Question 2 (25 Marks)

Over the past decade, the Pixie Company has expanded its activities by the profitable reinvestment of retained earnings. But despite a significant increase in turnover and a history of Balance Sheet solvency, it is now beset by liquidity problems.

The CEO Mr. Francis has convened a Board Meeting to establish what is wrong with its working capital position. The following snapshot data taken from the company accounts has been itemised as a basis for discussion.

Raw Materials Work in progress Finished goods Debtors Creditors

Sales

Purchases

Cost of goods sold

Last Year (GH Million) 200

140

160

320

160

1,600

960

1,400

This Year (GH Million) 270

180

240

480

195

2,000

1,300

1,800

Required:

a) Reformulate the data, using ratio analysis and the derivation of the companys operating and financing (cash conversion) cycles to interpret any possible mismanagement of working capital. Justify your response with an explanation of the ratios calculated.

(15 marks)

b) Critically evaluate alternative strategic options for how the companys future liquidity position might be improved. (10 marks)