Individual Assignment- Financial management

Due date 20 March 2022 Total 40 marks

Honolulu Fashions Group ltd

Honolulu Fashions Group Ltd is a high end exclusive clothing retail store operating in Honolulu Hawai. It was incorporated in Honolulu in 1925. It caters for the high end customers of the Hawai society. Honolulu Fashions Group ltd established a Club Card system some 30 years ago. All customers belong to a Club Card system. All sales under the Club Card system are made to customers on credit. However, sales have been poor over the past 2 years because of the Covid 19 pandemic. The state of Hawai has been under lock down for the past two years. During a board meeting held on 31 January 2022 the board raised concerns over the deteriorating sales. The financial manager proposed that certain changes should be made to the Club Card system in order to stimulate sales.

The current conditions of the Club Card are that:

All sales are interest free for the first 55 days. If payment is made after 55 days, then interest will be charged at 20% per annum on all outstanding debt until the debt is extinguished. Currently the group has an average debtors balance of $4,583 000. The current average collection period is 180 days. The average gross profit margin is 35% of sales. Currently 30 % of the customers under the Club Card settle all outstanding debt within 55 days. The rest of the customers do not take advantage of the interest free period. Bad debts are currently 1.5% of sales.

The financial manager proposed the following changes to the Club Card policy:

All sales are on credit. All customers that settle their debt within 30 days will get a discount of 2% on the debt. No interest is charged on debt for the first 44 days. If payment is made after 44 days, then interest will be charged at 25% per annum on all outstanding debt. The new policy is expected to reduce the average debtors to R4 350 000. The average debtors collection period is expected to be reduced to 120 days. The average gross profit margin is expected to remain at 35% of sales. Only 5 % of the customers are expected to take advantage of the 2% discount incentive. It is expected that 25 % (excluding the customers that take advantage of the 2% early settlement discount) of the customers will settle their debt within 44 days. The rest of the remaining customers are not expected to take advantage of the interest free period. Under the new policy, if customers do not settle their debt within the interest free period, a late payment penalty of 0.5% on all outstanding debt will be charged. This penalty is once off. Bad debts are expected to remain at 1.5% of sales under the new policy.

Additional information:

Extract from the latest financial statements:

Total current assets $7 010 000

Debtors (Club Card policy) $ 4 358 000

Stock on hand $2 652 000

Total current liabilities $3 200 000

Trade Creditors $ 1 970 000

Bank overdraft $ 1 230 000

The purpose of the bank overdraft is to fund seasonal fluctuations. It should not be regarded as part of the permanent financing structure of the Group.

REQUIRED:

1. Evaluate the impact of the new Club Card policy on the financial performance of the group. Use 360 days per year in your evaluations [23 marks]
2. Comment of the current working capital policy of the group. Support your answer with reasons [8 marks]
3. Discuss the long term financing options that may be available to the group. Support your answer with reasons. [9 marks]