36711831 virgin-soft-drinks-working-capital-management

Virgin Soft Drinks:
Working Capital Management

UNIVERSITY OF DHAKA
DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS
Virgin Soft Drinks: Working Capital Management
Submitted to:
Mr. Md. Amirus Salat
Assistant Professor
Department of Accounting and Information Systems
University of Dhaka
Submitted by:
Shah Kamal
Department of Accounting & Information Systems
University of Dhaka

Table of Contents
Executive Summary
1. Introduction 01
2. Objectives of the Study 02
3. Methodology 02
4. Limitations of the Study 03
5. Working Capital Management 04
5.1. Defining Working Capital 04
5.2. Working Capital Policies 05
5.3. Working Capital Cycle 07
5.3.1. Cash Management 08
5.3.2. Inventory Management 19
5.3.3. Managing Accounts Receivable (Debtors) 22
5.3.4. Managing Accounts Payable (Creditors) 26
6. Overview of Virgin Group 29
7. Overview of Virgin Soft Drinks 31
8. Finding of Working Capital Management Maintained by Virgin Soft
Drinks in Bangladesh 32
8.1. Cash Management 32
8.2. Inventory Management 38
8.3. Managing Accounts Receivable (Debtors) 40
8.4. Managing Accounts Payable (Creditors) 43
9. Recommendation 43
10. Conclusion 44
Bibliography
Annexure

EXECUTIVE SUMMARY
Working capital is basically an expression of how many in liquid assets the company
currently 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 and
investment. The cheapest and best sources of cash exist as working capital right
within the business. Good management of working capital will generate cash and
help improve profits and reduce risks. My study is based on the comparison between
theoretical and practical aspects of working capital management. For this purpose,
I've collected some information regarding working capital, its cycle and its
management from Virgin Soft Drinks. It has been found that their major transactions
are handled in cash. But one of its major weaknesses is that it keeps its surplus funds
in banks rather than investing in marketable securities. Therefore they can earn
optimum profit by implementing effective mechanism which will help to gain
optimum working capital.

1. INTRODUCTION:
Working capital is the life blood of any business big or small. However, smaller
businesses might find it more trying to maintain a comfortable level of capital.
Managing working capital is an important factor for them. Working capital
management is important because maintaining a balance of income to debt can be
difficult and owners must be diligent to assure that it is kept. Sometimes it takes a
little assistance to maintain levels of fluidity or make major purchases. If working
capital dips too low, a business risks running out of cash. Even very profitable
businesses can run into trouble if they lose the ability to meet their short-term
obligations. Working capital financing can be used as a fast cash option to cushion
the periods when the flow is not ideal or readily available. Even when owners are
meticulous in managing working capital, finding the right levels to remain
comfortable and competitive can be difficult.
The analogy has often been made that cash is the lifeblood of any business. A
transfusion will miraculously bring the patient back from the brink of death, but only
if:
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 suit
that business's own particular needs. For example, fixed assets should be financed by
long term loans and capital. Working capital requirements should be attended to by
short term finance, e.g., overdrafts.
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It goes without saying that before capital is injected into the business it should first be
ascertained whether all unnecessary leakages have been plugged. Otherwise, in time,
the transfusion will follow the same route. To control and exploit the cash cycle
through any business so that it can continue to function on a day-to-day basis, is
therefore, the hub of working capital management. The fundamental principle of

working capital management is having just the right amount of money available
when needed. Every rand in the business should be earning its maximum return
wherever 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 capital
management by Virgin Soft Drinks;
To understand the efficiency of Virgin Soft Drinks in managing working
capital.
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 data
collection method.
Conducted formal interview and focus observation and intensive practical
work to collect information;
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Collected information from company's profiles;

Collected current information from website.
b) Segregation of Data:
Necessary data were segregated from the source material for the purpose of preparing
the 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 turned
as the limitation of report:
Many personnel of the organization due to their pressure of the work were
reluctant to provide much useful information;
Sufficient records, publications, facts and figures are not available. These
constraints narrowed the scope of real analysis;
Due to time constraint, I could not spend sufficient time, which was
necessary to make this report more representative of the fact;
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Lack of experience has also acted as constraint for the exploration of the
topic.

5. WORKING CAPITAL MANAGEMENT:
5.1. DEFINING WORKING CAPITAL:
The term working capital refers to the amount of capital which is readily available to
an organization. That is, working capital is the difference between resources in cash
or readily convertible into cash (Current Assets) and organizational commitments for
which cash will soon be required (Current Liabilities).
Current Assets are resources which are in cash or will soon be converted into cash in
'the ordinary course of business'.
Current Liabilities are commitments which will soon require cash settlement in 'the
ordinary course of business'.
Thus –
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
In a firm's Statement of Financial position, these components of working capital are
reported 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.
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Working capital management involves the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has sufficient ability to
satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable
and 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 expensive
short term borrowings, and too much which is wasteful in terms of lost opportunities
for the funds tied up. The crucial role of working capital is that it finances the goods
inwards, 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 overall
level 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 carried
and sales are stimulated by a liberal (generous) trade credit policy resulting in high
levels of receivables. This is a low risk strategy because the firm always has plenty of
cash and inventory on hand. The return is low because more money is invested in
low yielding assets.
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2. Restricted Current Asset Investment Policy –
Holdings of cash securities, inventories, and receivables are minimized. This is a
high risk strategy because the firm tries to keep the bare minimum of cash and
inventory. The potential return is high because less money is invested in low
yielding assets.
3. Moderate Current Asset Policy –
Balance between relaxed and restricted current asset investment policies (moderate
risk - moderate potential return).
Alternative Current Asset Financing Policies:
These policies are general strategies that firms may follow with regard to how current
assets 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 maintain
throughout the entire year. Temporary current assets are those that are due to
seasonal fluctuations. With respect to the current asset financing policy, the question
is how the permanent current assets will and temporary current assets are financed
(long-term or short-term financing).
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Aggressive Moderate Conservative
Cash Minimum holding Prepared to hold
some precautionary
balances
Prepared to hold idle
cash balances
Debtors and
stock
Minimum
consistent with
business needs
Moderate levels High stock and
debtor levels to
maximize sales
Creditors Maximum
available without
compromising
business needs
Moderate level Low level seeking
discounts and
reputation for good
payment

