Loon Ltd is a small regional company specialising in the production of athletic footwear, which it sells to a variety of retail outlets in the South West of the country.

The company has recently appointed a new Credit Manager to look into the firms cash flow, as it has been affected by both the credit crunch and its customers payment pattern.

The Credit Manager has suggested the company changes the credit terms offered to its customers. Information on the existing, as well as the proposed, scheme is provided below.

At present, 20% of debtors pay one month after the invoice date, 26% pay two months after the invoice date and 50% three months after the invoice date, and 4% of trade debts are written off.

The proposed policy, would be to offer a discount of 2% for payment within one month of the invoice date. If the policy were implemented, the Credit Manager expects that 60% of debtors would pay within one month of the invoice date, 22% within two months and 15% within three months; 3% of trade debts would be written off.

The company has recently approached a bank for a term loan to increase its capacity by acquiring new machinery, which will cost 3.6m, payable at the end of each quarter. The bank has asked for a cash flow forecast for the next year.

Assume an opening balance of -200,000.

The following information is available at the beginning of January 2016:

Actual Sales:	October	2015	500,000
	November		500,000
	December		400,000
Expected Sales:	January	2016	400,000
	February		320,000
	March		280,000
	April		280,000
	May		280,000
	June		320,000
	July		400,000
	August		450,000
	September		500,000
	October		500,000
	November		500,000
	December		400,000
	January	2017	400,000

Leather is purchased, and manufacture of footwear takes place, in the month before sale. For all types of footwear, the cost of leather is equal to 20% of sales. All invoices for sales or purchases are issued or received by the company on the last day of the month to which they relate. The company gets one-monthcredit.

You are required to:

a) Prepare the companys cash flow forecast for the year 2016under the existing policy.

b) Prepare the cash flow forecast for the year 2016 under the new policy.

c) Discuss whether the new policy will solve the companys cash flow problem and suggest any other ways of enhancing liquidity.