Ch16 Tool Kit - financial management

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1 of 8 4/11/2010 Chapter 16: Tool Kit for Working Capital Management Tab 1. Cash Conversion Cycle (Section 16.3) Figure 16-4. GBM's Cash Conversion Cycle (Dollars in Millions) Panel a. Target CCC: Based on Planned Conditions = + - = 50.0 + 60.0 - 40.0 Target CCC = 70.0 Panel b. Actual CCC: Based on Financial Statements Sales $1,216.7 COGS $1,013.9 Inventories $140.0 Receivables $445.0 Payables $115.0 Days/year 365 Actual CCC = + - = + - = 50.4 + 133.5 - 41.4 Actual CCC = 142.5 Panel c. Actual versus Target components ICP ACP PDP Actual - Target = 50.4 - 50.0 133.5 - 60.0 41.4 - 40.0 = 0.4 + 73.5 - 1.4 % Difference = 0.8% 122.5% 3.5% OK VERY BAD OK Figure 16-5. Benefits from Reducing the CCC (Dollars in Millions) Old (Actual) New (Target) Inventory conversion period (ICP, days) 50.4 35.0 Average collection period (ACP, days) 133.5 40.0 Payable deferral period (PDP, days) -41.4 -50.0 Cash Collection Cycle (CCC, days) 142.5 25.0 Reduction in CCC 117.5 Effects of the CCC Reduction Annual sales $1,216.7 $1,216.7 Costs of goods sold (COGS) $1,013.9 $1,013.9 Inventory = Actual Old, New = new ICP(COGS/365) $140.0 $97.2 Receivables = Actual Old, New = new ACP(Sales/365) 445.0 133.3 Payables = Actual Old, New = new PDP(COGS/365) -115.0 -138.9 Net operating WC = Inv + Receivables – Payables $470.0 $91.7 Reduction in NOWC $378.3 Reduction in interest expense @ 10% $37.8 Actual data Days of Working Capital (DWC): NOWC/(Sales/365) 141.0 CCC: NOWC component ÷ Sales or COGS ÷ 365 142.5 Cash Conversion Cycle (CCC) Planned Inventory Conversion Period (ICP) Credit Terms Offered to Our Customers Credit Terms Our Supplier Offers Us Inventory ÷ COGS/365 Receivables ÷ Sales/365 Payables ÷ COGS/365 $140 ÷ ($1,013.9/365) $445 ÷ ($1,216.7/365) $115 ÷ ($1,013.9/365) GBM's inventories are in line with its plans, and it's paying its suppliers about on time, so the ICP and PDP are OK. However, some of its customers are paying quite late, so its average collection period (or DSO) is 133.5 days even though all customers should pay on Day 60. In the chapter's opening vignette, we discussed "Days of working capital." DWC is essentially the same as the CCC except that the CCC uses the COGS when calculating both the ICP and the PDP whereas DWC uses sales for all calculations. Here's the DWC calculation for GBM: The CCC is slightly larger than the DWC because Sales > COGS, and Sales is always used in the denom the DWC, lowering the result if inventories exceed payables. We regard the CCC as being somewhat be it is better reflects actual values. A B C D E F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73
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4/11/2010 Tab 2. The Cash Budget (Section 16.4) Educational Procucts Corporation (EPC), Cash Budget (Millions) Description of the scenarios. Current Big Disc't Short net Long net Bad econ. Data set up to create scenarios (Milions of Dollars) Use Scenario Manager to Pick a Scenario Active Scenario Shown in Tan Part 1. Inputs for the Cash Budget % customers who take discounts and pay in 1st month 20% 20% 70% 50% 5% 15% % who don't take discount and pay in 2nd month 70% 70% 20% 40% 5% 40% % who don't pay in 1st or 2nd month. Lates + bad debts 10% 10% 10% 10% 90% 45% Total: Must equal 100% 100% 100% 100% 100% 100% 100% Purchases as a % of next month's sales 60% 60% 60% 60% 60% 60% Other payments $30 $30 $30 $30 $30 $35 Construction cost for new plant (Sept) $150 $150 $150 $150 $150 $200 Target cash balance $10 $10 $10 $10 $10 $10
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