Future cash
flows
Predictable Reasonably
predictable
Unpredictable
Attitude to
Risk
Accepting Neutral Rejecting
Total assets = Fixed Assets + Permanent Current Assets + Fluctuating Current Assets
5.3. WORKING CAPITAL CYCLE:
Cash flows in a cycle into, around and out of a business. It is the business's life blood
and every manager's primary task is to help keep it flowing and to use the cash flow
to generate profits. If a business is operating profitably, then it should, in theory,
generate cash surpluses. If it doesn't generate surpluses, the business will eventually
run out of cash and expire.
The faster a business expands the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right
within business. Good management of working capital will generate cash will help
improve profits and reduce risks.
Working capital can be broken down into the following major components: cash (or
bank overdraft), stock, debtors, creditors. Each of these items can have a major
influence on the working capital (or simply cash) that any business requires on an
ongoing basis. For example, when a business starts up, the owner may inject a
certain amount of cash into the business which will enable him to purchase his initial
stock, pay his workers their first month's wages and cover other overheads such as
rent. He then sells his product and this income may be utilized to purchase more
stock, pay more wages and overheads and perhaps even have a surplus over for his
own use. The quicker he can turn his stock over to receive payment, the sooner the
working capital cycle will be completed.
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Figure: Working Capital Cycle
These 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 starts
its transit to the firm until it leaves the firm in payments. Cash management
encompasses the design of collection and disbursement systems for cash and the
temporary investment of cash while it resides with the firm. Widely used money
market instruments are-
Treasury bill;
Commercial paper;
Certificate of deposits;
Banker’s acceptance;
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Repurchase agreement.

5.3.1.1. Motives for Holding Cash:
Despite the seemingly low returns, there are several good reasons why firms hold
cash and marketable securities. These reasons are –
Cash for transactions;
Cash and near cash assets as hedges;
Temporary investment; and
Compensating balances.
5.3.1.2. Components of Cash Management:
A Cash Flow Statement shows the sources and uses of cash and is typically divided
into three components:
Operating Cash Flow:
Operating cash flow, often referred to as working capital, is the cash flow generated
from internal operations. It comes from sales of the product or service of your
business, and because it is generated internally, it is under your control.
Investing Cash Flow:
Investing cash flow is generated internally from non-operating activities. This
includes investments in plant and equipment or other fixed assets, nonrecurring gains
or 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.
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5.3.1.3. 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 from
the firm is on important function in the area of finance. Transit times for the check
takes in three stages. These are mail float, at firm float, and clearing float. Normally
mail float takes 1 to 5 days, at firm float takes 0.25 to 1 day, and clearing float takes 0
to 2 days .The firm should care about this process because every delay in the receipt
of 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 float
time, at time float time and clearing float time) that make up the total transit time of
fund from one firm to another.
Other Cash Management Tools:
When the economy is strong, companies can lapse into sloppy cash-management
practices. Firm should try exploring these options:
1. Sweep accounts:
These bank accounts are the easiest way to generate some income from company's
spare funds; however, they make sense only if the money you'll earn will be greater
than the fees your bank will charge. Business owners have two types of sweep
accounts to choose between:
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Controlled-investment accounts: These are the most profitable form of
sweep account, but they won't work for company if the firm has any
electronic payments or wire transfers, since those may be submitted for
payment later in the day and the account won't have enough cash in it to
cover them.

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End-of-day sweep accounts: A safer bet for most small-business owners,
these accounts wait until a late-hour cutoff to determine how much to
sweep into the firm's overnight investments. Typically their investment
yields are 10 to 20 basis points (.1% to .2% of the investment) lower than
those 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, lock
boxes provide the firm with a special zip code and, usually, quicker deliveries from
regional post offices. They are especially important if the firm has clusters of
customers in out-of-state locations and don't want to lose days waiting for their
checks 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 the
resulting cash balances is available in the firm’s lockbox (depository) banks. It is
useful for the firm to gather these balances from the lockbox banks into the central
bank account. The process of collecting funds is called cash concentration.
Several concentration mechanism are available for the firm to use in transferring
funds from its collection banks to regional concentration banks, and from there to the
central concentration bank. These mechanisms differ in cost and in the availability of
funds that they provide. These are –
a) Depository Transfer Check:
It is the cheapest transfer mechanism. This document instructs one bank to
send funds to another, and is treated the same as any other check.

