Financial management revision question and answer

CPA-Financial-Management-Section-3 Revision kit

Mary Atieno owns a chain of seven clothes shops in Kisumu town. Takings at each shop are remitted once a week on Thursday afternoon to the head office and are then banked at the start of business on Friday morning. As business is expanding, Mary Atieno has hired a finance assistant to help her. The finance assistant gave the following advice: “Turnover at the seven shops totaled Shs. 1,950,000 last year at aconstant daily rate but you were paying bank overdraft charges at a rate of 11% per annum. You could have reduced your overdraft costs banking the shop takings each day except Saturdays. Saturdays‟ takings could have been banked on Mondays.”

Required:
Using numbered paragraphs, comment on the significance of this advice, stating your assumptions.

(“Note” The shops are closed on Sundays).
ANSWER
A bank overdraft rate of 11% is approximately


(ii) An annual takings of Sh.1,950,000 would be an average Sh.1,950,000 ÷ 312 = Sh.6,250 a day for the seven shops in total. Assuming that it opened for 52 weeks of six days a week (312).

(iii) Using the approximate overdraft cost of 0.03% a day, the cost of holding Sh.6,250 for one day instead of banking is 0.03% x Sh.6,250 = Sj/1.875
(iv) Banking all takings up to Thursday evening of each week on Friday morning involves unnecessary delay in paying cash into the bank. The cost of this delay would be either:
 Opportunity cost investment capital for the business or
 Cost of avoidable bank overdraft charges.

(iv) The business woman could have saved Sh.187.5 per week and Sh.187.5 x 14 x 52 per year in bank overdraft charges.

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