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 125 Purchases 341 466 Closing inventories (143) (323)

Gross profit 129 Expenses (132)

Loss for the year (3)

CHAPTER 16 Managing 686 working capital Statement of financial position as at 31 December last year

£000 ASSETS Non-current assets Property, plant and equipment 357 Current assets Inventories 143 Trade receivables 163 306 Total assets 663 EQUITY AND LIABILITIES Equity Ordinary share capital 100 Retained earnings 158 258 Non-current liabilities Borrowings – Loans 120 Current liabilities Trade payables 145 Borrowings – Bank overdraft 140 285 Total equity and liabilities 663 The trade 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.

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

AppendixLO1