TAGUIG CITY UNIVERSITY

Name: Daniella Mariz G. Lamptey

Course and Section: MBA-B2023
Subject Code and Title: MBA 207 -ADVANCED FINANCIAL MANAGEMENT
Date: APRIL 6, 2024
Professor: PROF. BILLY I. BACARRA , CPA, PhD

ASYNCHRONOUS ACTIVITY

Case Problem:
Efficient Working Capital Management at TechGadget Inc.

Background:
TechGadget Inc., a leading manufacturer of innovative household gadgets, has seen a
significant growth spurt over the past two years, driven by the launch of its new line of smart
kitchen appliances. However, this growth has also brought challenges, particularly in managing
its working capital efficiently. The CFO, Alex Morgan, is concerned that if the company does not
address its working capital issues, it may face liquidity problems despite the growth in sales.

Financial Information:
Current Assets (Year End):
- Cash and Cash Equivalents: $4 million
- Accounts Receivable: $6 million
- Inventory: $10 million

Current Liabilities (Year End):

- Accounts Payable: $5 million
- Short-term Debt: $3 million

Other Financial Information:

- Annual Sales: $25 million
- Cost of Goods Sold (COGS): $15 million
- Annual Purchases: $12 million
The industry average for the Cash Conversion Cycle (CCC) is 60 days. However, TechGadget
Inc.'s current CCC stands at 85 days. The industry averages for the components of the CCC are
as follows:
- Inventory Days: 30 days
- Receivables Days: 45 days
- Payables Days: 15 days

The Problem
Despite TechGadget Inc.'s revenue growth, the company's cash flow has been under pressure,
mainly due to its inefficient working capital management. The prolonged CCC indicates that
cash is tied up for too long in the business cycle, affecting the company's ability to reinvest in
growth opportunities or meet its short-term obligations.

Questions:
1. Assessment of Current Working Capital Management:
- Calculate TechGadget Inc.'s current Inventory Days, Receivables Days, and Payables
Days. How do these figures compare with the industry averages?
- Analyze the discrepancies between TechGadget Inc.’s working capital components and
the industry averages. What insights can be derived from these discrepancies?

2. Strategies for Improvement:

- Propose at least three specific strategies that TechGadget Inc. can implement to
improve each component of its working capital (Inventory, Receivables, and Payables).
-How would these strategies help in aligning Tech Gadgets CCC with the industry
average?

3. Financial Impact Analysis:

- Estimate the potential impact of the proposed working capital management strategies
on TechGadget Inc.'s CCC. How would improving the CCC affect the company's overall
financial health and liquidity?

4. Risk Assessment:
- Discuss the potential risks associated with your proposed working capital management
strategies. How can TechGadget Inc. mitigate these risks?
Deliverable:
Prepare a report (a TERM PAPER) addressing the above questions. Your report should include
a detailed analysis of TechGadget Inc.'s current working capital management practices,
proposed strategies for improvement, and an assessment of the financial and operational
impacts of these strategies. Support your analysis with quantitative calculations where
applicable and ensure to consider the potential risks and mitigation strategies. This case
problem is designed to test your understanding of working capital management concepts and
your ability to apply these concepts in a real-world business scenario.
Answer:
Assessment of Current Working Capital Management

1.1 Inventory Days

Figure 1. Inventory Days Formula

= (10 / 15, 000,000) x 365
= 6.67 x 365
= 243.33 days

As you can see in the computed formula, the inventory days are significantly higher than
the industry average of 30 days. This means that TechGadget Inc. takes much longer to
turn its inventory into sales compared to the industry standard.

According to Hayes (2023), inventory days is the average number of days it takes for a
firm to sell off inventory. In addition, it also indicates the duration of time a company’s
cash is tied up in its inventory. A smaller number indicates that a company is more
efficiently and frequently selling off its inventory, which means rapid turnover leading to
the potential for higher profits (assuming that sales are being made in profit). On the
other hand, a large inventory day's value indicates that the company may be struggling
with obsolete, high-volume inventory and may have invested too much into the same.

As seen in TechGadget Inc.'s case, means that the company is holding onto its inventory
for a longer period before selling it.
1.2 Receivables Days

Figure 2. Receivables Days Formula

= (6,000,000 / 25,000,000) x 365

= 0.24 x 365
= 87.6 days

As you can see in the computed formula, the receivables days are higher than the
industry average of 45 days. This means that the company takes longer to collect
payments from customers.

Brett Johnson (2023) stated that Accounts Receivable Days (A/R days) represent the
average time customers take to repay a business for their purchases, reflecting credit
and collection process efficiency.

A higher number of receivables days implies that TechGadget Inc. is experiencing delays
in receiving payments from its customers.

1.3 Payable Days

Figure 2. Payable Days Formula

Payable Days = (Accounts Payable / Annual Purchases) x 365
= (5,000,000 / 12,000,000) x 365
= 0.4166666666666667 x 365
= 152.08 days

As you can see in the computed formula, payable days are much higher than the
industry average of 15 days. It means that TechGadget Inc. takes significantly longer to
pay its suppliers compared to the industry standard. Payable days represent the average
number of days it takes for a company to pay its suppliers after receiving goods or
services.

