has annual sales of $96,000,000 (all on credit), maintains an average inventory

Question

has annual sales of $96,000,000 (all on credit), maintains an average inventory level of $22,000,000, and an average accounts receivable balance outstanding of $16,000,000. The company makes all purchases on credit and has always maintained a policy of paying on the 20th day. Costs of Goods Sold (COGS) are 60% of sales. The company now plans to take full advantage of trade credit and pay its suppliers on the 28th day. If sales can be maintained at existing levels but inventory can be lowered by $1,800,000 and accounts receivable can also be lowered by $900,000, what will be the net change in the cash cycle assuming a 360-day year?

Explanation / Answer

Sales 96000000 Cogs 57600000 Gross profit 38400000 Old New Drs 16000000 7000000 Drs days (drs/sales)*360 60 26.3 Inventory 22000000 20200000 Cogs 57600000 57600000 Inv days (inv/cogs)*360 137.5 126.25 Creditors Days 20 28 Inv +drs - crs 177.5 124.5

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