- 20 Marks
Question
a) Gagba LTD, a manufacturing company, is planning to expand its operations to meet increasing demand for its products. As part of this expansion, the company needs to determine its working capital requirements to ensure smooth operations and avoid liquidity issues. The company has provided the following financial and operational data for the year ended 31 December 2023:
- Sales Data:
- Annual Sales: GH₵18,000,000
- Cost Data:
- Cost of goods sold (COGS): 70% of sales
- Inventory turnover ratio: 8 times per annum
- Accounts receivable turnover ratio: 6 times per annum
- Accounts payable turnover ratio: 4 times per annum
- Operation Data:
- Average inventory: GH₵1,500,000
- Average Accounts receivable: GH₵2,000,000
- Average accounts payable: GH₵1,200,000
- Additional Information:
- Desired Cash balance: GH₵500,000
- Projected Increase in Sales due to expansion: 15%
- Cost of capital: 12% per annum Required: Compute the working capital requirement for Gagba LTD after the planned expansion. (10 marks)
b) The Ministry of Health in Ghana is conducting a review of its procurement practices and the overall performance of its Public Financial Management (PFM) system. The review aims to enhance value for money in public spending while adhering to the principles outlined by the Public Expenditure and Financial Accountability (PEFA) framework. You are provided with the following data for the fiscal year 2023:
-
- Budgeted Public Expenditure: GH₵50 billion
- Actual Public Expenditure: GH₵52 billion
- Total Procurement Expenditure: GH₵25 billion
- Value of Contracts Awarded through Competitive Tendering: GH₵15 billion (60 contracts)
- Value of Contracts Awarded through Restricted Tendering: GH₵5 billion (20 contracts)
- Value of Contracts Awarded through Single-Source Procurement: GH₵5 billion (20 contracts)
- Number of Procurement Violations Detected: 15 (with a total value of GH₵300 million)
- Disposal of Stores and Equipment: GH₵100 million Required: i) Analyse the variance in the public expenditure and its implications for the PFM system in Ghana. (3 marks) ii) Discuss which procurement method appears to provide the best value for money with suitable computations. (7 marks)
Answer
a) Computation of Working Capital Requirement Projected Sales = Current Sales x (1 + Sales Growth Rate) Projected Sales = 18,000,000 × (1 + 15%) = 18,000,000 × 1.15 = GHS 20,700,000 Projected COGS = 70% × 20,700,000 = GH₵14,490,000 Projected Average inventory: Inventory Turnover Ratio = COGS / Average Inventory Average Inventory = Projected COGS / Inventory Turnover Ratio Average Inventory = 14,490,000 / 8 = GH₵1,811,250 Projected Average Accounts Receivable: Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable Credit sales = 100% of Projected Sales Average Accounts Receivable = Projected Sales / Accounts Receivable Turnover Ratio Average Accounts Receivable = 20,700,000 / 6 = GH₵3,450,000 Projected Average Accounts Payable: Accounts Payable Turnover Ratio = COGS / Average Accounts Payable Average Accounts Payable = Projected COGS / Accounts Payable Turnover Ratio Average Accounts Payable = 14,490,000 / 4 = GH₵3,622,500 Working Capital Requirement
| GH₵ | |
|---|---|
| Projected Average Inventory | 1,811,250 |
| Projected Average Accounts Receivables | 3,450,000 |
| Desired Cash Balance | 500,000 |
| Projected Average Accounts Payables | (3,622,500) |
| Working Capital Requirement | 2,138,750 |
b) i) Variance Analysis
- Budget Variance in Public Expenditure: Budget Variance = Actual Public Expenditure – Budgeted Public Expenditure Budget Variance = GH₵52 billion – GH₵50 billion = GH₵2 billion
- Comment: A negative budget variance of GH₵2 billion indicates that actual public expenditure exceeded the budgeted amount. This overspending could imply potential inefficiencies in budget planning and execution within the PFM system. It may suggest a need for tighter budget controls and monitoring mechanisms to prevent such deviations in future periods. (3 mark)
- ii) Procurement Efficiency Average Value per Contract: Average Value per contract (Competitive Tendering) = Value of contracts awarded through Competitive Tendering / Number of Competitive Contracts Average Value per contract (Competitive Tendering) = GH₵15 billion / 60 = GH₵250m Average Value per contract (Restricted Tendering) = Value of contracts awarded through Restricted Tendering / Number of Restricted Contracts Average Value per contract (Competitive Tendering) = GH₵5 billion / 20 = GH₵250m Average Value per contract (Single Source Procurement) = Value of contracts awarded through Single Source Procurement / Number of Single Source Contracts Average Value per contract (Competitive Tendering) = GH₵5 billion / 20 = GH₵250m Comment: All three procurement methods (Competitive Tendering, Restricted Tendering, and Single-Source Procurement) have an average contract value of GH₵250 million. While the average value per contract is the same, competitive tendering is generally preferred because it promotes transparency and competition, leading to better value for money. Therefore, even though the values are the same, competitive tendering would typically be seen as the method that offers the best value for money.
- Topic: Introduction to Financial Management
- Series: MAR 2025
- Uploader: Samuel Duah