MANAGERIAL FINANCE PROFESSIONAL 1 EXAMINATION - APRIL 2009

Transcription

1 MANAGERIAL FINANCE PROFESSIONAL 1 EXAMINATION - APRIL 2009 NOTES: Section A Answer Question 1 and Question 2 and either Part A or Part B of Question 3. Section B Answer Question 4 and either Part A or Part B of Question 5. (If you provide answers to both Parts A and B in Question 3 and/or Question 5, you must draw a clearly distinguishable line through the answer Part(s) not to be marked. Otherwise, only the first answer(s) to hand for each of these questions will be marked.) MANAGERIAL FINANCE TABLES ARE PROVIDED TIME ALLOWED: 3 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted. The Institute of Certified Public Accountants in Ireland,17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND MANAGERIAL FINANCE PROFESSIONAL 1 EXAMINATION APRIL 2009 Time allowed 3 hours, plus 10 minutes to read the paper. SECTION A (Answer Questions 1 and 2 and either Part A or Part B of Question 3.) 1. X Limited manufactures skateboards and custom built surfboards for the Irish market. The company was created three years ago by boarding enthusiasts David and Sean. The company has been successful to date with retained profits of 123,000. The company s most recent Balance Sheet is summarised as follows: X Limited Balance Sheet as at 30th June s Non-Current Assets at NBV Plant & Equipment 90 Motor Vehicles 140 Total Non-Current Assets 230 Current Assets Inventories 20 Prepayments - Trade Receivables (all collectible) 30 Cash & Cash Equivalents 5 Total Current Assets 55 Total Assets 285 Equity & Liabilities Equity Attributable to Equity Holders Share Capital (@ 5 each) 100 Other Reserves Non-Current Liabilities Long term borrowings 0 Current Liabilities Trade payables 50 Overhead payments 12 Total Current Liabilities 62 Total Equity & Liabilities 285 The company plans to enter the lucrative Italian market commencing in July They have carried out market research and the total sales projections for the next 15 months are as follows: X Limited - Sales Projections (Units) (ACTUAL) Qtr Qtr Qtr42009 Qtr Qtr Qtr Skateboards Surfboards The price of each skate board is 50. It is anticipated that this will remain fixed for the foreseeable future to help ensure market penetration. Customers pay in full when purchasing the skateboard. Page 1

3 Each surfboard presently sells for 200. This will increase by 50 per board effective from 1st January Each surfboard will take three month s to produce. Customers will pay a 25% cash deposit and pay the remainder on receipt of the board. Additional travel expenses will be incurred of 2,000 per month effective from 1st July David and Sean realise that the 5,000 cash on hand as at 30th June 2009 will not be sufficient to fund the planned market development and have agreed with their Bank Manager to provide an overdraft facility of 40,000. You have reviewed the company s operations and have discerned that there were 250 skateboards on hand as at 1st July As the surfboards are custom built no stocks of finished goods are held. Present inventory policy is to produce enough skateboards to meet 10% of the following quarter s estimated sales demand. However this policy will change to ensure that 40% of units are in stock prior to the commencement of Quarter The wood used to produce boards costs 10 per metre. This price is expected to increase by 10% from 1st October Each surfboard will require four metres of wood with each skateboard requiring 1 metre. The company purchases raw material to maintain a closing stock equal to 100% of the next quarter s production requirements. Opening stock of wood on 1st July 2009 is 4000 metres. Creditors terms allow for payment three months after the date of purchase. David and Sean produce the boards at present. It is anticipated that two new staff members will have to be employed from 1st October 2009 onwards of a monthly cost of 3,000 each. This will remain fixed for one year. David and Sean are paid a salary of 4,000 each per month. This will increase by 20% from 1st January All wages and salaries and travelling expenses are paid in the month incurred/to which they relate. Factory rental is payable on the quarter days 1st January, April, July and October. The annual rental for the year ended December 2009 has been fixed at 300,000. A recent rent review has set the rental at 400,000 per annum for the next five years effective from 1st January Ongoing overhead costs including depreciation of 10,000 total 30,000 per month. Cash overheads are paid 40% in the month incurred and 60% in the subsequent month. To enter the Italian market the company will have to purchase a new transporter van at a cost of 100,000. This will be paid for in November Additional Plant and Equipment costing 60,000 will be leased at a quarterly lease premium of 10,000, first payable in November REQUIRED: a) Prepare a quarterly cash budget for X Limited for the year ended 30th June (16 Marks) b) Comment on the cash budget and advise David and Sean on four steps they could take to improve X Limited s liquidity position. (9 Marks) [TOTAL : 25 MARKS] Page 2

