Wellcomp Computers is a leader in the PC market with a 45 percent market share a

Question

Wellcomp Computers is a leader in the PC market with a 45 percent market share and a reputation for efficient operations. Typically the company has only 10 days' sales in inventory and 5 days'sales in receivables. The company generally can deliver large corporate orders in less than two weeks. Wellcomp's parts suppliers, however, accept payment in 30 days. At a recent meeting of key executives, Nadine Hunt, senior VP of marketing, proposed dropping prices to grab even more market share. Preston Hunt, the chief operating officer, objected and said, "Nadine, our margin is only 5 percent. If we drop our price, our margin drops, and a lower margin means less cash coming into the company. If cash flow drops, we could have a very significant problem." Required Assume the role of Nadine and explain why cash flow is not likely to be a problem.

Explanation / Answer

cash conversion cylce = Days in inverntory + days in sales receivable - days in accounts payable

= 10 + 5 - 30

= -15 days

The negative in the cash cycle,the good for the company, it shows how efficiently the company using their working capital, and keeping sufficient cash balances for the other things.

Negative cash cycle of 15 days showing that company is not paying for the material purchased by it ,until their final product is sold. By the time their final product is not sold , cash will be in hand of company and can be allocated in other function area of company.

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