Working Capital Management

Review the case study provided below and then answer the questions that and provide explanations where needed. Provide all calculations.

Bolt Ltd is a prosperous sports regalia group in Gauteng. Currently, 96% of Bolt Ltd.'s annual sales are on credit and are expected to remain at this level in the future. Due to a large percentage of uncollectable debts, Bolt Ltd has decided to change its credit policy. You were approached to express an opinion on the effects of the proposed change in the credit policy. After further investigation, you determined the following:

Bolt Ltd.'s current credit policy is 3/10 net 60, and the proposed credit policy is 10/10 net 45. Currently, 10% of all clients who purchase on credit make use of the cash discount. In terms of the new credit policy, 20% of all clients who purchase on credit will make use of the cash discount. Due to the stricter proposed credit policy, the total annual credit sales will drop from R3 million to R2,5 million. Currently, the average debtor's collection period is 59 days. The average debtor's collection period should improve to 40 days in terms of the proposed credit policy. Bad debts, which currently amount to 7% of credit sales, will improve to 4% of credit sales with the implementation of the proposed credit policy. The opportunity cost associated with an investment in working capital is 19%. The gross profit percentage will remain unchanged at 15%.

REQUIRED:

Perform an analysis and calculations for Bolt Ltd in which you set out the impact of the proposed change in the credit policy. Indicate what the outcome of the change may be from a financial viewpoint. (15)

Suggested Template.

	Calculation	Amount	Increase/decrease
Change in gross profit
Change in marginal investment in accounts receivable: Current less proposed policy calculation
Change in marginal investment in accounts receivable opportunity cost calculation.
Change in bad debt losses
Change in cost of discount
Overall