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.