Mr. Kwesi Bonku is the Managing Director of Richsward Ltd, a small haulage contracting company, which he founder 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richsward Ltd operate a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks were acquired in the last financial year, replacing older unit which were becoming too expensive to maintain. The company now employs 20 full-time and varying number of part- time driver mates. The part-time staffs work as and when required.

Mr. Bonku acquired two plot of land six years ago and built a house on it. Which he and his family occupy. In addition, he built a garage with facilities for minor service and repairs on the same site. Living on site has enabled him to offer a 24-hours service t clients. Consequently, movement of the trucks in and out of the site occurs at all time of day and night. There have been objectives raised by the residents in the neighbourhood to disturbance and the local Radio stations has at various time reflected this critism.

In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richsward Ltd own garage facilities. It became clear to Mr. Bonku that the land which the garage facility id built was inadequate for the needs of his growing business.

Acquisition of land

One year ago, mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility, in addition, there is room to build a Worksop facility which would adequate the needs of the fleet following agreement of a lease arrangement of a lease which was concluded just before the completion of the last financial year, Richsward ltd occupied the land on which here were no building erected or utilities supplied. Since taking possession of the land, a large security fence has beeen erected and a small portable cabin placed on site. Water and electricity service have been supplied and negotiations are taking places for the installation of a large diesel tank adequate to service other vehicles beside those of Richsward ltd.

Accounting

Mr. Bonku recruited Mrs Efua Dadason, a part-time accountant, four years ago. Prior to Mrs Dadson’s arrival, Richsward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30days) allowed, Richsward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.

Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richsward Ltd expenditure, Mrs Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt, such control had been lacking prior to her arrival at the company.

The company faces strong competition for haulage contract work. Typically, hualage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scal hauliers. Richsward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal

One of its top clients, Grace Ltd , recently appointed a new transport manager. The new manager of Grace Ltd. Has begun to employ other hauliers besides Richsward Ltd. Over the two months, the haulage work Richsward Ltd has received from Grace Ltd has reduced by about a third.

In order to address the competition, Richsward Ld recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for dome time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.

Each gallon costs Ghc 1,500 and sells for Ghc 2,000. All purchases are on one months credit and sales on two months credit. The company feels hat, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following months sales.

Additional non- current assets ( a delivery van to help cope with the increased sales) will be bought and paid for in july 2016 at a cost of Ghc 15,000. Corporate tax of Ghc 25,000 is due for the payment on 1^st August, 2016. The balance of cash at 31^st May, 2016 is planned to be Ghc 30,000.

Operating costs will rise to cash payment totalling Ghc 10,000 each month . the advertising will cost Ghc 20,000 in june and Ghc 10,000 for each month from JULY to September inclusive, payable one month in arrears.

The Accountant has not yet had a cash budget prepared for the rest of the year, but se feels that the sales and expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (ie. Zero inventory at month ends)

Requirement

1. Advise Mr. Bonku on the strategic management accounting information which should be provided to assist the future decision making and cost control.
2. Prepare a cash budget for Richward Limited for the six months ending 30^th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods.
3. Suggest what other aspects Richward Limited should consider to solve the expected cash flow problem, should the suggested solution be unachievable.

Answer rating: 100% (QA)

ANSWER A The strategic management information which Mr Bonku should be provided with in order to assist with future decision making and cost control includes 1 An analysis of the companys current fina... View the full answer