ExpertACCA · Question 20 · Working Capital Management
CASE 5: MEDISUPPLY NGO
MediSupply is a large non-governmental organization (NGO) specializing in healthcare logistics across developing nations. The NGO currently operates an aggressive working capital policy, holding minimal inventory of medical supplies and relying heavily on a short-term bank overdraft to fund operations.
Recent supply chain disruptions have caused severe stockouts, damaging the NGO's reputation and ability to deliver critical care. The Board of Trustees has mandated a shift to a conservative working capital policy. This will involve doubling the inventory levels of essential medicines and maintaining a permanent cash buffer of $2,000,000.
To fund this permanent increase in current assets, MediSupply needs to raise $5,000,000. As an NGO, it cannot issue equity. The Finance Director is considering two options:
Option 1: A 10-year long-term bank loan at a fixed interest rate of 7%.
Option 2: Utilizing the NGO's existing restricted endowment fund, which currently earns 4% in government bonds, by seeking legal permission to repurpose the funds.
Required:
(a) Discuss the advantages and disadvantages of shifting from an aggressive to a conservative working capital policy for MediSupply. (8 marks)
(b) Evaluate the two financing options (Long-term loan vs Repurposing endowment funds) considering the specific context of an NGO. (8 marks)
(c) Explain how the shift to a conservative policy will impact MediSupply's Current Ratio and Return on Capital Employed (ROCE). (4 marks)
CASE 5: MEDISUPPLY NGO
MediSupply is a large non-governmental organization (NGO) specializing in healthcare logistics across developing nations. The NGO currently operates an aggressive working capital policy, holding minimal inventory of medical supplies and relying heavily on a short-term bank overdraft to fund operations.
Recent supply chain disruptions have caused severe stockouts, damaging the NGO's reputation and ability to deliver critical care. The Board of Trustees has mandated a shift to a conservative working capital policy. This will involve doubling the inventory levels of essential medicines and maintaining a permanent cash buffer of $2,000,000.
To fund this permanent increase in current assets, MediSupply needs to raise $5,000,000. As an NGO, it cannot issue equity. The Finance Director is considering two options:
Option 1: A 10-year long-term bank loan at a fixed interest rate of 7%.
Option 2: Utilizing the NGO's existing restricted endowment fund, which currently earns 4% in government bonds, by seeking legal permission to repurpose the funds.
Required:
(a) Discuss the advantages and disadvantages of shifting from an aggressive to a conservative working capital policy for MediSupply. (8 marks)
(b) Evaluate the two financing options (Long-term loan vs Repurposing endowment funds) considering the specific context of an NGO. (8 marks)
(c) Explain how the shift to a conservative policy will impact MediSupply's Current Ratio and Return on Capital Employed (ROCE). (4 marks)
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