Question

QUESTION 3 (15 Marks: 27 minutes)
Handyman Limited is a hardware wholesaler supplying goods to ‘do-it yourself’ retailers around the country. The company commenced operations at the beginning of the 20x3 year. The company has been operating successfully for a number of years. Although turnover increased consistently, the Company has recently been experiencing cash flow problems. The managing director has approached you for advice on how to improve this situation. The following amounts were extracted from the records of the company:
20x3 20x4 20x5 C000s C000s C000s Turnover 100 000 120 000 135 000 Cost of sales 75 000 90 000 101 250 Profit before interest and tax 6 000 5 500 5 600 Accounts receivable 16 500 25 000 29 600 Account payable 13 000 14 700 17 000 Inventory 18 750 26 000 30 400 Bank/ (overdraft) 5 000 (500) (2 000)

Required:
1. Identify and calculate the ratios that are needed to analyse the company’s working capital for the periods 20x4 and 20x5. 2. Comment on the company’s working capital management in the light of these ratios.

Answer 1

	2013	2014	2015
turnover	100000	120000	135000
cost of goods sold	75000	90000	101250
profit before interest and taxes	6000	5500	5600
Accounts receivables	16500	25000	29600
accounts payable	13000	14700	17000
inventory	18750	26000	30400
bank / overdraft	5000	-500	-2000
			2014		2015
current ratio =current assets/current liabilities		51000/15200	3.355263		3.157895
current assets		25000+26000	51000	29600+30400	60000
current liabilitties		14700+500	15200	17000+2000	19000
			2014		2015
Quick Ratio	quick assets/current liabilities		1.09		1.56
quick assets		16500	16500		29600
current liabilitties		14700+500	15200	17000+2000	19000
			2014		2015
cash ratio	cash/current liabilities		-0.03289		-0.10526
cash or bank			-500		-2000
current liabilities			15200		19000
Companys short term solvency position is not good as it has invested more funds into accounts receivables and inventory due to which company Is facing a shortage of cash in hand. So there should be proper management of receivables and inventory to reduce the level of current ratio and should focus on short term liquidity like cash and equivalents