4 2. A client company Gerry Limited has been approached by Denis PLC regarding the proposed purchase of Gerry Limited. They have indicated that consideration would be in the form of a cash purchase of each share. There will be no paper consideration. This is Gerry Limited Management s first experience of a takeover bid and they have asked you to advise them throughout the process. The Management Team of Gerry Limited have debated the proposal and are of the collective opinion that they would favour the proposed acquisition as they will belong to a significantly larger organisation with greater marketplace presence. Their acceptance of the takeover bid would be dependant upon the proposed price representing value for the company s shareholders. Gerry Limited s Managing Director has agreed to meet with Denis PLC s Financial Director to clarify further the detail of their proposal, and to negotiate the price payable per Gerry Limited share. Denis PLC s Financial Director has asked that the due diligence audit commence as soon as possible. You have researched relevant details pertaining to the proposed acquisition. A summary of your findings is as follows: Gerry Limited has 10 Million shares in issue. Denis PLC has 100 Million shares in issue. Gerry Limited has annual post tax recurrent earnings of 5M whilst Denis PLC s annual post tax recurrent earnings are 10M. Gerry Limited s management has forecast that the recurrent annual synergistic benefits which should accrue to the combined entity should total 2m pre tax per annum. Denis PLC s price earnings multiple is 20 times. This multiple is expected to continue to apply to all earnings in the event that the proposed takeover of Gerry Limited proceeded. An unlisted company of a similar size and in the same industry as Gerry Limited was recently acquired on a price earnings multiple of 15. Both companies pay corporation tax at 20%. REQUIRED: In preparation for the planned meeting with Denis PLC, prepare a memorandum for Gerry Limited s Management Team which advises on the following issues: a) Calculate the current market value/minimum price acceptable per Gerry Limited share. (3 marks) b) Using an earnings based approach, calculate the maximum price payable by Denis PLC per Gerry Limited share (assuming that the synergistic benefits forecasts are accurate). (5 Marks) c) Advise on the tactics to be adopted by Gerry Limited s management when discussing the price for the takeover. (7 marks) d) Explain the due diligence process in the context of a takeover bid. (5 marks) [TOTAL : 20 MARKS] Question 3 Answer either Part A or part B 3. Part A: You have recently acquired a new client, Bourke Limited. At your initial meeting with Bourke Limited s Managing Director he commented that he is tired of receiving a detailed annual ratio analysis based on the audited financial statements of the company. He has stated that he would prefer instead an assessment of the company s strategic potential and the preparation of detailed monthly cash and functional budgets aligned to the company s five year strategy. He believes that this would add real value and improve his understanding (and subsequent running) of the business. REQUIRED: Explain to the Managing Director of Bourke Limited: a) The limitations of traditional ratio analysis. (8 Marks) b) The criticisms of traditional budgeting. (7 Marks) [TOTAL: 15 MARKS] Page 3

5 OR Part B: A client company, C Limited, sells designer clothes throughout Ireland. C Limited has experienced rapid expansion and now employs 400 staff members across 20 retail outlets. The Management Team of C Limited realises the need to employ a system of budget management. C Limited s Managing Director is of the opinion that the company should employ a system of Zero Based Budgeting and that budget holding responsibilities should be delegated throughout the organisation. He is concerned to ensure that all Store Managers act as budget holders and are highly motivated to achieve their individual budget targets. REQUIRED: Prepare a briefing note for the Managing Director of C Limited that advises on: The meaning, benefits and limitations of Zero Based Budgeting. (8 Marks) The importance of the behavioural aspects of budgeting. (7 Marks) SECTION B (Answer Question 4 and either Part A or Part B of Question 5.) [TOTAL: 15 MARKS] 4. The following multiple choice question contains 8 sections, each of which is followed by a choice of answers. Only one of the offered solutions is correct. Each question carries 2.5 marks. Give your answer to each section on the answer sheet provided. Extracts from the most recent annual report of Dingy PLC read as follows: Annual Dividend Per Share Year Ended Cents 31st March st March st March Dingy PLC s shares are currently trading (31/3/2009) at 6.34 cum div. The company s Beta Co-efficient has been calculated at 0.8. The expected return on risk free securities is 10% and the expected return on the market portfolio is 15%. Q1) Dingy PLCs cost of equity using the Dividend Growth Model is closest to: a) 10% b) 11% c) 12% d) 13% Q2) Dingy PLCs cost of equity using the Capital Asset Pricing Model is closest to: a) 10% b) 12% c) 14% d) 16% N PLC, a quoted company on the Amsterdam Stock Exchange, has 100,000,000 shares in issue. The current market price of one N PLC share is 5. The recurrent annual profits of N PLC are 25 million. M PLC, an Irish quoted company has 400,000,000 shares in issue currently trading at 15 each. The recurrent annual profits of M PLC are 75 million. At a private board meeting held on 1st March 2009 M PLC agreed to attempt to acquire N PLC based on the combined entity s ability to achieve 400 million annual recurrent cost savings. This meeting concluded with an agreement to make a takeover bid for N PLC offering 6 cash per share. On 14th March 2009, M publicly announced the terms of their offer. They did not release any details of the cost savings. Page 4

