Answers:

1. Evaluate Marlows Working Capital Management in 2010 and 2011. Do you consider there to be a deficiency or excess in Marlos working capital levels relative to the industry? Marlows working capital greatly exceeds the industry averages in relation to the Current Ratio which will have a number of significant adverse consequences. Net Working Capital Year 2010 Current Assets Current Liabilities $530,000.00 $140,000.00 Current Ratio Industry Average 2011 $985,000.00 $230,000.00 Current Ratio Industry Average

3.79 2.50 4.28 2.70

As you can see from the above figures Marlows working Capital is higher than the industry averages in both 2010 and 2011. As the Current Ratio is a measure of a firms market liquidity and its ability to meet its current liabilities these figure lead me to believe that Marlow is holding to many assets and isnt leveraging its liabilities efficiently is comparison to its competitors.

2. Calculate Days Inventory, Days Receivable and Days Payable for 2010 and 2011. What is the funding Gap for Marlow in each of these periods? What does this mean in terms of Marlows growth strategy? Inventory Turnover: (Talk about growth strategy) Inventory Turnover Year 2010 COGS $710,000.00 Inventory $160,000.00 4.44 82.25 Days 2011 $959,000.00 $255,000.00 3.76 97.05 Days

This information is showing us that Marlow is increasing their costs and inventory from the 2010 figures. The Inventory turnover figure is showing us that they are increasing the time they hold onto inventory, which is supported by the working capital results. This will limit Marlows growth prospects as they are tying there cash up in inventory. Although the goods are not perishable cash flow at Marlows is a growing concern. There current inventory turnover figures leads us to believe they are operating inefficiently by not only having high inventory turnover but inventory turnover figures which are sizably increasing. Receivables turnover: Accounts Receivable $250,000.00 4.00 91.25 Days 2011 $1,370,000.00 $450,000.00 3.04 119.89 Days

Receivables turnover Year 2010

Sales $1,000,000.00

These figures show a sizable yearly increase in Marlows Receivable turnover. They show that Marlows account receivables are being paid into the company well beyond their 45 day limit highlight a massive internal issue. In relation to these figures influence on growth strategies we understand that at 119 days receivable turnover would significantly influence the funding gap and therefore would force Marlow to spend considerable amounts of cash covering interest payments when these monies could be better utilised elsewhere such as implementing new growth strategies.

Payables Turnover Payables Turnover Year 2010 COGS $710,000.00 Accounts Payable $85,000.00 8.35 43.70 Days 2011 $959,000.00 $185,000.00 5.18 70.41 Days

We can see through the payables turnover figure that Marlow is increasing the time in which it is paying its suppliers. An increase from 43 days in 2010 to 70 days in 2011 is a very sizable increase. With Ying Dang also introducing a late payment fee this has significant financial impacts as well as impacts to Marlows growth strategies. At these levels Ying Dang would be concerned with the reliability of Marlow and the possibility of losing their supply source is very real. As a key strength of Marlows is the leveraging of Ying Dangs reputation, this supply loss could prove fatal. Also they are incurring additional costs operating at these levels showing inefficient use of cash in the business. Funding Gap 2010 o 2011 o

129 Days 146 Days

The funding gap figure gives an understanding of the amount of time for which it must use short term loans to pay their suppliers before they receive payment from their customers. We can see that Marlows funding gap and therefore interest cost are increasing at an alarming rate. Again the growth strategy impact would be the unprofitability of Marlow directly related to this sizable and increasing cost.

3. How can Marlow improve its working capital management? Make recommendations in relation to specific short-term assets and liabilities. Are there any risks/downsides to your recommendations? To answer this question we must first assess both current assets and current liabilities for Marlow. Current Assets Cash Accounts Receivable Inventory Current Liabilities Accounts Payable 2011 80,000 200000 150000 2011 30000 140000 230000 60000 300000 170000 45000 600000 340000

Accounts payable For accounts payable he was within the 45 days and in 2010 he was pay in 43.7 Days and in 2011 this blew out to 70.41 Days

We can see through the above figures that accounts payable have increased significantly from 2009 2010 2011. Also through the case that Ying Dangs payment terms are 45 days with a 2% discount for payment within 10 days and the introduction of a 1% fee for late payment. I also note that in 2010 Marlows payable turnover figure was 43 days which is in line with Ying Dangs payment terms but has increased to 119 days in 2011. To improve Marlows working capital management the payables turnover figure must be within Ying Dangs payment terms as it would be inefficient to operate incurring a 1% fee. It would also be beneficial, if we return to operating within these terms, to analysis the possible benefit of payment within the first 10 days. However simply returning to operation within these terms is the first and most important step to increase working capital management through a reduction in accounts payable. To decrease the payables turnover figure I would recommend renegotiating terms with Ying Dang. If you could have your payment terms increase to 50 or desirably 60 days this would significantly increase working capital management by decreasing the funding gap. However it is worth noting that this may be unsuccessful. If you consider Porters five force analysis and more specificity power of suppliers section you will notice that Marlow has very little bargaining power. Cash More concerning is that they are not holding enough cash. Reduce inventory o Free up cash

In the case of Marlow cash has been reducing steadily over the last 3 years. To better increase working capital management I recommend that although assets need to be decrease to improve working our ratio cash must be increased.

I recommend that by reducing your inventory turnover you will be freeing up cash throughout the business. This will better utilise this asset and bring it back to efficient levels. However this could mean that you will not have enough inventories to cover demand, a concern of Guys. I would also create a budget and forecast to estimate cash and business demand to understand the appropriate amount of cash and inventory required. Consequently budgets and forecasts are not always precise with fluctuating demand so a buffer should always be held. Accounts Receivable Currently Marlows payment terms for customers are up to 60 days. We can see through the Payables turnover figures that in 2010 customers were paying in 43 days but now in 2011 this figure has increased to 70 days. This shows a very important area to focus on to reduce working capital.

