9609 · 5.1.2
Practice and worked examples for 9609 Working capital. Short previews only — attempt the full question in MarkScheme against the official scheme.
At year-end: stock $80k, debtors $50k, cash $20k, creditors $90k, overdraft $30k. Calculate working capital and comment.
Current assets = 80 + 50 + 20 = $150k Current liabilities = 90 + 30 = $120k Working capital = 150 − 120 = $30k positive
Comment: Positive but modest — current ratio 150/120 = 1.25 (acceptable but not strong). $80k stock is large - reduce inventory (4.2.1) could free cash. Overdraft $30k shows short-term borrowing already in use.
RetailCo provides the following data from its Statement of Financial Position for the last two years.
| Item | Year 1 | Year 2 |
|---|---|---|
| Inventory | $100,000 | $150,000 |
| Trade Receivables | $60,000 | $90,000 |
| Cash | $15,000 | $5,000 |
| Trade Payables | $80,000 | $120,000 |
| Bank Overdraft | $0 | $20,000 |
Part 1: Calculation
Year 1:
Year 2:
Part 2: Analysis and Suggestion
Analysis: Working capital increased from $95,000 to $105,000. However, the company's liquidity position has worsened. Both inventory and trade receivables have increased by 50%, tying up significant cash. Cash has fallen from $15,000 to just $5,000, and the company has had to take on a $20,000 overdraft. This pattern suggests the business might be overtrading – expanding sales rapidly without sufficient working capital to finance the growth, leading to a severe cash shortage.
Suggestion: One way to improve the working capital position is to manage trade receivables more effectively. The company could offer customers a discount for early payment, for example, a 2% discount if invoices are paid within 10 days instead of the usual 30. This would accelerate cash inflows. For instance, if half the receivables ($45,000) were collected 20 days earlier, it would significantly improve the cash balance, reducing the need for an overdraft, even though it would slightly reduce the gross profit margin.