Alpine Wear
Cash Conversion Cycle
Time from payment for raw materials until cash is collected on sales. *
Accounts payable- when should the firm pay
Inventory- How much to hold
Laber and Materials Needed
Finished Goods Inventory- how much needed
Credit Policy-restrictions
Cash collection- how fast do you collect
See exhibit 14.2 on page 86
Cash Conversion Cycle
1.) Operating cycle= days sales in inventory+ Days Sales Outstanding
=(Inv/(COGS/365))+(AR/(Credit
2.)
Ideally purchases would be used in place of CGS in the DPO calculation
What does the operating cycle tell us?
How long your cash is tied up in your goods. From inventory to sales.
Cash Conversion cycles
Having trade credit reduces cash conversion cycle
Negative cycle-operating efficiently
Days receivable short, inventory turnover quick collecting cash before you have to pay bills
WC Investment Strategies
Flexible strategies
High % of current assets to sales
Large amounts of cash, marketable securities and inventory
Liberal trade creit policy for customers, which results in high levels of accounts receivable
Low risk low return
Advantage: Large working capital balances
Disadvantage: High carrying cost
In 2008 it would have been an advangage
Would have had cash to buy things at lower cost
Credit was frozen during crisis. * * Restrictive
Current assets are kept to a minimum
Right terms of sale intended to curb credit sales and accounts receivable
High-risk-high-return
Disadvantages: shortage costs
Financial; emergency borrowing
Operating; lost production and sales (ex. Emergency inventory)
Advantage: lower carrying costs higher returns
AR Management Credit Policy Terms/Costs
Cash sales only; possibility of lost sales
Cash discounts
Lowers price
Attracts new customers and reduces DSO
Credit Period
Shorter period reduces DSO and average A/R
May discourage sales
Credit Standards: Tighter standards reduce bad debt losses, buy may reduce sales.
Collection
Time from payment for raw materials until cash is collected on sales. *
Accounts payable- when should the firm pay
Inventory- How much to hold
Laber and Materials Needed
Finished Goods Inventory- how much needed
Credit Policy-restrictions
Cash collection- how fast do you collect
See exhibit 14.2 on page 86
Cash Conversion Cycle
1.) Operating cycle= days sales in inventory+ Days Sales Outstanding
=(Inv/(COGS/365))+(AR/(Credit
2.)
Ideally purchases would be used in place of CGS in the DPO calculation
What does the operating cycle tell us?
How long your cash is tied up in your goods. From inventory to sales.
Cash Conversion cycles
Having trade credit reduces cash conversion cycle
Negative cycle-operating efficiently
Days receivable short, inventory turnover quick collecting cash before you have to pay bills
WC Investment Strategies
Flexible strategies
High % of current assets to sales
Large amounts of cash, marketable securities and inventory
Liberal trade creit policy for customers, which results in high levels of accounts receivable
Low risk low return
Advantage: Large working capital balances
Disadvantage: High carrying cost
In 2008 it would have been an advangage
Would have had cash to buy things at lower cost
Credit was frozen during crisis. * * Restrictive
Current assets are kept to a minimum
Right terms of sale intended to curb credit sales and accounts receivable
High-risk-high-return
Disadvantages: shortage costs
Financial; emergency borrowing
Operating; lost production and sales (ex. Emergency inventory)
Advantage: lower carrying costs higher returns
AR Management Credit Policy Terms/Costs
Cash sales only; possibility of lost sales
Cash discounts
Lowers price
Attracts new customers and reduces DSO
Credit Period
Shorter period reduces DSO and average A/R
May discourage sales
Credit Standards: Tighter standards reduce bad debt losses, buy may reduce sales.
Collection