David Vardon runs a small manufacturing business which he started 5 years ago. Although sales growth and profits have been fine, he is becoming increasingly concerned about his liquidity position and is under pressure from the bank to reduce his overdraft. He has provided the following information regarding his current and proposed trading position.
You should assume that all sales and purchases are on credit terms
(a) Show what is expected to happen to the total working capital requirement.
(b) What has happened to the amount of working capital required to produce £1 of sales?
(c) Calculate the change in the cash operating cycle in terms of days.
(d) What is expected to happen to the gross profit margin and to total gross profits?
(e) What impact is the budgeted working capital position likely to have upon the liquidity position of the firm? What recommendations can you make to increase the efficiency of working capital management?