Question

Case 1 – Working Capital (30%)

Masonry Ltd estimates that it takes the company 27 days on average to pay off its suppliers. It also knows that it has dyas’ sales in inventory of 64 days days’ sales outstanding of 32 days.

a) If the cash conversion cycle of the industry, on average, is 75 days, does Masonry manage their working capital good? Explain your answer by comparing the cash conversion cycle of Masonry’s and compare it with the industry (10%)

b) Assume you are the CFO of Mansory, explain your strategy to improve Mansory’s cash conversion cycle! (10%)

c) Explain the implemented strategy to improve cash conversion cycle in your current company you work with! (10%)

Answer 1

• Days taken to pay suppliers-27
• Days of inventory - 64 days
• Sales Outstanding Days - 32 days

(a) Cash Conversion cycle formula is as under

CCC = Days of Inventory + Sales Outstanding days - Days taken to pay suppliers

= 64+32-27 = 69 days

Cash conversion cycle of industry is 75 days.

So basis comparison, cash conversion cycle of Masonry Ltd is good.

(b) You can improve cash conversion cycle in below mentioned ways:-

1. Decrese in Inventory cycle
2. Quiker payments by reduced creditors payment period
3. Quicker supplies by improving supply system and reducing transit period

(c) Implemented startegy is as under:-

• Reduced supply period from 32 days to 29 days for which quicker payments were accepted from supplier by tempting them of some kind of discounts on quicker payments
• Due to that Inventory period was also reduced from 64 days to 61 days.
• Creditors payment period was reduced from 27 days to 22 days..

So overall CCC was under control.

The entire process was done due to redcution in CCC days leading to quicker supplies and payments.