b) Automated Clearing House (ACH) Electronic Transfer:
This vehicle is essentially an electronic version of the depository transfer
check, and can be used between banks that participate in the automated
clearing house system.
c) Wire Transfer:
These are electronic message between banks.
Decisions regarding concentration mechanism usually hinge on the size and
spread of the firm’s deposits. Firms with small deposits spread over a
substantial number of banks will tend to have more extensive concentration
systems and will transfer among accounts using low-cost transfer vehicles that
offer only delayed availability (such as depository transfer checks). Firms with
larger deposits will have fewer accounts (since a local deposit for transfer to
an upstream bank is not needed) and will use more expensive and more rapid
transfer mechanisms (such as wire transfers). The concentration systems of
major chemical companies for example, tend to be structured in this way –
Depository/Lockbox Banks
Regional Concentration Banks
Central Concentrated Bank
Figure: A typical Cash Concentration System
(Arrows indicate transfers of collected funds)
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Disbursement management addresses the efficient payout out of this cash once it is
concentrated. The firm’s objective in disbursement management is to retain the cash
for as long as possible. In this way, the firm will have the maximum amount of funds
available for investment and transactional purposes. Certainly this management
means making disbursement only when they are due and not before. The firm has
several available set of techniques for disbursement management. Included among
these are –
a) Management of Disbursement Float:
In this set of techniques, the disbursing firm attempts to increase the length of
time between the mailing of its checks and the eventual withdrawal of funds
from the banks. This involves strategies for increasing mail float, at firm float,
and clearing float on its outgoing checks. For example, the disbursing firm
may intentionally address checks to the firm’s office address rather than its
lockbox, creating at firm float.
b) Zero-Balance Accounts:
Here the firm holds the cash until the check arrive (or expected to arrive) at
the disbursement bank. In this strategy, an account for disbursement is first
established at a bank. For the zero-balance system to be effective, the
participating bank must be one on which most disbursement are made via the
Bangladesh Bank’s clearance system (which presents disbursements to banks
early in the morning), and not a bank where disbursements occur throughout
the day (as with a major money-center bank). Consequently, the banks used
in zero-balance strategies are usually branches of major banks and not their
main locations.
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c) Controlled Disbursing:
In this system, the firm projects the amount of checks to arrive each day at the
disbursement bank (based on the checks written in previous days and historic

statistics on disbursement float) and transfers the amount of the expected
checks 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 account
over a particular period of time, usually a quarter, month, week or day. The cash
forecast is primarily intended to produce a very useful piece of information: an
estimation of the firm’s borrowing and lending needs and uncertainties regarding
these needs during various future periods. Cash forecasting is very crucial to most
firms. It enables them to anticipate periods of surplus cash and periods where
financing will be necessary. This anticipation is the reason that cash forecasts are
generated. Anticipation enables the firm to plan much more effectively for
investment 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 two
dimensions: the length of the periods included within the cash forecast and the approach
to cash flows used in the cash forecast. The length of the period refers to the units of
time into which the cash forecast is divided. Firms may make cash flow forecasts
over periods of various lengths: yearly flows, quarterly flows, monthly flows, weekly
flows, or even daily flows. The most popular forecast involves monthly flows, but
most firms do not confine themselves to a single forecast. Instead they use several
forecasts with periods of various lengths. When the firm makes forecasts involving
multiple and overlapping period lengths, one forecast relates to another. Starting
with data on relatively long periods and breaking it down into smaller periods is
called distribution; starting with data on relatively short periods and aggregating into
longer periods is called scheduling.
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Firms use two common approaches to cash flows in generating the cash forecast: the
receipts and disbursements approach and the adjusted net income approach. The receipts
and disbursements approach use the amounts of cash expected to be received and
disbursed by the firm over the periods chosen for forecast. The adjusted income
statement approach is sometimes called the sources and use approach. Here, the
forecaster starts with projected net income on an accrual basis and adjusts to a cash
basis. This method provides a representation of changes in asset and liability
accounts; since the level of these accounts are of interest to the firm, this aspect of the
adjusted income statement is an advantage over the receipts and disbursements
method.
Items to Be Forecast:
In the receipt and disbursements cash forecasting method, estimates need to be made
of the numerous major and minor items that the firm collects (receipts) and that it
pays (disbursements). The more individual categories of items the firm includes in its
forecast procedure, the more accurate the forecast may be, but the more costly in
terms of time and effort it will be to generate.
Some Possible Types of Cash Receipts and Cash Disbursements
Cash Disbursements Cash Receipts
Cash Purchases of Materials Payroll
Taxes
Maturing Accounts Payable
Maturing Notes Payable
Miscellaneous Disbursements
Accounts Receivable
Notes Receivable
Rental Income
Interest Income
Miscellaneous Receipts
Methods of Financial Forecasting:
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Financial forecasting is the estimation of the future level of a financial variable, often
a cash flow, asset level or liability level. It is usually assumed that the relationship
between the financial variable and other variable is linear. The general linear model
can then be used:

nnt xa........xaxaaY 22110 ++=
Here,
= Financial variable (Y) to be forecast in period t.tY
x = 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 they
are all special cases of the general linear model. These are – spot method, proportion
to another account, compounded growth and multiple dependencies.
Using Cash Forecast:
The estimate of available funds for investment and needed financing enables the firm
to plan so as to obtain the most advantages borrowing terms for deficits and achieve
the greatest interest income on surplus. A useful chart for this planning purpose is a
bar chart. e.g.,
Figure: Bar Chart of Cash Surpluses and Deficits from hypothetical data
Page 16 of 46
75
50
-60
30
100
-20
-80
-60
-40
-20
0
20
40
60
80
100
120
DeficitSurplus
January February March April May June