A higher number of payable days implies that TechGadget Inc. is taking longer to settle
its accounts payable obligations with its suppliers.

2. Based on all the results gathered, the discrepancies between TechGadget Inc.’s
working capital components and the industry averages are the following:

2.1 In terms of inventory days computed, there are high inventory days. TechGadget Inc.
holds inventory for a much longer period compared to the industry. This could indicate
overstocking, obsolete products, or inefficient inventory management practices.
2.2 While for the receivable days, there is an elevated receivables days. The company
takes longer to collect payments from customers, potentially due to lenient credit terms,
weak collection processes, or a high number of bad debts.
2.3 Lastly, TechGadget Inc. has excessive payable days. TechGadget Inc. pays suppliers
much later than the industry average. This approach might strain supplier relationships
or limit access to favorable payment terms in the future.

Strategies for Improvement

The three specific strategies that I can propose to be implemented by

TechGadget Inc. to improve each component of its working capital in terms of inventory
are the following: First, categorizing inventory into priority groups can help understand
ideal ordering quantities and frequencies.(Caramela, 2024)
 According to Devesh Sharma (2023) segregating inventory to A, B and C groups
to prioritize items based on importance and sales frequency companies can allocate
resources more effectively, ensuring that companies have enough of the high-priority
items while managing lower-priority items efficiently.
Second, track all product information to manage inventory better. Inventory
tracking is the process of keeping a record of all of the products in a company’s
possession, regardless of location. Tracking inventory helps avoid running out of the
products needed, investing money in excess stock and having products spoil or become
obsolete before you can use them. (Indeed, 2023)
In addition, here are some steps to track inventory effectively. A company must
choose an inventory management tool that meets organizations needs by streamlining
the tracking process and making more informed decisions regarding the management of
stocks. Examples of this are pen and paper, spreadsheet and other softwares.(Indeed,
2023)
Also, organizations should also focus on forecasting. This involves analyzing past
sales and marketing strategies promotions and predicted growth as well as the overall
trends of the economy and market. It helps to better predict future needs. When
effectively forecast, this can track how much inventory a company might need for certain
seasons, months and even weeks.(Indeed, 2023)
Another step is that companies should also have a method of stacking inventory
in the US the most commonly used is the first-in, first-out (FIFO) . It involves organizing
products so that the oldest items are more readily accessible by adding the newer goods
to the back, which shifts the older items to the front. (Indeed, 2023)
Lastly, for better inventory management is to audit inventory, analyze supplier
performance, track sales, order restocks yourself, invest in inventory management
technology and use inventory management tools that integrate with other
solutions.(Caramela, 2024)

The three specific strategies that TechGadget Inc. can implement to improve
each component of its working capital in terms of receivables is systemizing invoicing
and payment, automating invoicing with software can also help send an invoice as soon
as possible after delivering services or products. This ensures customers aren’t
surprised by bills and are prepared to pay them. Another strategy is by developing a
collection strategy. An example of a method is to focus first on the big accounts that are
overdue and then from there organizations can refine the process and fine-tune the
collection strategy. In addition, maintaining a positive relationship with customers is
important in receivables management. Clear communication, transparency, and
responsiveness to customer inquiries or concerns can facilitate prompt payment and
reduce the likelihood of disputes or payment delays. Ensuring a quality customer
experience gives the organization an opportunity to communicate directly with
customers, so that the organization can determine what’s causing the non-payment and
keep a good customer relationship. That should drive how a company proceeds with
collections, not a rigid, automated process.(Louisy, 2023)
Lastly, companies can avoid late payments and time-consuming collections
processes by making it easier for clients to pay on time by offering convenient payment
methods. Offer payment installments for clients with consistently poor cash flow, setting
up a systematic way to collect payments without a disruption collection process. (Louisy,
2023)

The three specific strategies that I can propose to TechGadget Inc. to improve
each component of its working capital in terms of payables is ensuring timely payments
to vendors. This is essential for maintaining positive relationships with suppliers. It helps
in securing favorable terms, discounts, and continued supply of goods or services.
Timely payments also reduce the risk of disruptions in the supply chain. (Karp, 2024)
Another effective strategy is by adopting strong governance practices is a key
part of managing accounts payable. Companies must be able to establish policies,
procedures, and guidelines to help ensure that all stakeholders are held accountable to
the same standards and that payment processes remain accurate and efficient. Some
practices include: Regularly reviewing supplier contracts, Setting up controls to reduce
the risk of fraud and financial loss due to late payments or inaccurate invoices,
Implementing software solutions for automating invoice processing tasks, Validating
payment data, Tracking customer credit limits, Monitoring cash flow. By taking proactive
steps to establish clear expectations for accounts payable management, companies can
ensure they are not exposed to unnecessary risk or financial losses. (ProcureDesk, 2023)
Accurate financial reporting or proper management of accounts payable also
contributes to accurate financial reporting. It ensures that liabilities are recorded correctly
on the balance sheet, providing stakeholders with transparent and reliable financial
information for decision-making purposes. Improving processing efficiency in accounts
payable operations is also one strategy because this leads to faster invoice processing,
approval, and payment cycles. This not only saves time but also allows organizations to
utilize resources more effectively and focus on value-added activities. (Karp, 2024)

By implementing these strategies, Tech Gadgets CCC can optimize their working
capital across inventory, receivables, and payables. This will likely bring them closer to
the industry average for these metrics, potentially leading to improved cash flow,
profitability, and overall financial health.

