HAPPY BENGAL CASE STUDY

(Financial Planning While Exploring Alternative Channel)

Ms Linda the General Manager Finance of Happy Bengal Private Limited is thoughtful about the upcoming quarterly meeting with the Financing Director next Monday. In the meeting Linda usually place quarterly financial plan of the company for critical review. After the meeting she and her team update the plan with inputs from the meeting and get it approved before she shares it with all the functional heads to put it into operation. Finance Director, Mr. Nayer Aslam notified Linda that not only the Managing Director Mr. Nawal Mohamed but also the directors of Marketing, Sales and Operations will be there in this quarters meeting. Last quarter have been an exceptional experience for the company due to recent outbreak of COVID 19 pandemic. The company has made many adjustments in its operation to cope with the required social distancing, restrictions on movement, low business activity and sudden disruption in supply chain. The company is still facing very low revenue hence bleeding to pay the expenses.

Happy Bengal is a retailer of health, wellness and fitness products. Their product lines range from vitamins, supplements, nutraceuticals, herbal skin and body care, mechanical/electronic pain relievers to small handy working out items. Each of their current retail out lets has large (above 2000 sq ft) floor areas which house a gym and fresh juice bar. Customers can buy membership in the gym or they can just drop by and do some work outs by paying an hourly calorie burn fee. The juice bar has cozy sitting arrangements for customers to enjoy freshly made juice and health drinks as per their taste. Take away services are also available. Happy Bengal outlets so far manage to maintain a jolly, active ambience that attracts its customers. Customers not only buy products from the store they also enjoy spending time in the premises. That results a lot of impulse buying by the customers. Currently, the company is suffering from lost revenue in the form of product sales, gym subscription, calorie burn fee, and juice bar revenue. Monthly revenue data from last two quarters and projected revenue for next quarter are presented in table 1. From the end of March, the company has started selling its products online. They are delivering the products by the in-store sales personnel. Currently the company has bought 20 bicycles (which cost BDT300,000) with locked baskets attached to it to deliver products. To boost online sales the company has involved SocialMarket the renowned social media marketing company in the country. SocialMarket is taking a monthly charge of BDT 1,550,000.

Table 1: Monthly Sales (actual and projected) volume

Month	Sales (mill BDT)	Month	Sales (mill BDT)	Month	Sales (mill BDT)
Nov Dec Jan	430 450 400	Feb Mar Apr	350 180 120	May June July Aug	230 270 300 350

Until April all sales were in store sales. 50% of April sales are online sales and the rest 50% are from regular gym subscription fee. Percentage of online sales is expected to be 65% from May to July. In store sales are paid in cash. 60% of online sales collect cash on delivery, the rest is collected one month later.

Payments for purchases of merchandise are 70% of the following months anticipated sales.

Wages and salaries are BDT 50 million per month. This is not expected to change shortly. Monthly rental expense is BDT 2 million. Interest of BDT 7.5 million is due at the end of each quarter. Calendar starts from Feb 1. A tax prepayment is of BDT 50 million is due in June 2020. The company has a cash balance of BDT 100 million on 30^th April 2020 which is the minimum desired cash balance. Additional funds can be borrowed from the revolving credit agreement from the companys bank. At the end of the quarter ended on 31^st Jan company had a fixed asset of BDT 250 million. No other fixed assets but the bicycles for delivery of online sales are purchased. All fixed assets are depreciated on a straight-line basis with an average remaining life of 10 years. The tax rate is 50%. Last quarter ended with an inventory of BDT 200 million. The balance sheet of the company as of 30^th April is as follows-

Table 2: Happy Bengal Balance Sheet on April 30^th 2020

Assets		Liability and Equity
Cash Accounts receivable Inventory Fixed Asset (net)	BDT 100 million 425 200 244.05	Accounts payable Bonds Common stock and Retained earning	BDT 130 million 500 339.05
	969.05		969.05

Ms. Linda has asked you (you are the finance executive) to prepare cash budget for next three months starting from May 2020. She also has asked for proforma income statement and balance sheet of the quarter ending on July 31^st 2020.

Thread bear discussion took place in the quarterly meeting. Ms. Linda presented the cash budget proforma income statement and balance sheet. The operations director proposed to reduce inventory level. She pointed to the fact that future business growth will happen on online platform. As the company has not decided to pass on delivery charges to customers and did not make any changes in pricing the company must cut cost in some way. The company should also consider streamlining retail outlets. However, thats a long-term plan. The finance director Mr. Nayer asked Linda to do projections using several levels of inventory (e.g. 20%, 30% and 40% below the current level). Linda knows that the change in inventory level will not have any impact on cost per order and inventory carrying cost per unit. Currently the company maintains store-wise inventory which is not required for online sales. For each store the company determines economic order quantity and top that up with safety inventory.

Both Marketing and Sales director opt for offering lenient credit terms to boost sales. Linda did some quick calculations and asserted that if the company relax its credit standards sales will go up by 5% in each month but the percentage of credit sales will remain unchanged. Average collection period will become 1.5 months (which is currently 1 month). Opportunity cost of short-term fund from the companys current financial institution 8% per annum with no compensating balance.

The Finance Director asked Ms Linda to explore stretching payables by 10 days to meet the short-term cash crunch. Although stretching will not apparently affect Happy Bengals relationship with suppliers, Linda knows that it is only viable as an once in a while option; it cannot be a permanent source of short-term financing. Rather Linda is thinking of exploring some alternative sources of short-term financing, as such the new revolving credit agreement from Sonali Bank supported by the Covid 19 Ease Fund of the government. Short term loans from this source costs 5% per annum plus a commitment fee of 2% on the unused fund. Another private bank has given an offer to charge only 4% interest but 20% compensating balance have to be maintained.

The managing director raised concern about the payments being made to SocialMarket. According to him the company is charging too high. He wants to know specifically whether this expense paying off in terms of increased sales. If not, what alternative payment options can be devised?

Now Linda is having a zoom meeting with you. She heartily thanked you for your great job in preparing the quarterly cash budget and projected financial statement. She just has briefed you about the issues raised in the meeting. By the end of today she is meeting the finance director on Zoom to update him about the issues she is supposed to look into. She also should provide recommendations based on concrete analysis of facts and projections.

To dos for you-

1. Prepare cash budget
2. Prepare proforma income statement and balance sheet
3. Do required analysis with respect to i) lowering inventory level ii)reducing credit standard iii)stretching payables and iv) alternative sources of short-term finance