Sources of Uncertainty in Cash Forecasting and Hedging Uncertainties:
There are numerous sources of risk in cash forecasting. Among the sources are sales
uncertainty, collection rate uncertainty, production cost uncertainty and capital
outflow 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 = iY
n
n
⎥⎦
⎤
⎢⎣
⎡ −
2
1
Profit = naiY
n
n
−⎥⎦
⎤
⎢⎣
⎡ −
2
1
Optimum number of transactions = ⎟
⎠
⎞
⎜
⎝
⎛
a
iY
2
Where, n = Optimum number of transactions
i = Interest rate per period
a = Transaction cost
Y = Total inflow for the period
Page 17 of 46
Miller-Orr and Stone use the same model, i.e., R-Statistic. The model is –
31
4
3
/
i
av
R ⎟
⎠
⎞
⎜
⎝
⎛
=
Optimum Control Limit = R + L
Upper Control Limit = 3R + L
Where, a = Transaction Cost

v = Variance of daily cash flows
i = Daily interest rate
5.3.1.7. 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 not
available 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 "we've
always had them", they should be discontinued. There may be situations where they
are useful, however. For example, it may be desirable for peripheral parts of
departments to meet urgent local needs from cash floats rather than local bank
accounts.
5.3.1.8. Internal Control:
Cash and cash management is part of a firm's overall internal control system. The
main internal cash control is invariably the bank reconciliation. This provides
assurance that the cash balances recorded in the accounting systems are consistent
with 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 firm's cash needs will occur;
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Knowing the best sources for meeting additional cash needs;

Page 19 of 46
Being prepared to meet these needs when they occur, by keeping good
relationships with bankers and other creditors.
5.3.2. INVENTORY MANAGEMENT:
Inventory management is necessary for owners who want to maintain a stocking
service for quick turnaround to help ensure total customer satisfaction. The 'fill rate'
of an item on a managed inventory list must be maintained to avoid shortages of
frequently 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 be
sold. The total balance of inventory is the sum of the value of each individual stock
line.
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 in
pipelines;
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 the
objectives of establishing optimum stock levels for each category and, thereby,
minimize the cash tied up in stocks. Factors to be considered when determining
optimum stock levels include:

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What 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 without
compromising best sellers?
Inventory management is an important aspect of working capital management
because inventories themselves do not earn any revenue. Holding either too little or
too 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 administrati
nts.Loss of quantity discou

Carrying costs can be minimized by making frequent small orders but this increase
ordering costs and the risk of stock outs. Risk of stock-outs can be reduced by
carrying 'safety stocks' (at a cost) and re-ordering ahead of time.
The best ordering strategy requires balancing the various cost factors to ensure the
firm incurs minimum inventory costs. The optimum inventory position is known as
the Economic Reorder Quantity (ERQ).
Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby
all the components to be assembled on a particular today, arrive at the factory early
that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT
stocks take up little space, minimize stock-holding and virtually eliminate the risks of
obsolete or damaged stock. Because JIT manufacturers hold stock for a very short
time, they are able to conserve substantial cash. JIT is a good model to strive for as it
embraces 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 the
trivial many;
Sell off outdated or slow moving merchandise - it gets more difficult to sell the
longer the firm keeps it;
Consider having part of its product outsourced to another manufacturer rather
than make it itself;
Review its security procedures to ensure that no stock "is going out the back
door!"
Higher than necessary stock levels tie up cash and cost more in insurance,
accommodation costs and interest charges.
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However, it is important to keep an overall perspective. It is not cost-effective to
closely manage a large number of low value inventory lines, nor is it necessary. A
usual feature of inventories is that a small number of high value lines account for a
large 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 inventory
items. Those high value lines need reasonably close management. The remaining
80% 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 are
collected faster. Every business needs to know.... who owes them money.... how much is
owed.... how long it is owing.... for what it is owed.
Debtors (Accounts Receivable) are customers who have not yet made payment for
goods or services which the department has provided. The objective of debtor
management is to minimize the time-lapse between completion of sales and receipt
of payment. The costs of having debtors are:
Opportunity costs (cash is not available for other purposes);
Bad debts.
If firm doesn't manage debtors, they will begin to manage business as the firm will gradually
lose control due to reduced cash flow and, of course, it could experience an increased
incidence of bad debt. The following measures will help manage debtors:
Having the right mental attitude to the control of credit and make sure that it
gets the priority it deserves;
Establishing clear credit practices as a matter of company policy;
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Making sure that these practices are clearly understood by staff, suppliers and
customers;

Page 23 of 46
Being professional when accepting new accounts, and especially larger ones;
Checking out each customer thoroughly before the firm offers credit. Use
credit 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 coming
or if operating in a volatile sector;
Keeping very close to the firm's 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 don't let any debts
get 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 late
payment;
Agreeing payment terms in advance;
Requiring cash before delivery;
Setting credit limits;
ning credit;Setting criteria for obtai
Billing 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 p
P
Placing the responsibility
Identifying long overdue balances and doubtful debts by regular analytical reviews;
Having an established procedure for late collections, such as
A reminder;
A letter;

Page 24 of 46
ion of further credit;Cancellat
Telephone calls;
n agency;Use of a collectio
he firm should recognize that the longer someone owes firm, the greater the chance
Legal action.
T
it will never get paid. If the average age of debtors is getting longer, or is already very
long, it may need to look for the following possible defects:
Weak credit judgment;
res;Poor collection procedu
ms;Lax enforcement of credit ter
Slow issue of invoices or statements;
Errors in invoices or statements;
Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally
demand 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 G
Receiving part payments from debtors.
dit ranting to Marginal Accounts:
Traditional Approach:
In the traditional approach to the credit granting decision, it is the credit analyst's job
rmation that has been collected and reach a judgment
regarding the applicant's creditworthiness. One traditional way of organizing this
to synthesize all the info

information is by characterizing the applicant along five dimensions. These
dimensions are called the Five C's of credit –
Capital;
Character;
Collateral;
andCapacity
Conditions.
Net Present Value (NPV) Approach:
Once a firm has assessed the creditworthiness of a customer, it has to decide whether
r not credit should be granted. The firm should use the NPV rule to make the
ld be granted.
Figure
o
decision. If NPV is positive, credit shou
Credit Granting
Decision
: Credit Granting Decision
he act of collecting money is one which most people dislike for many reasons and
therefore put on the long f selves there is something
ore urgent or important that demands their attention now. There is nothing more
T
inger because they convince them
m
important than getting paid for firm's product or service. A customer who does not
Page 25 of 46
Grand Credit
Payment received Payment not received
Benefit of present value
of future net cash flow
Cost of present value
mentof lost invest
Net Payoff. PV of
benefit-cost
No Credit
No Payoff

