Bruton Ltd is a manufacturer of stylish and high-specification computer workstation furniture.
Bruton Ltd is a manufacturer of stylish and high-specification computer workstation furniture. The business’s products have rapidly gained market acceptance allowing it to expand rapidly from its start up four years ago. Except during the first few months, the business has never been able to produce all that the market demanded. As a result it dispatches finished products to customers as soon as they are complete.
The directors feel that the business has reached a stage where it needs to make a fairly significant investment in equipment (about £5 million) if it is to move forward in the manner that they would like. They would also like to clear the business’s overdraft.
The following is included in the business’s recent draft financial statements:
Profit and loss account for last year
£m
£m
Sales revenue
15.6
Raw materials and components
opening stock:
(1.1)
purchases
(5.7)
closing stock
1.9
(4.9)
Production labour
(3.3)
Production overheads
(2.5)
(10.7)
4.9
Administration and selling costs
(1.2)
Operating profit
3.7
Interest charges
(0.1)
Profit before tax
3.6
Tax
(1.3)
Profit (all retained)
2.3
Sales and production are spread fairly evenly over the year
Balance sheet as at the end of last year
£m
£m
Non-current assets
Freehold land and buildings
3.2
Machinery and equipment
1.6
4.8
Current assets
Stock (all raw materials and components)
1.9
Trade debtors
4.2
6.1
Current assets
Bank overdraft
(1.3)
Trade creditors
(0.6)
Taxation
(1.3)
(3.2)
Net current assets
2.9
7.7
Equity
Ordinary shares
2.0
Reserves
5.7
7.7
The directors are concerned that a lot of cash seems to be tied up in working capital.
Bruton Ltd is a member of the Office Furniture Manufacturers Association, a trade association. In a recent copy of the Association’s journal, some statistics had been published of the average accounting ratios for the industry. These had been compiled from a recently conducted survey of members. Included in these were the following:
settlement period for trade debtors
1.5 months
settlement period for trade creditors
1.5 months
stock turnover period
1.0 months
Required
(a) Show workings which indicate the amount of cash that it will be necessary to raise for the purposes mentioned by the directors, assuming that Bruton Ltd were able to achieve industry average debtor, creditor and stock periods.
(b) Provide some practical suggestions for managing Bruton Ltd’s working capital elements more effectively.