Van Den Borsh Corp. has annual sales of $71,735,000, an average inventory level

Question

Van Den Borsh Corp. has annual sales of $71,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?

Explanation / Answer

calculation of net change in conversion cycle original new Annual sales                                                             71,735,000                                 71,735,000 Days in year                      365 365 Sales per day ( a / b )                                             196,534                                      196,534 cogs / sales 85% 85% cogs per day ( c * d )                                             167,054                                      167,054 Inventory                                                                15,012,000                                 13,066,000 Accounts receivable                                                      10,008,000                                   8,062,000 Pay. deferral period              30 40 $ Reduction in Inv.                                                                                            1,946,000 $ Reduction in Rec.                                                                                            1,946,000 new inventory 15012000 - 1946000 new inventory                                        13,066,000 new accounts receivable 10008000 - 1946000 new accounts receivable                                          8,062,000 ` calculation of cash conversion cycle original cash conversion cycle inventory conversion period + average collection period + pay deferral period inventory conversion period average inventory / cost of goods sold per day inventory conversion period 15012000 / 167054.10 inventory conversion period 89.86310423 average collection period average accounts receivables / sales per day average collection period 10008000 / 196534.24 average collection period 50.92242451 pay deferral period 30 cash conversion cycle 89.86 + 50.92 + 30 cash conversion cycle 170.78 calculation of cash conversion cycle new cash conversion cycle inventory conversion period + average collection period + pay deferral period inventory conversion period average inventory / cost of goods sold per day inventory conversion period 13066000 / 167054.10 inventory conversion period 78.21418331 average collection period average accounts receivables / sales per day average collection period 8062000 / 196534.24 average collection period 41.02084197 pay deferral period 40 cash conversion cycle 78.21 + 41.02 + 40 cash conversion cycle 159.23 change in cash conversion cycle cash conversion cycle original - cash conversion cycle new change in cash conversion cycle 170.78 - 159.23 change in cash conversion cycle 11.55 change in cash conversion cycle 11.55 days

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