(a) Discuss why balancing between profitability and liquidity is necessary in working capital management. Explain the principles of working capital management. (6 marks)

(b) A Company has 20 days as average raw material inventory holding period (AAI), 15 days processing time, 10 days finished goods inventory holding time, 20 days’ average receivable collection period (ACP) and 30 days’ average payment period. The Company estimated for 2022 that raw material costs shall be N$15 million, processing costs shall be N$ 5 million, raw materials and finished goods holding costs shall be N$3 million and marketing and collection costs shall be N$1 million.

Required 

(i) Calculate the operating cycle (OC) and cash conversion cycle (CCC). (3 marks)

(ii) Determine working capital requirement of the company for 2022 assuming 365 days in a year. (7 marks)

(c) The position of sales revenue, current assets and current liabilities of a firm during 2020 and 2021 is given below:

___________________________________               2020                     2021

Sales revenue                                                           600,000                   660,000 

Cash                                                                               8 000                        8 800

Trade Receivables                                                     70 000                      91 000

Stock                                                                           80 000                       96 000

Total current assets                                               158 000                     195 800

Trade Payables                                                         40 000                       48 000

Net working capital                                               118 000                      147 800

The expected increase in sale from 2021 to 2022 is 20%. However, the growth in each of the current assets and current liabilities is expected to double in 2022 from the growth during 2020 to 2021. Required Determine:

(i) the growth in current assets and current liabilities in 2021 from 2020 and in 2022 from 2021, and (ii) Estimate requirement of additional working capital for 2022. (20 marks)

(iii) Describe different costs associated with inventory and also explain the relationship between costs associated with inventory and state how this affects inventory decisions. (6 marks)

Answer rating: 100% (QA)

A An important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm Like most corporate financing decisions the decision on how much working capital should be ... View the full answer