6 On 17th March, M PLC announced publicly details of the potential cost savings. Q3) Assuming that the capital markets display semi-strong from efficiency. The price of one N PLC share on 14th March 2009 should be: a) 5 per share b) 6 per share c) 15 per share d) 20 per share Q4) Assuming that the capital markets display semi-strong from efficiency. The price of one M PLC share on 14th March 2009 should be: a) per share b) per share c) per share d) per share Q5) Assuming that the capital markets display strong from efficiency. The price of one M PLC share on 1st March 2009 should be: a) per share b) per share c) per share d) per share M PLC s Ice Cream Division employs standard marginal costing to control production costs. The standard cost card of its Italian Range of Ice Cream reads as follows: Standard Cost Card Italian Range (Per Litre of Ice Cream) Direct Materials Cream per litre = 2.50 Direct Labour.02 hours of 10 per hour =.20 Variable Overhead.02 hours 20 per hour =.40 Standard Marginal Cost per Litre = 3.10 For the month of April 2009, M PLC budgeted to produce and sell 20,000 litres of Italian Ice Cream at a budgeted selling price of 5 per litre. M PLC s Management Accountant has calculated the following variances for the month ended April There were no stocks of raw materials or finished goods at the start of end of April Sales Volume Variance = 3,800 favourable Direct Materials Usage Variance = 3,750 adverse Direct Labour Rate Variance = 270 favourable Direct Labour Efficiency Variance = 1000 adverse Q6) What quantity of ice cream was actually sold during the month of April 2009? a) 20,000 litres b) 18,000 litres c) 22,000 litres d) None of the above Q7) What quantity of cream was actually purchased/used during the month of April 2009? a) 24,375 litres b) 26,375 litres c) 29,375 litres d) None of the above Q8) What rate per hour was actually paid during the month of April 2009? a) 9.50 per hour b) 10 per hour c) 11 per hour Page 5

7 d) per hour Answer Part A or Part B only. [Total: 20 Marks] 5. Part A: A client, M Limited, manufactures and sells custom built wardrobes. They produce three types of wooden wardrobes from Oak, Mahogany and Ash. The standard cost profiles for each of these products are as follows: Standard Costs ( ) Oak Mahogany Ash Materials Direct Labour Fitting Cost ( 100 per hour) Variable Overheads Fixed costs of 2,520,000 are incurred evenly throughout the year. M Limited is finding it difficult to source qualified fitters and has forecast that only 6,000 fitting hours will be available for the month of September A minimum quantity of each product must be supplied to customers. Details are as follows: Monthly Demand Oak Mahogany Ash Unit Selling Price ( ) Maximum Monthly Demand (Units) Minimum Monthly Supply (Units) M Limited s Operations Manager is concerned to ensure that the use of the limited fitting hours is optimised during September 2009 and has asked for your advice. REQUIRED: Prepare a briefing note for the Operations Director of M Limited that: a) Explains the term Limiting Factor and describe briefly the approach to optimise the use of one (only) limiting factor. (6 Marks) b) Propose an optimum production schedule for the month of September (10 Marks) c) Project the profit for the month of September 2009 if your recommendation at (b) above is implemented. (4 Marks) OR [TOTAL : 20 MARKS] Part B: A client company, T PLC, has asked for your assistance to evaluate proposals aimed at reducing the cost of the company s working capital management. The company s most recent audited accounts read as follows: T PLC Income Statement - Year Ended 31st March 2009 Ms Revenue 1654 Cost Of Sales 900 Gross Profit 754 Selling & Distribution Expenses 112 Admistration Expenses 120 Profit Before Interest & Taxation 522 Finance Charges 48 Corporation Tax 124 Profit after Interest & Taxation 350 Proposed Dividend 100 Retained Profit for the year 250 Page 6

