U&I is a privately owned machine tool manufacturing company based in Zambia. For the past five years,

Fantastic news! We've Found the answer you've been seeking!

Question:

U&I is a privately owned machine tool manufacturing company based in Zambia. For the past five years, it has operated an aggressive policy in respect of the management of its working capital. The following information concerns the company’s forecast end of year financial outcomes if it continues with this type of policy.

K millions

Debtors 5,200

Stock 2,150

Cash at bank 350

Total current assets 7,700

Fixed assets 14,500

Trade creditors 4,500

Sales 17,500

Operating costs 14,000

Operating profit 3,500

Earnings 2,625

There are 2.5 million shares in issue.

The company has been experiencing a series of problems because of the type of working capital management policy it has been following and is considering an alternative approach to working capital management.

The figures below are changes to the above forecast. These changes are anticipated to occur if a more conservative policy is adopted.

Debtors -40%

Stock +20%

Cash (figures in K m) Increase to K1,000

Fixed assets No change

Current liabilities -30%

Forecast sales -5%

Operating profit and earnings +5%

You are required to evaluate the two working capital management policies described above and recommend a proposed course of action. Include in your evaluation a discussion of the problems that might have arisen as a result of operating aggressive working capital management policies. You should calculate appropriate and relevant ratios or performance measures to support your arguments.