pay is not a customer. Here are a few ideas that may help the firm in collecting
money 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 firm's and it is entitledCompany shouldn't feel guilty asking f
to it;
ction;
Firm must make that call now. And it should keep asking until it gets some
satisfa
lessens the problem;
In difficult circumstances, take what the firm can now and agree terms for the
remainder. It
paying;
When asking for money, be hard on the issue - but soft on the person. It shouldn't
give the debtor any excuses for not
5.3.4. BLE (CREDITORS):
ices for goods or services have
een paid. Organizations often regard the
not
to delay all payments until the latest possible date., Regular weekly or
The firm make it its objective is to get the money - not to score points or get
even.
MANAGING ACCOUNTS PAYA
Creditors (Accounts Payable) are suppliers whose invo
been processed but who have not yet b
amount owing to creditors as a source of free credit. However, creditor
administration systems are expensive and time-consuming to run. The over-riding
concern in this area should be to minimize costs with simple procedures.
While it is unnecessary to pay accounts before they fall due, it is usually
worthwhile
Page 26 of 46
fortnightly payment of all due accounts is the simplest technique for creditor
management.

Electronic payments (direct credits) are cheaper than check payments, considering
that transaction fees and overheads more than balance the advantage of delayed
presentation. Some suppliers are reluctant to receive payments by this method, but in
view of the substantial cost advantage (and the advantages to the suppliers
themselves) departments may wish to encourage suppliers to accept this option.
However, electronic payments are likely to be used in conjunction with, rather than
as a replacement for, check payments.
Applying Best Practices in Managing Accounts Payable:
f course, simply deferring payments to suppliers could have adverse consequencesO
that more than offset the benefits of this additional cash flow. Therefore, it is
important to develop a holistic approach. The firm should consider the following
best practices for payables management:
Managing payment dates and terms to maximize cash flow –
y reporting on
receivable and
id penalty charges and taking advantage of
wer vendors and negotiate for more
to buying consortia with others, even
voices for
payment based on receipt of goods or receipt of invoice, whichever
comes later.
Calculating and setting performance targets. Regularl
A/P performance measures, such as days in payables;
Coordinating the A/P processes with accounts
inventory management to ensure that the company is collecting more
cash than it is paying out;
Paying bills on time to avo
prompt-payment discounts where the discounts exceed the company’s
cost of working capital;
Consolidating purchases with fe
favorable payment terms;
Considering entering in
Page 27 of 46
competitors, to obtain favorable supplier pricing and terms;
Unless contract terms specify otherwise, setting up in

Page 28 of 46
Em
process
-time payments with Electronic Funds Transfer (EFT);
uraging vendors to utilize electronic invoice presentment;
a
ndancies and more
ploying technology to automate the accounts payable transaction
es –
Making just-in
Using an electronic invoice-matching application;
Enco
For companies with multiple locations or business units, employing
shared service approach for A/P to eliminate redu
quickly implement process improvements.
Mainta
vendor
Communicating accounts payable requirements to suppliers at the
m key suppliers;
for suggestions on how to improve the
Efficient a
and making th ’s cash is just good business.
ining open communications and building strong relationships with
s to access valuable trade credit –
beginning of transactions;
Requesting summary invoicing fro
Requiring suppliers to send invoices directly to accounts payable;
Asking tier-one suppliers
payment process.
nd effective management of accounts payable helps improve cash flow –
e most of company

6. OVERVIEW OF VIRGIN GROUP:
Virgin - one of the most respected brands in Britain - is now becoming the first global
brand name of the 21st
century. Virgin is involved in planes, trains, finance, soft
drinks, 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 its
people. Virgin has created over 200 companies worldwide, employing over 25,000
people. Its total revenues around the world in 2002 exceeded £4 billion (US $7.2
billion).
In 1970, Richard Branson founded Virgin as a mail order record retailer, and not
long after he opened a record shop in Oxford Street, London. During 1972 a
recording 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 Rolling
Stones have helped to make Virgin Music one of the top six record companies in the
world. The equity of Virgin Music Group - record labels, music publishing, and
recording studios was sold to THORN EMI in 1992 in a US$1billion deal.
Page 29 of 46
The Virgin Group has now expanded into international music Mega stores, air
travel, mobile, financial, retail, music, internet, drinks, rail, hotels and leisure, with
around 200 companies in over 30 countries.

In Virgin's customers' eyes, Virgin stands for value for money, quality, innovation,
fun and a sense of competitive challenge. It delivers a quality service by empowering
its employees and facilitates and monitors customer feedback to continually improve
the customer's 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 customer's shoes to see
what could make it better. Virgin asks fundamental questions:
Is this an opportunity for restructuring a market and creating competitive
advantage? 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 46
Virgin is also able to draw on talented people from throughout the group. New
ventures are often steered by people seconded from other parts of Virgin, who bring

with them the trademark management style, skills and experience. Virgin frequently
creates partnerships with others to combine skills, knowledge, and market presence
and so on. Contrary to what some people may think, their constantly expanding and
eclectic empire is neither random nor reckless. Each successive venture demonstrates
its 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 with
Virgin Cola in the UK. Since then the company has ventured across the carbonated
soft drinks arena and beyond into energy drinks, tea and flavored Colas. This
expansion has lead to the evolution of the Virgin Drinks Company, a company
whose aim is to put the excitement back into the world of soft drinks. It launched in
Bangladesh in 1999. Virgin Soft Drinks is monitored by Global Beverage Co. Ltd. in
Bangladesh.
Brief history of Virgin Drinks is given below:
Page 31 of 46
1994 November: Virgin Cola launched in the UK
1996 March: Virgin Cola launched in France
1998 June: Virgin Cola launched in Belgium
April: Virgin Cola launched in the French West Indies

