Question

(Related to Checkpoint​ 18.2) ​(Calculating the operating and cash conversion​ cycle) Carraway Seed Company Inc. has for many years cultivated and sold what are known as heritage plants and seeds. For​ example, the company has sought out older varieties of tomato plants that are no longer grown by commercial vegetable farmers since they either take too long to​ mature, do not ship​ well, or do not hold up for long on the store shelf. The company has recently been considering ways to reduce its investment in working capital in order to make itself more profitable. At present the firm has an inventory conversion period of 95 days and the majority of its customers take advantage of its credit terms of 20 days. The company purchases its inventory items on credit terms that allow them 52 days to pay but has always followed a policy of making cash payments for invoices as soon as they are​ received, so the accounts payable deferral period is typically only 12 days. a. What are​ Carraway's operating and cash conversion​ cycles? b. If Carraway were to decide to take full advantage of its credit terms and delay payment until the last possible​ date, how would this impact their cash conversion​ cycle? c. What would be your recommendation to the company with regard to its working capital management practices and​ why?

Answer 1

Answer:

a.Operating Cycle = Inventory Conversion period + Days Sales Outstanding = 100 + 35 = 135 Days

Cash Conversion Cycle = Inventory Conversion period + Days Sales Outstanding - Days Payables Outstanding

                              = 100 + 35 - 11 = 124 Days

b.If Carraway were to decide to take full advantage of its credit terms and delay payment until the last possible date , their cash conversion cycle is 100 + 35 - 51 = 84 Days

c.Carraway should take its suppliers offer to finance its inventory with the interest free 35 Day loan