Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and statement of financial position of the business are as follows:
Income statement for the year ended 31 December last year:
£000 £000
Sales revenue: 452
Cost of sales
Opening inventories Purchases 125
341
466
Closing inventories 143 323
Gross profit 129
Expenses 132
Loss for the year 3
Statement of financial position as at 31 December last year:
ASSETS
Non-current assets
Property, plant and equipment………………………………………………………….357
Current Assets:
Inventories…………………………………………………………………………………………143
Trade receivables………………………………………………………………………………163
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306
Total Assets………………………………………………………………………………………663
EQUITY AND LIABILITIES:
Equity:
Ordinary Share Capital………………………………………………………………………100
Retained earnings…………………………………………………………………………….158
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258
Non-current Liabilities
Borrowings- Loans……………………………………………………………………………120
Current Liabilities
Trade Payables…………………………………………………………………………………145
Borrowings- Bank Overdraft…………………………………………………………….140
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285
Total Equity and Liabilities 663
The trade receivables and payables were maintained at a constant level throughout the year.
1) Explain why Hercules Wholesalers Ltd is concerned about its liquidity position.
2) Calculate the operating cash cycle for Hercules Wholesalers Ltd.
3) State what steps may be taken to improve the operating cash cycle of the business.