determine the optimal level of inventory to be maintained to meet the demand during the lead time. The lead time is the time taken between placing an order and receiving the delivery. The ROP is calculated based on the lead time demand, safety stock, and service level. This model is used to determine the optimal level of inventory to be maintained to meet the demand during the lead time. The lead time is the time taken between placing an order and receiving the delivery. The ROP is calculated based on the lead time demand, safety stock, and service level. The formula for calculating the ROP is: ROP = Lead time demand + Safety stock, where, Lead time demand is the demand during the lead time, and Safety stock is the additional inventory maintained to protect against demand variability. The service level is the probability of not running out of stock during the lead time.

Periodic Review Model: The periodic review model is used when the inventory level is reviewed at fixed intervals. The objective of this model is to determine the optimal review period and the optimal order quantity that minimizes the total inventory cost. This model is used when the inventory level is reviewed at fixed intervals. The objective of this model is to determine the optimal review period and the optimal order quantity that minimizes the total inventory cost. The formula for calculating the optimal order quantity is similar to the EOQ formula. The optimal review period is determined based on the lead time and the demand variability.

Continuous Review Model: The continuous review model is used when the inventory level is continuously monitored, and an order is placed whenever the inventory level reaches a certain threshold level. This model is also known as the (s, Q) model, where s is the reorder point and Q is the order quantity. This model is used when the inventory level is continuously monitored, and an order is placed whenever the inventory level reaches a certain threshold level. This model is also known as the (s, Q) model, where s is the reorder point and Q is the order quantity. The reorder point is calculated based on the lead time demand, safety stock, and the current inventory level.

Newsboy Model: The newsboy model is used when the demand is uncertain, and the inventory is perishable. The objective of this model is to determine the optimal order quantity that maximizes the expected profit, taking into account the cost of ordering and the cost of stockouts. This model is used when the demand is uncertain, and the inventory is perishable. The objective of this model is to determine the optimal order quantity that maximizes the expected profit, taking into account the cost of ordering and the cost of stockouts. The formula for calculating the optimal order quantity is: Q* = sqrt((2KSD)/H) where K is the profit margin per unit, S is the ordering cost per order, D is the demand per    period, and H is the holding cost per unit per period. By using this formula, companies can  determine the optimal order quantity that maximizes the expected profit.

These inventory models help companies determine the optimal level of inventory to be maintained, taking into account the uncertainty in demand. By using these models, companies can minimize inventory holding costs while ensuring that they have enough inventory to meet customer demand.

Q 3. “Trade Credit is regarded as a spontaneous source of Short-Term Finance”, discuss and comment.

Ans) Trade credit is a sort of short-term financing that enables a company to buy products or services on credit from its suppliers. This type of finance is used by businesses. As a result of the fact that it emerges spontaneously from the typical course of commercial transactions, it is frequently believed to be an impromptu source of financing. When a company buys products or services from a supplier, the supplier might make trade credit terms available to the company, which would allow the company to postpone payment for a predetermined amount of time.

Businesses frequently and frequently rely on trade credit as a significant and vital source of short-term finance. It is a sort of credit that is granted by suppliers to businesses in order to give such businesses the ability to acquire products or services on credit and postpone payment for a specific amount of time. Trade credit is regarded as an impromptu source of funding due to the fact that it is created organically as a by-product of the typical functioning of commercial transactions. It is frequently issued on the basis of the existing relationship between the buyer and the supplier, and it normally does not demand for any kind of formal application or credit checks to be performed.

One of the primary benefits of trade credit is that it enables firms to more efficiently manage their cash flow, which is one of the most important advantages. Before they are required to make a payment, businesses can use the products or services they have purchased to generate revenue and cover their expenses if the payment is delayed for a specified amount of time. Businesses have a better chance of avoiding the need for additional borrowing if they are able to keep their positive cash flow situation.

One more advantage of using trade credit is that it is often simple to obtain. This makes it quite convenient. Trade credit, in contrast to regular bank loans or credit lines, does not necessitate a protracted application process or credit checks. In its place, it is determined by the nature of the relationship that already exists between the seller and the purchaser, in addition to the creditworthiness of the purchaser in the eyes of the seller. Because of this, many firms find that trade credit is a source of finance that is both simple and easy to get.

However, there are certain potential drawbacks involved with using trade credit that you should be aware of. One of these is the danger of an organization's credit being stretched too thin. It is not uncommon for a business to become unduly dependent on a certain source of funding due to the fact that trade credit is often determined by the pre-existing relationship that exists between the supplier and the buyer. If a company takes on too much trade credit, it may find it difficult to meet its payment obligations and may have trouble with its cash flow in the future.

Another potential downside of trade credit is the lack of control that a company may have over the terms and circumstances of the credit that it is granted. This lack of control might make it more difficult for a company to negotiate favourable terms. Because trade credit is an impromptu source of funding, it is possible that firms will not have a great deal of influence over the conditions of the credit that is granted to them. This can make it difficult to predict when payments will be due and how much they will be, which can lead to uncertainty and make it difficult to properly manage cash flow. This can also make it difficult to estimate when payments will be due and how much they will be.

In conclusion, company trade credit is an impromptu source of short-term financing that offers various benefits to companies. It is often straightforward to acquire, and it enables companies to better manage their cash flow and satisfy their immediate financial requirements. However, in order to avoid potential issues with their cash flow in the future, firms need be careful to manage the trade credit they have available to them. Businesses are able to make the most of this significant source of financing if they carefully monitor their utilisation of credit and take preventative measures to prevent them from becoming overextended.

Q 4. Study the case given in unit 15 on ‘Cash Management in Paytm’ and answer the Question given at the end of this case.

