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2
3
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5
6
7
8
9
13
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19
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Collections in 2nd month after sale 70%
Collections in 3rd month after sale 10%
Purchases % of 2nd month sales 85%
Target cash balance $1,500
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A B C D E F G H I J
15 Case model
PART D
Length of accounting year 365
365 / Inventory turnover
PARTS F & G
Discount given on sales (2/10) 2%
Collections during month of sale 20%
Inventory conversion peiod =
Chapter 15. Working Capital Management
9/12/2022 17:22
Assume that SKI’s payables deferral period is 30 days. Now calculate the firm’s cash conversion cycle estimating
the inventory conversion period as 365/Inventory turnover.
12/9/2018
This spreadsheet model is designed to be used in conjunction with the chapter’s integrated case and the related
PowerPoint slide presentation.
−
CCC =
Inventory conversion
+
Receivables
Payables deferral period 30.00
Days sales outstanding 45.63
Inventory turnover 4.82
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(7) Payments (1-month lag) $44,603.75 $36,472.65
(10) Wages and salaries $6,690.56 $5,470.90
(11) Rent $2,500.00 $2,500.00
(12) Taxes
(13) Total payments $53,794.31 $44,443.55
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(17) Target cash balance $1,500.00 $1,500.00
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52
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59
60
Days to take discount 10
Days until due 30
Day paid 40
Annual purchases $3,000,000
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A B C D E F G H I J
TABLE IC 16.2 Cash Budget for January and February
Nov Dec Jan Feb March April
I. Collections and purchases worksheet
(1) Sales (gross) $71,218 $68,212 $65,213.00 $52,475.00 $42,909 $30,524
Collections
(2) During month of sale (0.2) × (1 – disc%) $12,781.75 $10,285.10
Purchases
(6) 0.85 (forecasted sales 2 mos from now) $44,604 $36,472.65 $25,945.40
II. Cash gain or loss for month
(8) Total collections (from Section I) $67,651.95 $62,755.40
(9) Payments for purchases (from Section I) $44,603.75 $36,472.65
III. Cash surplus or loan requirement
(15) Cash at beginning of month $3,000.00 $16,857.64
(16) Cumulative cash
$16,857.64 $35,169.49
PART M
Length of accounting year 365
Discount 1%
Gross purchases = Annual purchases / (1 – Discount%)
Assume that SKI buys on terms of 1/10, net 30, but that it can get away with paying on the 40th day if it chooses
not to take discounts. Also assume that it purchases $3 million of components per year, net of discounts. How
much free trade credit can the company get, how much costly trade credit can it get, and what is the percentage
cost of the costly credit? Should SKI take discounts? Why or why not?
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(3) During first month after sale (0.7) $47,748.40 $45,649.10
(4) During second month after sale (0.1) $7,121.80 $6,821.20
Average A/P = $8,219.18 x 40
Average A/P = $328,767
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Effective cost of trade credit = 13.01%
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Loan amount $100,000
Simple interest effective rate = 8.00%
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108
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Monthly payment $9,000
Monthly periodic rate 1.20%
Add-on loan nominal annual rate = 14.45%
Add-on loan effective rate = 15.45%
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A B C D E F G H I J
Average A/P = Daily purchases x Time of discount
Average A/P = Daily purchases x Time until paid
Costly trade credit = $246,575
PART N
Nominal interest rate 8%
Approximate annual rate of add-on loan = 16.00%
Face amount $108,000
Take discounts:
Without taking discounts:
Suppose SKI decided to raise an additional $100,000 as a 1-year loan from its bank, for which it was quoted a rate
of 8%. What is the effective annual cost rate assuming simple interest and add-on interest on a 12-month
installment loan?
Discount %
365 Days
Average A/P = $8,219.18 x 10
Average A/P = $82,192