- 20 Marks
Question
TechNova Ghana Ltd is a fast-growing technology solutions provider in Accra. The company has experienced rapid sales growth but is facing increasing pressure on its cash resources due to extended credit terms offered to customers and pressure from suppliers for quicker payments.
The finance director has prepared the following forecast information for the next six months (all figures in GH¢’000):
| Month | Jan | Feb | Mar | Apr | May | Jun |
|---|---|---|---|---|---|---|
| Credit sales | 18,000 | 20,000 | 22,000 | 25,000 | 28,000 | 30,000 |
| Cash sales | 2,000 | 2,200 | 2,400 | 2,600 | 2,800 | 3,000 |
| Purchases | 12,000 | 13,500 | 15,000 | 16,500 | 18,000 | 19,500 |
Additional information:
- 60% of credit sales are collected in the month following sale, 35% in the second month, and 5% are bad debts.
- All purchases are on credit and paid two months after purchase.
- Operating expenses (excluding depreciation) are GH¢4,500 per month, paid in the month incurred.
- Capital expenditure of GH¢15,000 is planned for April.
- Opening cash balance in January is GH¢8,000.
Required: a) Prepare a cash budget for TechNova Ghana Ltd for the six months from January to June. (10 marks)
b) Identify and explain THREE measures the company could take to improve its cash flow position. (6 marks)
c) The company maintains a cash balance that fluctuates within certain limits. The finance director has decided to implement the Miller-Orr model for cash management. The following data is relevant:
- Return on short-term investments: 0.5% per month
- Fixed cost per transaction: GH¢250
- Standard deviation of daily net cash flows: GH¢4,000
- Lower limit set at GH¢10,000
Calculate: i) The spread between upper and lower limits (3 marks) ii) The return point (1 mark)
(Total: 20 marks)
Answer
a) Cash budget (GH¢’000)
| Item | Jan | Feb | Mar | Apr | May | Jun |
|---|---|---|---|---|---|---|
| Opening balance | 8 | 3.8 | (0.9) | (5.35) | (10.8) | (13.25) |
| Receipts: | ||||||
| Cash sales | 2,000 | 2,200 | 2,400 | 2,600 | 2,800 | 3,000 |
| Credit sales collection | 0 | 10,800 | 12,000 | 13,200 | 15,000 | 16,800 |
| Total receipts | 2,000 | 13,000 | 14,400 | 15,800 | 17,800 | 19,800 |
| Payments: | ||||||
| Purchases | 0 | 0 | 12,000 | 13,500 | 15,000 | 16,500 |
| Operating expenses | 4,500 | 4,500 | 4,500 | 4,500 | 4,500 | 4,500 |
| Capital expenditure | 0 | 0 | 0 | 15,000 | 0 | 0 |
| Total payments | 4,500 | 4,500 | 16,500 | 33,000 | 19,500 | 21,000 |
| Net cash flow | (2,500) | 8,500 | (2,100) | (17,200) | (1,700) | (1,200) |
| Closing balance | 5,500 | 12,000 | 9,900 | (7,300) | (9,000) | (10,200) |
(Note: Examiner’s model answer shows cumulative pressure leading to negative balances from April; minor rounding differences possible.) (10 marks)
b) Measures to improve cash flow
- Tighten credit control – Reduce credit period offered, introduce early settlement discounts (e.g. 2% for payment within 10 days), improve debt collection procedures and credit assessment to reduce bad debts and debtor days.
- Negotiate better supplier terms – Extend payment period with suppliers (e.g. from 60 to 90 days), take advantage of any early payment discounts if cost-effective, or seek bulk purchase discounts to reduce unit cost.
- Manage operating expenses and capital timing – Delay non-essential expenditure, review overheads for cost savings, lease instead of buy capital items, or phase capital expenditure to avoid large single outflows.
(Any three relevant measures well explained @ 2 marks each = 6 marks)
c) Miller-Orr model calculations i) Spread = 3 × [(3/4 × transaction cost × cash flow variance) / interest rate]^(1/3) Variance = (4,000)^2 = 16,000,000 Spread = 3 × [(3/4 × 250 × 16,000,000) / 0.005]^(1/3) = 3 × [30,000,000,000 / 0.005]^(1/3) = 3 × [6,000,000,000,000]^(1/3) ≈ 3 × 1,817 ≈ GH¢5,451 (rounded)
Upper limit = lower limit + spread = 10,000 + 5,451 ≈ GH¢15,451
(3 marks for correct formula, variance, cube root approx. and spread)
ii) Return point = lower limit + (1/3 × spread) ≈ 10,000 + 1,817 ≈ GH¢11,817
(1 mark)
- Topic: Working Capital Management
- Series: NOV 2025
- Uploader: Samuel Duah