Lahore School of Economics

Financial Management II
Working Capital Management – 3
Assignment 18
Examples
Receivables
Q1) DSO = Sales/365
$2 ,000 ,000
= $10 ,000 ,000/365 = 73 days.

If all customers paid on time, then the firm’s DSO = 30 days. If customers paid on time, the firm’s
A/R = Average Collection Period  Sales per Day
A/R = 30  $10,000,000/365 = $821,917.81.
Capital released = New A/R – Old A/R = 2,000,000 – 821,917.81 = $1,178,082.19

Q2) a. Calculate inventory:

Inventory turnover ratio = Sales/Inventory
6 = $150,000/Inventory
Inventory = $25,000.

Calculate inventory conversion period:

Inventory
Cost of goods
Inventory conversion period = sold per day
$ 25 , 000
$150 , 000
0. 8×
= 365
= 76.04 days.

Receivables collection period = DSO = 36.5 days.

Cash Inventory Receivables Payables
conversion conversion + collection − deferral
cycle = period period period
= 76.04 + 36.5 – 40 = 72.54 days.

b. Total assets = Inventory + Receivables + Fixed assets

= $150,000/6 + [($150,000/365)  36.5] + $35,000
= $25,000 + $15,000 + $35,000 = $75,000.
Total assets turnover = Sales/Total assets
= $150,000/$75,000 = 2.0.
ROA = Profit margin  Total assets turnover
= 0.06  2.0 = 0.12 = 12%.

$ 150 ,000
c. 9 = Inventory
Inventory = $16,667.
 $ 16 ,667
Inventory conversion period = $328 .7671 = 50.69 days.
Cash conversion cycle = 50.69 + 36.5 – 40 = 47.19 days.

Total assets = Inventory + Receivables + Fixed assets

= $16,667 + $15,000 + $35,000 = $66,667.
Total assets turnover = $150,000/$66,667 = 2.25.
ROA = $9,000/$66,667 = 13.50%.

Problems for Assignment

Q1)
April May June July August

Forecast sales $ 65 $ 60 $ 70 $ 100 $ 100

Cash sales (50%) $ 32.5 $ 30 $ 35 $ 50 $ 50

Collections of A/R:
Lagged 1 month (25%) 16.25 15 17.5 25
Lagged 2 months (25%) 16.25 15 17.5
Total cash receipts $ 66.25 $ 82.5 $ 82.5

Q2)
August September October November December

Forecast sales $ 100 $ 200 $ 400 $ 300 $ 200

Cash sales (20%) $ 20 $ 40 $ 80 $ 60 $ 40

Collections of A/R:
Lagged 1 month (50%) 50 100 200 150
Lagged 2 months (30%) 30 60 120
Other cash receipts 30
Total cash receipts $ 210 $ 320 $ 340

Purchases $ 70 $ 140 $ 280 $ 210 $ 140

Cash purchases (10%) $7 $ 14 $ 28 $ 21 $ 14
Payments of A/P:
Lagged 1 month (70%) 49 98 196 147
Lagged 2 months (20%) 14 28 56
Rent payments 5 5 5
Wages and salaries 48 38 28
Tax payments 25
Fixed-asset outlays 130
Interest payments 10
Cash dividend payments 20
Principal payments 20
Total cash disbursements $ 213 $ 418 $ 305

Net cash flow $ (3) $ (98) $ 35

Lon requirement or cash surplus:

Cash start of the month $ 50 $ 47 $ (51)
Cumulative cash $ 47 $ (51) $ (16)
Target cash balance $ 25 $ 25 $ 25

Cash surplus $ 22
Loan requirement $ (76) $ (41)