Question 21

For the year ended 31 March 2021, Manchester Plc had total domestic and foreign credit sales of 40 million. The cost of these credit sales was 20 million. Trade payables are associated with domestic and international suppliers.

The current assets and liabilities of Manchester Plc as of March 2021 are summarised as follows:

	'000	'000
Inventory	5,000
Trade Receivables	6,000
Current Assets		11,000
Trade Payables	2,000
Overdraft	4,000
Current Liabilities		6,000
Net current assets		5,000

For the year ended 31 March 2022, Manchester Plc predicts that the cost of sales would decline to 60% of sales, and the credit sales would still be at 40 million. The company expects current assets to comprise of inventory and trade receivables, and current liabilities to comprise of trade payables and the companys overdraft.

Manchester Plc expects to achieve the following target working capital ratio values for the year ended 31 March 2022:

Trade receivables days: 70 Trade payables days: 50

Inventory days: 60 Current ratio: 1.3 times

Required:

1. Calculate the working capital cycle of Manchester Plc at the year ended March 2021 and discuss whether a working capital cycle should be positive or negative. (8 marks)

2. Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of Manchester Plc at the end of March 2022. (7 marks)

3. Compare the current asset and current liability positions for March 2021 and March 2022 and discuss how the working capital financing policy of Manchester Plc would have changed. (10 marks)