Page 16 - CIMA OCS August 2018 Day 2 Suggested Solutions

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

Overall

Overall, given the above factors, it could be argued that having a greater number of customers,
especially as some will be smaller than current ones, then the operating cycle will decrease
rather than increase.

Recent Management of Working Capital
Inventory

Inventory days at the present time are well managed, we would need to ensure Thomas Fine
Teas were able to continue with this level of inventory management even with increased
volumes of raw materials and finished goods.
Raw Materials

Raw materials inventory has traditionally been managed by Production and may have been
tempted to acquire inventory in larger amounts in order to obtain bulk discounts. This may be
leading to higher storage costs and therefore the use of an Economic Order Quantity (EOQ)
approach may be beneficial.
Finished goods

High levels of finished goods does allow safety when it comes to satisfying demand from
customers. The move towards a more ‘just in time approach’ may allow Thomas Fine Teas to
reduce storage costs, reduce the risk of out of date inventory and reduce the cost of financing
inventory thus improving liquidity.
Payables

Over the course of the two year period, the level of payables has fallen from 92 days to 85 days.
This has had an effect on the operating cycle which has increased from 44 days to 49 days. It
could be argued that Thomas Fine Teas has recently been taking a very long time to pay its
suppliers and I suspect this is well outside of the suppliers’ payment terms. This has not fitted
well with maintaining a good relationship with those suppliers.

However, whilst it might be considered the right thing to do to reduce the payables days the
timing of this move could be brought into question.

Payables are a source of free short term finance so in the time that the payables days has
reduced it can be seen that Thomas Fine Teas has increased. It would therefore be my
suggestion that whilst in the longer term Thomas Fine Teas might want to reduce the payables
days further, until the receivables days are significantly reduced, any greater reduction in
payables days should be avoided.

Kind Regards

Finance Officer.

72 KAPLAN PUBLISHING