Case Study on Assessing Roche Publishing Company’s Cash Management Efficiency Course Name: Working Capetal Management Course code: ACT602
Submitted To: Md. Anwar Ullah , FCMA Guest Faculty Department of Business Administration ASA University Bangladesh.
Submitted By: Group- A Program: MBA (R) Section: A Department of Business Administration ASA University Bangladesh Date of submission: May03, 2013.
Group- A Sl
Name
ID
01
Md. Abdulla All Shafi
12-3-14-0017
02
Amena Begum Jeasmin
12-3-14-0015
03
Md. Moneruzzaman Mithu
12-3-14-0016
04
Abu Naser Md. Reazul Hapue
11-3-15-0001
05
Hasan Imam
11-2-14-0023
06
Md. Minhajul Islam
12-3-14-0109
Case Summary Roche Publishing Company’s Cash Management Efficiency Case involves the evaluation of a furniture manufacturer's cash management by its treasurer. We must calculate the operating cycle, cash conversion cycle, and resources needed and compare them to industry standards. The cost of the firm's current operating inefficiencies is determined and the case also looks at the decision to relax its credit standards. Here Includes two type of information The firm average payment period was 25 days The average payment period for the industry was 40 days Three similar publishing companies revealed that their average payment period was also 40 days. She estimated the annual cost of achieving a 40-day payment period to be $53,000. The average age of inventory was 120 days . Industry the average age of inventory was 85 days. The annual cost of achieving an 85 day acerage age of inventory to be $150,000. The firms average collection period was 60 days. Three similar publishing companies, was found to be 42 days-30% lower than Roches. Arlene estimated that if Roche initiated a 2% cash discount for payment within 10 days of the beginning of the credit period, the firms average collection period would drop from 60 days to the 42-day industry average. She also expected the following to occur as a result of the discount: Annual sales would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and the 2% cash discount would be applied to 75% of the firms sales. The firms variable cost equal 80% of sales. Arlene knew that the company paid 12% annual interest for its resource investment
Key Issue Operating Cycle
Cash Conversion Cycle
Resources needed
Cost of inefficiency
Roche Publishing
Industry
180 days
127 days
Roche Publishing
Industry
155 days
87 days
Roche Publishing
Industry
$5,166,667
$2,900,000
$ 272,000
=
If the sales change volume Total contribution margin of annual Proposed condition sales $3,000,000
Increase in contribution margin
accounts receivable
=
Existing Condition
$2,750,000
$ 250,000
Proposed condition
Existing Condition
$1,400,233
$1,833,333
Decrease in accounts receivable
=
($ 433,100)
Cost of marginal accounts receivable
=
($ 51,972)
Cost of marginal bad debts: Bad debt would remain unchanged as specified in the case. Net profits from implementation of new plan Increase in contribution margin
=
$ 250,000
Cost of marginal accounts receivable = Net profit
($ 51,972) $ 198,028
Analysis of the Key Issues Calculation
(Assume a 360-day year)
Operating Cycle Firm = 120 days + 60 days = 180 days
Conversion Cycle Firm = 180 days - 25 days = 155 days
= Average Age of Inventory + Average Collection Period Industry = 85 days + 42 days = 127 days
= Operating Cycle - Average Payment Period Industry = 127 days - 40 days = 87 days
Resources needed
=
Total annual outlays Cash Conversion Cycle 360 days
Firm
Industry
$12,000,000 155 360 = $ 5,166,667
=
$12,000,000 87 360 = $ 2,900,000
=
Roche Publishing Resources needed Less: Industry Resources needed
= $5,166,667 = $ 2,900,000 $2,266,667
Cost of inefficiency:
$2,266,667 x .12 = $ 272,000
Changes in sales volume Total contribution margin of annual sales: Under present plan = ($13,750,000 x .20)
=
$2,750,000
Under proposed plan = ($15,000,000 x .20) =
$3,000,000
Increase in contribution margin = ($3,000,000 - $2,750,000) = $ 250,000
Investment in accounts receivable: Turnover of accounts receivable: Under present plan
360 360 6 Average collection period 60
Under proposed plan
360 360 8.57 Average collection period 42
Average investment in accounts receivable: Under present plan
$13,750,000 .80 $11,000,000 $1,833,333
Under proposed plan
6
6
$15,000,000 .80 $12,000,000 $1,400,233 8.57
8.57
Decrease in accounts receivable = ($1,400,233- $1,833,333) = ($ 433,100) Cost of marginal accounts receivable
= ($ 433,100) x 12% = ($ 51,972)
Net profits from implementation of new plan Increase in contribution margin Cost of marginal accounts receivable = Net profit
=
$ 250,000 ($ 51,972) $ 198,028
Comments Positive side of the firm, I f the firm follows the 2% discount strategy within 10 days because for that strategy, the firms average collection period would drop from 60 days to the 42-day of industry average. Negative side of the firm, actually the firm cash management is inefficient because Operating Cycle, Conversion Cycle, and Resources needed are higher than industry average.
Recommendation Roche Publishing should incur the cost to correct its cash management inefficiencies and should also soften the credit standards by efficient cash management strategies (Delaying and stretching Accounts Payables, Speeding up collection of Accounts Receivables, Efficient Inventory-Production Management and Combined cash management strategies.)
Conclusion Finally we learn from the case study. How to manage the firm is cash efficiency. What is the impact of Operating Cycle, Conversion Cycle, Resources needed, and changing sales volume for the firm.
