Finance and Accounting

Working capital
Foundations of Finance and Controlling Group assignment: (1) October 201
123 Co
123 Co is a relatively small company involved in the manufacture of sports equipment. It is
highly mechanised and uses modern techniques and equipment. In the past, it has operated a
very conservative policy in respect of the management of its working capital. Assume that
you are a newly recruited management accountant. The finance director, who is responsible
for financial control, has asked you to take a look at this policy.
You assemble the following information about the company’s forecast end-of-year financial
outcomes. The company’s year end is 31 December. It is now June.
$’000 $’000
Non-current assets 1,250
Trade receivables 2,500
Inventory 2,000
Cash at bank 500
Current assets 5,000
b 6,250
Current liabilities ( 1,850)
4,400
Forecast sales (for whole year) 8,000
Forecast operating profit (18% of sales) 1,440
You wish to evaluate the likely effect on the company if it introduced one or two alternative
approaches to working capital management. The finance director suggests you adjust the
figures in accordance with the following parameters:
0 Moderate policy Aggressive policy
Trade receivables -20% -3 0%
Inventory -20% -3 0%
Cash Reduce to $250,000 Reduce to $100,000
Non-current assets No change No change
Current liabilities +10% +20%
Forecast sales +2% . +4%
Forecast profit Remains at 18% of sales Remains at 18% of sales
Required:
Write a report for the finance director that includes the following:
(a) A discussion of the main aspects to consider when determining policy in respect of the
investment in and financing of working capital, in general and in the circumstances of
123 Co.
(b) Calculations of relevant ratios based on the three scenarios: the current policy, if the
company adopts a moderate policy and if the company adopts an aggressive policy.
(c) A recommendation for the company of a proposed course of action.