U&I is a privately owned machine tool manufacturing company based in Zambia. For the past five years,
Question:
U&I is a privately owned machine tool manufacturing company based in Zambia. For the past five years, it has operated an aggressive policy in respect of the management of its working capital. The following information concerns the company’s forecast end of year financial outcomes if it continues with this type of policy.
K millions
Debtors 5,200
Stock 2,150
Cash at bank 350
Total current assets 7,700
Fixed assets 14,500
Trade creditors 4,500
Sales 17,500
Operating costs 14,000
Operating profit 3,500
Earnings 2,625
There are 2.5 million shares in issue.
The company has been experiencing a series of problems because of the type of working capital management policy it has been following and is considering an alternative approach to working capital management.
The figures below are changes to the above forecast. These changes are anticipated to occur if a more conservative policy is adopted.
Debtors -40%
Stock +20%
Cash (figures in K m) Increase to K1,000
Fixed assets No change
Current liabilities -30%
Forecast sales -5%
Operating profit and earnings +5%
You are required to evaluate the two working capital management policies described above and recommend a proposed course of action. Include in your evaluation a discussion of the problems that might have arisen as a result of operating aggressive working capital management policies. You should calculate appropriate and relevant ratios or performance measures to support your arguments.
Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman