Working Capital Management and Cash Budgeting - Business Report

Working Capital and Cashflow

Your work must indicate the number of words you have used. Written assignments must not exceed the specified maximum number of words. When a written assignment is marked, the excessive use of words beyond the word limit is reflected in the academic judgement of the  piece of work which results in a lower mark being awarded for the piece of work (regulation 6.74).

• Assignment submissions are to be made anonymously. Do not write your name anywhere on your work.

• Write your student ID number at the top of every page.

• Where the assignment comprises more than one task, all tasks must be submitted in a single document.

Business report with a title page, contents page and clear structure. It must be written in an appropriate business tone with appropriate Harvard reference where necessary. Note no introduction is required. No marks will be awarded for an introduction.

TASK 1 (60 marks)

Trend Ltd (“TL”) manufactures gym clothing and footwear. It supplies several large design companies who then market the clothes and shoes under their own brands. The company last year had turnover in excess of £300 million. Two key corporate customers are Tkechers Ltd and Sadidas Ltd.

The company is managed by Arpha, who owns 30% of the shares in the company, while the remaining 70% is split between four other family members. The other shareholders are concerned about the business. Although there seems to be plenty of business coming in and the last year has been reasonably profitable (Operating profit was £60 million last year before interest and tax), the company’s debt has increased to £95 million from £60 million the year before. Arpha has started talking about the need for the other shareholders to invest more money to reduce the debt.

Towards the end of last year, TL acquired a 30% stake in a company which produces a range of walking clothes and sandals. TL invested £20 million in the company to acquire the shares and has agreed to pay a £5 million advance fee for exclusive supply of the products.

The company is owed £10 million for a series of large orders placed by Tkechers last year. There is also an outstanding dispute about a £12.5 million delivery to Sadidas completed in 2019. This has led to payment being withheld while negotiations continue between lawyers and industry consultants.

There is a further problem that Arpha believes the Sadidas issue arose due to the supply of sub-standard materials by a supplier in 2018. He has refused to pay the supplier which is now threatening legal action. In the meantime, a large stock of materials and supplies has built up at the company’s London warehouse. Arpha 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 TL’s accountants to review the situation.

Impact of Working Capital on Financial Results of Trend Ltd

Requirements:

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

i. Explain:

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

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 cash flow through better Working Capital management.

TASK 2

Thorne Estates Limited advertises and sells residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of 2021. Expected sales of residential properties are as follows:

The average price of each property is £180,000 and Thorne Estates charges a fee of 3% of the value of each property sold. Thorne Estates receives a 1% in the month of sale and the remaining 2% in the month after sale.

The company has nine employees who are paid on a monthly basis. The average salary per employee is £35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of £140 for each additional property sold.

Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of £4,300 per month are paid in the month in which they arise. Thorne Estates pays interest every three months on a loan of £200,000 at a rate of 6% per year. The last Interest payment in each year is paid in December. Rent of £42,000 will fall due at the end of May.

An outstanding tax liability of £95,800 is due to be paid in April. In the same month, Thorne Estates intends to dispose of surplus vehicles, with a net book value of £15,000 for £20,000. The cash balance at the start of January 2021 is expected to be a deficit of £40,000.

Required:

1. Prepare a monthly cash budget for the FOUR months from 1st Jan to 30 April 2021. (30 Marks)

2. Are there any observations or recommendations that you would make to the management of Thorne Estates arising from your analysis?

This assignment requires you to demonstrate your knowledge and understanding of a) the management of cash and b) budget techniques.

Your discussion for part 1 of the assignment should explain the difference between cashflow and profit.

Your answer must identify and explain why the accounts of a business can report a profit but a shortage of cash, and discuss the consequences to a business of being short of cash.

The general causes of cash flow problems should be analysed using the case study presented to you, particularly regarding the management of working capital. Methods for dealing with cash flow problems and managing cash for the business described should be proposed and evaluated.

Your answer for Part 2 of the assignment is the preparation of cash budget and you can use the blank formats provided in week 1 of Trimester.

You are not expected to show any specialist knowledge of the sector in which the business operates, but credit will be given for evidence that you have considered as to what issues might be specific to this company.