The Alborg Company Ltd manufactures and sells doors and window frames to the building trade. It has been expanding rapidly over the last two years, experiencing an annual growth rate of 25%. The board is looking at the draft results for 2013 together with a forecast for 2014 (see below). Although the company wishes to continue growing rapidly, it is uncertain whether it will be able to finance this due to the size of the forecast overdraft. The overdraft at the end of 2013 is £245,000 compared with a positive bank balance of £25,000 one year earlier when the overdraft limit was £125,000. During 2013, the bank had agreed a temporary increase to £250,000 but has now written to say that this increase can no longer be allowed, and must be reduced to £125,000 by the end of March 2014, i.e. within the next three months. The board observes from the forecast that, without corrective action, the predicted overdraft in 12 months€™ time will be £605,000. Currently, there are no alternative sources of finance available and the board is now considering how it might resolve the problem.

Tasks:
1. Using a cash fl ow statement for 2013, explain why the cash position has deteriorated during that year.
2. Comment on the company€™s management of working capital by commenting on the operating and cash cycles for all three years and suggest ways in which the company might improve its working capital position. (You are aware that the 2012 position is typical of the industry in which Alborg operates.)
3 By looking at your suggestions to improve working capital and at the expected cash flow over the next three months, advise the company how (if at all) the overdraft can be reduced to £125,000 by the end of March 2014.

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Alborg Co. Ltd Income statements for y/e 31 December 2014 forecast 2012 2013 £000 £00 £000 Sales 2,000 2,500 3,000 Costs: Materials used 950 750 1,125 Other production costs Depreciation Cost of goods sold Admin and selling 600 500 700 200 300 400 1,850 1,450 2,225 100 1,550 150 2,000 200 2,425 Profit before tax 450 500 575 150 Тахation 125 200 Profit after tax 375 325 350 Dividends 225 195 210 Retained profit 130 140 150 Balance sheets at 31 December Fixed assets (net book value) Current assets 1,000 1,200 1,475 Stocks: Raw materials 175 275 375 Finished goods 325 475 575 Debtors 150 225 375 Bank 25 675 975 1,325 Less: Current liabilities Trade creditors 150 225 275 Tax due 125 150 200 Dividends due 195 210 225 0 470 205 245 830 1,205 Overdraft 145 605 1,305 20 1,345 1,495 Financed by: Issued share capital Retained profits 500 500 500 705 845 995 1,205 1,345 1.495