2 pages/≈550 words
Business & Marketing
MCGEE'S CASH CYCLE (Case Study Sample)
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MCGEE’S CASH CYCLE
(26, October, 2010)
McGee’s Cash Cycle
Average daily sales = Annual Sales = $15,968,750 = $44,358
Average cost of goods sold = Annual cost of good sold = $10,675,000 = $29,653
Average daily purchases = Annual Purchases = $11,252,500 = $31,257
Average daily operating expenses = Annual Daily Operating Expenses = $4,462,500
Conversion of assets into daily equivalent
= Average daily sales + Average daily Costs of goods= $44,358 + $29,653 = $ 74,011
Days cash = cash amount in the balance sheet = 74, 011 x365 = 609 days
Average daily sales 44,358
Asset cash to cash cycle= Days cash + inventory days
Conversion of short term liabilities into daily equivalents
= average daily purchases + operating expenses= 31257+12396= 43653
Liability cash-to-cash cycle = average daily liabilities x 365 = 43,653 x 365 = 537 days
Cost of goods sold 29,653
The number of days that McGhee will need to finance itself is (609-537) days, i.e. =72 days.
This number may be used in determining the amount of external financing necessary by calculating the difference between when cash will be received from customers who owe the business and when short term liabilities are due for payment. It is important as it will provide information on when to expect payment from debtors so as to decide when it would be possible to pay the external financiers.
The sources of external financing that are appropriate for working capital deficits faced by McGhee include bank overdrafts, short term loans, and bank loans. In determining the external finance source, it is important that the management consider the cost of this finance, the terms of payment and the duration of payment. A short term loan may lead to more serious problem as the payment maybe required sooner than the business is ready to pay. A long-term arrangement is more appropriate as the business is required to pay small portions. There are some sources that maybe inappropriate as they may be too expensive and more so if the repayment is in the short term or requires a lump sum payment. A lump sum payment may lead to liquidity problem for the business.
McGhee can shorten the asset cash-cash cycle first by reducing the inventory levels to the minimum requirement at any particular period (Masyami, 2009). This can be achieved by applying just-in-time inventory method which will require getting reliable suppliers. Secondly the firm can improve debtor management, by reducing bad debts, improving invoicing and billing systems, and encouraging prompt payments from debtors. The firm can use factoring or invoice discounting as methods to improve in debt collection.
McGhee can lengthen the liability cycle by taking the maximum number of days offered by creditor...
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