Financial Management $2$ Group Course Work

Case Study: Working Capital Management at TechPro Limited

Company Background

TechPro Limited is a medium$-$sized manufacturing company that produces high$-$tech equipment for the electronics industry. The company is looking to improve its working capital management practices to ensure smooth operations and enhance profitability.

Financial Statements

Balance Sheet $($as of December $31,2023)$

$$000$

Non$-$Current Assets:

Property, Plant, and Equipment $2,000$

Current Assets:

Cash $100$

Accounts Receivable $500$

Inventory $600$

Total Current Assets $1,200$

Total Assets $3,200$

Non Liabilities:

Long$-$term Debt $1,500$

Current Liabilities:

Creditors $500$

Total Liabilities $1,500$

Equity & Reserves:

Common Stock $1,000$

Retained Earnings $700$

Total Equity & Reserves $1,700$

Total Liabilities, Equity & Reserves $3,200$

Income Statement $($for the year ended December $31,2023)$

$$000$

Revenue $3,000$

Cost of Goods Sold $(2,000)$

Gross profit $1,000$

Operating Expenses $(600)$

Operating Income $400$

Interest Expenses $(50)$

Net Profit $350$

The following are part of the companys cash management technique:

TechPro Limited uses credit scoring models to assess the creditworthiness of its customers before extending credit. They also implement strict credit v f$`87905$control policies to ensure timely collections and reduce the risk of bad debts.

The company takes advantage of bulk purchasing discounts to reduce the cost of goods sold. However, they ensure that inventory levels are managed efficiently to avoid excess holding costs.

TechPro Limited negotiates favorable credit terms with its suppliers to extend the payables period without incurring late payment fees. This helps in maintaining a healthy cash flow.

Required:

a$.$ Determine the companys inventory turnover ratio and explain why inventory management is critical to the firms profitability? $(10$ marks$)$

a$.$ Calculate the liquidity ratios for the company? $($ Quick and current ratios$)(4$ marks$)$

a$.$ Determine the activity ratios?

$-$ Debtors collection period. $(3$ marks$)$

$-$ Creditors payment period $(3$ marks $(6$ marks$)$

d$.$ Profitability ratios $($gross profit, net profit, return on equity and return on capital employed$)(9$ marks$)$

e$.$ Calculate the amount of working capital the company has at the end of the

accounting period? $(4$ marks$)$

f$.$ How does TechPro Limited manage its receivables? $(6$ marks$)$

g$.$ Explain how bulk purchasing was beneficial for TechPro Limited? $(6$ marks$)$

h$.$ How does TechPro Limited ensure a healthy cash flow through credit

control? $($Total marks

a$.$ Determine the companys inventory turnover ratio and explain why inventory management is critical to the firms profitability?

Formula: Inventory Turnover Ratio $=$ Cost of Goods Sold

Average Inventory

Inventory Turnover Ratio$=200,000,000=3\mathrm{.}33$

$600,000$

An inventory turnover ratio of $3\mathrm{.}33$ indicates that TechPro Limited sells and replaces its inventory approximately $3\mathrm{.}33$ times per year.

Inventory management is critical to the firms profitability:

Effective inventory management keeps a company organized. It also provides critical data to help businesses respond to trends, avoid breakdowns in supply chain management, and maintain profitability. Lower costs and saves money, prevent overspending on warehouse storage, minimize storage needs, reduce losses to improve cash flow, forecast sales trends, satisfies customers with timely deliveries. Therefore, avoiding excess inventory helps to avoid excessive stock levels. Excess inventory ties up cash that could be used for other productive purposes. In the case of TechPro Limited, a high inventory turnover ratio suggests that the company is efficiently converting inventory into sales, thereby freeing up cash.

Minimizing Costs$-$ Maintaining optimal inventory levels minimize costs, which contributes to higher profitability.

Satisfying Customers: Efficient inventory management ensures that TechPro Limited has enough stock to meet customer demands without overstocking. This helps in maintaining customer satisfaction and potentially increasing sales.

Bulk Discounts vs$.$ Holding Costs: TechPro Limited benefits from bulk purchasing discounts. However, over$-$purchasing can lead to high holding costs. Effective inventory management strikes a balance between taking advantage of discounts and managing holding costs, which can enhance overall profit margins.

Streamlining Operations: Efficient inventory management contributes to smoother operations by reducing the need for frequent stock replenishment or handling issues. This can improve the overall efficiency of TechPro Limited's production and sales processes.

b$.$ Calculate the liquidity ratios for the company? $($Quick and current ratios$)$

Formula: Quick Ratio $=$ Current Assets Inventory

Current Liabilities

$=1,200,000600,000=600,000\backslash 500,000=1\mathrm{.}2$

$500,000$

Current Ratio $=$ Current Assests $=1,200,000=2\mathrm{.}4$

Current Liabilities $500,000$

c$.$ Determine the activity ratios:

Formula: Debtors collection period $=$ Accounts Receivable x $365$

Revenue

$=500,000$ x $365=61$ days

$3,000,000$

Creditors paymentperiod $=$ Creditors x $365$

Cost of Goods Sold

$=500,000$ x $365=0\mathrm{.}25$ x $365=91$ days

$2,000,000$

d$.$ Profitability ratios $($gross profit, net profit, return on equity and return on capital employed$)$

Formula: Profitability ratios $($Gross Profit Margin$)=$ Gross Profit Margin x $100$

Revenue

$=1,000,000$ x $100=0\mathrm{.}33$ x $100=33\mathrm{.}33\%$

$3,000,000$

Net Profit $=$ Net Profit x $100=350,000$ x $100=0\mathrm{.}17$ x $100=11\mathrm{.}67\%$

Revenue $3,000,000$

Return on equity $=$ Net Profit $=350,000=20\mathrm{.}59\%$

Total equity $1,700,000$

Return on Capital employed $=$ Operating Income x $100$

Total Assets Current Liabilities

$=400,000$ x $100=14\mathrm{.}81\%$

$2,700,000$

e$.$ Calculate the amount of working capital the company has at the end of the

accounting period.

Formula: Working capital $=$ Current Assets Current Liabilities

$=1,200,000500,000=700,000$

f$.$How does TechPro Limited manage its receivables?

TechPro Limited manage its receivables in which the companyuses credit scoring models to assess the credit worthiness of its customers before approving customer for credit. This helps in reducing bad debts. They also implement strict credit control policies to ensure timely collections and minimizethe risk of overdue receivables.

g$.$ Explain how bulk purchasing was beneficial for TechPro Limited?

Bulk purchasing was beneficial to the company because it is a form of cost reduction. They take advantage of bulk purchasing discounts, which lowers the cost of goods sold and enhances profitability.

h$.$ How does TechPro Limited ensure a healthy cash flow through credit control?

TechPro Limited ensures a healthy cash flow through credit control byextending the payables period by negotiating favorable credit terms with suppliers without incurring late fees, which helps in maintaining a healthy cash flow.