Elm Ltd. sells stationery and office supplies on a wholesale basis and has annual revenue of £4,000,000. The company employs four people in its sales ledger and credit control department at an annual salary of £12,000 each. All sales are on 40 days’ credit with no discount for early payment. Bad debts represent 3% of revenue and Elm Ltd. pays annual interest of 9% on its overdraft. The most recent accounts of the company offer the following financial information: Statement of Financial Position as at 31 December 2020

Non-current assets 17,500, Current assets (Inventory (900), Receivables (550) Cash (120), Total assets (19,070), Equity and Liabilities (Ordinary shares (3,500), Reserves (11,640)) Non-current liabilities (12% bonds due 2040 (2,400) Current liabilities (Trade payables (330) Overdraft (1,200) Total equity and liabilities (19,070)

Elm Ltd. is considering offering a discount of 1% to customers paying within 14 days, which it believes will reduce bad debts to 2.4% of revenue. The company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 26 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. Two-thirds of customers are expected to take advantage of the discount. Assume a 365-day year.

Required: (a) Using the information provided, assess and comment on the financial position of Elm Ltd.

(b) Using the information provided, determine whether a discount for early payment of 1% will lead to an increase in the profitability for Elm Ltd, assuming the total sales remain unchanged.

(c) It has been suggested by the managing director of Elm Ltd that the one way to optimize the company’s overall level of working capital position is by minimizing its cash conversion cycle. Critically discuss whether the finance director should follow this suggestion.

Answer rating: 100% (QA)

Solution Solution 1 a Particular Amt Annual Revenue 4000000 Less Salary of 4 EE 48000 Net 3952000 Ba... View the full answer