Debtors
The total debtors of your company have increased by more then a double. People owe your company too much money. You will have to bring this figure down immediately. If your debtors have any financial problems, you will not have a chance to get it back.
Suggestions: I suggest Robert Casualwear Ltd to put more pressure on your debtors and try to get as much back as possible. (2/3 will be Ideal) The best way is to ask for those who owe you the most first. This will give £2,764,000 cash inflow to Robert Casualwear Ltd .
In alternative, you can factor your debt. Look for a factor. A Factor is someone who will collect your debts on your behalf, managing your trade debtors. A factor is usually a commercial bank, ask them to do the job for you. They will cut up to about 20% of your debtors and the rest they will hand it over to you. This will give u £3,316,800 in cash. In the future, debtors should be kept to as low as possible.
Reference: A2 Business Studies Unit 4, AQA, 2001
Creditors
In a year time, you have managed to increase your creditors by 51.5%. Keeping this figure low is always a good idea to a business. Your business partner will have a good impression to your company and if your business is really in trouble, they might help you. This is all about trust.
Bank overdraft: £4,250,000
Total Creditors: £3,014,000
current ratio = current assets / current liabilities
£9,974,000/£7,264,000=1.4
current ratio= 1.4 : 1
The ideal current ratio is between 1:1 and 2:1. Robert Casualwear Ltd’s current ratio is 1.4 : 1, a company with a high current ratio may be a very inefficient firm. As least you can keep the bank and creditors happy and still have extra cash in hand.
Reference: Accounting Theory and Practice, 6th edition, Glautier & Underdown, Financial Times, Pitman Publishing 1997 p.263
Option 2: Negotiation, Cash
As Arena has just placed a big order, you can use this, and show the bank your last year performance, to try to negotiate with your bank and ask them to let you repay your overdraft at a later time. Tell the bank your orders have been increasing and is looking very good. You can prepare a report for other banks and try to obtain loans from them. This is the quickest way to solve the problems but it won’t last long because you will have to pay interest. You will still have to clear your stocks and chase up debtors to obtain cash the banks.
Option3: new assets
Your company has spent £8,670,000 on the new plant. At the moment your company can’t afford to do so. The maintenance will be very high and your company doesn’t have extra cash for this.
Suggestions: Find someone to sell your new assets to. Then lease your new assets back from them. You will lose about 5% to 10% from your original price, but in long term, you can save up a lot. Wait till your company is mature enough, then u can invest money into new plant.
£8,670,000 – (£8,670,000 x 10%) = £7,803,000
With this cash, u can pay off your loan and overdraft.
£7,803,000 - £7,250,000 = £553,000
You will still have £553,000 for this year’s operation.
The reason why I advice you to pass off your loan is because the amount of interest you are paying to the bank is around £910,000. this is a large amount of money. Think about it, is it better to have interest from the bank that paying the bank interest.
Option4: Source of Finance
Financial market = Source of finance
Financial market is a meeting point of money-borrower (who need money to make investment) and money-supplier (who have excess money but have no intention to start a new business/project).
Reference: Lecture 6, Lecture handout, Y.Guney, Business Finance 2004
In Robert Casualwear Ltd’s case, Verani plc can be an ideal money supplier. Verani plc rejected Mr. Jill Dempsey and Mr. Mike Greaves’s ideas because Verani plc wear making lost for the last few years. Now that Robert Casualwear Ltd’s sales are increasing largely (especially with Arena’s order) and have the potential to make a huge profit, Mr. Dempsey and Mr. Greaves can propose a report to Verani plc and try to set up a financial market with them. I am sure if Verani plc has extra cash, they will not waste their chance in making money.
Additional advises on the operation of Robert Casualwear Ltd
When looking through the cash flow statement of Robert Casualwear Ltd, I have realized your company have given £600,000 dividends to your share holders. Since you company are not making any profit at the moment, my advice to you is to stop giving out dividends until your company is making a good amount of profit.
Also, I think Robert Casualwear Ltd should really consider employing at least one financial expert. I am sure this will prevent your company going into this kind of crises again in the future.
Conclusion
The most important thing in running a business is, do not get yourself in too many debts and have sufficient amount of cash in hand. Also important is keep your banks and creditors happy at all time. For a success business, cash going out must be lower than cash coming in.
References:
- A2 Business Studies Unit 4, AQA, 2001
- Accounting Theory and Practice, 6th edition, Glautier & Underdown, Financial Times, Pitman Publishing 1997 p.263
- Lecture 6, Lecture handout, Y.Guney, Business Finance 2004