Suggested answers for General Machinery questionImportant note:
These are INDICATIVE answers only. They are written in bullet point
form but in answering any similar examination question you woul!
nee! toargue your "ase "learly showing #hat are the $ey issues %our
e&i!en"e for i!entifying these as issues %our reasons as to why
the issue is important 'e"ommen!ations for impro&ementAfter a
!e"line the "ompany(s pro)tability *'+I '+CE +perating margin, has
impro&e! re"ently. -owe&er the gross margin has !roppe! for
)&e "onse"uti&e years suggesting that selling pri"es are
not being in"rease! to pass on pur"hase *or pro!u"tion, "ost
in"reases. This !eteriorating margin is a signi)"ant ris$ for the
"ompany as pro)ts ha&e only been in"rease! by the large
re!u"tion in o&erhea! in .//0. If margins "ontinue to ero!e an!
if o&erhea!s "annot be "ontinually "ut pro)ts may be at serious
ris$. The "ompany nee!s to "ontinue to in"rease sales growth )x its
gross margins an! "ontinue to manage o&erhea!s.#or$ing "apital
has been at extremely high le&els but has fallen to "lose to
.:1 an impro&ement but with an a"i! test greater than 1 is
probably still too high. This is !emonstrate! by the relati&ely
high !ays( sales outstan!ing *2/ against 3/ !ay terms, whi"h
e&en though it has impro&e! is still too high.
In&entory represents the biggest "on"ern to wor$ing "apital as
at 3.3 it represents an a&erage sto"$hol!ing of 11/ !ays
*32453.3,. The "ompany nee!s to manage its or!ering to a
6ust7in7time basis. The "ash 8ow statement shows that most "ash has
been use! in .//0 hen"e wor$ing "apital is straine! by a la"$ of
"ash an! slow !ebtor "olle"tions an! in&entory turno&er.
The result is too high !ays( pur"hases outstan!ing of 9:
representing o&er ..4 months. This is li$ely to gi&e the
"ompany ba! "re!it rating an! may impa"t its ability to maintain
"ontinuity of supply. Asset turno&er has stea!ily in"rease! a
tren! whi"h nee!s to "ontinue.;earing at e"on! a!!itional "ash
woul! enable the "ompany to pay its "re!itors more qui"$ly. It
woul! be better for the "ompany to )x its in&entory problems
an! "olle"t its !ebts on time pay its o&er!ue "re!itors an!
then loo$ to see how mu"h a!!itional borrowing was require!.>o
the "ompany fa"es three ma6or issues it nee!s to a!!ress: Fix the
!e"lining gross margin to maintain pro)tability. Fix the
in&entory an! !ebtors problem to impro&e "ash 8ow. ?ay its
"re!itors on time. #hether or not the "ompany nee!s to borrow
further will only be seen after the eAe"ts of these
impro&ements are ma!e.
