Case Study: Rapide Ltd.
Rapide Ltd is a high growth company, who are concerned about maintaining a stable cash position. To secure cashflow, they are considering using a debt collection agency and the Finance Director is has negotiated a fee of 2% of turnover for their services. The company currently makes annual credit sales of £2.4 million, has receivables (debtors) of £360,000 and bad debts account for 1.5% of turnover. It is anticipated that the agency will reduce receivable days to 40 and bad debts to 0.5%. It has also been discovered that administrative costs associated with receivables management will reduce from £165,000 to £145,000 per annum. Accounts receivable are financed by an overdraft at an annual interest rate of 8%.
You are required to write a report to the senior management team at Rapide, incorporating the following:
1. Financially evaluate the change in receivables management proposed and advise Rapide as to whether they should proceed.
2. Explain to Rapide that it has been discovered that the collection agency will charge £10,000 set up fee. Include a calculation of how long it will take to payback this up-front cost.
3. Explain what is meant by the working capital cycle, define how it is calculated and explain why it is important. State those factors which are important in determining the length of the working capital cycle.
Do not generalize, be specific
Broad use of academic literature is required
Weighting
Introduction
- Concise summary of issues addressed in the report, methods used, types of resource 10%
Financial evaluation and advice
- Clearly presented calculations on the effect of using the collection agency and recommendation including discussion on non-financial considerations 40%
Recovery of set-up fee calculation and advice
- Clearly presented calculations and recommendation, again including non-financial considerations. 15%
Working Capital Cycle
- Detailed explanation of the meaning, how calculated, importance, effect on profitability and factors determining relating to a company or industry of your choice. 25%
Presentation and Referencing
- Clear structure to the report, appropriate and clear arguments, use of charts and graphics, correct application of Harvard Referencing 10%
Resources:
Beaver, W.H., 1967. Financial ratios as predictors of failure. Journal of Accounting Research, 4 (Supplement), pp.71-111.
Spicer, B., 1992. The resurgence of cost and management accounting: a review of some recent developments in practice, theories and case research methods, Management Accounting Research, Vol .3 (1), pp.1-37
Sony playstation and break even point-Bloomberg article: http://www.bloomberg.com/news/ XXXXXXXXXX/sony-selling-playstation-4-near-break-even-point-ihs-says-1-.html
Love, I., Preve, L., Sarria-Allente, V., 2007. Trade credit and bank credit: Evidence from recent financial crises, Journal of Financial Economics, 83 (2), pp XXXXXXXXXX
Forbes article on business loans: http://www.forbes.com/sites/sageworks/2014/03/10/why-business-loans-get-rejected/
Mason, C., Stark, M., 2004. What do investors look in a business plan? A comparison of investment criteria of bankers, venture capitalists and business angels, International Small Business Journal, 22 (3), pp XXXXXXXXXX
Bank of England report: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130407.pdf
Guardian article: http://www.theguardian.com/voluntary-sector-network/2012/mar/05/global-tweet-chat-charity-worldwide-audience
Wall Street journal article: http://online.wsj.com/news/articles/SB XXXXXXXXXX
Journal papers:
Myers, S., 1984. The Capital Structure Puzzle, The Journal of Finance, 39 (3), pp XXXXXXXXXX
Modigliani, F., Miller, M., The Cost of Capital, Corporation Finance and the Theory of Investment, The American Economic Review, 48, (3), pp XXXXXXXXXX
Forbes article: http://www.forbes.com/sites/sageworks/2013/04/12/businesses-seeking-working-capital-survey/
Journal article: García-Teruel,P.,J., Martínez-Solano,P., 2007. Effects of working capital management on SME profitability, International Journal of Managerial Finance, Vol. 3 (2), pp XXXXXXXXXX
Forbes article: http://www.forbes.com/sites/tatianaserafin/2012/07/02/risky-business-managing-risk-in-a-volatile-world/
bbc article: http://www.bbc.co.uk/news/business XXXXXXXXXX