Case Study

on

Assessing Roche Publishing Company’s Cash Management Efficiency

Course Name: Working Capetal Management

Course code: ACT602

Submitted To:

Md. Anwar Ullah , FCMA

Guest Faculty
Department of Business Administration
ASA University Bangladesh.

Submitted By:

Group- A
Program: MBA (R)
Section: A
Department of Business Administration
ASA University Bangladesh
Date of submission: May03, 2013.
 Group- A

Sl Name ID
01 Md. Abdulla All Shafi 12-3-14-0017
02 Amena Begum Jeasmin 12-3-14-0015
03 Md. Moneruzzaman Mithu 12-3-14-0016
04 Abu Naser Md. Reazul Hapue 11-3-15-0001
05 Hasan Imam 11-2-14-0023
06 Md. Minhajul Islam 12-3-14-0109
Case Summary
Roche Publishing Company’s Cash Management Efficiency

Case involves the evaluation of a furniture manufacturer's cash management by its treasurer. We
must calculate the operating cycle, cash conversion cycle, and resources needed and compare
them to industry standards. The cost of the firm's current operating inefficiencies is determined
and the case also looks at the decision to relax its credit standards.

Here Includes two type of information

The firm average payment period was 25 days

The average payment period for the industry was 40 days

Three similar publishing companies revealed that their average payment period was also 40 days.
She estimated the annual cost of achieving a 40-day payment period to be $53,000.

The average age of inventory was 120 days . Industry the average age of inventory was 85 days.
The annual cost of achieving an 85 day acerage age of inventory to be $150,000. The firms
average collection period was 60 days.

Three similar publishing companies, was found to be 42 days-30% lower than Roches. Arlene
estimated that if Roche initiated a 2% cash discount for payment within 10 days of the beginning
of the credit period, the firms average collection period would drop from 60 days to the 42-day
industry average. She also expected the following to occur as a result of the discount: Annual
sales would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and
the 2% cash discount would be applied to 75% of the firms sales. The firms variable cost equal
80% of sales.

Arlene knew that the company paid 12% annual interest for its resource investment
Key Issue

Operating Cycle Roche Publishing Industry

180 days 127 days

Cash Conversion Cycle Roche Publishing Industry

155 days 87 days

Resources needed Roche Publishing Industry

$5,166,667 $2,900,000

Cost of inefficiency = $ 272,000

If the sales change volume

Total contribution margin of annual Proposed condition Existing Condition

sales

$3,000,000 $2,750,000

Increase in contribution margin = $ 250,000

accounts receivable Proposed condition Existing Condition

$1,400,233 $1,833,333

Decrease in accounts receivable = ($ 433,100)

Cost of marginal accounts receivable = ($ 51,972)

Cost of marginal bad debts:
Bad debt would remain unchanged as specified in the case.

Net profits from implementation of new plan

Increase in contribution margin = $ 250,000

Cost of marginal accounts receivable = ($ 51,972)

Net profit $ 198,028

Analysis of the Key Issues

Calculation (Assume a 360-day year)

Operating Cycle = Average Age of Inventory + Average Collection Period

Firm Industry

= 120 days + 60 days = 85 days + 42 days

= 180 days = 127 days

Conversion Cycle = Operating Cycle - Average Payment Period

Firm Industry

= 180 days - 25 days = 127 days - 40 days

= 155 days = 87 days
 Total annual outlays
Resources needed =  Cash Conversion Cycle
360 days

Firm Industry

$12,000,000 $12,000,000
=  155 =  87
360 360
= $ 5,166,667 = $ 2,900,000

Roche Publishing Resources needed = $5,166,667

Less: Industry Resources needed = $ 2,900,000

$2,266,667

Cost of inefficiency: $2,266,667 x .12 = $ 272,000

Changes in sales volume

Total contribution margin of annual sales:

Under present plan = ($13,750,000 x .20) = $2,750,000

Under proposed plan = ($15,000,000 x .20) = $3,000,000

Increase in contribution margin = ($3,000,000 - $2,750,000) = $ 250,000

Investment in accounts receivable:

Turnover of accounts receivable:

360 360
Under present plan   6
Average collection period 60

360 360
Under proposed plan    8.57
Average collection period 42
 Average investment in accounts receivable:

Under present plan 

$13,750,000  .80  $11,000,000  $1,833,333
6 6

Under proposed plan 

$15,000,000  .80  $12,000,000  $1,400,233
8.57 8.57

Decrease in accounts receivable = ($1,400,233- $1,833,333) = ($ 433,100)

Cost of marginal accounts receivable = ($ 433,100) x 12% = ($ 51,972)

Net profits from implementation of new plan

Increase in contribution margin = $ 250,000

Cost of marginal accounts receivable = ($ 51,972)

Net profit $ 198,028

Comments

Positive side of the firm, I f the firm follows the 2% discount strategy within 10 days because for
that strategy, the firms average collection period would drop from 60 days to the 42-day of
industry average.

Negative side of the firm, actually the firm cash management is inefficient because Operating
Cycle, Conversion Cycle, and Resources needed are higher than industry average.

Recommendation

Roche Publishing should incur the cost to correct its cash management inefficiencies and should
also soften the credit standards by efficient cash management strategies (Delaying and
stretching Accounts Payables, Speeding up collection of Accounts Receivables, Efficient
Inventory-Production Management and Combined cash management strategies.)
Conclusion

Finally we learn from the case study. How to manage the firm is cash efficiency. What is the
impact of Operating Cycle, Conversion Cycle, Resources needed, and changing sales volume for
the firm.