T3.1 SOLUTION
a) Length of working capital cycle
Year 1 Year 2
(days) (days)
Raw materials x 365 70 76
Purchases
Trade creditors x 365 (64) (55)
Purchases
Work-in-progress x 365 31 36
Cost of sales
Finished goods x 365 47 49
Cost of sales
Debtors x 365 91 95
Sales
Total length of cycle 175 201
b) Reduction in length of cycle
This can be achieved by reducing the length of any of the individual periods. The
company could do the following:
i) Delay payments for raw materials, but they might lose goodwill and/or prompt
payment discounts from suppliers.
ii) Speed up production times or reduce production volumes. Changing from
existing practices could, however, lead to problems with labour.
iii) Reduce finished goods inventory holdings, at an increased risk of stock-outs,
with consequent loss of customer goodwill.
iv) Reduce credit given, but this would be unpopular with customers, who might
take their custom elsewhere.
v) Reduce raw material inventory holding by reviewing slow-moving lines and re-
order levels. Reducing inventory may involve loss of discounts or lead to
production delays as a result of stock-outs.
c) Effective cost of finance
a) Length of working capital cycle
Year 1 Year 2
(days) (days)
Raw materials x 365 70 76
Purchases
Trade creditors x 365 (64) (55)
Purchases
Work-in-progress x 365 31 36
Cost of sales
Finished goods x 365 47 49
Cost of sales
Debtors x 365 91 95
Sales
Total length of cycle 175 201
b) Reduction in length of cycle
This can be achieved by reducing the length of any of the individual periods. The
company could do the following:
i) Delay payments for raw materials, but they might lose goodwill and/or prompt
payment discounts from suppliers.
ii) Speed up production times or reduce production volumes. Changing from
existing practices could, however, lead to problems with labour.
iii) Reduce finished goods inventory holdings, at an increased risk of stock-outs,
with consequent loss of customer goodwill.
iv) Reduce credit given, but this would be unpopular with customers, who might
take their custom elsewhere.
v) Reduce raw material inventory holding by reviewing slow-moving lines and re-
order levels. Reducing inventory may involve loss of discounts or lead to
production delays as a result of stock-outs.
c) Effective cost of finance
