"cash outs were 342,000,000 netting of to -192,000,000.00 the cash balance as in 2013 was134,000,000 aggregating to overall balance of -58,000,000 booked as overdraft. It is advisablethat company raise further share capital to 350Million (M), decrease stock amount by openingdigital stores (200M), improves debtors turnover ratio , built relationship with supplier to furtherextend on credit terms to 50 days. This would leave a positive cash balance. Cash operating cycle 2014365 xAverage inventories + 365x Average Accounts Receivable (Mead, 2013)PurchasesCredit Sales Calculating Average InventoryStock as on 2013 120mStock as on 2014 290m Average stock = 120+290 /2 = 205mReceivable Receivable as on 2013 = 253mReceivable as on 2014 = 468mAverage receivable = 253+468/2 = 360.50m365 x 205= 49.71 +365 x 360.5 = 65.0715052022 = 49.71 (days taken in selling) +65.07 (days taken in recovering cash) = 114.78Cash operating cycle 2014Accounting & Decision Making Page 10 365 x 205= 36.35 +365 x 360.5 = 50.032058 2630= 49.71 (days taken in selling) +65.07 (days taken in recovering cash) = 86.38This indicates improvement in cash operating cycle from 114 to 86 days. Task 2Recalculation of ratios as a result of GBP 150 million bad debts 1. Current ratio 608 = 2.00 3032. Quick Ratio608- 290 =1.053033. Gearing 250* 100 = 20% 250 + 9494. Interest cover = 105 =4.225 Current ratio reflects company’s ability to pay back its short term liabilities. The higher the ratio,greater is the company’s ability to pay its debts. It must be greater than one (Drucker, 2013). Theratio trend is declining from 3.67 to 2.5 and revised to 2:1 The bank may put limit to supportfinancially due to low current ratio under the fear that company may not have suffice currentassets to meet its current liabilities obligations. Bank will cease if the ratio further deteriorates toless than 1 as it’s a warning sign for bank that company may go into bankruptcy. Quick ratio is also called popularly called as Acid Test Ratio. It test the company’s ability to payits current liabilities when they get due with their quick assets (assets that can easily be convertedAccounting & Decision Making Page 11 into cash) (Davis, 2014). The key difference between current and quick ratio is consideration ofstock as stock is not a liquid item that can be sold immediately and liabilities can be paid out.Therefore, this ratio is very imperative for banks in deciding the sanction of financial support tocompany. The declining trend can be concern to bank with revised ratio standing to 1.05. Sincethis is greater than one, it assures bank that its short term liabilities will be meet. The bank mayraise objection to grant support in future if this ratio goes beyond 1.00 It is therefore advisable toplace control on sales counterparty and check creditworthiness before granting credit terms. The capital gearing ratio indicates capital structure of the company. A very high gear ratio showsthat company is more dependent on debt funds rather than owned funds and therefore, the bankmay not be willing to lend financial support. Again in the given scenario the capital gearing ratiotrend increases from 9.62% in 2013 to 18.53% in 2014 and as a result of GBP 150,000,000 ofbad debs this ratio is further increased to 20%. This indicates company is 20% dependant ondebts and uses 80% of its own funds (equity). Bank may not be willing to offer financial supportor may charge more in such cases. To improve gearing ratio, Raztech must raise capital and payback its debts by 50%. This would bring down the capital gearing ratio to 10% which isgenerally acceptable by banks. The interest coverage ratio is very important for banks as it provides scenario of organisaitonability to meet interest obligations. It suggest how many times interest could be paid fromavailable earnings thereby making sense of safety margin an organisation has for paying itsinterest for any period (Davis, 2014). The interest coverage was sound in 2013 which dropped to10.2 and further declined to 4.2 This indicates that company can pay has profits upto 4.2 timesthe finance (interest) cost. If company suffers any loss in forthcoming years, this could decline toless than 1 indicating risk to bank. The bank decision to support may hamper due to poor ratio. Accounting & Decision Making Page 12 "