Report on Working Capital Management and Budgeting Methods in BrightLawns Ltd and BoatWorld Plc

Working Capital Management for BrightLawns Ltd

BrightLawns Ltd (“BLL”) owns and operates three factories in London, Birmingham and Manchester producing valves and fittings for garden hoses. The company last year had turnover in excess of £50 million. The company is managed by Simmo, the grandson of the founder. Simmo owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren.

Most of BLL’s clients are large retailers in the UK and EU. Two key customers are C&P DIY Ltd and BricoFrance SA, which are both large chains of DIY and garden centres in the UK and France. The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable (Operating profit was £5 million last year before interest and tax), the company’s debt has increased to £18 million from £16 million the year before. Simmo has started talking about the need for the other shareholders to invest more money to reduce the debt.

Towards the end of last year BLL acquired a 30% stake in a company which designs ornamental garden fountains and water features. BLL invested £10 million in the company to acquire the shares and has agreed to pay an £8 million advance fee for exclusive use of the designs.

The company is owed £1.5 million pounds for a series of large orders placed by C&P last year. There is also an outstanding dispute about a £2 million consignment for BricoFrance completed in 2017. This has led to payment being withheld while negotiations continue between lawyers and technical specialists.

There is a further problem that Simmo believes the BricoFrance issue arose from faulty workmanship by a contractor which BLL engaged in 2017. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended, a large stock of materials and supplies has built up at the company’s London site. Simmo insists that the company needs to have this level of stock for when the dispute is sorted out. He is also reluctant to press his key customers too hard for payment.

The other shareholders have approached BLL’s accountants to review the situation. 

Prepare a report of up to 1,250 words for the shareholders addressing the following issues.

i. Using the reading list provided on the VLE, explain:

a. what is meant by Profit and Cashflow and how they are different

Recommendations for Improving Cash Flow

b. what is meant by Working Capital and, the meanings of Receivables, Inventory and Payables

c. how changes in Working Capital affect Cashflow

ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results.

iii. Analyse and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management.

BoatWorld Plc is an international leisure company which rents boats to holiday makers. The company operates in the UK and France. The company has been operating for 25 years and had revenues last year of £250 million. It was listed on the London Stock Exchange 10 years ago and has a market capitalisation of £300 million with debt of £50 million. The founder, James, is the CEO and owns 15% of the shares.

The company headquarters is located in Woking which accommodates 20 staff including management, sales, finance, HR and administration. It has three operations in the UK and five in France. In these centres it employs 125 staff assisting customers and maintaining the boats. The company is planning to open a new outlet in the Netherlands and two in Germany. This will lead to the rollout of 30 new boats with support facilities. The company has always used a traditional budgeting system. The Finance Director, Hayley, joined 3 years ago but is concerned that this approach might not be the most appropriate. However, if a change of budget approach is going to be made, she thinks it should happen in time for next year’s budget process. That way any “bugs” can be ironed out before the company goes through more significant changes in the following years.

Prepare a report of up to 1,250 words for the board addressing the following issues:

i. An understanding of the purposes of preparing a budget; an explanation of

a) traditional budgeting approaches and

b) the following alternative budget methods: rolling budgets, zero based budgets and activity-based budgets, explain their relative strengths and weaknesses 

ii. Demonstrate the application of these methods showing how they might be used to plan future cost management for this specific business.

Illustrate your answer with examples of how products and processes for this business would be budgeted for in a traditional approach and using the alternative methods

iii. Analysing whether a traditional or alternative budgetary system is appropriate to all or any parts of the business in its planned future form