Analyze the problems being faced by the SEC.

The managing director of Sporty Equipment Company (SEC) was surprised to observe that there was a decrease in the working capital for 2005 when he reviewed the financial statements for the year. He had planned to acquire new machinery by raising funds from I.P.Os (Invitation to Public Offer) and utilizing the retained earnings of the previous years. He had expected the working capital to remain at the same level as that of 2004. The financial statements of SEC are given as:
Sporty Equipment Company—Balance sheet as on 31 March 2005 and 2004 2005 2004 (Rs) (Rs)
Assets:
Current assets:
Cash 4,25,000 7,20,000 Debtors 2,10,000 3,75,000 Stock 5,85,000 6,92,000 Prepaid expenses 15,000 48,000 Total current assets 12,35,000 18,35,000 Investments: 6,00,000 2,80,000 Plant and machinery 20,00,000 10,00,000 (Net of depreciation)
Total assets 38,35,000 29,15,000 Liabilities:
Current liabilities:
Creditors 2,00,000 1,29,000 Bank loans 1,00,000 1,12,000 Accrued expenses 80,000 36,000 Income tax payable 3,00,000 2,80,000 Total current liabilities 6,80,000 5,57,000 Debentures 5,50,000 8,00,000 Share capital of Rs 10 each 12,00,000 4,20,000 Reserves and surplus 10,05,000 8,58,000 Total liabilities 38,35,000 29,15,000 Sporty Equipment Company Profit and loss account for the year ending 31 March 2005 (Rs)
Sales 34,00,000 Cost of goods sold (including depreciation on machinery Rs 1,40,000) 19,20,000 Gross profit 14,80,000 Operating expenses 8,80,000 Operating profits 6,00,000 Profit on sale of assets 3,000 Profit before interest and tax 6,03,000 Interest (paid) 60,000 Profit before tax 5,43,000 Provision for tax 2,96,000 Net profit 2,47,000 The book value of the equipment as on 31 March 2004 was Rs 4,000 and it was bought for Rs 10,000 six years ago. The equipment was sold in the beginning of April 2004.