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 company are as follows:

Income statement for the year ended 31 May 20XX

£ £

Sales 452,000 Less: Cost of sales Opening stock 125,000 Add purchases 341,000 466,000 Less: Closing stock (143,000) 323,000 Gross profit 129,000 Expenses (132,000)

Net loss for the period (3,000)

Statement of financial position as at 31 May 20XX £ £ £
Fixed (non-current) assets Freehold premises at valuation 280,000 Fixtures and fittings at cost less depreciation 25,000 Motor vehicles at cost less depreciation 52,000 357,000 Current assets Stock 143,000 Debtors 163,000 306,000 Less creditors due within one year Trade creditors (145,000)
Bank overdraft (140,000) (285,000)
21,000 378,000 Less creditors due after more than one year Loans (120,000)
258,000 Capital and reserves Ordinary share capital 100,000 Retained profit 158,000 258,000 The debtors and creditors were maintained at a constant level throughout the year.
Required

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

(b) Explain the term ‘operating cash cycle’ and state why this concept is important in the financial management of a business.

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

(d) State what steps may be taken to improve the operating cash cycle of the company.
(Certified Diploma)