Part 1 (READING LIST)

BrightLawns Ltd (“BLL”) owns and operates three factories in London, Birmingham and Manchester producing valves and fittings for garden hoses. The company last year had turnover in excess of £50 million. 

The company is managed by Simmo, the grandson of the founder. Simmo owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren. 

Most of BLL’s clients are large retailers in the UK and EU. Two key customers are C&P DIY Ltd and BricoFrance SA, which are both large chains of DIY and garden centres in the UK and France. 

The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable (Operating profit was £5 million last year before interest and tax), the company’s debt has increased to £18 million from £16 million the year before. Simmo has started talking about the need for the other shareholders to invest more money to reduce the debt. 

Towards the end of last year BLL acquired a 30% stake in a company which designs ornamental garden fountains and water features. BLL invested £10 million in the company to acquire the shares and has agreed to pay an £8 million advance fee for exclusive use of the designs. 

The company is owed £1.5 million pounds for a series of large orders placed by C&P last year. There is also an outstanding dispute about a £2 million consignment for BricoFrance completed in 2017. This has led to payment being withheld while negotiations continue between lawyers and technical specialists. 

There is a further problem that Simmo believes the BricoFrance issue arose from faulty workmanship by a contractor which BLL engaged in 2017. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended, a large stock of materials and supplies has built up at the company’s London site. Simmo 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 BLL’s accountants to review the situation.

Requirements: 

Prepare a report for the shareholders addressing the following issues. 

i. Using the reading list provided, explain: 

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

2. what is meant by Working Capital and, the meanings of Receivables, Inventory and Payables 

3. how changes in Working Capital affect Cashflow 

ii. Apply the concepts in the reading list above to this company to show how the way the company is being managed might affect its financial results. 

iii. Analyze and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management.