TASK 1(60 marks)TrendLtd (“TL”) manufactures gym clothing and footwear. It supplies several large design companies who then market the clothes and shoes under their own brands. The company last year had turnover in excess of £300million.Two key corporate customers are Tkechers Ltd and Sadidas Ltd.The company is managed by Arpha, whoowns 30% of the shares in the company, while the remaining 70% is split between fourother family members.The other shareholders are concerned about the business. Although there seems to be plenty of businesscoming in and the last year has been reasonably profitable (Operating profit was £60million last year before interest and tax), the company’s debt has increased to £95million from £60million the year before. Arphahas started talking about the need for the other shareholders to invest more money to reduce the debt. Towards the end of last year TLacquired a 30% stake in a company which produces a range of walking clothes and sandals. TLinvested £20 million in the company to acquire the shares and has agreedto pay a £5million advance fee for exclusive supply of the products.The company is owed £10million pounds for a series of large orders placed by Tkecherslast year. There is also an outstanding dispute about a £12.5million delivery to Sadidascompleted in 2019. This has led to payment being withheld while negotiations continue between lawyers and industry consultants. There is a further problem that Arphabelieves the Sadidasissue arose due to the supply of sub-standard materials by a supplier in 2018. He has refused to pay the
supplierwhichis now threatening legal action. In the meantime, a large stock of materials and supplies has built up at the company’s London warehouse. Arphainsists that the company needs to have this level of stock for when the dispute is sorted out. He is also reluctant to press his key customers too hard for payment.The other shareholders have approached TL’s accountants to review the situation. Requirements;
Prepare a report of up to 1,250 words for the shareholders addressing the following issues.
i.Explain:a.what is meant by Profit and Cashflow and how they are different
b.what is meant by Working Capital and, the meanings of Receivables, Inventory and Payablesc.how changes in Working Capital affect Cashflow(30marks)
ii.Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. (15 marks)
iii.Analyse and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management.(15 marks)
TASK 2 (35 Marks)Thorne Estates Limited advertises and sells residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for first four months of 2021. Expected sales of residential properties are as follows:20202021202120212021MonthDecJanFebMarAprUnits Sold 1010152530
The average price of each property is £180,000 and Thorne Estates charges a fee of 3% of the value of each property sold. Thorne Estates receives a 1% in the month of sale and the remaining 2% in the month after sale.The company has nine employees who are paid on a monthly basis. The average salary per employee is £35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of £140 for each additional property sold.Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of £4,300 per month are paid in the month in which they arise. Thorne Estates pays interest every three months on a loan of £200,000 at a rate of 6% per year. The last Interest payment in each year is paid in December. Rent of £42,000 will fall due at the end of May.An outstanding tax liability of £95,800 is due to be paid in April. In the same month, Thorne Estates intends to dispose of surplus vehicles, with a net book value of £15,000 for £20,000. The cash balance at the start of January 2021 is expected to be a deficit of £40,000.Required:
1. Prepare a monthly cash budget for the FOUR months from 1stJan to 30April 2021.(30 Marks)
2. Are there any observations or recommendations that you would make to the management of Thorne Estates arising from your analysis
