Trend Ltd (“TL”) manufactures gym clothing and footwear. It supplies several large design companies who then market the clothes and shoes under their own brands. The company last year had turnover in...

Trend Ltd (“TL”) manufactures gym clothing and footwear. It supplies several

large design companies who then market the clothes and shoes under their own

brands. The company last year had turnover in excess of £300 million. Two key

corporate customers are Tkechers Ltd and Sadidas Ltd.
The company is managed by Arpha, who owns 30% of the shares in the company,

while the remaining 70% is split between four other family members.
The other shareholders are concerned about the business. Although there seems

to be plenty of business coming in and the last year has been reasonably profitable

(Operating profit was £60 million last year before interest and tax), the company’s

debt has increased to £95 million from £60 million the year before. Arpha has

started talking about the need for the other shareholders to invest more money to

reduce the debt.

Towards the end of last year TL acquired a 30% stake in a company which produces

a range of walking clothes and sandals. TL invested £20 million in the company to

acquire the shares and has agreed to pay a £5 million advance fee for exclusive

supply of the products.
The company is owed £10 million pounds for a series of large orders placed by

Tkechers last year. There is also an outstanding dispute about a £12.5 million

delivery to Sadidas completed in 2019. This has led to payment being withheld

while negotiations continue between lawyers and industry consultants.

There is a further problem that Arpha believes the Sadidas issue arose due to the

supply of sub-standard materials by a supplier in 2018. He has refused to pay the supplier which is now threatening legal action. In the meantime, a large stock of

materials and supplies has built up at the company’s London warehouse. Arpha
insists that the company needs to have this level of stock for when the dispute is

sorted out. He is also reluctant to press his key customers too hard for payment.
The other shareholders have approached TL’s accountants to review the situation.

Requirements:


1. Explain:
a. what is meant by Profit and Cashflow and how they are different

b. what is meant by Working Capital and, the meanings of

Receivables, Inventory and Payables
c. how changes in Working Capital affect Cashflow


2. Apply the concepts in (1) above to this company to show how the way

the company is being managed might affect its financial results.



3 Analyse and recommend what steps should now be taken to improve

this company’s cash flow through better Working Capital

management. (