Case Study on Assessing Roche Publishing Companys Cash Management Efficiency Course Name: Working Capetal Management Course

code: ACT602

Submitted To: Md. Anwar Ullah , FCMA Guest Faculty Department of Business Administration ASA University Bangladesh.

Submitted By: Group- A Program: MBA (R) Section: A Department of Business Administration ASA University Bangladesh Date of submission: May03, 2013.

Group- A
Sl 01 02 03 04 05 06 Name Md. Abdulla All Shafi Amena Begum Jeasmin Md. Moneruzzaman Mithu Abu Naser Md. Reazul Hapue Hasan Imam Md. Minhajul Islam ID 12-3-14-0017 12-3-14-0015 12-3-14-0016 11-3-15-0001 11-2-14-0023 12-3-14-0109

Case Summary
Roche Publishing Companys Cash Management Efficiency Case involves the evaluation of a furniture manufacturer's cash management by its treasurer. We must calculate the operating cycle, cash conversion cycle, and resources needed and compare them to industry standards. The cost of the firm's current operating inefficiencies is determined and the case also looks at the decision to relax its credit standards. Here Includes two type of information The firm average payment period was 25 days The average payment period for the industry was 40 days Three similar publishing companies revealed that their average payment period was also 40 days. She estimated the annual cost of achieving a 40-day payment period to be $53,000. The average age of inventory was 120 days . Industry the average age of inventory was 85 days. The annual cost of achieving an 85 day acerage age of inventory to be $150,000. The firms average collection period was 60 days. Three similar publishing companies, was found to be 42 days-30% lower than Roches. Arlene estimated that if Roche initiated a 2% cash discount for payment within 10 days of the beginning of the credit period, the firms average collection period would drop from 60 days to the 42-day industry average. She also expected the following to occur as a result of the discount: Annual sales would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and the 2% cash discount would be applied to 75% of the firms sales. The firms variable cost equal 80% of sales. Arlene knew that the company paid 12% annual interest for its resource investment

Key Issue
Operating Cycle Roche Publishing 180 days Industry 127 days

Cash Conversion Cycle

Roche Publishing 155 days

Industry 87 days

Resources needed

Roche Publishing
$5,166,667

Industry
$2,900,000

Cost of inefficiency If the sales change volume

$ 272,000

Total contribution margin of annual Proposed condition sales $3,000,000

Existing Condition

$2,750,000

Increase in contribution margin

$ 250,000

accounts receivable

Proposed condition $1,400,233

Existing Condition $1,833,333

Decrease in accounts receivable Cost of marginal accounts receivable

= =

($ 433,100) ($ 51,972)

Cost of marginal bad debts: Bad debt would remain unchanged as specified in the case. Net profits from implementation of new plan Increase in contribution margin = $ 250,000 ($ 51,972) $ 198,028

Cost of marginal accounts receivable = Net profit

Analysis of the Key Issues Calculation (Assume a 360-day year) = Average Age of Inventory + Average Collection Period Industry = 85 days + 42 days = 127 days

Operating Cycle Firm = 120 days + 60 days = 180 days

Conversion Cycle Firm = 180 days - 25 days = 155 days

= Operating Cycle - Average Payment Period Industry = 127 days - 40 days = 87 days

Resources needed

Total annual outlays Cash Conversion Cycle 360 days

Firm
$12,000,000 155 360 = $ 5,166,667

Industry =
$12,000,000 87 360 = $ 2,900,000

Roche Publishing Resources needed Less: Industry Resources needed

= $5,166,667 = $ 2,900,000 $2,266,667

Cost of inefficiency:

$2,266,667 x .12 = $ 272,000

Changes in sales volume Total contribution margin of annual sales: Under present plan = ($13,750,000 x .20) = $2,750,000 $3,000,000

Under proposed plan = ($15,000,000 x .20) =

Increase in contribution margin = ($3,000,000 - $2,750,000) = $ 250,000

Investment in accounts receivable: Turnover of accounts receivable:

Under present plan 360 360 6 Average collection period 60

Under proposed plan

360 360 8.57 Average collection period 42

Average investment in accounts receivable:

Under present plan

$13,750,000 .80 $11,000,000 $1,833,333

6 6

Under proposed plan

$15,000,000 .80 $12,000,000 $1,400,233

8.57 8.57

Decrease in accounts receivable = ($1,400,233- $1,833,333) = ($ 433,100) Cost of marginal accounts receivable = ($ 433,100) x 12% = ($ 51,972)

Net profits from implementation of new plan Increase in contribution margin Cost of marginal accounts receivable = Net profit = $ 250,000 ($ 51,972) $ 198,028

Comments Positive side of the firm, I f the firm follows the 2% discount strategy within 10 days because for that strategy, the firms average collection period would drop from 60 days to the 42-day of industry average. Negative side of the firm, actually the firm cash management is inefficient because Operating Cycle, Conversion Cycle, and Resources needed are higher than industry average.

Recommendation Roche Publishing should incur the cost to correct its cash management inefficiencies and should also soften the credit standards by efficient cash management strategies (Delaying and stretching Accounts Payables, Speeding up collection of Accounts Receivables, Efficient Inventory-Production Management and Combined cash management strategies.)

Conclusion Finally we learn from the case study. How to manage the firm is cash efficiency. What is the impact of Operating Cycle, Conversion Cycle, Resources needed, and changing sales volume for the firm.