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You work for a company that provides financial advisory and consultancy services to its clients. Your manager has provided you with the following brief about a new client.
Aesthetics4U is a large wholesaler of cosmetic products. The company sources its products directly from various manufacturers and sells on to large retail stores as well as supermarkets. The company’s average annual turnover over the past 5 years has been approximately £9 million.
Nine months ago the head of the credit control department resigned. There was no succession plan in place and the company has still not yet been able to find a permanent replacement. As a consequence, the company’s credit control function has been neglected. Poor credit control has had a serious effect on the company’s overdraft, which currently stands at $5 million, compared to $1 million at the same time last year. Interest cover has deteriorated as a result of higher interest costs.
From speaking to the Finance Director, it appears that the management of working capital has never been a priority. Prior to the problems with credit control, the company’s working capital cycle was 4 times longer than the industry norm. Your line manager has asked you to produce a report which will:
i. Discuss the importance of working capital management;
(30 marks) ii. Analyse the factors which influence the level of working capital a business holds; (40 marks) iii. Discuss the nature and functions of a good credit control department.