I have parts A-D but need help completing more of the problem. Thank you! Part 7
ID: 2342436 • Letter: I
Question
I have parts A-D but need help completing more of the problem. Thank you!
Part 7 Managing Global Operations MINI CASE Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company's working capital policy in light of a recent scare she faced when R's corporate banker, citing a nationwide credit crunch, balked at renewing RR's line o credit. Had the line of credit not been renewed, RR would not have been able to make payroli, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR's working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is wel aware that reducing working capital will improve free cash flonw Historically, RR has done little to examine working capital, mainly because of poor communication among business functions. In the past, the production manager resisted J ohnson's efforts to question his holdings of raw materials, the marketin manager resisted questions about finished goods, the sales staff resisted questions about credit policy (which affects accounts receivable). and the treasurer did not want to talk about the cash and securities balances. However, with the recent credit scare, this resistance has become unacceptable and Johnson has undertaken a company-wide examination of cash, marketable securities, inventory, and accounts receivable levels. Johnson also knows that decisions about working capital cannot be made in a vacuum. For example, if inventories could be lowered without adversely affecting operations, then less capital would be required, and free cash flow would increase However, lower raw materials inventories might lead to production slowdowns and higher costs, and lower finished goods inventories might lead to stockouts and loss of sales. So, before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables. Johnson has begun her investigation by collecting the ratios shown here. (The partial cash budget shown after the ratios is used later in this mini case.) Industry Current Quick Total liabilities/assets Turnover of cash and securities Days sales outstanding (365-day basis) Inventory turnover Fixed assets turnover Total assets turnover Profit margin on sales Return on equity (ROE) Payables deferral period 1.75 0.92 58.76% 16.67 45.63 10.80 7.75 2.60 2.07% 10.45% 30.00 2.25 1.16 50.00% 22.22 32.00 20.00 13.22 3.00 3.50% 21.00% 33.00Explanation / Answer
Answer (e)
In the short run - The free cash flows will increase in the short run. As the same will free up cash from the inventory which was blocked earlier.
In the long run - It will lead to less growth of the business, as the inventory is the core of the business which a business tries to sell to customers.
Answer (f)
As presented in the earlier ratios, the days of sales outstanding in RRs case is more than the Industry standards. On an average, the collections by RR is delayed by 13-14 days than the industry standards which inversely affects the cash flow position of the business.
The differences suggest that RR should tighten their credit policy. The four variable are credit standards, cash discount, collection effort and credit period.
RR should - stricken credit standards, increase cash discount, put more collection efforts and reduce the credit period.
Answer (g)
The risk is that it lose loose some customers which might reduce its sales.
Answer (h)
If the DSO gets reduced,
In the short run - This will help generate some cash flows and get back on track
In the long run - it will also help in the long run and will stabilize the cash flows for the company. Which will help to increase the growth prospects.
Answer (i)
Higher accrual leads to increased liability. Which might affect the business in the long run and affects the going concern ability. This will also harm the cash flows in the long run. Yes, RR should make changes to its accruals.