CASE CONTEXT First Farms Corporation (FFC) is a publicly-listed Philippine corporation established in the 1950s.

At its inception, its business involved manufacturing small animal feeds but it has since expanded to other agribusiness products and now has facilities set up nationwide. FFCs business has been doing well until 1996 when an oversupply of chickens in the market caused prices to drop to 1993 levels. Before the year ends, the company reported that its other problems included rising production costs which reached 20% over 1995 levels. Financing costs are also taking its toll upon the company since construction of additional plants in Laguna and Cebu is under way. In addition, FFC has also not been successful in its processed foods line. Efforts to address the supply glut included delaying harvest of chickens but it only worsened FFCs problems as chickens produced became harder to sell because of their increased size. Also, contract growers increased their requirements which overburdened FFCs feed mills. The company was also forced to lease its cold storage facilities to store chicken. As a consequence, FFCs bottomline has suffered and top management is now finding ways to get the company out of the red. 1. Offer 5% discount to customers. 1993 180,887 2,891,656 15.98598 22.51973 1994 293,307 3,957,039 16.68954 21.5704 1995 474,200 5,683,133 14.80933 24.309 June 96 530,575 3,247,145 6.463427 27.849 Proposal 386,951 6,331,933 16,36364 22

Accounts Receivable Sales Accounts receivable turnover Average age of receivables

According to Ricardo Sarmiento, by offering a 5% discount to customers for payment within 10 days, collection period would be decreased by 20%. This means the average age of receivables would be decreased from 28 days to 22 days. Assuming that there would be the same sales result for the second half as the first half, but due to the 5% discount, there would only be an additional sales of P3,084,787,750 for a total of P6,331,932,750 at year end of 1996. The ending A/R would be at P386,951,000 and this would lead to 22 days average collection period. This entails that although customers would pay earlier, the company will earn less. This may be a good option though if this increases the working capital of the company. 2. Negotiate supplier credit term from 30 days to 60 or 90 days. Year 1996 1996 1996 Collection Period 28 28 28 No. of Days in Inventory 74 74 74 Payment Period 30 60 90 Operating Cycle 102 102 102 Cash Conversion Cycle 72 42 12

Purchases Average Accounts Payable A/P TO Age of A/P

30 7,115,020 571,297.50 12.00 30.00

60 7,115,020 1,185,836.67 6.00 60.00

90 7,115,020 1,778,755.00 4.00 90.00

As demonstrated in the table above, if FFC is able to negotiate the extension of its supplier credit term, its cash conversion cycle would be shorter, thus improving its working capital. Assuming that its purchases will remain the same, its accounts payable turnover will decrease but its average accounts payable would increase. Since it is the largest consumer of corn and feed grains, it has been able to buy raw materials at a lesser cost than its competitors. The company can try to stretch its bargaining power by extending its supplier credit term as well.