Cosh management is a very important function of managers Companies need to manag
ID: 2795869 • Letter: C
Question
Cosh management is a very important function of managers Companies need to manage their operations in away that they can sustain growth and yet not run out of cash Consider the case of the Extersve Enterprise Inc.: Extenslve Enterprise Inc. has forecested sales of $28,000,000 for next year and expects its cost of goods sold (COGS) to remain at 80% of sales. Currently, the firm holds $3,200,000 in inventories, 1,800,000 in accounts receivable, and $2,700,000 in accounts payable Approximately how long does it take Extersive Enterprise to convert its raw materials to its finished products and then to sell those goods? (Note: In all calculations, assume that there are 365 days in a year) 52.14 days 49.53 days 57.35 days O 41.71 days On average, it take from the time asale is made until the time cash is collected from customers. Extenslve Enterprise relies on customer credit when it buys raw materisls from its suppliers. On average, it takes after the firm purchases materials before it sends cash to its suppliers What is the length of Extensive Enterprise's cash converslon cydle (CCC)? 37.92 days O 26.86 days 31.60 days O 33.18 days The management at Extensive Enterprise wants to continue its internal discussions regarding its cash management One of the finance tearn members presents the following case to hercohorts Which of the following responses to the CFO's statement is most acpurate? Case in Discussion The) is not taking into account the amount of time the company has to pay ts suppliers. Generally, there is a certain length of time between the purchase of materisls and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time. Green Catepillar Garden Supplies Inc.s management plans to finance its operations with bank loans that wbe repaid as soon as cash is available. The management expects that it wl take 50 days to manufacture and sell its products and 40 days to receive payment from its custamers Green Catepillar Garden Supplies Inc.'sCFO has told the rest of the management tearn that they should expect the length of the bank loans to be approximately 90 days companys The CO's approximation of the length of the bank loans should be accurate, because it will take 90 days for the company to manufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank Is it possible for afirn to have a negative CCC O Yes NoExplanation / Answer
The no. of days it takes for Exclusive Enterprise to covert raw materials to finished products for sale is nothing but "Day of Inventory on Hold (DOH)"
DOH = No. of days in a period/Inventory Turnover
Inventory Turnover = COGS/Avg. Inventory
Here COGS is 80% of the Sales 28,000,000 so COGS = 22,400,000
Avg. Inventory is 3,200,000
Inventory Turnover = 28,000,000/3,200,000= 7
DOH = 365/7 = 52.14 Days
Similarly, Receivable Turnover = Revenue/Avg. Receivables
= 28,000,000/1,800,000 = 15.5 Days
No. of Days Receivable = No. of days in a period/Receivables Turnover = 365/15.5 = 23.5 Days
It takes 23.5 days from the time sale is made until the time cash is collected from customer.
Payable Turnover = Purchase/Avg. Payables = COGS/Avg. Payables = 22,400,000/2,700,000 = 8.3
No. of Days Payable = No. of days in a period/Payables Turnover = 365/8.3 = 44 Days
On average it takes 44 days after the firm purchases raw materials and send cash to its suppliers.
Cash Conversion Cycle = DOH + No. of Days Receivables - No. of Days Payable = 52.14 + 23.5 - 44 = 31.60 Days