JONEJA BRIGHT

STEELS: THE
CASH
DISCOUNT
DECISION
Financial Management 2 Assignment 3

Group 1
Divya Negi MS19A008
Priyanka Tambe MS19A060
Calculate the various ratios used to quantify
working capital in an organization – working
capital ratios, working capital cycle and trend
analysis of ratios.

Working
Capital
Ratios
Calculated
Calculate the various ratios used to quantify
working capital in an organization – working capital
ratios, working capital cycle and trend analysis of
ratios.
● Current ratio decreased in the
financial year 2011-12 to 1.70
from 2.69 in the previous year.
The ideal ratio is 2:1. It has been
consistent after 2012-13.
● Quick Ratio of the company
follows the same trend as current
ratio.
● Cash ratio of the company has
been fluctuating between 2-6%.
It has been high in the starting
years and is falling since 2012-
13.
● Payable turnover of the company has significantly increased in year 2013-14
and 2014-15.
● Inventory turnover of the company has been increasing from 2010-11 to 2012-
13 but fell after that. It has fluctuated between 7-10.
● Receivable turnover of the company has been more or less the same,
fluctuating decently between 4-5.
● Inventory conversion period decreased till 2012-13 but has been increasing
after that.
● Receivables conversion period decreased in 2011-12, increased for two
subsequent years and then again decreased in 2014-15.
● Payable period of the company has been on a decreasing trend in recent
years.
● Operating cycle of the company has been showing a mixed trend of increase
and decrease but overall it has decreased in the five years.
● Cash cycle of the company shows a mixed trend of increase and decrease but
it has increased as compared to the cycle five years ago.
● The gap between the operating cycle and cash cycle has also decreased. The
reason for this is the dramatic decrease in the payable period in the recent
years.
Compare JBS’s working capital with that of its
competitors.
Compare JBS’s working capital with that of its
competitors.

JBS’s current, quick and

cash ratio are much better
than its competitors except
for Omega Bright Steels.
Compare JBS’s working capital with that of its
competitors.

Inventory Turnover of JBS is

lower than all except for C.
Lal Alloys.
Receivables turnover is
highest and very close to C.
Lal Alloys.
Payable Turnover is higher
than two of its competitors
but C.Lal Alloys has the
highest.
Compare JBS’s working capital with that of its
competitors.

Inventory conversion period

for JBS is among the higher
ones.
Payables Deferral period is
lower than two of the
competitors.
Receivables conversion for
JBS is pretty quick as it is the
lowest.
Compare JBS’s working capital with that of its
competitors.

Operating cycle of JBS is

comparatively better than its
competitors except for C. Lal
Alloys, which has the lowest.
Cash cycle is very high but at
par with its competitors
except for Gopalsons which
has the least.
 What will be impact of the cash discount on the
organization?
● Since JBS is planning to introduce a cash discount policy on terms “2/10 net 45
days”, it means that customers paying their bills within 10 days will get a cash
discount of 2 percent, otherwise they are required to pay their bills before the
45th day.
● A discussion with the field sales managers suggested that approximately 50
percent of JBS customers would take advantage of the new policy. If the
customers are induced to pay early, then bad debt losses can be reduced.
● The new average collection period will be (0.5 × 10 + 0.5 × 45) = 27.5 days.
The ACP reduces from 45 days to 27.5 days. This means quicker collections.
● The cash discount policy would lead to a loss in revenue for the company.
● Loss in revenue (1357 × 0.5 × 0.02)= 13.57 millions
 Should management implement the proposed
cash discount for its accounts receivables?
● Accounts receivables before cash discount:
45 × (1357/360) = 169.63
● Accounts receivables after cash discount:
27.5 × (1357/360) = 103.65
● The lower ACP will affect investment in accounts receivables. Return on
investment at existing opportunity cost of investing funds:
65.98 × 0.18 = 11.87 millions
● This return on investment is less than the loss in revenue. Hence, the
management should not implement the proposed cash discount for its
accounts receivables.