VNACS

Balance Sheet as on 1st April 2001

Liabilities (Rs) Assets (Rs)
1. Bank 1. Cash 5,00,000
a. Loan 5,00,000 2. Paddy 5,00,000
b. Accrued Interest 29,167
2. Farmers 5,00,000
3. From P&L (29,167)

10,00,000 10,00,000

VNACS has Rs 5,00,000 in cash and paddy worth Rs. 5,00,000. It owes Rs. 5,00,000 to
farmer members for which payment is due on 1st April. The Overdraft inclusive of
interest is Rs 5,29,167. This overdraft has been drawn since September of last year; this is
over and above the credit limit permissible under the cash credit arrangement. Mr.
Agarwal, Manager, has two business propositions to consider. It seems given the
resources (both in terms of cash and funds) of VNACS he may not be able to adopt both
simultaneously. But with some stretching of resources he might just. Given this situation;

Objectives would have to be formulated in the language of contributing to or furthering

the interests of stakeholders, i.e., Farmer-members, Banker, Co-operative Society. (Here
Mr. Agarwal is the decision maker and hence is capable of looking at the Co-op as an
entity, different from himself).

Problem has to be formulated in terms of the two business propositions; one with respect
to Paddy (hold or sale now), and the other with respect to Fertlisers (buy or not buy).

Criteria are to be stated such that the interests of stakeholders are reflected in measurable
terms (or applicable terms).

Alternatives are to be generated vis-à-vis the two business propositions, Paddy and
Fertilisers. Both independently and jointly.

The interests of stakeholders would meet the business propositions at the stage of
evaluating alternatives.

The decision would be such that the business proposition that enhances the interests of
the stakeholders while not pushing up the risks would be selected. May not be the one,
which maximises profits!!!

Course of action would include the actual manner of implementing the decision and
suggestion regarding distribution of the surplus earned.

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Contingency would include discussion regarding fine-tuning of the action plan in view
of minor uncertainties that may arise at its implementation stage. Further, any changes in
surplus distribution necessitated due to any change in expectations may also be discussed.

A Rough-Cut Case Analysis:

Broadly, the question is, What could/ should Mr. Agarwal do? He is faced with a
decision problem because, as Manager VNACS, he sees at least two business
opportunities, which could contribute towards VNACS’s objective of serving members
interests better, and his objective of serving VNACS’s interests better. But the limited
resources available to VNACS give rises to this situation in which Mr. Agarwal is faced
with a decision problem. He has the option of holding the paddy for sale in October in
order to get a better realisation, as well as the option of buying the Fertiliser now so that
it could be supplied cheaper to the farmer members, again in October. But he does not
have the funds internally to do both. The farmer members are obviously anxious to
receive their payments by the due date, i.e., 1st April. He knows how important it is for
them to realise the sales value of paddy given the nature of cash flow in agriculture-based
households. He certainly would not like to default on that, at any cost. Once the available
cash is used to pay the Members, VNACS would be left only with Rs 500,000 worth of
paddy on the Asset side. The fact that the overdraft has been drawn and is pending shows
that the credit limit under the cash credit arrangement has been fully exhausted. Thus,
Mr. Agarwal is faced not only with a cash constraint but also a funds constraint.

To sale the paddy now, pay the farmers now and retire the loan is not much of an option
because VNACS would end up with a net loss of Rs. 29,167/-; what is more the loan with
accrued interest cannot be retired for lack of money. Secondly, the Bank is a business
associate; its interests are best served when VNACS continues to avail of the loan,
deploys the funds in its business and services the loan. Similar is the case with the
members. Though they are under pressure to receive their payments, by only paying them
what they could possibly have got on their own (may be a little less), you don’t serve
their best interests. Agricultural produce are subject to price variation across seasons.
Individual farmers often do not have the ability to make use of the higher prices during
off-season. The objective of coming together is not only to get a better bargain in season
through aggregation but also to be able to access the higher prices during off seasons. The
Co-operative could help them in this regard by developing its ability to hold their
produce. As we know, holding has costs (inventory carrying costs), and therefore, if
VNACS has to, over a period of time, develop that ability, it must build its ‘reserves and
surplus’.

Given the above, the Obejctive could be formulated as “to serve the expectations and
interests of farmer members, both in short and long run, by building VNACS’s holding
capacity, while maintaining the credit-worthy relationship with the Bank”. Then the
problem is to decide whether to sale paddy now or hold it till end September, and
whether to buy the Fertilisers now? The problem could be formulated as “Among the
business propositions presently available, which one or combination to adopt”.

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Criteria, in order of priority, here would be as follows;

 Payment to farmer members on due date

 Given the outstanding loan, only very small additional loans could be sought and
got
 Maximum surplus for VNACS

Alternatives are; (1). Sale paddy now but do not buy any Fertiliser, (2) Hold paddy for
sale in end-September/ 1st October, but do not buy Fertiliser now; (3) Sale paddy now and
buy Fertiliser now; and (4) Hold paddy for sale in end-September/ 1st October, and buy
Fertiliser now.

