Year 1 Year 2 Sales 20,000,000 25,000,000 Cost of goods sold 12,000,000 15,000,000 Gross Profit 8,000,000 40% 10,000,000 40% Overheads 7,600,000 9,500,000 Retained profit 400,000 2% 500,000 2% Main working capital items Days Days Accounts Receivable (AR) 2,630,137 48 3,630,137 53 Inventory 1,709,589 52 2,054,795 50 Accounts Payable (AP) 1,315,068 40 1,890,411 46 If the business increased sales to 30,000,000 in year three and the terms of trade stayed the same, how much additional working capital would be required to fund the change in the main working capital items? Use the same assumptions as in question 1, and assume that the business will have the same 2% ratio for retained profit: sales next year what will be the funding gap (i.e. how much additional finance will be required to finance the change in working capital after profits have been re-invested in the business)? What is the number of days of the cash conversion cycle (CCC) in year 2?

Answer rating: 100% (QA)

Year 3 Working Capital Requirements and Funding Gap Assumptions Sales increase to 30000000 in year three Terms of trade and profit margin 2 remain the ... View the full answer