Army Institute of Business Administration

Savar Cantonment, Savar

Assignment
( Case Solution)

Course Name: Working Capital Management

Course Code: FIN 4703

Submitted By Submitted To

Md Rasel Kaniz Fatema

Id: B4170B041 Lecturer
Batch:BBA-4(FIN) Army IBA, Savar

Date of Submission: 6th September,2020

 Working Capital Management Case Study -Extreme Toys
1.PART-A
a.
Here,
Average Inventory = 2100000
Cost of Sales = 6700000
Now,
Inventory Conversion period
= Average Inventory / Cost of Sales per day = 2100000 / (6700000/360) = 112.84 = 113 days

b.
Here,
Accounts payable = 750000
Cost of sales = 6700000
Now,
Payables deferral period,
= Accounts Payable / cost of sales per day
= 750000 / (6700000 / 360) = 40.3 = 41 days

c.
Here,
Accounts Receivable = 2075000
Net Sales = 12000000
Now,
Receivable conversion period
= Accounts Receivables / (net sales / 360) = 2075000 / (12000000 / 360) = 62.25 days
d. Net operating cycle = operating cycle – payable deferral period
= inventory conversion period + receivable conversion period – payable deferral period
= 112.84 + 62.25 – 40.2075 days = 134.88 days = 135 days

e. Financial fund needed = cost of sales per day X CCC

= 18611.11 x 135 = 2512500
Annual cost of fund = 2512500 x 8% = 201000

2.PART-B
important to understand that profit reported on a company’s income statement does not equate to
cash flow. Understanding a company’s cash –cycle can be vital to truly understanding and
assessing how the company is doing overall. The cash cycle is an important component to
understand when assessing a company’s operations and for understanding and assessing risk. 
We often look to the cash conversion cycle, which is a measure of how fast the company can
convert purchased inventory into cash and collecting trade accounts receivable to generate cash.
In other words, it measures how long cash is tied up from purchasing inventory before inventory
is sold and cash is collected from customers.  A long cash conversion cycle can be an indication
of problems.

The timely managing of cash flow is a vital skill for sustaining a successful business. Reporting
profit is great, but cash is king, and is needed to pay employees, suppliers, rent, and investors.
Understanding and managing your cash conversion cycle can identify potential problems and
alert management that corrective action is needed, which will keep your business healthier and
more valuable.
3.PART-C
If extreme toys reduce cash gap by 20 days, cash gap = 135 – 20 = 115
Financial needs for these 115 days = 18611.11 x 115 = 2140277.65
Annual cost of fund = 2140277.65 x 8% = 171222.212
They will need these additional 171222.212 cash to reduce 20 days cash gap.