Based on this information can this company manage both the accounts payable period and the cash...

Based on this information can this company manage both the accounts payable period and the cash cycle? Why, or why not?

	Company	Industry
Receivables Turnover (Days)	15	13
Inventory Turnover (Days)	18	21
Cost of Goods Sold (COGS) or Cost of Revenue in $	51445	46488
Accounts Payable (AP) in $	1281	2402
Payables Turnover (Pay TO) = COGS / AP	40.16	19.35
Days Payables (DP) = 365 / Pay TO	9.08	18.86
Cash Cycle = 1 + 2 - 6	23.91	15.14

Expert Solution

In order to determine if the company could manage the payment of payables, it is inevitable to analyse and compare each component of cash operating cycle in order to arrive at an accurate conclusion -

a. Inventory Turnover Days - Vis-a-viz the Industory, the company is able to convert their inventory to sales quickly and at faster rate. So company has lower chances of obsolecense and blockage of working capital funds. Lower Inventory turnover days doesn't guarantee the payment made to creditors. It is important to look at the receivable conversion period to analyse the collection of funds.

b. Receivable Conversion Period - Receivable Conversion period is slightly higher compared to that of industry. This could mean that the company offer a bit liberal terms of credit with extended credit period for the Debtors. Ths could be reason why company is able to garner hgher sales for its products and a high inventory turnover. However, company might also run into risk of irrecoverable debts and possibly lower cash collections from them. As such company has to excercise a strict credit control over them. Recievable Conversion and Inventory Turnover in turns determines how far company will be able to make payment to its creditors.

c. Payable Deferral Period - Compared to that of industry, it has lower deferral period, On bright side, this could prove advantageous as creditors will be willing to lend more money if they have sound track record. It could also add to the credit worthiness of the firm. However, when we analyze in depth, competitors operating in the similar line could get extended credit period for purposes of payment. This could give them a sufficient time for collecting payment from receivables and pass on that to creditors. Also there's no mention of any credit discounts available to company for earleir payments. It could also be that the company is also a new player in the market and that they might not be in a position to negotiate a better terms with the suppliers.

Conclusion

From the above information, it could be seen that there's a difference of 8 days in the cash operating cycle compared to that of industry. So there's possibility that company might be struggling to make payment to its vendors. But this is purely on the basis of financial information given here. There could also be lot of cost savings available to company in form of discount from its vendors. But as per the above given data, there might be risk that company couldn't manage payment to its vendors as a result of high recivable conversion period and lower payables deferral period.

ekkarill92 answered 2 years ago

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Based on this information can this company manage both the accounts payable period and the cash...

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