Should A.W. Thompson accept a new order when operating at full capacity?
.W. Thompson supplies and installs relocatable partitioning systems, dry-lining, and suspendable ceilings. It started ten years ago; there was no initial capital injection. It is a typical soletrader, in which the owner is in control of all sides of the business. Over the years the business has expanded with jobs being taken nationally, principally through a contractor- Unite. The majority of jobs involve private organisations, such as university accommodation and offices, but markets also include the public sector such as police headquarters and schools.
The business is currently running at full capacity with jobs being undertaken in Portsmouth and Bristol. The Company through which A. W. Thompson gets the majority of their jobs -UNITE, have offered them an additional, large job in Edinburgh, Scotland. In order to obtain the relevant information it will be necessary to carry out both desk and field research. Desk research involves the use of secondary data i. e. data which already exists. An example of such information that may be used would be the turnover of the firm for previous years.
Field research however will involve collecting primary data i. e. data that will have to be gathered in the process of the investigation. An example would be the information gathered during the interview with the owner. A careful assessment of the availability of liquid assets is essential for the smooth running of any business. With cash planning or budgeting, the flows of cash into and out of a firm’s bank account has been forecast, so that any excess of payments over receipts can be highlighted and action taken to overcome it in the short-run.
Any profitable business has the potential to become insolvent if its cash is not managed effectively using a cash flow forecast. There are several reasons why the profit or loss recorded by a business in one time period will not be the same as its cash balance. These include: A business may be selling more of its output on credit than in previous years. Therefore, a profit is being made as the goods are being recorded as sold, but the cash payment from customers will be received at some time in the future.
This period of credit may leave the firm dangerously short of cash and liquid funds. Capital expenditure is recorded on the profit and loss account under depreciation as an expense. However, only a proportion of the cost of additional capital spending will be recorded as depreciation each year, yet the total cash payment may occur in the first year. It can be seen from the cash flow forecasts including and not including the estimated costs and receipts from the additional job that A. W.
Thompson will benefit in the long run. However, in the short run, it will create a cash deficit, as expenditure is greater than receipts. Although, this may be a deterrent for other small firms for taking on the additional job, A. W. Thompson has a strong acid test ratio of 1. 27 (see 9. below). This means for every i?? 1. 00 of current liabilities, A. W. Thompson has i?? 1. 27 of current assets. The business can therefore afford to take on the job and it will not in turn cause great cash-flow difficulties.