Professional Documents
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Overview of Term Project
Overview of Term Project
For Term Project I, please read the following mini-case and ask the corresponding
questions. Submit your answers in a Word document to the drop-box folder. Your
submission should be 3 to 5 pages in length. You should also include at least 2 peer
reviewed sources.
Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking
her company’s working capital policy in light of a recent scare she faced when RR’s corporate
banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of
credit not been renewed, RR would not have been able to make payroll, potentially forcing the
company out of business. Although the line of credit was ultimately renewed, the scare has
forced Johnson to examine carefully each component of RR’s working capital to make sure it is
needed, with the goal of determining whether the line of credit can be eliminated entirely. In
addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that
reducing working capital will improve free cash flow.
Historically, RR has done little to examine working capital, mainly because of poor
communication among business functions. In the past, the production manager resisted
Johnson’s efforts to question his holdings of raw materials, the marketing manager resisted
questions about finished goods, the sales staff resisted questions about credit policy (which
affects accounts receivable), and the treasurer did not want to talk about the cash and securities
balances. However, with the recent credit scare, this resistance became unacceptable and
Johnson has undertaken a company-wide examination of cash, marketable securities, inventory,
and accounts receivable levels.
Johnson also knows that decisions about working capital cannot be made in a vacuum. For
example, if inventories could be lowered without adversely affecting operations, then less capital
would be required, and free cash flow would increase. However, lower raw materials inventories
might lead to production slowdowns and higher costs, and lower finished goods inventories
might lead to stock-outs and loss of sales. So, before inventories are changed, it will be necessary
to study operating as well as financial effects. The situation is the same with regard to cash and
receivables. Johnson has begun her investigation by collecting the ratios shown below.
RR Industry
1. Johnson plans to use the preceding ratios as the starting point for discussions with RR’s
operating team. Based on the data, does RR seem to be following a relaxed, moderate, or
restricted current asset usage policy?
2. How can one distinguish between a relaxed but rational working capital policy and a situation
in which a firm simply has excessive current assets because it is inefficient? Does RR’s working
capital policy seem appropriate?
3. Calculate the firm’s cash conversion cycle given annual sales are $660,000 and cost of goods
represent 80% of sales. Assume a 365-day year.
4. Is there any reason to think that RR may be holding too much inventory?
5. If RR reduces its inventory without adversely affecting sales, what effect should this have on
free cash flow: (1) in the short run and (2) in the long run?
2. The Term Project II needs to be submitted in module 7.
Choose one publicly-traded company that you will use for your research paper. You will
research and monitor this company during the course. Your research should include all of the
following :
Paper Format