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Case of Joneja Bright Steels: The Cash Discount Decision

Joneja Bright Steels is considering implementing a 2% cash discount for customers who pay their invoices within 10 days. [1] Implementing the discount improved the company's cash flow by reducing receivable conversion from 73 to 31 days. [2] It also increased profit margins by 8% and encouraged earlier payments from customers. [3] However, managing the cash discount policy requires additional administrative work to track payments and apply discounts.

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575 views10 pages

Case of Joneja Bright Steels: The Cash Discount Decision

Joneja Bright Steels is considering implementing a 2% cash discount for customers who pay their invoices within 10 days. [1] Implementing the discount improved the company's cash flow by reducing receivable conversion from 73 to 31 days. [2] It also increased profit margins by 8% and encouraged earlier payments from customers. [3] However, managing the cash discount policy requires additional administrative work to track payments and apply discounts.

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RHEA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case of Joneja Bright Steels:

The cash discount decision

By GROUP 12

Devatha N MS22A023
Dipika A MS22A025
Harini M MS22A032
Harish R MS22A033
Rhea Chawla MS22A068
1. Calculate the various ratios used to quantify working
capital in an organization – working capital ratios, working
capital cycle and trend analysis of ratios.

Working Capital Ratios:

Over time, the company's short-term borrowing account has increased. This increase,
from 34.46 million to 176.4 million, shows that the corporation is using credit to cover its
costs and does not have adequate cash on hand.
Despite the fact that our current account of assets is increasing, both the current and
liquidity ratios are decreasing. The company's ability to turn assets into cash that we may
utilise on hand is demonstrated by the current ratios and liquidity ratios.
Working Capital Cycle:
Working Capital Cycle:

The business has reduced its operating cycle from 132 to 119 days by improving its
average collection duration and inventory conversion period.

Another significant problem for the company's cash flow is the need to pay suppliers
much more quickly than they are getting payments from clients. JBS's financial
health suffers since it takes them 73 days to collect payments from clients despite
having a 16-day payment deadline for suppliers.

To combat this, JBS should renegotiate with their suppliers and pay them before
they get payment from customers. The cash flow problems we are having will be
improved if the money is collected more quickly.

The best fix for the issues at hand is to improve the management of the accounts
receivable and the use of trade credit due to the increase in cash flow.
2. Compare JBS’s working capital with that of its competitors
In comparison to JBS’s
competitors, the company’s
current and liquidity ratios are
below the average. This tells us
that companies like Omega
have more capital to meet
demands for expansion and
growth.
JBS has very little cash on
hand to use. Omega Bright
Steel has 346.28 million more
cash on hand, but only 53
million more in revenue. This
means that JBS and Omega
are close in competition, but
the competitor has more cash
at their disposal use.
When Compared to its competitors, we can see
that JBS's working capital is much smaller than
Omega Bright Steel Pvt Ltd.
In all the years mentioned, Omega Bright Steel
Pvt Ltd has a much higher working capital than
JBS.
On the other hand, both Gopalsons Steels Pvt
Ltd and C. Lal Alloys Pvt Ltd have much smaller
working capital than JBS.
This comparison suggests that JBS may have
to manage its working capital more efficiently
to compete with companies like Omega Bright
Steel Pvt Ltd.
3. What will be impact of the cash discount on the organization?

A cash discount of 2% helped JBS in reducing receivable conversion from 73 days to 31


days and shortens cash conversion cycle to 31 days.
The profit margin increased by 8% from 310.5 to 331.98 which shows that the cash
discount of 2% on 50% of sales was beneficial to the comapny.
Improved cash flow Increased profit margins
01 Encourages customers to pay their
invoices early, which improves the
02 The profit margin has been increased
due to the inclusion of 2% cash discount
company's cash flow. which is around 8% revenue growth

Increased sales Increased administrative burden


03 Offering a cash discount can make
04 Implementing and managing a cash
the company's products more
discount policy requires additional
attractive to customers, potentially
administrative work, such as tracking
leading to increased sales.
payments and applying discounts. This
Helps the company stand out from
can increase the workload for the
competitors who may not offer such
accounting and finance teams.
discounts.
4. Should management implement the proposed cash discount for
its accounts receivables?
YES, After conducting a thorough analysis , we recommend that management should implement the cash discount of 2
% on the payment of account receivables in 10 days. Making credit terms flexible will help handling the cash issue and
prevents company from paying the interest against the short term loans. so ultimately leading to increase in
profitability.

Following the current conservative credit policy, the company incurs huge loss because of the interest it pays for their
working capital loan and also for the decreased demand.

The income statement projected by giving a 2% discount suggests a growth rate of 8% and these amounts can be
further utilized to meet the company's capital working requirements.

Reducing the company's working capital just for 10 days leads to a positive cash flow, reduced short term borrowings
and a surplus cash for investing in other growth avenues.

Increase output with the unutilized 20% of plant capacity so that the fixed cost component remains the same as for
80% utilisation and only the variable cost varies. As a result, increased production will be seen as more profitable in this
capital-intensive investment sector.

The Managing Director has proposed a flexible credit discount policy, because he is unable change the price of their
products due to weak demand and the slow-down in the economy. The thorough situational analysis suggests that the
liquidity of the company can be enhanced and improved by adopting credit discount policy
Thank You

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