FIN-515- Managerial Finance Week 7_Working Capital Management_Discussion_Question_1_Answer

Apr 24th, 2015
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FIN-515- Managerial Finance Week 7_Working Capital Management_Discussion_Question_1_Answer

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Working Capital Management (graded)How does management determine the total amount of working capital required?In order to shorten a firms cash conversation cycle there are a few things they can do:1. Asking suppliers to accept longer debt repayment period2. Offering a discount or incentive to encourage customers to pay faster3. Creating or improving the billing process to be more efficient4. Use inventory technology to help manage inventory more efficientlyYou can shorten the cash conversion cycle by reducing the inventory conversion period and thereceivables collection period. They can try to speed up the production process to speed up sells.The cash conversion cycle (CCC) is measure of the number of days it takes to convert assets andinventory into cash. It is calculated by the following formula: CCC = Inventory Conversion Period +Average Collection Period - Payables Deferral Period. If a company wants to shorten their CCC, thereare three step they can take. They can decrease their Inventory Conversion Period, which isshortening the time it takes to convert inventories into accounts receivable such as by implementinga just in time inventory management system, Another way is to reduce the Average CollectionPeriod, which is the amount of time the company's customers take to pay for the goods. This isusually accomplished by instituting a small discount for payments made promptly. The third way isto increase the Payables Deferral Period, which is to extend the

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