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Question 3 (42 marks) (a) Discuss why balancing between profitability and liquidity is necessary in working capital management. Explain the principles of working capital management. (6 marks)

(b) A Company has 20 days as average raw material inventory holding period (AAI), 15 days processing time, 10 days finished goods inventory holding time, 20 days average receivable collection period (ACP) and 30 days average payment period. The Company estimated for 2022 that raw material costs shall be N$15 million, processing costs shall be N$ 5 million, raw materials and finished goods holding costs shall be N$3 million and marketing and collection costs shall be N$1 million.

Required (i) Calculate the operating cycle (OC) and cash conversion cycle (CCC). (3 marks)

(ii) Determine working capital requirement of the company for 2022 assuming 365 days in a year. (7 marks)

(c) The position of sales revenue, current assets and current liabilities of a firm during 2020 and 2021 is given below: _____________________________________________________ 2020 2021

Sales revenue 600,000 660,000 _____________________________________________________

Cash 8 000 8 800

Trade Receivables 70 000 91 000

Stock 80 000 96 000

Total current assets 158 000 195 800

Trade Payables 40 000 48 000

Net working capital 118 000 147 800 _____________________________________________________ The expected increase in sale from 2021 to 2022 is 20%. However, the growth in each of the current assets and current liabilities is expected to double in 2022 from the growth during 2020 to 2021. Required Determine:

(i) the growth in current assets and current liabilities in 2021 from 2020 and in 2022 from 2021, and (ii) Estimate requirement of additional working capital for 2022. (20 marks)

(iii) Describe different costs associated with inventory and also explain the relationship between costs associated with inventory and state how this affects inventory decisions. (6 marks)

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