The key to reducing the accounts receivable figure it to incentives customers to pay their bill more quickly or disincentives them to pay late. Both of these methods are being employed by Ying Dang: 2% discount in the first 10 days and 1% penalty for late payment creating incentives for customers to pay their bills earlier then agreed upon with price reductions and disincentives them by implementing penalties for customers who do not pay in the agreed upon time frame. This is a strategy I recommend to increase working capital management. It is worth noting the negative consequences of this method. By incentivising customer to pay quickly through discounting we are reducing our profit margins. However the earlier they do pay the more this will be offset by our ability to earn interest off these funds before they are paid to our suppliers. This method should be used up until a certain point. With implementing penalties for late payment you may also create hostility with your customer base. Another recommendation would be to either hire a debt collector to increase payment of accounts receivable to within the payment terms. There must be a focus within Marlow to collect their account receivable within the 60 days payment term. Alternatively you could outsource this function. Both of these recommendations come with financials costs which I believe our outweighed by their benefits. It is also worth considering reducing your payment terms to be in line with Ying Dangs 45 day terms. I do note the 60 day terms seems to be a key contributor to increased demand for Marlow so if terms are not reduced to keep this benefit to Marlows customers the 60 days terms must be meet. Inventory: To more efficiently manage working capital the reduction in inventory turnover should be considered. By reducing the amount of inventory held and decreasing the days inventory figure by ordering goods more frequently we are able to better manage one integral aspect of working capital. However a negative effect from this would be increased cost of transport. Also by reducing the inventory order and increasing the frequency Ying Dang may want to increase their charges as economies of scale have been lost. If this was to become an issue raised by Ying Dang it would be

worth making a deal to commit to their new payment terms in return for no price increase with smaller and more frequent placement of orders. Just In Time (JIT) management is also another method to reduce or even abolish inventory levels. This methods works on the basic that no or little inventory is kept in Marlows warehouses and inventory is shipped directly to job sites. Alternatively highly reduced levels of inventory would be held in Marlows warehouses and forecasting techniques would re-order goods when inventory reach certain levels. It is understood that in the case of Marlow, Guy has insisted that a certain level of inventory be held as a buffer and also he has been concerned with avoiding stock outs and missing sales opportunities. It is recommended that a balance must be met to hold sufficient stock levels to meet current demand with a buffer but not tying up to much assets in inventory which would be an inefficient use of assets. We note that we are able to forecast 25% of our sales due to seasonal changes. Although this is not a precise method we are able to increase our inventory orders to meet the suspected increase in demand that summer brings. The major issue we are facing with inventory levels and Guys insistence on holding buffer levels is due to poor and unpredictable performance of their current transport supplier from China. A new and more reliable importer must be found to allow predictability to inventory forecasts. Also if Marlow is able to find a faster supplier who is more expensive the increased cost would be severely offset by the benefit gained from speedier and more reliable supply chain management.

4. To convince Guy about flaws in Marlows working capital management, a bottom-line impact needs to be demonstrated. Is it possible to attribute approximate cost to the deficiency or excess as calculated in (1)? What is the approximate cost? Net Working Capital Year 2010 Current Assets $530,000.00 Current Liabilities $140,000.00 Net working captial at 8% interest 2011 $985,000.00 $230,000.00 Net working capital at 8% interest $755,000.00 $60,400.00

$390,000.00 $31,200.00

As you can see from the above figures there is a server bottom-line impact of inefficient working capital management. Using interest calculated at 8% we can see that in 2010 these inefficiencies directly related to a cost of $32,000.00 and $60,400.00 in 2010. By increased efficiency of working capital management you would be able to increase cash within the business. This is required as equity investors want dividend payments which are a current a stressor to the business. It also seems that the bank is unimpressed with the current financial performance of Marlow which I believe is directly related to incorrect working capital management as profit has increased 47% along with sales growth of 37%.

3. A global mindset is important in Accounting for both regulatory and business operational reasons. Discuss in no more than 400 words. A global mindset is gained through the implementation of regulatory requirements in accounting which has significant business operations advantages. A global mindset is needed in accounting due to the ever increasing size and influence of multinational businesses, their impact on local businesss and the increase of globalisation. A global mindset considers cultural and national diversity and the strategic complexity associated with globalisation. To understand these advantages we must explore why accounting is used within business and who the users are. Accounting information is used internally and externally. Externally it is used by shareholders, potential investors, business competitors, lenders and government regulators, among others, for many reasons. Internal it is used by managers to better plan strategy, control costs and evaluate business performances. Internally this information has significant business operational advantageous. Accounting provides organisations with an objective base for decision making. The regulatory benefit of accounting in a global mindset is gained by reducing the complexity and ambiguity gained by operating in a global world. As different counties have unique problems and significant differences in how they obtain their financial information, it is through regulatory accounting practises that consistency, reliability, understandability and relevance is gained which reduces ambiguity (Mustata, Matis & Bodea 2007, p. 5). Through regulatory accounting requirements we are able to compare relevant, understandable and reliable financial information which allows us to compare accounts throughout the globe and act with a global mindset. In Australia we conform to the framework provided by the Australian Securities and Investments Commission (ASIC). International Accounting Standards Board (IASB) is an institution responsible for shaping the International Financial Reporting Standards (IFRS) which have been adopted in Australia by ASIC. This has both Regulatory and business operational advantages. The works of IASB has allowed capital to be allocated effectively internationally. That is to say that international regulations for accounting brings transparency and confidence to investors wanting to invest in global businesses. This allows capital investments in global business, bringing business operational benefits and opportunities.