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I collecting Credit control - the processof monitoring and the money owed to a business' be changed Liquidity - the easewith

which an assetcan into cash. of the that arisebecause Liquidity problems- difficulties to cash into that can easilybe converted tacf of assets make immediatePayments'

t,
attemptsto ratse Overtrading - a situationwhere a business working capital' its the sizeof increasing production-wittrout day to day Working capital - the funds left over to meet lt after current debts havebeen paid' is calculated expenses minuscurrentliabilities' by currentassets into - the flow of liquid resources cycle capital Working and out of a business'

EmersonEngineeringLtd
beyond the agreed credit Period' of Emerson EngineeringLtd makes a range due to be i*o d"ys before the foreign orders were lt in Sheffield' factory modern a in components meeting delivered on 23.5.2003,an emergency board is 43 staff.About 80 per cent of its output During problem. flow the cash company is was held to discuss "rpioy, sold to two manufacturersin the UK'The solutionswere discussed' possible three meeting the In efficient,ambitious and reasonablyprofitable' Henderson o Saleand lease back of machinery to recent years it has grown by taking over some a specialistsale and lease back Associates, smaller comPetitors in the north' comPany. ln 2003 Emerson'ssalesdirector Savea Sell debts to a debt factoring comPany' o Munich'As in presentation at an industrial exhibition o An unsecuredshort term bank loan' of inquiries a result the company receiveda number Table 48.2 shows the value Emerson'scurrent one of the larger from foreign producers"Eventually the assetsand current liabilitiesthe day of these companiesplaced a sizeableorder'To meet ago' Figure months l2 emergency board meeting and orders Emerson had to steP uP production'This in position cash 48.3 shows the company'smonthly a new involved recruiting 4 more staff,purchasing the previous trading Period' and machine,buying l.iot" materials and components overtime to emPloYees' paying ' following ir*uuer, the expansion beganto escalate a visit to the factory by some French delegates'Two Tab|e4S.2CurrentossetsandcurrentliobilitiesforEmerson days after their visit another large order was 23.5.2003 g Ltd, gin eerin En feel reteived. Emerson was now beginningto 2002 buy 2003 stretched. lt needed to recruit more staff and t000s t000s run out even more resources.Emerson'scash had exceeding to close and the comPanywas dangerously Current assets exceed to have Stocks of raw materials its overdraft limit. Indeed,it would 1,001 1,229 and comPonents this limit at the end of the month to pay wages' 1,765 3,445 Work-in-Progress 1,778 which again included large overtime Payments' 2,189 Debtors agreed terms 1,239 credit the was 0 problems the of One Cash at bank 5,783 90 6,863 offered were customers'They with the foreign these Current liabilities days credit and so far none of the work for 2,311 3,112 creditors Trade not did period credit 1,365 orders had been delivered'The 1,299 Taxation add to 1,765 2 , 1 0 0 start until the goods had been delivered'To creditors Other 0 from 2,460 exacting Payment Bank overdraft this was the uzual problem of 5,441 8,971 provided, they its regular two customers'Whilst orders' Emerion with a reliable stream of profitable to well they nearly alwaysseemed to delay Payment

342Working CopitolUnit 48

Figure 48.3 EmersonEngineering Ltd end of month coshposition,2002

t000s 4,000 3,000 2,000 1,000 0

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(a) What evidence is there in the case to suggest that Emerson is overtrading? (6 marks) (b) (i) Calculat6 the value of working capital for Emerson in 2002 and 2003. (5 marks) (ii) Do the answers in (i) confirm that Emerson has a cash flow problem? Explain your answer. (6 marks)

(c) Explain the disadvantagesto Emerson of using (i) sale and lease back (ii) debt factoring to resolve the cash crisis. (10 marks) (d) Discusswhether you think Emerson is in danger of going out of business. ( | 2 marks)

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