8 T PLC Balance Sheet as at 31st March 2009 Ms Non Current Assets at NBV Property and Plant 1670 Fixtures & Fittings 120 Total Non-Current Assets 1790 Current Assets Inventories 141 Trade Receivables 159 Cash & Cash Equivalents 0 Total Current Assets 300 Total Assets 2090 Equity & Liabilities Equity Attributable to Equity Holders Share Capital (@ 2 each) 600 Other Reserves Non-Current Liabilities Long-term borrowings 110 Current Liabilities Trade payables 212 Dividend payable 0 Short-Term Borrowings 420 Current portion of long term borrowings 68 Total Current Liabilities 700 Total Equity & Liabilities 2090 Notes: All sales are on credit with standard settlement terms of 30 days. Bad debts of 2.5% of gross sales are normally incurred. All purchases are made on credit. Early settlement discounts are not availed of. Interest on overdraft is charged at 9%. To reduce the costs associated with working capital the following proposals have been put forward: Employ a Credit Controller at an annual cost of 27,000. It is expected that this will reduce bad debts to 1.5% of sales and that all debtors will pay on terms. Pay creditors after 40 days to avail of an early settlement discount of 3% on all purchases. There are no planned changes to Inventory Management. REQUIRED: Prepare a briefing note for T PLC s Financial Controller which: a) Calculates the present (y/e 31/3/2009) working capital cycle for T PLC. (4 Marks) b) Calculates the proposed working capital cycle for T PLC for the year ended 31/3/2010 assuming that all sales, purchases and inventory levels are as per the year ended 31st March (6 Marks) c) Evaluates the (combined) financial impact of the proposed changes to working capital management and comment briefly on your findings. (10 Marks) [Total : 20 Marks] END OF PAPER Page 7

9 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND MANAGERIAL FINANCE PROFESSIONAL 1 EXAMINATION APRIL 2009 SOLUTION 1 a) X Limited Projected Cash Budget - Four Quarters Ended Q Details Note Q Q Q Q Sales Receipts Payments Raw material suppliers Wages Travel Expenses Cash Overheads Rent & Rates Motor Vehicle Purchase Lease Payments Net in Month Cash Movement Opening Cash Balance Closing Cash Balance The increased investment in capital assets and inventories has placed a strain on the company s cash resources. At the end of Quarter X Limited will require 178,500 additional cash whilst an overdraft of 40,000 is permissible. By the end of Quarter X Limited will no longer need an overdraft. Recommendations To ease the cash constraints the following steps could be considered: request a higher percentage deposit from surfboard customers request a longer settlement period from raw materials creditors negotiate later payment of the rent and rates reduce/delay the size/payment of the payment for the Motor Vehicle lease the motor vehicle Supporting Notes Note 1) Debtors Receipts - Product A Q Q Q Q Sales Budget - Skateboards Deposit - Surfboards Final Payment - Surfboards Total Sales Receipts Page 9

10 Note 2 Production Budget - Surfboards Q Q Q Q Q Finished Goods Closing Stock Less:Finished Goods Opening Stock = Finished Goods Stock Budget Sales Budget Production Budget Materials Usage Production Budget Q Q Q Q Q DM required for metre each DM required for metres each Materials Purchase Budget Q Q Q Q Raw Materials Closing Stock Budget Less:Raw Materials Opening Stock = Raw Materials Stock Budget Raw material required for production Raw Material Purchase Budget Kgs Cost Per Metre Raw Materials Purchase Budget - Cost Raw materials Payment Page 10