Ans) “Cash Management in Paytm.”

Questions for Discussion:

Q 1) How do you analyze the Business Model of Paytm? Do you have any suggestions?

Ans) Paytm is a digital wallet and e-commerce platform that has gained significant popularity in India. The company has a diverse business model that includes digital payments, e-commerce, financial services, and others.

Some ways to analyze the business model of Paytm:

1. Revenue Streams: Paytm generates revenue through various streams, including commission on transactions, advertising, and subscription fees for premium services.

2. Value Proposition: Paytm's value proposition is its ability to offer a simple, easy-to-use platform for digital payments, coupled with a wide range of e-commerce services and financial products.

3. Customer Segments: Paytm targets a diverse range of customers, including individuals, merchants, and small businesses.

4. Key Activities: Paytm's key activities include developing and maintaining its technology platform, acquiring and retaining customers, and partnering with merchants to expand its e-commerce offerings.

5. Key Resources: Paytm's key resources include its technology platform, partnerships with banks and other financial institutions, and a large user base.

6. Partnerships and Key Relationships: Paytm has formed partnerships with banks, financial institutions, and merchants to expand its range of services and reach a wider customer base.

7. Cost Structure: Paytm's cost structure includes expenses related to technology development, marketing, and customer acquisition.

Some suggestions for analysing Paytm's business model further could include:

1. Conducting a SWOT analysis to identify the company's strengths, weaknesses, opportunities, and threats.

2. Examining the company's financial statements and performance metrics to assess its financial health and growth prospects.

3. Analysing the competitive landscape to identify Paytm's key competitors and how the company differentiates itself from them.

4. Assessing the regulatory environment and any potential risks or challenges that may impact Paytm's business model.

5. Exploring potential areas for growth or expansion, such as new products or services or entering new markets.

Q 2) In the light of the stiff competition among the multiple players of payment Gateways, what kind of Cash Management strategies you can think of for Paytm.

Ans) In the face of stiff competition among multiple players in the payment gateway industry, Paytm can adopt various cash management strategies to maintain its competitive advantage and sustain its growth.

Some Potential Management Strategies

Diversify Revenue Streams: Paytm can explore new revenue streams such as offering value-added services or cross-selling financial products to its existing user base. This can help reduce reliance on transaction commissions and create additional sources of income.

Optimize Working Capital: Paytm can implement effective working capital management practices to ensure that it has sufficient cash on hand to meet its operational needs. This can involve optimizing inventory levels, managing accounts receivable and payable, and forecasting cash flows.

Reduce Payment Gateway Fees: Paytm can offer lower transaction fees or even free services for small businesses or merchants to incentivize them to use Paytm as their preferred payment gateway. This can help attract new customers and increase transaction volume.

Improve Customer Experience: Paytm can invest in improving its platform's user experience to retain existing customers and attract new ones. This can involve offering more convenient and secure payment options, reducing transaction processing time, and providing personalized customer service.

Partner with Banks and Financial Institutions: Paytm can form partnerships with banks and other financial institutions to expand its range of financial products and services. This can help increase revenue and provide customers with more comprehensive financial solutions.

Explore International Expansion: Paytm can explore expanding its operations beyond India to tap into new markets and increase its customer base. This can involve partnering with local businesses and tailoring its services to meet the unique needs of each market.

Overall, Paytm's cash management strategies should be aligned with its business goals and market conditions and should aim to enhance its competitive advantage and provide value to its customers.

Q 3) How do you look at the Ratio between Current Assets and Non-Current Assets of the company?

Ans) The ratio between current assets and non-current assets can be used to evaluate a company's liquidity and financial flexibility. A higher ratio indicates that the company has a higher proportion of assets that can be converted into cash in the short term, which is generally viewed positively.

In the case of Paytm, as a digital payments and e-commerce platform, it is likely that the company has a higher proportion of current assets, such as cash and cash equivalents, compared to non-current assets like property, plant, and equipment. This is because Paytm's business model revolves around facilitating digital transactions and providing services that are typically more short-term in nature.

However, it is important to note that the ratio between current assets and non-current assets should be evaluated in conjunction with other financial metrics and in the context of the company's overall business strategy and industry dynamics.

Q 4) Keeping in view the given Financials, what kind of working capital policies do you imagine for the company?

Ans) The general recommendations for working capital policies that a company like Paytm might consider are:

Manage Accounts Receivable: Paytm may implement policies to manage its accounts receivable, such as setting credit limits for customers, establishing clear payment terms, and actively monitoring collections. By effectively managing its accounts receivable, Paytm can improve its cash flow and reduce the risk of bad debt.

Optimize Inventory Management: Paytm may use inventory management techniques to ensure it has the right level of inventory on hand to meet demand, without overstocking or understocking. This can help reduce the risk of obsolescence or spoilage and free up cash that would otherwise be tied up in inventory.

Negotiate Payment Terms with Suppliers: Paytm may work with its suppliers to negotiate favourable payment terms, such as extended payment periods or early payment discounts. This can help manage its accounts payable and improve cash flow.

Use Short-Term Financing: Paytm may use short-term financing options, such as lines of credit or factoring, to meet short-term working capital needs. These options can provide additional liquidity to the company and help manage cash flow fluctuations.

Improve Payment Collection Process: Paytm may look for ways to streamline its payment collection process, such as offering multiple payment options, automating invoicing and collections, and reducing payment processing times. By doing so, Paytm can improve its cash conversion cycle and reduce the risk of late payments.

Overall, the working capital policies that Paytm adopts should be tailored to its business model, industry dynamics, and financial objectives. By implementing effective working capital policies, Paytm can optimize its liquidity, reduce financial risk, and support its long-term growth.