Question

Modern Kitchens specializes on sell prefabricated kitchens. The company has stores in all major capital cities throughout Australia. It’s been established since 2001 and has seen tremendous growth but more recently has seen several overseas competitors enter the Australian market resulting in an increase in competition. This increased competition has placed significant pressure on containing costs and drawn management’s attention to a review of working capital practices. Detailed below are relevant figures and ratios to assist you in evaluating Modern Kitchen’s working capital management.

Working Capital Ratios 2016 2017 2018 2019

Accounts Receivable Days 14.0 days 18.1 days 23.1 days 31.9 days

Inventory Days 16.0 days 19.1 days 21.9 days 25.0 days

Accounts Payable Days 14.1 days 21. days 29.0 days 37.0 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 0.20 mill 0.15 mill .01 mill (.003 mill)

Sales – all on credit 8.1 mill 6.9 mill 8.0 mill 9.0 mill

Accounts Receivable Balance 0.3069 mill 0.3453 mill 0.5044 mill 0.7894 mill

Inventory 0.1754 mill 0.2186 mill 0.2712 mill 0.3219 mill

Cost of Goods Sold 4.0 mill 4.2 mill 4.5 mill 4.7 mill

Accounts Payable 0.1534 mill 0.2417 mill 0.3574 mill 0.4762mill

Budgeted Figures

Cash on hand 0.3 mill 0.3 mill 0.31 mill 0.32 mill

Accounts Receivable Balance 0.30 mill 0.31 mill 0.37 mill 0.38 mill

Inventory Balance 0.16 mill 0.17 mill 0.20 mill 0.21 mill

Accounts Payable 0.16 mill 0.17 mill .19 mill 0.20 mill

Accounts Receivable Terms 14 days 14 days 14 days 14 days

Accounts Payable Terms 30 days 30 days 30 days 30 days

Industry Averages

Accounts Receivable Days 14 days 14 days 15 days 16 days

Inventory Days 15 days 16 days 16 days 15 days

Accounts Payable Days 30 days 28 days 25 days 20 days

REQUIRED:

Calculate (show full workings to your answer):

(i)  the dollar value of actual net working capital each year from 2016 to 2019 for Modern Kitchens.

(ii) the duration of the operating cash cycle each year from 2016 to 2019 for Modern Kitchens.

(iii) interpret the meaning of each of the figures calculated above (40-word limit)

(a) Review Modern Kitchens’s working capital management performance utilizing calculations in (a) above and information provided such as trends / benchmark figures / industry averages and budgets (300-word limit).

(b)  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. (400-word limit)

Answer 1

Answer iii b)

Modern kitchen has a scope for improving its working capital improvement at each component level

1. Inventory - Modern kitchen can benefit from better inventory management. As its inventory days is much higher than industry average, there is scope for improvement. Company can adopt leaner and lighter model. This will reduce its cost of operations

2. Acc. Receivables & Payable - Modern kitchen need to strike better terms with its Debtors, as industry players are almost 100% more efficient than modern kitchen. With better terms here, and already superior terms with its creditors, firm can almost get to a point where its working capital will be funded by market