11 SOLUTION 2 Memorandum To: Management Team, Gerry Limited From: Corporate Finance Advisor Date: 20th September 2009 Subject: Proposed Acquisition by Denis PLC Introduction This memo advises on a number of key issues relating to the proposed takeover of Gerry Limited by Denis PLC. a) Due Diligence When a company makes a formal takeover bid which is welcomed by the target company, the predator company will require a degree of assurance that the financial position and financial performance of the target company are as indicated in their financial and management accounts. To gain this assurance (or otherwise) the predator company will typically request that its accountants carry out a financial due diligence audit of the target company. The due diligence auditors will typically carry out the following tests: Verify the accuracy of profits reported in financial and management accounts Review the value of non current assets Check trade receivables for any potential bad debts Check inventories for any obsolete/spoiled items The due diligence auditors will furnish their client with a due diligence report which will have an impact on whether the takeover bid will proceed or not and if so, as to the indicative value to be placed on the target company. b) Minimum Price Acceptable per share in Gerry Limited Minimum Price Acceptable Per Gerry Limited Share Recurrent annual post tax earnings Indicative Price Earnings Multiple 15 Indicative Total Company Valuation Shares in Issue Indicative Minimum Price Per Share 7.5 c) Maximum Price payable by Denis PLC per Share of Gerry Limited Maximum Price Payable Per Gerry Limited Share Recurrent annual post tax earnings Denis PLC Recurrent annual post tax earnings Gerry Limited Recurrent annual post tax savings ( @ 80%) Total projected recurrent annual post earnings Price Earnings Multiple 20 Indicative Total Company Valuation Present Company Value ( 10m * 20times) Increase in Company Value/Maximum Affordable Shares in Issue Indicative Maximum Price Per Share Payable 33.2 d) Conduct of Negotiations do not reveal you minimum acceptable price never accept a price below your minimum acceptable negotiate towards the price affordable by Denis PLC approach the negotiations with a win-win mindset Conclusion I trust that this briefing will enable you to enter the negotiations with Denis PLC in a confident and prepared manner. Page 11

12 Solution 3 A) A) Limitations of Traditional Ratio Analysis It should be noted that the calculation and interpretation of such traditional ratios is subject to the following inherent limitations: ratios act only as a guide and should be used in conjunction with a subjective viewpoint e.g. what is the intended corporate strategy?, what are the underlying economic conditions?, what stage of the product life cycle is being experienced? ratios do not provided controls, they act as an indication of potential difficulties to be addressed ratios are only comparable year on year when they are computed in the same manner using the same accounting policies differing accounting policies may inhibit ratio comparison between organisations most accounts are prepared using the historic cost convention which is likely to differ greatly from current costs/valuations ratios generally use year end figures for the purposes of calculation. These balance sheet figures are only a snapshot in time and may not always be representative of typical balance sheet values. B) Criticisms of Traditional Approaches to Budgeting Budgets are typically set in circumstances of uncertainty. It can be argued that this inherent uncertainty diminishes greatly the value of the process Budgets tend to concentrate on a retrospective review of performance rather than a forward looking prospective view As most budget setting is carried out incrementally, this can create a culture of rigidity which is slow to change and which stifles innovation and creativity Budgets consume significant management time and financial resources As markets become increasingly globalised and complex, it is making increasingly less sense to budget in such an uncontrollable and volatile environment B) Briefing Note To: Managing Director, C Limited From: Management Accounting Consultant Date: 14th September 2009 Subject: Budgeting Introduction This briefing note outlines some of the key issues and considerations prior to implementing a system of budgetary control. Zero Based Budgeting (ZBB) This approach to budget setting involves setting budgets each year as if doing so for the first time. i.e. starting from a zero-base. The system involves an annual root and branch review of each budget with budget resources being allocated to the highest value added proposals. Benefits it eradicates budget slack budget holders cannot assume an automatic right to receive an allocation, thus it avoids complacency budget resources are directed to those activities delivering the highest value added it creates a climate/culture where change and innovation are the norm Limitations it is an expensive system to maintain and support constant change may unsettle employees and budget holders Behavioural Aspects of Budgeting It is important that all budget holders are motivated and feel able to achieve their budget targets. To ensure that this is the case the following issues must be carefully considered throughout the budget setting and budgetary control system. Page 12

