During the global economic recession that began in mid 2008, many companies found it diffi cult to gain enough credit in the form of short-term loans from their banks and other lenders. In some cases, this caused working capital problems as short-term cash fl ow defi cits could not be funded. Ultra-Uber Limited (UU), a large manufacturer based in an economically depressed region, had traditionally operated a voluntary supplier payment policy in which it was announced that all trade payables would be paid at or before 20 days and there would be no late payment. This was operated despite the normal payment terms being 30 days. The company gave the reason for this as ‘a desire to publicly demonstrate our social responsibility and support our valued suppliers, most of whom, like UU, also provide employment in this region’. In the 20 years the policy had been in place, the UU website proudly boasted that it had never been broken. Brian Mills, the chief executive often mentioned this as the basis of the company’s social responsibility. ‘Rather than trying to delay our payments to suppliers,’ he often said, ‘we support them and their cash flow. It’s the right thing to do.’ Most of the other directors, however, especially the fi nance director, think that the voluntary supplier payment policy is a mistake. Some say that it is a means of Brian Mills exercising his own ethical beliefs in a way that is not supported by others at UU Limited. When UU itself came under severe cash fl ow pressure in the summer of 2009 as a result of its bank’s failure to extend credit, the fi nance director told Brian Mills that UU’s liquidity problems would be greatly relieved if they took an average of 30 rather than the 20 days to pay suppliers. In addition, the manufacturing director said that he could offer another reason why the short-term liquidity at UU was a problem. He said that the credit control department was poor, taking approximately 50 days to receive payment from each customer. He also said that his own inventory control could be improved and he said he would look into that. It was pointed out to the manufacturing director that cost of goods sold was 65% of turnover and this proportion was continuously rising, driving down gross and profi t margins. Due to poor inventory controls, excessively high levels of inventory were held in store at all stages of production. The long-serving sales manager wanted to keep high levels of finished goods so that customers could buy from existing inventory and the manufacturing director wanted to keep high levels of raw materials and work-in-progress to give him minimum response times when a new order came in. One of the non-executive directors (NEDs) of UU Limited, Bob Ndumo, said that he could not work out why UU was in such a situation as no other company in which he was a NED was having liquidity problems. Bob Ndumo held a number of other NED positions but these were mainly in service-based companies. Required:
(c) Examine the obstacles to embedding liquidity risk management at UU Limited. (8 marks)
参考答案：
Obstacles to embedding liquidity risk management at UU Limited The case draws attention to three aspects of working capital management at UU Limited: payables, receivables and inventory. All of these are necessary issues in the management of liquidity and hence the reduction of liquidity risk. Specifi cally, however, it identifi es four potential obstacles to embedding the management of liquidity risk. Primarily, however, the individual managers of the company are all acting in isolation and not working together for the good of the company. The sales manager’s desire to have high levels of fi nished goods for maximum customer choice. It is quite reasonable for a sales manager to support high levels of fi nished goods inventory but there is an inventory-holding cost associated with that which increases the amount of money tied up in working capital. A wider recognition of the overall liquidity pressures on the business would be a very helpful quality in the sales manager and this is a potential obstacle. The same points apply to the manufacturing director’s desire to have high raw material levels. Clearly, his effectiveness as head of manufacturing is partly measured by the extent to which the factory fulfi ls orders and avoids the disruptions to production that arise through inventory ‘stock-outs’. He prefers having raw materials in stock rather than having to order them with a supplier’s lead time but this, of course, leads to a greater exposure to liquidity risk. The ineffective credit control department. According to the manufacturing director, the credit control department, responsible for the timely payment of receivables, was poor. The vulnerability to liquidity risk is clearly infl uenced by days receivables and so an ineffective credit control department is a major obstacle. Finally, the CEO’s desire to pay payables early as part of the company’s social responsibility efforts. Brian Mills is clearly of the view that offering a voluntary prompt payment of payables is an important component of the company’s social responsibility and that is costing the company an average of A0 days payables on most accounts. Over the course of a year that will place a great deal of arguably unnecessary pressure on working capital. The fact that it is the CEO himself that holds this view might make it diffi cult to change.
