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CASE : 01





Cooking LPG Ltd, Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a network of distributors in the districts of Gurgaon and Faridabad. The bottling plant of the firm is located on National Highway – 8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon.  The firm has been consistently performing us.”  And plans to expand its market to include the whole National Capital Region.

       The production process of the plant consists of receipt of the bulk LPG through tank trucks, storage in tanks, bottling operations and distribution to dealers.   During the bottling process, the cylinders are subjected to pressurized filling of LPG followed by quality control and safety checks such as weight, leakage and other defects.  The cylinders passing through this process are sealed and dispatched to dealers through trucks.  The supply and distribution section of the plant prepares the invoice which goes along with the truck to the distributor.

Statement of the Problem :

Mr. I. M. Smart, DGM (Finance) of the company, was analyzing the financial performance of the company during the current year.  The various profitability ratios and parameters of the company indicated a very satisfactory performance.  Still, Mr. Smart was not fully content-specially with the management of the working capital by the company.  He could recall that during the past year, in spite of stable demand pattern, they had to, time and again, resort to bank overdrafts due to non-availability of cash for making various payments.  He is aware that such aberrations in the finances have a cost and adversely affects the performance of the company.  However, he was unable to pinpoint the cause of the problem.

       He discussed the problem with Mr. U.R. Keenkumar, the new manager (Finance).  After critically examining the details, Mr. Keenkumar realized that the working capital was hitherto estimated only as approximation by some rule of thumb without any proper computation based on sound financial policies and, therefore, suggested a reworking of the working capital (WC) requirement.  Mr. Smart assigned the task of determination of WC to him.

Profile of Cooking LPG Ltd.

1)         Purchases: The Company purchases LPG in bulk from various importers ex-Mumbai and Kandla, @ Rs. 11,000 per MT.  This is transported to its Bottling Plant at Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual contract basis.  The average transportation cost per bullet ex-either location is Rs. 30,000.  Normally, 2 bullets per day are received at the plant.  The company makes payments for bulk supplies once in a month, resulting in average time-lag of 15 days.

2)         Storage and Bottling: The bulk storage capacity at the plant is 150 MT (2 x 75 MT storage tanks) and the plant is capable of filling 30 MT LPG in cylinders per day.  The plant operates for 25 days per month on an average.  The desired level of inventory at various stages is as under.

  • LPG in bulk (tanks and pipeline quantity in the plant) – three days average production / sales.
  • Filled Cylinders – 2 days average sales.
  • Work-in Process inventory – zero.

3)         Marketing: The LPG is supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder.  The rate of applicable sales tax on the invoice is 4 per cent.  A commission of Rs. 15 per cylinder is paid to the distributor on the invoice itself.  The filled cylinders are delivered on company’s expense at the distributor’s godown, in exchange of equal number of empty cylinders.  The deliveries are made in truck-loads only, the capacity of each truck being 250 cylinders.  The distributors are required to pay for deliveries through bank draft.  On receipt of the draft, the cylinders are normally dispatched on the same day.  However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on one truck-load.

4)         Salaries and Wages: The following payments are made:

  • Direct labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the month.
  • Security agency – Rs. 30,000 per month paid on 10th of subsequent month.
  • Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last working day.

5)    Overheads:

  • Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on the 10th of subsequent month.
  • Power (including on DG set) – Rs. 1, 00,000 per month paid on the 7th Subsequent month.
  • Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum paid at the beginning of the year.
  • Insurance – Rs. 5, 00,000 per annum to be paid at the beginning of the year.
  • Housekeeping etc – Rs. 10,000 per month paid on the 10th of the subsequent month.
  • Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every month to the vendors. This includes expenditure on account of lubricants, spares and other stores.
  • Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum – paid on monthly basis on the 15th of the subsequent month.
  • All transportation charges as per contracts – paid on the 10th subsequent month.
  • Sales tax as per applicable rates is deposited on the 7th of the subsequent month.

6)   Sales: Average sales are 2,500 cylinders per day during the year.  However, during the winter months (December to February), there is an incremental demand of 20 per cent.

7)   Average Inventories: The average stocks maintained by the company as per its policy guidelines:

  • Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh. This amounts to 15 days consumption.
  • Maintenance spares – Rs. 1 lakh
  • Lubricants – Rs. 20,000
  • Diesel (for DG sets and fire engines) – Rs. 15,000
  • Other stores (stationary, safety items) – Rs. 20,000

8)    Minimum cash balance including bank balance required is Rs. 5 lakh.

9)    Additional Information for Calculating Incremental Working Capital during Winter.

  • No increase in any inventories take place except in the inventory of bulk LPG, which increases in the same proportion as the increase of the demand. The actual requirements of LPG for additional supplies are procured under the same terms and conditions from the suppliers.
  • The labour cost for additional production is paid at double the rate during wintes.
  • No changes in other administrative overheads.
  • The expenditure on power consumption during winter increased by 10 per cent. However, during other months the power consumption remains the same as the decrease owing to reduced production is offset by increased consumption on account of compressors /ACS.
  • Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies during winter.
  • No change in time schedules for any payables / receivables.
  • The storage of finished goods inventory is restricted to a maximum 5,000 cylinders due to statutory requirements.
  1. Suppose you are Mr.Keen Kumar the new manager.  What steps will you take for the growth of Cooking LPG Ltd.?


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