Working Capital Management

Assuming a constant rate for purchases , production and sales throughout the year , what are Innovative Furniture 's existing operating cycle (OC cash conversion cycle (CCC

and negotiated financing need

Assuming that there is a constant rate for purchases , production and sales through the year , the Innovative Furniture will have 185 days in operating cycle , its cash conversion cycle is equivalent 125 . Negotiated financing for under this situation is 6 .67 days

The computation will be

Operating cycle inventory period account receivables period 110 75 185 days

Cash Cycle Operational cycle

- accounts payable period 185 - 60 125 days

If Teresa can optimise Innovative Furniture 's operations according to industry

standards , what would Innovative Furniture 's OC , CCC and negotiated financing need to be under these more efficient conditions

If Theresa can optimise the Innovative Furniture 's operations according to industry standards . Using the formula used in no .1 then the company will have operational cycle of 113 days and cash conversion cycle of 53

In terms of negotiated financing requirements , what is the cost of Innovative

Furniture 's operational inefficiency

The cost of operational efficiency of Innovative Furniture is 484 ,260 .28

a . If , in addition to achieving industry standards for payables and inventory , the firm can reduce the average collection period by offering 3 /19 net 60 credit terms , what additional savings in negotiated financing costs would result from the shortened CCC , assuming that the level of sales remains constant

Assuming that the levels of sales remain constant , the additional savings under negotiated financing costs will be 94 per cent

b . On the firm 's sales (all on credit ) are 40M , and 45 of the customers are expected to take cash , how much will the firms revenues be reduced by as a result of the discounts

Let us assume that each customer purchases 10 ,000 on credit , therefore there will be 1800 clients for Innovative furniture . If 45 of them will take then the company will be deducting 540 ,000 from the company 's sales , giving them 39 , 460 , 000 sales

c ) If the firm 's variable cost of the 40 million in sales is 80 per cent , determine the reduction in the average investment in accounts receivable and the annual savings resulting from this reduced investment assuming that sales remain constant (Assume a 365-day year

Sales Per Day

Average

Collection

Period 200 300 400 500 600

Investment in Accounts Receivable

30 6 ,000 9 ,000 12 ,000 15 ,000 18 ,000

40 8 ,000 12 ,000 16 ,000 20 ,000 24 ,000

50 10 ,000 15 ,000 20 ,000 25 ,000 30 ,000

60 12 ,000 18 ,000 24 ,000 30 ,000 36 ,000 d ) If the firm 's bad debt expenses decline from 2 per cent of sales to 1 .5 per cent of sales , what annual savings would result , assuming sales remain constant

Annual Sales 40 , 000 , 000 .00

Less

Bad Debt (1 .5 ) 600 , 000 .00

Cash Discounts 540 ,000 .00 38 , 860 ,000 .00

e...