- 15 Marks
FM – NOV 2018 – L2 – Q4 – Working Capital Management
This question assesses the computation of working capital under different policies and discusses the importance of the cash conversion cycle and effective accounts receivable management.
Question
Kankam Ghana Ltd currently operates a long working capital cash cycle. Management is considering an initiative to reduce the cash cycle in order to manage the size and cost of the company’s working capital. Below are the components of working capital under the existing policy:
| Component | Existing (GH¢) |
|---|---|
| Cash | 1,000,000 |
| Debtors | 4,000,000 |
| Inventory | 6,000,000 |
| Creditors | 4,000,000 |
Under the proposed policy or initiative:
- Cash is expected to increase by 50%
- Debtors are expected to reduce by 25%
- Creditors are expected to increase by 25%
- The current ratio is expected to be 1.9 times.
The cost of funds to the company is 20% per annum.
Required:
a) Calculate the company’s net working capital under existing and proposed policies.
(5 marks)
b) Compute the change in the company’s working capital financing cost if the new policy is implemented. Advise management on whether to implement the new policy.
(3 marks)
c) Explain the importance of the cash conversion cycle in ascertaining the working capital needs of the company.
(4 marks)
d) Explain THREE (3) advantages to be derived from effective management of Accounts Receivable.
(3 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Accounts Receivable, Cash Conversion Cycle, Cost of Funds, Working Capital
- Level: Level 2
- Topic: Working Capital Management
- Series: NOV 2018