1

Workshop 8 – working capital cycle

Boswell Wholesalers Ltd has been particularly concerned with its liquidity position in

recent months. The most recent income statement and balance sheet of the business

are as follows:

Income statement for the year ended 31 December 2008

£000 £000

Sales revenue 452

Cost of sales

Opening inventories 125

Purchases 341

466

Closing inventories (143) (323)

Gross profit 129

Expenses (132)

Loss for the period (3)

Balance sheet as at 31 December 2008

£000

Non-current assets

Property, plant and equipment

Freehold premises at valuation 280

Fixtures and fittings at cost less depreciation 25

Motor vehicles at cost less depreciation 52

357

Current assets

Inventories 143

Trade receivables 163

306

Total assets 663

Equity

Ordinary share capital 100

Retained earnings 158

258

Non-current liabilities

Borrowings – loans 120

Current liabilities

Trade payables 145

Borrowings – bank overdraft 140

285

Total equity and liabilities 663

2

The trade receivables and payables were maintained at a constant level throughout the

year.

Required:

(i) Explain why Boswell is concerned about its liquidity position.

(ii) Calculate the working capital cycle for Boswell based on the information

above (assume a 365-day year).

(iii) State what steps may be taken to improve the working capital cycle of the

business.