Vibha Project Ltd., a mid-sized manufacturing company, is reviewing its financial performance for the year ended 31st March 2025. The Finance Director has sought a detailed analysis of the company's working capital effic

Answer 1 (a) Total Sales Particulars Amount (₹) Gross Profit 5,00,000 Gross Profit Ratio 20% Total Sales of the Company (₹5,00,000 / 20%) * 100 25,00,000 (b) Sundry Debtors Particulars Amount (₹) Sales 25,00,000 Debtors Collection Period 3 months Year-end Sales outstanding (Average Trade Receivables) (₹25,00,000 * 3 / 12) 6,25,000 Less: Bills Receivable 60,000 Sundry Debtors 5,65,000 (c) Sundry Creditors Purchase = Sales - Gross profit + Increase in Stock OR Cost of goods sold + Increase in Stock Particulars Amount (₹) Cost of goods sold (₹25,00,000 - ₹5,00,000) 20,00,000 Increase in stock 20,000 Purchases 20,20,000 Creditors Payment Period 2 Months Year-end outstanding for purchase (Average Trade Payables) (₹20,20,000 * 2 / 12) 3,36,667 Less: Bills Payable 36,667 Sundry Creditors 3,00,000 (d) Closing Stock Particulars Amount (₹) Cost of goods sold 20,00,000 Stock velocity 6 months Average Stock (₹20,00,000 * 6 / 12) 10,00,000 Let Opening stock be 'x' Closing Stock = x + 20,000 Twice Average stock = Opening Stock + Closing Stock 2 * 10,00,000 = x + (x + 20,000) 20,00,000 = 2x + 20,000 2x = 19,80,000 x = 9,90,000 Thus, the opening stock = ₹9,90,000 Hence, closing stock = ₹9,90,000 + ₹20,000 = ₹10,10,000 (e) Working Capital Cycle Particulars Period Inventory Holding Period 6 months Debtors Collection Period 3 months Gross Operating Cycle 9 months Less: Creditors Payment 2 months Net Working Capital Cycle 7 months (f) Liquidity & Efficiency Analysis Inventory Period (6 months) → High → Slow Movement of Stock Debtors Period (3 months) → Moderate → Average Collection Efficiency Creditors Period (2 months) → Low → Company pays suppliers quickly Conclusion: Funds are blocked for 7 months. Liquidity pressure exists due to high inventory holding period and short credit period from suppliers. (g) Note to Finance Director (i) Key Observations Sales: ₹25,00,000 with Gross Profit margin of 20% Working capital cycle is long (7 months) Inventory holding is relatively high Debtors recovery is moderate (ii) Strengths & Weaknesses Strengths Weaknesses Stable profitability (20% Gross Profit) Excess inventory holding Reasonable debtor management Short credit period from suppliers Long cash conversion cycle (iii) Suggestions for Improvement Reduce Inventory Holding - Adopt better inventory control through better inventory planning and forecasting. Improve Collection Efficiency - Offer cash discounts, Strengthen credit policy. Negotiate Better Credit Terms - Increase creditors payment period. Working Capital Optimization - Reduce cycle from 7 months to lower level.