Question

Modern Furniture Ltd competes in the modern furniture retail market alongside Adair’s, Harvey Norman and other major furniture retailers. The market is highly competitive prompting management to review working capital practices. Detailed below are relevant figures and ratios to assist you in evaluating Modern Furniture’s working capital management.

Working Capital Ratios                  2014                       2015                       2016                       2017

Accounts Receivable Days            30.0 days             38.6 days             44.0 days             51.0 days

Inventory Days                                  30.0 days             34.5 days             37.0 days             46.0 days            

Accounts Payable Days                  29.6 days             30.2 days             38.2 days             53.0 days

Note: Ratios are based on assuming end year figures are the average throughout the majority of the year

Extracts from Financial Statements

Cash on hand                                     0.35mill                                 0.3mill                   .01mill                   .005mill

Sales – all on credit                          15 mill                   14 mill                   15mill                    16mill

Accounts Receivable Balance      1.2 mill                  1.5 mill                  1.8 mill                  2.2 mill

Inventory                                            0.66 mill               0.79 mill               0.9 mill                  1.17mill

Cost of Goods Sold                          8.0 mill                  8.5 mill                  8.9 mill                  9.3 mill

Accounts Payable                             0.65mill                                 0.7 mill                  0.95 mill               1.35 mill

Budgeted Figures                           

Cash on hand                                     0.3 mill                  0.3 mill                  0.31 mill               0.32 mill

Accounts Receivable Balance      1.2 mill                  1.22 mill               1.28 mill               1.35 mill

Inventory Balance                            0.7 mill                  0.72 mill               0.78 mill               0.80 mill

Accounts Payable                             0.64 mill               0.65 mill               .70 mill                  0.71 mill

Accounts Receivable Terms         30 days                30 days                30 days                30 days

Accounts Payable Terms               45 days                 45 days                 45 days                 45 days

Industry Averages

Accounts Receivable Days            30.1 days             29.6 days             30.4 days             33.1 days

Inventory Days                                  30 days                 31 days                 33 days                 32.2 days

Accounts Payable Days                  30 days                 28.5days              17 days                 15 days

Review Modern Furniture’s working capital management performance utilizing the above information / benchmark figures / industry averages and budgets (250 words).

Once you have analyzed their performance, provide some strategies and recommendations to assist in improving any weaknesses in working capital management referring to the management of components of working capital including cash, inventory, accounts receivable and accounts payable. As part of your recommendations identify the associated potential benefits and costs of each recommendation? (250 word limit)

Answer 1

Woking capital ratios	2014	2015	2016	2017
Accounts receivables(days)
Modern	30	38.6	44	51
Industry average	30.1	29.6	30.4	33.1	Company takes increasingly longer no.of days to collect receivables ,during periods 2015-2017--almost 2 months in 2017--almost always exceeded the 30 days budgeted.
Inventory Days
Modern	30	34.5	37	46
Industry average	30	31	33	32.2	Compared to industry average of around 30 days through-out,Modern is taking more no.of days to convert its inventory to sales--almost 1.5 months in 2017
Accounts Payable Days
Modern	29.6	30.2	38.2	53
Industry average	30	28.5	17	15	Modern seems to take longer than the industry peers in settling trade dues.It has exceeded the 45 days(terms budgeted) in 2017

Issues:

1.Slackened collection of receivables.

2.Conversion of inventory to sales/receivables taking longer than normal for the industry.

3.Increasingly delayed payment to trade creditors.

In addition,

it can be seen from the budget figures that

1. Cash on hand is heavily reduced in actual than that budgeted for yrs. 2016 & 2017

2. Receivable balance has increased from that budgeted in all the last 3 yrs.--2015-2017

3. Accounts payables balance also has increased from that budgeted in all the last 3 yrs.--2015-2017

4. It can be concluded from the above --also it is corroborated by the figures-- that more cash is spent on inventory accumulation----actual inventory balance is greater than that budgeted in yrs.-- 2015-2017.

which has a spiralling effect-more inventory balance --more no.of inventory days of conversion --

cash held up as inventories-opportunity cost of interest lost or carrying more payables

more carrying costs such as storage &insurance

To improve the working capital position or to bring it on par with the industry peers,

Modern should :

1. Lessen its inventory levels according to demands

2. Launch collection drives so as to collect receivables with in a period of 30 days.

3.Take maximum advantage of the credit period offered for trade payables.