Identify the costs of holding:

(a) too little cash;

(b) too much cash.11.1 Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and balance sheet of the business are as follows:

Income statement for the year ended 31 December last year

£000 £000 Sales revenue 452 Less Cost of sales Opening inventories 125 Add purchases 341 466 Less Closing inventories 143 323 Gross profit 129 Expenses 132 Net loss for the period (3)

Balance sheet as at 31 December last year £000 £000 £000 Non-current assets Property, plant and equipment Freehold premises at valuation 280 Fixtures and fittings at cost less depreciation 25 Motor vehicles at cost less depreciation 52 357 Current assets Inventories 143 Receivables 163 306 Less Current liabilities Trade payables 145 Bank overdraft 140 285 21 378 Less Non-current liabilities Loans 120 258 Equity Ordinary share capital 100 Retained profit 158 258 The receivables and payables were maintained at a constant level throughout the year.
Required:

(a) Explain why Hercules Wholesalers Ltd is concerned about its liquidity position.

(b) Calculate the operating cash cycle for Hercules Wholesalers Ltd based on the information above. (Assume a 360-day year.)

(c) State what steps may be taken to improve the operating cash cycle of the business.