pgbm01 - mba financial management and control (2015-16 trm1 a)pgbm 01 workshop 8 solutions boswell
TRANSCRIPT
Suggested Approach
Calculate the current ratio
Calculate the acid test / quick ratio
Comment on the results found.
( a.) Boswell Liquidity Position
Current Ratio = Current Assets
Current Liabilities
= 306 = 1.1 times
285
Quick Ratio = Current Assets – Inventory
Current Liabilities
= 163 = 0.6 times
285
Boswell Liquidity Position Ratio Calculations
Both the liquidity ratios for the business seem to be extremely low.
Business may have insufficient liquid assets to pay its short-term obligations.
Bank overdraft seems to be extremely high.
Questions that may need to be asked include what overdraft limit has been set for Boswell & are the bank pressing for the overdraft to be reduced.
Boswell Liquidity Position Analysis
Formula
Average Inventory Holding Period
Plus
Average Settlement Period for Trade Receivables
Minus
Average Settlement Period for Trade Payables
(b.) Working Capital Cycle
Average Inventory Holding Period
((Opening Inventory + Closing Inventory) / 2) x 365 days
Cost of Sales
= ((125 + 143) / 2) x 365 days
323
= 151 days
(b.) Working Capital Cycle (cont.)
Average Settlement Period for Trade Receivables
Trade Receivables x 365 days
Credit Sales Revenue
= 163 x 365 days
452
= 132 days
(b.) Working Capital Cycle (cont.)
Average Settlement Period for Trade Payables
Trade Payables x 365 days
Credit Purchases
= 145 x 365 days
341
= 155 days
(b.) Working Capital Cycle (cont.)
Working Capital Cycle
151 days
+
132 days
-
155 days
= 128 days
(b.) Working Capital Cycle (cont.)
Possibly reduce inventory levels – tighter control around inventory, but still ensure customer demand is still met.
Attempt to shorten the average settlement period for trade receivables. Potential ways of doing this may include tighter credit control or possibly offering discounts for early repayment.
Extend the period of credit taken to pay suppliers. This shouldn’t be done at the risk of damaging company image / reputation.
Potential ways to improve the working capital cycle of the business