Loon Ltd is a small regional company specialising in the production of athletic footwear, which it sells
Question:
Loon Ltd is a small regional company specialising in the production of athletic footwear, which it sells to a variety of retail outlets in the South West of the country.
The company has recently appointed a new Credit Manager to look into the firm’s cash flow, as it has been affected by both the credit crunch and its customers’ payment pattern.
The Credit Manager has suggested the company changes the credit terms offered to its customers. Information on the existing, as well as the proposed, scheme is provided below.
At present, 20% of debtors pay one month after the invoice date, 26% pay two months after the invoice date and 50% three months after the invoice date, and 4% of trade debts are written off.
The proposed policy, would be to offer a discount of 2% for payment within one month of the invoice date. If the policy were implemented, the Credit Manager expects that 60% of debtors would pay within one month of the invoice date, 22% within two months and 15% within three months; 3% of trade debts would be written off.
The company has recently approached a bank for a term loan to increase its capacity by acquiring new machinery, which will cost £3.6m, payable at the end of each quarter. The bank has asked for a cash flow forecast for the next year.
Assume an opening balance of -£200,000.
The following information is available at the beginning of January 2016:
| Actual Sales: | October | 2015 | £500,000 |
| | November | | £500,000 |
| | December | | £400,000 |
| Expected Sales: | January | 2016 | £400,000 |
| | February | | £320,000 |
| | March | | £280,000 |
| | April | | £280,000 |
| | May | | £280,000 |
| | June | | £320,000 |
| | July | | £400,000 |
| | August | | £450,000 |
| | September | | £500,000 |
| | October | | £500,000 |
| | November | | £500,000 |
| | December | | £400,000 |
| | January | 2017 | £400,000 |
Leather is purchased, and manufacture of footwear takes place, in the month before sale. For all types of footwear, the cost of leather is equal to 20% of sales. All invoices for sales or purchases are issued or received by the company on the last day of the month to which they relate. The company gets one-monthcredit.
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