Assessing Roche Publishing Company’s Cash Management Efficiency
Lisa Pinto, vice president of finance at Roche Publishing Company, a
rapidly growing publisher of college texts, is concerned about the
firm’s high level of short-term resource investment. She believes that
the firm can improve the management of its cash and, as a result, reduce
this investment. In this regard, she charged Arlene Bessenoff, the
treasurer, with assessing the firm’s cash management efficiency. Arlene
decided to begin her investigation by studying the firm’s operating and
cash conversion cycles.
AND SO ON
Roche Publishing Company is currently spending $12,000,000 per year on
its operating-cycle investment, but it expects that initiating a cash
discount will increase its operating-cycle investment to $13,100,000 per
year. (Note: The operating-cycle investment per dollar of inventory,
receivables, and payables is assumed to be the same.) Arlene’s concern
was whether the firm’s cash management was as efficient as it could be.
Arlene knew that the company paid 12% annual interest for its resource
investment and therefore viewed this value as the firm’s required
return. For this reason, she was concerned about the resource investment
cost resulting from any inefficiencies in the management of Roche’s
cash conversion cycle. (Note: Assume a 365- day year.)
To Do
a. Assuming a constant rate for purchases, production, and sales
throughout the year, what are Roche’s existing operating cycle (OC),
cash conversion cycle (CCC), and resource investment need?
b. If Roche can optimize operations according to industry standards,
what would its operating cycle (OC), cash conversion cycle (CCC), and
resource investment
need be under these more efficient conditions?
c. In terms of resource investment requirements, what is the annual cost of Roche’s operational inefficiency?
d. Evaluate whether Roche’s strategy for speeding its collection of
accounts receivable would be acceptable. What annual net profit or loss
would result from implementation of the cash discount?
e. Use your finding in part d, along with the payables and inventory
costs given, to determine the total annual cost the firm would incur to
achieve the industry level of operational efficiency.
f. Judging on the basis of your findings in parts c and e, should the
firm incur the annual cost to achieve the industry level of operational
efficiency? Explain why or why not.
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