Question

please send the solution in Excel format if possible. Thank you

Part C The following information is available for Healthy & Fresh Ltd: Ratios 2012 2012 2013 2014 Current Ratio (times) 2.61:1 1.94:1 1.32:1 Average settlement period for debtors (days) 37 43 47 Average settlement for creditors Inventory turnover period (days) 54 65 Non-current assets (indexed, 2012 as base) 100 118 141 Long-term finance (indexed. 2012 as base) 100 109 115 * Credit terms : 2% discount pay within 10 days. Normal credit term is 30 days. You are required to evaluate the management of working capital for Healthy & Fresh Ltd, based on what the above figures reveal about changes in its operating cycle and financing scheme.

Answer 1

Every business required working capital to operate apart from fixed assets.

Current Ratio is derived as Current Assets/ Current Liability.

We observe that Current ratio is reducing over the years. Decreasing Current Ratio indicates that we require less of own fund for working capital and our current assets requirement is getting funded from Current Liability.  

Positives of Working Capital Situations are

1. Current liability has increased by appx. 98% in 2014 over 2012(keeping Current asset as constant). Prima facie, this seems to be a healthy situation.

Improvement in Working capital Situation required are:

1. Creditors settlement has increased from 8 days to 31 days, which is beyond normal credit period. Paying in days exceeding 10 days is leading to loss of discount of 2% on procurement amount, which may have added directly to operating profit. Secondly, Exceeding normal credit period of 30 days, may lead to loss of reputation/ goodwill and creditor may apply additional interest as well which may lead to financial loss. Creditors settlement days of 8 in 2012 indicates Creditors are paid appx 45.6 times(365/ 8) in a year. If in each time we get 2% cash discount on purchase, which makes it 91.25% discount on same value in a year. If Borrowing rate is lower than 19.25%, it is advisable to keep paying the creditors within 10 days to availing discount. In most cases it will be in the poorest of economies.

2. Debtor settlement period has increased from 37 days to 47 days. Debtors are delaying in payment. This indicates that collection policy is not upto the mark. Infact, there is no visible credit policy as per example. This might lead to bad debt situation in business in future and must be addressed now. This also indicates competition pressure or liquidity crunch in the market.

3. Inventory turnover has also increased from 48 to 65 in 2 years span. This indicates either our sales has declined or we have procured more than required. Maintaining higher inventory might lead to goods getting outdated and near expiry  given the nature of business. This also indicates a lack of material management. Organisation must initiate Economic Order Quantity (EOQ), define Maintain Minimum and Maximum level of Inventory for the organisation. This will reduce losses and bring efficiency.

4. Increase in Non Current Assets indicates the growth in the business. This indicates company has invested in Land, property, Trademarks, or Goodwill generation.

5. Long term finance has grown by just 15% over 2 years. Long term finance are generally low interest bearing finances. Hence are good options for business finance. However too much of loan/ Liability creates pressure on Profits in tough market situations. Hence company must maintain a healthy balance between Equity/ Owned capital and Loans.

Ratios	2012	2013	2014
Current Ratio (a)	2.61	1.94	1.32
Current Asset (b)	261	261	261
Current Liability (c )	100	135	198
Settlement Debtors Days(d)	37	43	47
Debtor Turnover( e )= 365/(d)	9.9	8.5	7.8
Settlement Creditors Days (f)	8	9	31
Creditors Turnover( g )= 365/(f))	45.6	40.6	11.8
Discount Benefit (h)= (g) *2%	91.3%	81.1%	-
Inventory TO(Days) (h)	48	54	65
Non Current Status (i)	100	118	141
Long Term Finance (j)	100	109	115