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 Chiron. What do the CCC for the two companies tell us about their working capital management? Why is Genzyme’s 2005 CCC different from Chiron’s? Suppose that Genzyme’s annual sales are $2,734,842,000 and its cost of capital is 15%. If Genzyme’s CCC rises to the level of Chirons’s, how much additional money will Genzyme need to tie up in net working capital and what is the annual cost of this additional capital in dollars?

Ratio Genzyme Chiron Days Sales Outstanding 81.5 90.5 Days Inventory Outstanding 39.7 44.0 Days Payable Outstanding 12.9 22.4 Cash Conversion Cycle 108.3 112.1

Explanation / Answer

Genzyme has a better working capital management compared to Chiron as reflected by the lower cash conversion cycle (CCC).

The CCC for Genzyme remains comfortable than Chiron due to better collection period (as reflected by DSO) and lower inventory holding. However, lower cerditor funding impacted the CCC adversely for Genzyme.

Additional fund needed = (112.1 - 108.3)/365 * $2,734,842,000

= $28,472,327.67

Annual cost of capital in dollars = $28,472,327.67 * 15%

= $4,270,849.15

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