August: Virgin Cola launched in Switzerland
1999 March: Virgin Colours launched in Italy
March: Virgin Cola launched in Japan
July: Virgin Colours launched in South Africa
December: Virgin Colours launched in Bangladesh
2001 January: Sweden launched Virgin Colours
November: Singapore launched Virgin Colours
2002 February: Croatia launched Virgin Colours
June: Russia launched Virgin Colours
June: Tunisia launched Virgin Colours
2003 May: Israel launched Virgin Colours
8. FINDINGS OF WORKING CAPITAL MANAGEMENT MAINTAINED BY
VIRGIN 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 marketable
securities, 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 some
important reasons, such as –
i) Near cash assets as hedges;
Page 32 of 46

ii) 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 repurchase
agreement. This firm deposits its money in bank as currant A/C or fixed A/C. They
say 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 market
short term securities. We know that near cash, interest earning assets can be
substituted for cash when motivation for holding these assets is the hedging of cash
flow uncertainties or is the temporary investment of surplus funds. In this point,
Virgin's position is not good as there is no significant hedging against uncertainty of
cash.
8.1.2. Floatation and Check Clearing:
Virgin is very smart in handling the problem of transit time for checks. Here mail
float takes 2 to 3 days, at firm takes 0.25 day and clearing float takes 1-3 days. Virgin
uses 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 uses
electronic collection process which ensures faster collection and its at the firm check
processing is satisfactory. But Virgin does not use lockbox. The reason behind this is
that it is not cost-effective for Virgin to set lockboxes. At this point, we can say that
Virgin's check clearing mechanism is much good.
8.1.3. Cash Concentration and Disbursement Management:
Page 33 of 46
Virgin Soft Drinks takes the matter of cash concentration very seriously. They use all
the available cash concentration mechanism. Virgin is a firm with small deposits
spread over a substantial number of banks and this is why the firm tends to use

depository transfer checks extensively. If is less costly. Virgin also uses automated
clearing 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 Virgin
always performs it in an ethical manner. Virgin does not try to defeat the receiving
firm’s attempts to reduce the float on incoming checks. It does not take any strategy
for increasing mail float, at firm float, and clearing float on its outgoing checks. To
Virgin, it is deemed to be unethical. It thinks that maximization of disbursement float
will not go unnoticed by sophisticated creditors for very long. When it is noticed it
will negatively affect relations with these creditors, reducing the firm’s bargaining
power with them. This may ultimately cost Virgin dearly when future prices and
delivery schedules for goods and services purchased from trade creditors are
negotiated. Virgin follows “Zero-Balance Accounts” methods for managing
disbursement. It thinks that in this method the coordination of funds inflows to
disbursement banks with the presentation of checks does not work to the detriment
of creditors since the firm’s checks to them are honored as presented and this strategy
does not affect float significantly. Controlled disbursing method is less attractive to
Virgin because zero-balance system is already feasible.
8.1.4. Cash Forecasting:
Cash Forecasting and Its Types:
Page 34 of 46
Virgin forecasts the future cash inflows and outflows. To Virgin, cash forecast is an
important part of the firm’s cash control system and is one of the forecasts that are
part of the Virgin’s financial plan. Virgin forecasts cash on monthly basis and on
yearly basis. Virgin does not forecast on daily basis assuming that the temporary
shortage of funds within these periods can be covered without value cost, e.g.,
advance receipts from customers. Virgin’s cash forecasting system involves a
combination of distribution and scheduling. The receipts and disbursements
approach of cash forecasting is used in virgin. This method is used because it
minutely traces the movement of cash and very close control of cash is possible.

Virgin does not use adjusted net income approach on two grounds. First, it does not
permit the tracing of the individual types of cash inflows and outflows for any given
period, 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., accounts
receivable, 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 or
liability level. We know, in short term forecasts many things will result from plans
and events that are already in place (contracts, capital budgets, long-range financing
plans, and so forth). But in the long run, most things can vary and are dependent on
outside influences such as the firm’s long-term growth rate. Since Virgin’s cash
forecasting deals mostly with near future, many of the items on the cash forecasts are
estimated by some variation of the spot method and remaining estimates are mostly
on a “proportion of another account” basis with this “other account” often being a
particular 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 funds
for investment and need financing) and for meeting some special objectives (e.g., to
know whether the firm will fulfill it's out of debt requirement). But it is matter to note
that Virgin does not make any short term investment of its surplus cash but only keep
this surplus in Bank Account.
Page 35 of 46

Sources 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) sales
increases but in dull season (e.g., in winter) sales decreases drastically. Production
cost may be increased because of increase of price of sugar, chemicals, aluminum
can. Virgin follows two methods for hedging cash balance uncertainties. These are –
i) Holding a stock of extra cash; and
ii) 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 cash
continuously and pays salary at steady rate and pays continuously for other
expenses. So it neither follows Baumol model nor Beranek model. It has no upper
control limit, lower control limit, return point in case cash management. So it neither
follows Miller-Orr model nor Stone model.
In Summary:
Page 36 of 46
Standard Compliance by Virgin Soft Drinks
Generally all firms hold cash and
marketable securities.
Virgin holds only cash.
Firms hold cash and marketable
securities for some reasons like
• Cash for transactions;
• Cash and near-cash assets as
hedges;
• Temporary investments;
• Compensating balances.
Virgin holds cash only for
two reasons –
• Cash for transactions;
• Cash as hedges.
Available money market instruments Virgin does not invest in any such