Financial Impact Analysis

Estimating the potential impact of the proposed working capital management

strategies on TechGadget Inc.'s Cash Conversion Cycle (CCC) involves analyzing how
each strategy would affect the components of the CCC - Inventory Days, Receivables
Days, and Payables Days.

The strategy of categorizing inventory and managing priority items should lead to
a reduction in Inventory Days. By focusing on efficient management of lower-priority
items (C) and ensuring optimal stock levels for high-demand items (A), Tech Gadgets
can potentially hold less overall inventory, reducing the average time it takes to sell it.
While with improved inventory tracking this could have a neutral or slight
reduction on Inventory Days. Improved tracking helps avoid stockouts, potentially
leading to more consistent sales and potentially lower average inventory levels.
However, the impact might be limited depending on existing tracking practices.

The strategy of systemized invoicing and collection strategy for receivables

should lead to a reduction in Receivables Days. Faster and more efficient invoicing
minimizes delays in receiving payments. Additionally, prioritizing collection of large
overdue accounts improves overall collection effectiveness, leading to faster conversion
of receivables to cash.
With convenient payment methods, the impact on Receivables Days might be
neutral or slightly positive. Offering various payment options might incentivize faster
payments from some customers, but the overall effect could be minimal depending on
existing customer payment behavior.
 The strategy of timely payments to vendors is unlikely to directly affect the CCC.
While it has positive long-term benefits, it doesn't necessarily change the time it takes to
convert inventory to cash. Payables Days (PD) represent the average time a company
takes to pay its suppliers after the goods or services are received.

By implementing these strategies, we expect a reduction in Inventory Days and

Receivables Days. This will likely lead to a shorter Cash Conversion Cycle (CCC) for
Tech Gadgets. The exact improvement will depend on the effectiveness of the
implemented strategies and the starting point of Tech Gadget's current CCC metrics.
Implementing these strategies might involve some initial costs for new technology or
training. These costs should be factored into the overall impact analysis.

By analyzing the individual components and considering these additional factors,

Tech Gadgets can get a more comprehensive picture of how the proposed working
capital management strategies can potentially improve Tech Gadget's Cash Conversion
Cycle.

4. The potential risks associated with my proposed working capital management

strategies in terms of inventory is that there will be an over-reliance on categorization.
Organization will solely focus on categorization (A, B, C) for managing inventory and that
can be risky if demand fluctuates unexpectedly. Less popular items (C) might experience
sudden surges in demand, leading to stockouts if inventory levels are too low. What Tech
Gadget can implement is a safety stock buffer for category C items to handle
unexpected demand fluctuations. Additionally, regularly reviewing sales data and
adjusting categorization based on actual buying patterns can minimize stockout risks.

In terms of receivables, this will likely strained customer relationships. Aggressive

collection tactics for overdue accounts, while necessary for large outstanding balances,
can damage customer relationships if not handled delicately. Tech Gadget can
implement a tiered approach to collections. Start with friendly reminders and gradually
escalate to more forceful tactics for persistently delinquent accounts. Offering flexible
payment options like installments can also improve customer relations and encourage
on-time payments.
 While with increased bad debt, focusing solely on collecting outstanding
receivables might lead to neglecting creditworthiness checks for new customers. This
could increase the risk of bad debt.Tech Gadget should implement a strong credit
approval process for new customers to minimize the risk of bad debt. Additionally,
offering discounts for early payments can incentivize on-time payments and reduce the
overall risk of bad debt.

In terms of payables, this will also strain supplier relationships. Early payments to
vendors might seem beneficial, but they can strain relationships with suppliers who offer
discounts for longer payment terms.Tech Gadget should analyze the potential benefits of
discounts offered by suppliers against the cost of early payments. They can negotiate
payment terms that balance cost savings and maintain positive supplier relationships.

Implementing new strategies can be challenging. There might be resistance from

staff accustomed to existing processes. Additionally, new technology or software
adoption might have a learning curve. Effective communication and training for staff can
help overcome resistance to change. A well-defined implementation plan with phased
rollouts can minimize disruption and ensure a smooth transition to the new strategies.

By understanding these potential risks and implementing the suggested

mitigation strategies, Tech Gadget Inc. can minimize the downsides while maximizing the
benefits of the proposed working capital management strategies.