Section 2: Working Capital Management

Firms set policies on (investments, financing, inventory, payables and accounts receivable) to manage the cash available in the operations. The objective is to always have cash on hand to meet its obligations in a manner that is acceptable to all its stakeholders.

With reference to the accounts for FastFix Auto Parts Ltd (FastFix), carry out some basic calculations (listed below) and comment on the changes in these ratios as to their affect on working capital. Then specifically list some actions that management could take to improve the cash situation.

Fastfix Auto Parts Ltd

Income Statement: for the period ending 31 December

2011

2012

Sales

6,034,400

7,035,600

COGS

4,980,000

5,800,000

Other expenses

720,000

612,960

Depreciation

116,960

120,000

Total operational costs

5,816,960

6,532,960

EBIT

217,440

502,640

Interest expense

176,000

80,000

EBT

41,440

422,640

Taxes (40%)

16,576

169,056

Net Income

24,864

253,584

Fastfix Autoparts Ltd

Balance Sheet: As at 31 December

2011

2012

Cash

7,282

14,000

Short-term investments

20,000

71,632

Accounts Receivable

632,160

878,000

Inventories

1,287,360

1,716,480

Total Current Assets

1,946,802

2,680,112

Net Fixed Assets

939,790

836,840

Total Assets

2,886,592

3,516,952

Accts. payable

324,000

359,800

Notes payable

720,000

300,000

Accruals

284,960

380,000

Total Current Liabilities

1,328,960

1,039,800

Long-term debt

1,000,000

500,000

Common stock

460,000

1,680,936

Retained earnings

97,632

296,216

Total equity

557,632

1,977,152

Total Liabilities & Equity

2,886,592

3,516,952

Other data

2011

2012

Stock price

$6.00

$12.17

No. of shares

100,000

250,000

EPS

$0.25

$1.01

DPS

$0.11

$0.22

Book val. per share

$5.58

$7.91

Lease payments

40,000

40,000

Tax rate

40%

40%

Required Calculations

a)Calculate the percentages changes from 2011 to 2012 for all 33 lines in the accounts listed above (use the Excel file provided).(16.5 marks)

b)Calculate the following for both 2011 and 2012:

i) Working capital

ii) Current ratio

iii) Debt to total assets ratio

iv) Times interest earned

v) Inventory turnover

vi) Days sales in inventory

vii) Accounts receivable turnover

viii) Average collection period

ix) Payables deferral period

x) Cash conversion cycle

c)Although net income has increased significantly in 2012 list and discuss three improvements and actions that management could take to make the working capital situation even better in 2013? (Your ratio calculations and percentage changes guide this answer)