Reference no: EM13490556

The recommendations to the company's management are as follows:

1 Investigate and identify the administrative expense(s) which have risen sufficiently to cause a drop in the operating profit.

2 Investigate and identify the reason for the early payment of suppliers. If there is none, make more use of this source of short term finance.

3 When considering the funding of the expansion programme, the following points should be borne in mind:

i No more fixed assets should be bought using short term sources of finance. The company should match the requirement for long term assets with long term sources of finance such as a new share issue or more loan finance (debentures).

ii In relation to a possible new share issue, unfortunately the current share price is low, perhaps a rights issue, after informing the shareholders of the advantages to be gained from the expansion, could be successful.

iii With regards to possible new loan capital, the company is currently low geared and could certainly support new debt finance. It is, however, important to keep a watch on interest cover.

iv Additional requirements for working capital will also arise as a result of the expansion. Use should be made of credit facilities where available and extra requirements met from long term sources.

v Consideration should be given to leasing rather than purchasing some of the fixed assets. Perhaps this option should have been considered in the year just passed. Leasing allows the company to benefit from the use of new technology without having to pay out large capital sums at the outset. It is a form of finance particularly suited to areas where new technology has yet to be proved efficient and effective.