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VNACS Financial Strategy for Payments

1) VNACS has Rs. 5 lakh in cash and 100 tons of paddy in storage, needing to pay farmers for procurement costs and an overdraft of Rs. 5 lakhs. 2) Selling the paddy now would incur storage and insurance costs of Rs. 20,000 plus 10% interest on the overdraft of Rs. 25,000, totaling Rs. 35,000 in costs. Past records show waiting 6 months to sell would yield higher returns to cover these costs and still earn a profit. 3) Buying fertilizers now at a discounted price would save Rs. 1 lakh but incur storage, labor, and insurance costs totaling Rs. 50,

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Veethica Smriti
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85 views1 page

VNACS Financial Strategy for Payments

1) VNACS has Rs. 5 lakh in cash and 100 tons of paddy in storage, needing to pay farmers for procurement costs and an overdraft of Rs. 5 lakhs. 2) Selling the paddy now would incur storage and insurance costs of Rs. 20,000 plus 10% interest on the overdraft of Rs. 25,000, totaling Rs. 35,000 in costs. Past records show waiting 6 months to sell would yield higher returns to cover these costs and still earn a profit. 3) Buying fertilizers now at a discounted price would save Rs. 1 lakh but incur storage, labor, and insurance costs totaling Rs. 50,

Uploaded by

Veethica Smriti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Solving the dilemma of VNACS

30 May, 2019

Mr. Agarwal,
Manager VNACS

VNACS has two things at hand, 5 lakh cash in its bank account and 100 tons of paddy in
storage. How can these be used to settle two urgent payments looming at this month’s end?
First, the payment to farmers for procurement cost and second, an overdraft of 5 lakhs from
District Cooperative Bank. An additional opportunity is available to buy fertilizers being
offered by the National Fertilizer Corporation at a special price now. This offer will not hold
valid after two weeks. An ideal solution, as discussed below, seems to prioritize paying the
procurement costs to farmers by utilizing cash balance.

Delaying paddy sales for six months will cause annual storage and insurance costs of Rs.
20,000. Additionally, the overdraft will be charged an interest of 10% and cost Rs. 25,000. The
actual cost for VNACS will thus be Rs. 35,000. Past seasons’ record show that the expected
market price for paddy after six months will yield more returns and cover these costs to still
give profits. The paddy thus should not be sold now to pay the overdraft.

The decision of purchasing fertilizers within two weeks or after six months, when actually
needed, can also be made on cost benefit analysis. The discounted price being offered now is
2,000x250 i.e. 5 Lakhs. This is one lakh less than the market price after six months, Rs. 300
per bag. The farmers don’t need this fertilizer before six months from now. The cooperation
could save one lakh but the associated monthly storage costs of Rs. 500, labour and
equipment cost of Rs. 25,000, and annual insurance of Rs. 20,000 reduce this benefit
considerably. Storage will also cause loss of 5% stock worth Rs. 25,000. The overdraft interest
payment of Rs. 35,000 will still hold valid. Hence, the actual benefit to cooperation in making
fertilizers purchase now will be Rs. 12,000 only, which is a meagre 2%.

Thus, the most viable option, in the best interests of society and farmers, seems to pay the
procurement costs to farmers by utilizing the cash balance of 5 lakhs. The paddy in stock
should be sold after six months and the earnings can be used to repay the overdraft along
with its interests. Fertilizers should not be purchased at a discounted price now but can be
bought later as and when there is demand.

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