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F. Naz
F. Naz, Chartered Accountant
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As a consultant, you have been called in to improve the efficiency

Resolved Question:

As a consultant, you have been called in to improve the efficiency of your client's Working Capital management. Your initial fidings disclose the following (you may use a 360 day year and you may round off):

Annual sales are projected at $60,000,000
The projected gross profit can be assumed to be 40%
Accounts Receivable turnover is estimated at 45 days
Accounts Payable turnover is estimated at 40 days
Inventory turnover is estimated at 100 days
Working capital is generally funded by the use of intermediate term debt costing 8%/year.

Further, it was determined that the industry offers your client 2%/10, net 30 credit terms and it is obvious your client is not utilizing the discount, nothing that the extended credit from the supplier is like free capital. Also, many of your client's competitors are offering their customers similarly, credit term of 2%/10, net 30. It was determined from speaking with your client's competitors, that their average collection period is 25 days.

Required: What is your client's cash gap and what is it costing them to finance it. Further, should you recommend to your client that they offer discounts to their customers as does their competitors and take discounts as offered by their suppliers? Fully support your conclusion.
Submitted: 5 years ago.
Category: Homework
Expert:  F. Naz replied 5 years ago.

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