Page 26 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

The inventories average holding period fell from 114 days to 95 days, which will help
management of working capital. However, this average may hide some significant variances in the
inventory holding period for different product lines and should be reviewed further if additional
information was to be made available.

In contrast the average collection period for trade receivables increased from 103 days in 2017 to
116 days in 2018. This may be a product of extending credit to selected customers to encourage
revenue growth, or it may be a consequence of poor credit control by Grapple, or a combination
of both factors. Further investigation would be required to confirm the reason(s) for this increase
and to enforce more effective credit control.

There was an increase in the average payment period for trade payables to 98 days in 2018 from
65 days in 2017. This may be a consequence of the increase in the volume of business, particularly
if it was planned and agreed in advance with suppliers. However, it could also be reflection of the
early stages of cash flow problems, given that there was a significant increase in the trade
receivables collection period and there was an increase of Z$6.4m in long‐term loan finance ‐ why
was this loan required?

The working capital cycle for 2018 was 113 days (95 days + 116 days ‐ 98 days), in comparison
with 152 days (114 days + 103 days ‐ 65 days) for 2017. Whilst the net reduction of 39 days in the
working capital cycle will have a positive impact upon cash flows, this hides the fact that there
was an increase in the trade receivables collection period, offset by an even bigger decrease in the
trade payables payment period.

Long term loans outstanding increased from Z$10.1m to Z$16.5m during the period under review.
This resulted in an crease in the gearing ratio from 9.9% to 14.9%. Whilst this increase may not, in
itself, be regarded as a significant increase in financial risk, any further increase in gearing may
lead to stakeholders (including providers of finance) to view Grapple less favourably should
additional finance be required at a later date. Although finance charges increased slightly during
2018, interest cover improved from 5.0 times to 8.3 times due to the growth in profitability.

On the one hand Grapple seems to maintain relatively low cash in hand balances (approximately
1.5% of total assets in 2017 and 2018). There is no indication whether Grapple also has an
overdraft facility, how much it is for and the extent to which it was used during the period under
review.

Statement of cash flows

Grapple generated a small net increase in cash and cash equivalents for 2018 of Z$0.5m. The key
elements from the statement of cash flows are considered below.

Grapple made a profit before tax of Z$10,2m and generated cash from operations of Z$8.7m,
which was further reduced to a net cash inflow from operating activities of Z$6.3m after interest
and tax payments. Normally a business entity would try to generate a higher net cash inflow of
cash from operations as, often, this net inflow would be used to finance net outflows in both
investing and financing activities.

76 KAPLAN PUBLISHING