Working Capital


Ragha Co makes annual credit sales of $1,500,000. Credit terms are 30 days, but its debt administration has been poor and the average collection period has been 45 days with 1.5% of sales resulting in bad debts which are written off.
A factor would take on the task of debt administration and credit checking, at an annual fee of 2.5% of credit sales. Ragha would save $30,000 a year in administration costs. The payment period would be 30 days.
Factor will also reduce bad debt to 0.5% of the credit sales.

Grabbit Quick Co

Grabbit Quick Co achieves current annual sales of $1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and the annual profit is as follows.


Sales 1,800
Less COGS (1,440)
Gross profit $360
Less bad debts ($18)
Profit $342



Rubic with export sales of $480m pa has an average collection period of 3 months, bad debts are 2% on sales. 


A factoring company will provide non-recourse factoring for a fee of 5% of revenue. As a result of this, administration savings will be made of £8m p.a. and the credit period will fall to 2 months.


Rubic has a cost of capital of 10%, and the exchange rate is currently 2 $/£.


Pips Limited is considering offering a cash settlement discount to its customers.

Currently its annual credit sales are $10m and its normal payment terms are 90 days.

Customers will be able to take a 2% discount for payments after 10 days.

Pips anticipates that sales will increase by 10% after the discount offer and approximately 20% of customers will take the discount.

After the offer bad debt will reduce from 2.5% of sales to 1% of sales.

Pips has a CS ratio of 40%.

Currently Pips has an overdraft on which it is paying 10% interest.


All the sales of Greedy Ltd are on credit. It is considering a proposal to change its credit policy from allowing debtors credit of 2 months to credit of 3 months.

Sales are currently $600,000 p.a. and as a result of the proposed change, it will increase by 15%.

The contribution/ sales ratio is 20% and the cost of financing working capital using overdraft is 10%.

Currently bad debt is 1% of sales. After the new policy it is expected to be 2% of sales.

KXP Co (12/12, amended)

KXP Co is an e-business which trades solely over the internet. In the last year the company had sales of $15 million. All sales were on 30 days' credit to commercial customers.

Extracts from the company's most recent statement of financial position relating to working capital are as follows:


ZSE Co (6/10, amended)

ZSE Co is concerned about exceeding its overdraft limit of $2 million in the next two periods. It has been experiencing considerable volatility in cash flows in recent periods because of trading difficulties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experiences an increase in bad debts due to a small number of customers going into liquidation.