Working Capital Management Case Study -Xtreme Toys
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Xtreme Toys® is a small manufacturing company in Southern California. Management is concerned because as their sales have grown, their cash flow has shrunk. Management doesn't understand how this could happen and has approached your team to find a solution for this dilemma.
1) Part A:
Calculate the following:
a) Inventory conversion period
b) Payables deferral period
c) Receivables conversion period
d) Operating cycle
e) Cash conversion cycle (cash gap)
If the company's cost of funds is 8%, what is the annual cost of financing the cash gap?
2) Part B:
Explain to Xtreme Toys® management how rising sales could cause a decrease in the company's cash position and provide three specific recommendations to management on ways to reduce the cash gap. Explain to management why monitoring and managing the cash conversion cycle is important to the overall profitability of the company.
3) Part C:
Assume your recommendations have now resulted in Xtreme Toys® being able to reduce their cash gap by 20 days. Calculate the amount of additional cash that Xtreme Toy® will now have on hand and the savings on the annual cost of financing the cash gap at 8%. What tax considerations need to be factored into your analysis?
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Solution Summary
The solution calculates Inventory conversion period , Payables deferral period, Receivables conversion period , Operating cycle, Cash conversion cycle (cash gap) ; explains management why monitoring and managing the cash conversion cycle is important to the overall profitability of the company and calculate the amount of additional cash that would be on hand as a result of reduction in cash gap and the savings on the annual cost of financing the cash gap.
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