13 That budgets are set at a level of performance that is achievable yet challenging That budget holders are only held responsible for issues that are within their direct control That budget holders participate in the budget setting process as much as possible That budget holders are appropriately trained and supported to enable them to carry our their responsibilities properly That budget holders receive clear communications in relation to what their budget targets are SOLUTION 4 1 Average Annual Growth in Dividend 6% Cost of Equity (Gordon's Growth Model) [.34*(1+.06)/( )] +.06 = 12.01% 2 Cost of Equity (CAPM) [ ( ) = 14.00% 3. Per announced cash offer of 6 per share. 4 14th March Valuation M PLC Share Million Market Capitalisation M PLC 1/3/ Market Capitalisation N PLC 1/3/ Less:Price Payable to N PLC -600 Market Value of M PLC 5900 M PLC shares in issue 400 Market Value of M PLC Share st March Valuation M PLC Share Million Market Capitalisation M PLC 1/3/ Market Capitalisation N PLC 1/3/ Less:Price Payable to N PLC -600 Add:Synergystic Savings 400 Market Value of M PLC 6300 M PLC shares in issue 400 Market Value of M PLC Share Italian Ice Cream Determination of Actual Sales Volume (Actual Units Sold - Budgeted Unit Sales ) * Standard Profit Per Unit (? ) * 1.9 = 3800 Favourable Therefore litres were sold. 7 Determination of quantity of cream purchased/used (Standard Unit Usage (for the actual level of production)- Acutal Units Used) * Standard Cost Per Unit ([22000*1.25] -?) * 2 = Adverse Therefore 27,500 litres should have been used. If an additional cost of 3750 was incurred then 3750/2 an extra 1875 litres were used. Thus 29,375 ( ) litres of cream was actually purchased/used. 8 Determination of rate paid per hour (Standard Hourly Rate - Actual Rate Per Hour ) * Actual Hours Worked (10 -?) * 540 = 270 Favourable Therefore 9.50 was paid per labour hour. Page 13

14 SOLUTION 5 Briefing Note To: Operations Director, M Limited From: Management Accounting Advisor Subject: Optimum Production Schedule September 2009 Date: 20th June 2009 Introduction A limiting factor is any resource which will prevent an organisation making infinite profits e.g. shortages of materials, staff, production capacity. In your case the fitting hours are limited during the month of September To optimise the use of one limiting factor (only) we produce first the unit of production which delivers the highest contribution per unit of limiting factor. This briefing proposes how to use the 6000 fitting hours available during September 2009 to maximum effect. Optimum Production Schedule Determination of Optimum Production Plan Oak( ) Mahogany Ash( ) Selling Price Less: Variable Costs Materials Direct Labour Fitting Cost Variable Overheads Total Variable Cost Per Unit Contribution Per Unit Fitting Hours Per Unit Contribution Per Fitting Hour Production Ranking 1st 3rd 2nd Optimum Production Plan Oak Mahogany Ash Fitting Units Hours Units Hours Units Hours Hours Minimum Supply Contract (Units) Produce Product 1 (Rank 1) Produce Product 3 (Rank 2) Produce Product 2 (Rank 3)Balance Total M Limited should produce: 1000 Oak wardrobes 1750 Mahogany wardrobes 2500 Ash wardrobes during September Thus will produce / 1,850,000 profit for the month, calculated as follows: Profits of Optimum Production Plan Oak Mahogany Ash Total Contribution Per Unit Units Produced and Sold Total Contribution Delivered Less: Monthly Fixed Cost ( /12) Total Monthly Profit Page 14

15 SOLUTION 6 Briefing Note To: Financial Controller, T PLC From: Finance Manager Date: 1st April 2009 Subject: Working Capital Management Introduction This note advises on the financial impact of the proposed changes to working capital policy. Operating Cash Cycle Your present Operating Cash Cycle is 6 days, calculated as follows: T PLC - Operating Cash Cycle - Y/E 31st March 2009 Days Average Stockholding Days (141/900 * 365) 57.2 Average Debtors Settlement Period (159/1654 * 365) 35.1 Average Creditors Settlement Period (212/900 * 365) Operating Cash Cycle 6.3 If the proposals are implemented this would increase to 47.2 days. T PLC - Operating Cash Cycle - Proposed Days Average Stockholding Days No Change 57.2 Average Debtors Settlement Period As proposed 30.0 Average Creditors Settlement Period As proposed Operating Cash Cycle 47.2 Evaluation of Proposed Changes to Payment and Collection Policy You have proposed to : employ a credit controller make early payments to creditors As a result of the combined proposals T PLC should save 8,412 in working capital related costs. This is calculated as follows: Current Cost of Working Capital s Interest paid on debtors balances 159*9% Bad debts (1654*2.5%) Interest saved on creditor balances 212*9% Interest paid on inventory balances 141*9% Total Cost of Working Capital Proposed Cost of Working Capital M Interest paid on debtors balances *30/365 * 9% Bad debts ( *1.5%) Interest saved on creditor balances *40/365* Interest paid on inventory balances 141*9% Settlement Discount received * 3% Credit Controller Cost Total Cost of Working Capital Conclusion Whilst your operating cash cycle will increase dramatically the proposals will save the your company 8,412 per annum. This is mainly as a result of paying creditors early. Improving credit control is always a positive step. Perhaps, you may consider the more effective management of inventories for next year! Page 15