(short term securities) are –
Treasury Bills;
Commercial Paper;
Certificates of Deposit;
Banker’s Acceptance;
Repurch menase Agree ts.
instruments. They only keep cash in
Bank Account.
Mail Float
(1 to 5 days)
At Firm
Float
(0.25 to 1
day)
Clearing
Float
(0 to
2 days)
Mail Float
(2 to 3 days)
At firm
Float
(0.25
day)
Clearing
Float
(1 to 3
days)
Figure: Transit time for a typical check Figure:Transit time for a check for
Virgin
Strategies that firms can use to reduce
the delay in receiving funds are –
☯ Selecting of Banks with
accelerated clearing capabilities;
☯ of check processingAcceleration
at the firm;
☯ ectronic collectionUse of el
procedures;
☯ Use of lockboxes.
Virgin follows the first three strategies
but does not use lockboxes.
Available cash concentration
mechanisms are –
Depository transfer check;
ouseAutomated Clearing H
(ACH) electronic transfer);
Wire transfer.
Virgin uses all these mechanisms of
cash concentration.
Available sets of techniques for cash
disbursement management are –
ement of disbursement
Page 37 of 46
Manag
float;
Virgin uses zero-balance accounts
technique.

Zero-Balance Accounts;
Controlled disbursing.
Firms may make cash flow forecasts
over periods of various lengths: yearly
flows, quarterly flows, monthly flows,
weekly flows or even daily flows.
Virgin forecasts cash on yearly basis and
monthly basis.
Cash forecasting system may involve –
Distribution;
Scheduling.
Virgin’s cash forecasting system
involves a combination of distribution
and scheduling.
Two common approaches to cash flow
in generating the cash forecast:
and disbursementReceipts
approach;
Adjusted net income approach.
Virgin uses the receipts and
disbursement approach.
There are many items to forecast. Virgin forecasts only major items like
A/R, payroll etc.
Four common approach to forecasting
fina i –nc al variables are
Spot method;
Proportion to another account;
Compounded growth;
Multiple dependencies.
Virgin uses spot method for forecasting
cash. It uses proportion to another
account method for other variables and
remaining two methods are frequently
used.
Sources of uncertainty in cash
forecasting are –
Sales uncertainty;
Collection rate uncertainty;
Production cost uncertainty;
Capital outflow uncertainty.
Virgin faces uncertainty mainly from
sales and production cost.
Methods for hedging cash balance
unc a
Page 38 of 46
ert inties are –
i) Holding a stock of extra cash;
Virgin two available methods for
hedging cash balance uncertainties.
These are –

ii) stock of near-cashHolding a
assets;
iii) Extra borrowing capacity;
iv) ary surpluses inInvesting tempor
near-cash assets.
i) Holding a stock of extra cash;
ii) Extra borrowing capacity
(advance receipt from
customers).
Models for the management of cash and
temporary investments are – Baumol
model, Beranek model, Miller-Orr
model, and Stone model.
Virgin does not follow any method
wholly but a combination of Baumol
model and Beranek model is occurred.
8.2. INVENTORY MANAGEMENT:
.2.1. Certainty Approach:
isn't used in
irgin because it thinks it is not possible to implement in Bangladesh.
d time is one to three days. It
oes not use ABC system of inventory management.
8
Main item of inventory of Virgin is Can, pet chip, sugar, label, chemical, artificial
sweet etc. Virgin maintains a minimum level of inventory but it does not have to face
problems because inventory is managed efficiently. just-in-time (JIT)
V
Virgin maintains buffer stock because of the shortage of work-in-process (WIP)
inventory. Its production process may also be hampered. That's why it maintains
safety stock to avoid stock out cost. In case of imported goods, normal lead time is
about one month and within the country, normal lea
d
Page 39 of 46
Inventory 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.

8.2.2 Uncertainty Approach:
Virgin does not use any model for handling inventory uncertainty. It says that such
decision 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:
Firms maintain inventory to guard
against several problems.
Virgin maintains a minimum level of
inventory which is managed efficiently.
Some firms use JIT to avoid inventory
cost.
JIT is not used by Virgin as it thinks it is
impossible to implement in Bangladesh.
Firms maintain buffer stock. Virgin maintains buffer stock too.
Firms maintain safety stock to avoid
shortage cost.
Virgin also maintains safety stock.
Firms use ABC system to monitor
inventory.
Virgin doesn't use ABC system.
EOQ model is an appropriate method
for measuring quantity that has to be
ordered per order.
Virgin does not use EOQ model rather
makes order based on experience and
market demand.
8.3. MANAGING ACCOUNTS RECEIVABLE (DEBTORS):
8.3.1. Terms of Sale Decision:
Page 40 of 46
Virgin offers the term 2/10, net 30, enables the customers to deduct 2 percent from the
face value of the bill when paying within the first 10 days, but if the discount is not
taken, the customer must remit the full amount within 30 days. But Virgin does not

offer the same terms of sale to all customers. For prime customers, it offers special
terms of sale. In setting an appropriate term of sale, it costs and benefits regarding
this are compared. It uses the standard approach of terms of sale decision as it is
simple 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 it
because of its simplicity. Virgin does not use Net Present Value (NPV) method in
credit granting decision. It thinks that NPV is an appropriate method and should be
used next time. It does not face any severe problem because of bad debts. The reason
is 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 positive
and negative durations in accounts signal differences from the results that
management believe to be the most advantageous for the firm.
Tools for Monitoring Accounts Receivable:
Page 41 of 46
For monitoring accounts receivable, there are several tools such as aging schedule,
the ratios of receivable outstanding to original sales, customer's payment proportion,
and sales weighted DSO (Days' Sales Outstanding). For monitoring accounts
receivable, Virgin uses aging schedule fractions and traditional DSO statistics
because of their simplicity in use. Although payment proportions, ratios of
receivables outstanding and sales weighted DSO methods are free from inherent bias.
None of these is used because all these are complex to maintain.

