It is 30 January 2013 and Worthy Ltd’s board of directors is meeting to discuss the 2012 accounts (summarized below together with those of 2011). Worthy Ltd is a manufacturing business and all its sales and purchases are made on credit terms. During 2012, it adopted an expansion strategy led by an across-the-board reduction in its selling prices. Its overdraft limit is £1.6 million but, towards the end of 2012, the bank reluctantly agreed to increase this to £2.0 million on a temporary basis. The directors are due to meet their bank next week to present a report analysing the causes of the cash shortage and outlining the action they intend to take in order to improve the situation. It is very likely that the bank will give notice that the temporary overdraft extension will be terminated in the near future. (Worthy’s stock at 1 June 2010 was £230,000.)

Task:Prepare a report for the board of directors of Worthy Ltd examining the financial performance of the company during the two-year period to 31 May 2012. The report should also include advice as to how the company could reduce its overdraft to below the original limit of £1.6 million.