Use the table below, summarized from CFO Magazine’s 2006 working capital survey

Question

Use the table below, summarized from CFO Magazine’s 2006 working capital survey to answer this question. Compare Genzyme’s CCC to that of Quest Diagnostics. What do the CCC for the two companies tell us about their working capital management? Why is Genzyme’s 2005 CCC different from Quest’s? Suppose that Genzyme’s annual sales are $2,734,842,000 and its cost of capital is 15%. If Genzyme’s CCC drops to the level of Quests’s, how much savings will Genzyme generate in net working capital and what is the annual benefit of this savings in dollars?

Explanation / Answer

Cash Conversion Cycle (CCC) helps in identifying the length of time it takes to sell the inventory and the amount of time needed to collect the receivable and the amount of time given to the firm to pay its vendors without penalty.The CCC of Genzyme is 108.3 and that of Quest is 40. This means that Genzyme gives a longer credit period for it customer to pay and in turn takes a longer time to pay its vendors. On the other hand Quest has a lower and more effecient working capital practices.

The days sales outsatanding or the collection period for its customer is much higher when compared to Quest. Secondly the days inventory outsanding is very high. This means Genzyme takes 7.5 times longer than quest to convert its inventory to finished goods. Hence its CCC is higher in 2005

The cost of capital is 15% for 365 days. Now since its CCC is reduced from 108.3 to 40.9. This reduction in 67.4 days. Hence the cost of capital savings will be 2.77% (67.4*15%/365) proportionally. Therefore savings will be 2.77% of 2,734,842,000 which is $75,751,377

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