The following information has been extracted from the financial statements of Rowett: 

Statement of profit or loss extracts

Financial position statements extracts

Powell, a factoring company, has offered to take over Rowett’s debt administration and credit control on a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett €160,000 per year in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell would reduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at an interest rate of 10 per cent.

Rowett finances working capital from an overdraft at 8 per cent.

(a) Calculate the length of Rowett’s cash conversion cycle and discuss its significance to the company.

(b) Discuss ways in which Rowett could improve the management of its receivables.

(c) Using the information given, assess whether Rowett should accept the factoring service offered by Powell. What use should the company make of any finance provided by the factor?

Transcribed Image Text:

Sales 12,000 Cost of sales: Raw materials Labour 5,800 3,060 Gross profit Administration/distribution costs Profit before interest and tax 8,860 3,140 1,680 1,460 Current assets: Inventories of raw materials Inventories of finished goods Trade receivables Cash and bank 1,634 2,018 1,538 500 5,690 Current liabilities: Trade payables Overdraft Other expenses 1,092 300 76 1,468