16 Chapter model

16 Chapter model - 16 Chapter model 3/22/2010 7:09...

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16 Chapter model 3/22/2010 7:09 2/16/2006 Chapter 16. Working Capital Management = + EXAMPLE Sales $1,216,666 COGS $1,013,889 Inventories $250,000 AR $300,000 AP $150,000 Days/year 365 CCC = ICP + RCP PDP = Inv /(COGS/365) + AR/(Sales/365) AP/(COGS/365) = 90 + 90 54 = 126.00 Disregarding profits, how much capital does GFI have tied up in working capital? Answer: (C of GS / day) * (CCC) = $2,778 × 126 = $350,000 If the cost of capital is 10%, then it costs GFI $35,000 per year to carry working capital. This chapter deals with working capital management. Two useful tools for working capital managem the cash conversion cycle and (2) the cash budget. This spreadsheet model shows how these tools help manage current assets and presents them on separate worksheets. THE CASH CONVERSION CYCLE (Section 16.2) The cash conversion cycle focuses on the length of time between when the company must make pay when it receives cash inflows. The cash conversion cycle is determined by three factors: (1) The inv conversion period, which is the average time required to convert materials into finished goods and th those goods. (2) The receivables collection period, which is the length of time required to convert th receivables into cash, or how long it takes to collect cash from a sale. (3) The payables deferral perio is the average length of time between the purchase of materials and labor and payment for them. Th conversion cycle is determined by the following formula: Cash conversion cycle Inventory conversion period Receivables collection period Payables deferral period Calculate the cash conversion cycle for Great Fashions Inc. Sales are $1,216,666 and costs of goods $1,013,889, while inventories are $250,000, accounts receivable are $300,000, and payables are $150, Based on a 365-day year, calculate the CCC. It takes 90 days to make and sell dresses and another 90 days to collect cash after the sale, or a tota days between spending money and collecting cash. However, the company delays its own payments days. Therefore, the net days the firm must finance its labor and purchases is 90 + 90 − 54 = 126 day is the cash conversion cycle.
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Answer: Receivables would go to zero, the CCC would fall to zero days, and carrying costs would de
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16 Chapter model - 16 Chapter model 3/22/2010 7:09...

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