Evaluation of Alternatives:

1. By selling paddy and not buying Fertiliser now, Members’ payment could be
made but the bank loan cannot be fully repaid. Net result is a loss of Rs. 29,167. No
contribution to farmers’ collective interest. Bank’s interests are also not served if you
are not using the credit available to you. Thus only the first criterion is fulfilled not
the other two.
2. Pay the farmers (Rs. 500,000, using the available cash), hold paddy till end
September and sell on 1st October (no Fertiliser). It could be safe to assume that
VNACS would get at least Rs 6,00,000 for the paddy. In this case VNACS may
negotiate with the Bank to extend the loan (the Bank Manager is agreeable and it
meets Bank’s interest), ask for a further loan of Rs. 10,000 (only, quite reasonable
amount surely) to pay for the insurance charges. Paddy sold on 1st October would
fetch Rs. 6,00,000. Additional interest cost would be Rs 25,500 for the six-month
period. Total cost of paddy would be Rs 5,35,500 (cost plus interest charge plus
insurance). Thus a surplus of Rs. 64,500 could be earned on 1st October. This could
be used to retire the entire loan and end up with a cash surplus of Rs 35,333. This
alternative fulfils all the three criteria.
3. Sale paddy now and buy Fertiliser. The calculation of fertiliser business can
have two different routes. First, if it is a package deal, with fixed quantity and price
(i.e., 2000 bags only at Rs. 250/ per bag) then the total cost of Fertiliser on 1st October
would be Rs. 5,94000.. This alternative would meet criteria 1, though we would need
a bigger loan (say roughly about Rs. 35,000/ to Rs. 61,000/) to be able to buy the
fertiliser. Even if the accumulated loss of Rs. 29, 167/ - is not loaded here, this
alternative falls far short of the second alternative on third criterion.
Extra fertilizer 5%+25000 storage+extra interest rate+insurance=94000

4. Hold paddy till end of September, buy fertiliser. Prima facie, this looks
infeasible. After paying the farmers, if we hold paddy and buy fertiliser, we would
need an additional loan amount of more than 5 lakhs over and above the existing
overdraft of Rs 5,00,000/ (and accrued interest of Rs 29,167/). The first criterion
would be met, but the Banker is most likely to refuse loan of such a large amount

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 given a similar amount loan is still outstanding. This would be stretching the limits of
Banker’s good will. However, on the third criterion, we may end up with the highest
surplus under this alternative.

Decision: Thus the 2nd alternative turns out to be the one that meets the first two criteria
and fares second best (among the four alternatives) on the third criterion. This, by far,
then is the best alternative and hence should be Mr. Agarwal’s decision.

Action Plan: Mr. Agarwal should pay the farmer members using the available cash. He
should express his inability to make the deal with the Fertiliser Company. But he should
talk with them to get more details about the offer and keep open the possibility for future.
He should hold the paddy in stock. Based on the estimated realisations he should prepare
a business plan and get the Banker to support it. Further, he should seek and get a
miscellaneous loan of Rs. 10,000/- for paying the insurance charges.

The paddy should be sold in the last week of September after watching the price
movement over the week. Upon realisation of the revenue, Mr. Agarwal should first retire
the loan of Rs. 5,10,000/- alongwith the accrued interest of Rs. 54,667/-. Out of the
balance amount of Rs. 35,333/- VNACS should arrange to distribute a sum of Rs.
15,333/- as price-differential among farmer members following the co-operative principle
in the matter. The residual amount of Rs. 20,000/- should be held as reserve in the books
of accounts of VNACS and deposited with the Bank.

While negotiating with the Fertiliser Company Mr. Agarwal should indicate that, as per
present status VNACS’s requirement would be 2,106 bags at a discounted price as
offered this year. In case this agreement is arrived at, at current prices and present level of
requirement, VNACS could save upto Rs. 7,500/- from the fertiliser business.

This course of action meets the interests of all stakeholders today while building up the
internal resources of VNACS for future operations. The farmer members could be
expected to be satisfied as they receive their payments early while also getting a price-
differential in October. The Banker would be happy that his good will is not tested with
unreasonable loan requests, while the existing loans are serviced. VNACS builds up its
reserves thereby building its holding capacity for future operations. Thus, this course of
action would establish Mr. Agarwal’s credibility and reputation as an enlightened
Manager, who, while meeting the short-term/ situational objectives/ requirements also
addresses the long run objectives of his organisation.

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As on 1st October 2001
Assets (Rs)
Liabilities (Rs.)
Bank Cash 6,00,000
 Loan 5,10,000
 Accrued Interest 54,667
o Old 29,167
o During 6 months 25,500
 Surplus 35,333
o Loss (previous period) (29,167)
o Surplus (6 months) 64,500
6,00,000 6,00,000

Contingency Plan: Two types of contingencies may arise. First, with the given decision,
the actual market prices of paddy in end-September may be different from expected. In
such a case, Mr. Agarwal should re-work the financial results and adapt the surplus
distribution plan.

The second type of contingency may be that the Fertiliser Company may actually clarify
that VNACS could purchase its requirement of 2,106 bags at the given or a little lesser
price right now. And if the Banker somehow agrees to finance the fertiliser purchase,
then Mr. Agarwal may opt for alternative number 4, i.e., hold paddy and purchase
fertilisers now.