Question

The following table reports the working capital data for selected industries in the UAE.

Company	DIO	DSO	DPO
A	30	10	60
B	20	30	40
C	90	60	30

-       Which company is efficient in managing working capital?

-       How an increase or a decrease in Account receivables, inventory and Account payables affects the cash conversion cycle and the liquidity of the company.

Ratios	Company     A	Company       B	Industry ratio
Inventory days	30	35	40
Receivable days	20	30	35
Payable days	15	20	25
Current ratio	3.1x	2.1x	2.4x
Quick ratio	2.1x	1.8x	1.32x

-       Conclusion about the ratios?

-       Cost and benefits of increasing or decreasing the inventory days, receivable days or payable days?

-       Costs and benefits of increasing cash, A/R, Inventory and Account payables.

Answer 1

Company	Days of inventory outstanding	Days of Sales outstanding	Days of payable outstanding	Cash conversion Cycle = DIO+DSO-DPO
A	30	10	60	-20	CCC is negative , that means your working capital blocked for long, and the business has greater liquidity.
B	20	30	40	10	CCC is low as compared to company C
C	90	60	30	120	Ineffective management of working capital as it has been blocked in inventory and Receivables excessively

Company A has managed its working captial effeciently as it has a negative Cash converssion cycle.

	Affect on CCC Liquidity	Remarks
Increase in Accounts Receivable	Decrease	More Cash will be blocked in AR
Decrease in Accounts Receivable	Improves	Cash Realized from AR
Increase in Accounts Payable	Improves	Good available on credit hence no cash cash blocked
Decrease in Accounts Payable	Decrease	Cash paid out
Increase in Inventory	Decrease	Cash blocked in pruchase of inventory
Decrease in Inventory	Improves	Cash realized from sale of inventory

Ratios	A	B	Industy Avg	Conclusions
Inventory days	30	35	40	Both the companies are efficiently managing the inventory which is low as compared to Industry average
Receivable days	20	30	35	Both the companies are efficiently managing the Receivable and collection is better than Industry average as receivable days are low
Payable days	15	20	25	Payable days are comparatively low as compare to industry standard which shows that company's have to negotiate with their suppliers to get a better credit term which is 25 days as per industy standard
Current ratio	3.1x	2.1X	2.4x	CompanyA has better Current ratio than B but might be holding excess cash as industry average is 2.4
Quick ratio	2.1x	1.8x	1.32x	Both the company has enough cash to pay off the short term obligations

		Benefits
Increase in Inventory days	Increase the CCC
Decrease in Inventory days	Decrease the CCC	Fast realization of cash
Increase in Receivable days	Increase the CCC
Decrease in Receivalbe day	Decrease the CCC	fast realization of cash from Debtors
Increase in Payable days	Decrease the CCC
Decrease in Payable days	Increase the CCC	More credit period hence cash payemnt will be slowed

	Cost & Benefits
Increase in Cash	Availing short term credit & more liquidity
Increase in AR	More credit sale risk of Bad debt
Increase in Inventory	More storage and carrying cost
Increase in Accounts payable	More credit period hence slow down in cash payment & more liquidity