QUESTION ONE

You are presented with the following information extracted from your organisations financial statements for the year ended 31 December 2019.

1. Sales on 31 December 2019 were K110 million. For the year 2020, sales are expected to grow at 8% per month for the year.
2. 90% of the sales made are on account; the remainder on cash.
3. Credit customers pay as follows:
   1. 85% in the month following the sale;
   2. 10% two months after the sale month.
   3. Irrecoverable debts are expected at the historical norm of 5% of credit sales.
4. Inventory levels are maintained at 20% of the following months sales.
5. Accounts payables are at settled at 30 days after purchase.

Required:

1. Prepare a cash flow forecast for the three-month period from January to March 2020.

[10 Marks]

2. Calculate the following for each month of the forecast period:
   1. Inventory days
   2. Accounts receivable days
   3. Accounts receivable days
   4. Cash conversion cycle

[10 Marks]

3. Briefly explain the implication of your assessment in (ii) above on the continued management of the working capital position.