In summary:
Page 42 of 46
Generals terms of sale is 2/10, net 30. Normally, Virgin also use general terms
of sale, i.e., 2/10, net 30.
Firms do not offer the same terms of
sale to all customers.
Yes. For prime customers, Virgin offers
special terms of sale.
Approaches of terms of sale decisions
are –
• Standard approach;
• Multi period approach
Virgin uses standard approach of terms
of sale decision as it is simple to use and
understand.
Source of credit information are –
Seller's prior experience with the
customer;
Credit agency ratings and
reports;
Personal contact with the
applicant's bank and other
creditors;
Analysis of applicant's financial
statements;
Customer visit.
Main source of credit information to
Virgin is its prior experience with the
customer. All other sources are not cost-
effective for Virgin.
Approaches of credit granting to
marginal accounts are –
Traditional approach;
Net Present Value (NPV)
approach
It uses traditional approach still now but
thinks that NPV should be used for the
next periods.
Firms monitor accounts receivable
because deviations from the expected
levels of turnover and of bad debt can
Virgin also monitors its accounts
receivable.

signal several different problems.
Different tools for monitoring accounts
receivable are –
Aging schedule;
Ratios of receivables
outstanding to original sales;
Customer's payment
proportions;
Sales-weighted DSO.
For monitoring accounts receivable,
Virgin uses aging schedule and
traditional 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 to
the banks rather than suppliers. But we don't have any clear information about
Virgin's accounts payable.
9. RECOMMENDATION:
Virgin should invest its surplus cash in short term marketable securities
because it is suitable hedging against cash uncertainties and will also give
some returns (interest income);
Virgin should publish its own annual report which will satisfy information
needs of stakeholders and also increase the credibility of information provided
by Virgin;
Page 43 of 46
Virgin should use multi period approach in terms of sale decision because
standard approach which is already exists in Virgin has some inherent
problems;

It should stop using traditional approach from now. It should use NPV
method in credit granting to marginal accounts;
In monitoring accounts receivable, Virgin should use sales-weighted DSO
method because it has least limitation compared to the others;
It should be more flexible in granting credit, which will ultimately increase its
sales;
To get the appropriate number of quantity to be ordered per order, it should
use DSO model;
It should be ABC system for proper monitoring of inventory.
10. CONCLUSION:
The use of other people's money in business is usually an expensive resource. Before
looking outside for finance, a firm should examine its own working capital cycle to
make sure that every rand of its own internal funds is being fully utilized. Good
management of working capital is part of good financial management. Effective use
of working capital will contribute to the operational efficiency of the whole
organization; 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 firm's
overall management. The needs of efficient working capital management must be
considered in relation to other aspects of the Virgin's financial and non-financial
performance. That's why, when planning the development of a business, it is critical
that the impact of working capital be fully assessed.
Page 44 of 46

BIBLIOGRAPHY
Scherr, F.C., (1989), International Edition, Prentice-Hall International, Inc. "Modern
Working 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
Page 45 of 46
http://www.advanceme.com/ visited on March 13, 2006

"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
http://www.treasury.govt.nz/ visited on March 13, 2006
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 we're about"
Page 46 of 46
http://www.virgin.com/ visited on March 13, 2006

Annexure
Annexure
Interview with YASEER RIZVI
Mr. Yaseer Rizvi, the DMD of Global Beverage Co. Ltd., obtained his MBA degree
from a reputed university. He had been the Director of Ocean Container Ltd. before
joining 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 marketable
securities?
Yaseer Rizvi: Basically, we do not invest our surplus cash in short term marketable
securities like T-Bill, commercial paper, certificate of deposit etc. But we keep our
surplus 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 days
At firm float 6 hours
Clearing float 1 to 3 days
Shah Kamal: Do you maintain any cash concentration mechanism like depository
transfer check, automated clearing house and wire transfer?
i

Annexure
Yaseer Rizvi: Our position in this case is very strong as we use all the mechanisms
you mentioned. As Virgin is a firm with small deposits spread over a substantial
number of banks, so we tend to use depository transfer checks extensively. It is less
costly. We also use automated clearing house and wire transfer but later is used in a
less 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 of
disbursement float as it seems unethical. We follow Zero-Balance Accounts method
for managing disbursement. We do not prefer Controlled Disbursing method since
Zero-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 for
facing 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 terms
of 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. In
case of a new customer, personal contact is weighted.
Shah Kamal: Does your firm consider 5 Cs in granting credit?
ii

Annexure
Yaseer Rizvi: In case of Virgin, Capital and Character get more importance than the
others. 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 suitable
method 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 any
problem because of bad debt. Just note that we make more than 80% of sales in cash
and 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 face
stock 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 when
we 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 decision
depends on business cycle and market situation. Long before the Eid festival, we
bought large amount of sugar because price of sugar was increased on the occasion
of Eid.
iii

Annexure
Shah Kamal: What are the main items of inventory of your firm?
Yaseer Rizvi: Well, these are – aluminum can, pet chip, sugar, label, chemical and
artificial 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

Global Beverage Company Limited::

36711831 virgin-soft-drinks-working-capital-management

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