Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent

Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent

Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent profit and loss account and balance sheet of the company are as follows:

Profit and Loss Account for the year ended 31 May 199X

	£	£
Sales		452,000
Less: Cost of sales
Opening stock	125,000
Add purchases	341,000
	466,000
Less: Closing stock	(143,000)	323,000
Gross profit		129,000
Expenses		(132,000)
Net loss for the period		(3,000)

Balance Sheet as at 31 May 199X

	£	£	£
Fixed assets
Freehold premises at valuation			280,000
Fixtures and fittings at cost less depreciation			25,000
Motor vehicles at cost less depreciation			52,000
			357,000
Current assets
Stock		143,000
Debtors		163,000
		306,000
Less creditors due within one year
Trade creditors	(145,000)
Bank overdraft	(140,000)	(285,000)
			21,000
			378,000
Less creditors due after more than one year
Loans			(120,000)
			258,000
Capital and reserves
Ordinary share capital			100,000
Retained profit			158,000
			258,000

The debtors and creditors were maintained at a constant level throughout the year.

Required

(a) Explain why Hercules Wholesalers Ltd is concerned with its liquidity position.

(b) Explain the term ‘operating cash cycle’ and state why this concept is important in the financial management of a business.

(c) Calculate the operating cash cycle for Hercules Wholesalers Ltd based on the information above. (Assume a 360-day year.)

(d) State what steps may be taken to improve the operating cash cycle of the company.

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