Charlesworth plc is a distributor of tiles to the building trade. The vast majority of these tiles are purchased in Eastern Europe and South-East Asia. It has been quite successful since it was set up 10 years ago with sales growing, on average, at the rate of 10% a year. Amy Backson has recently taken over as managing director to oversee a planned expansion of about 20% in the coming year. Amy is satisfi ed that the expansion can be managed from a logistical point of view as £11 million is planned to be spent on new vehicles and warehousing facilities. The old vehicles being replaced will be sold at auction and are expected to raise £250,000 which is also their net book value at the end of the current year. (The £21 million forecast for expenses includes £5 million for depreciation.) However, the fi rst draft of the forecast for next year is causing some concern as it predicts a substantial overdraft. The summarized accounts of Charlesworth plc have just been completed in draft form for the current year together with a forecast for next year (see below). Amy has been told by the bank that the overdraft limit has just been doubled to £1 million but no further increases will be granted for the foreseeable future. Charlesworth pays interest at 10% a year on its overdraft and loans. Amy wants to have these matters discussed at the board meeting next week and has asked you for some help in preparing the necessary figures setting out some options.

Tasks:
1. Create a cash fl ow statement for next year explaining why the cash position deteriorates during that year.

2. Comment on the company€™s management of working capital by examining the operating and cash cycles for both years and suggest ways in which the company might improve its working capital position.
3. In what other ways could Charlesworth achieve its planned expansion while not breaching the overdraft limit of £1 million?

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Balance sheets as at 31 December (£000) Current year Next year's forecast Fixed assets (at NBV) 30,000 35,750 Stocks 8,000 12,000 Debtors 8,000 11,000 Bank 300 16,300 23,000 Creditors 3,500 5,800 2,900 Overdraft Tax due 3,000 2,500 Dividends due 9,900 4,000 4,200 16,000 Working capital 7,000 6,400 36,400 42,750 Less: Loan @ 10% 4,000 32,400 7,000 35,750 Financed by: Share capital 10,000 22,400 10,000 Reserves 25,750 35,750 32,400 Profit and loss accounts for year ended 31 December Sales 52,000 61,000 Opening stock Purchases 5,000 8,000 30,000 33,000 35,000 41,000 Less: Closing stock Cost of goods sold Gross profit 8,000 12,000 27,000 29,000 25,000 32,000 Less: Expenses Interest – O/D 17,000 21,000 250 Interest – loan 400 17,400 700 21,950 Net profit Tax Profit after tax 7,600 10,050 3,000 2,500 4,600 7,550 Dividends 4,000 4,200 3,350 Retained in year 600