Understanding Cash Cycle And Decision Making For Special Orders

Calculation of Cash Cycle for Cash Convertors International Limited

Cash cycle is the net estimated period in which the company is expected to make all payments and receive all payments. The cash cycle consists of debtor’s period creditor’s period and inventories period. (Fridson & Alvarez, 2012)The lower the cash cycle better it is for the company. Cash cycle is very important for the companies to maintain as it helps in maintaining liquidity. Liquidity is very important for the management to keep the functions of the company moving. Lack of liquidity may bring a pause in the operations of the company which will harm the profitability and performance of the company. (Ramírez, 2018)

Following is the calculation done for the Cash Cycle Of Cash Convertors International Limited for the last five years:

Particulars	2017	2016 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015	2014	2013
Inventory	20,991	17,612	27,684	25,562	21,783
Debtors	7,574	13,651	28,120	29,443	13,032
Creditors	21,288	19,821	26,450	26,794	20,048
Cogs	97,803	1,09,084	1,38,457	1,18,869	94,158
Sales	2,71,473	3,09,995	3,74,893	3,31,669	2,72,723
Inventory Turnover	72	76	70	73	42
Debtor Turnover	14	25	28	23	9
Creditor Turnover	77	77	70	72	39
Cash Cycle	10	23	28	24	12

The cash cycle of the last five years of the company show gradual increase in period and then in the current year the cash cycle has been reduced to lowest of the last five years, with 10 days. This cash cycle depicts that the inventory has been moving as a faster rate, which has led to increased production and sales. Overall the company is settling its cash positing in 10 days which is very good for the liquidity of the company.

The cash flow statement of the company show increase in cash inflows for the company in the current year as compared to that of the last year. There has been an increase in net cash inflow by $7,000,000 which has mainly been contributed by increased cash from operating activities. The major movement in the cash from operating activities was contributed by the tax figures. Last year the company paid tax whereas in the current year they have had refund which has lead to increased cash in operating activities.

In order to boost up the profitability of a product, the management is required to take both quantitative and qualitative steps. The quantitative steps include changes in cost and pricing policy and the qualitative steps include increase in promotion and factoring. For the given situation we have been provided by three alternatives, we would choose the alternative with the highest returns.

Financial data of FreeWheels from last year
Sales	5,000
Selling price	420
Variable manufacturing cost	144
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	36
Fixed selling and administrative costs	5,00,000
Profit statement
Particulars	Amount
Sales	21,00,000
Less:
Variable manufacturing cost	7,20,000
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	1,80,000
Fixed selling and administrative costs	5,00,000
Profit/Loss	2,40,000

Alternative 1:

Under the proposed alternative by Aaron Jacobsen we see that the proposed profits of the company will increase to $388000 from $ 240000.

Proposal 1- Aaron Jacobsen
Sales	6,500
Selling price	420
Variable manufacturing cost	172
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	36
Fixed selling and administrative costs	5,00,000
Advertisement charges	30,000
Profit statement
Particulars	Amount
Sales	27,30,000
Less:
Variable manufacturing cost	11,18,000
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	2,34,000
Fixed selling and administrative costs	5,00,000
Advertisement charges	30,000
Profit/Loss	3,88,000

Alternative 2:

Under the proposed alternative by Joanne Arnett we see that the proposed profits of the company will increase to $340000 from $ 240000.

Proposal 2- Joanne Arnett
Sales	4,500
Selling price	480
Variable manufacturing cost	144
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	36
Fixed selling and administrative costs	5,00,000
Advertisement charges	50,000
Profit statement
Particulars	Amount
Sales	21,60,000
Less:
Variable manufacturing cost	6,48,000
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	1,62,000
Fixed selling and administrative costs	5,00,000
Advertisement charges	50,000
Profit/Loss	3,40,000

Analysis of the Cash Flow Statement

Alternative 3:

Under the proposed alternative by Jennifer Saunders we see that the proposed profits of the company will increase to $480000 from $ 240000.

Proposal 3- Jennifer Saunders
Sales	6,000
Selling price	420
Variable manufacturing cost	144
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	36
Fixed selling and administrative costs	5,00,000
Rebate	45,000
Advertisement charges	60,000
Profit statement
Particulars	Amount
Sales	25,20,000
Less:
Variable manufacturing cost	8,64,000
Fixed manufacturing costs	4,60,000
Variable selling and administrative costs	2,16,000
Fixed selling and administrative costs	5,00,000
Rebate	45,000
Advertisement charges	60,000
Profit/Loss	4,80,000

Therefore from the above evaluation of various alternatives we can see that the alternative proposed by Jennifer is likely to provide highest profits.

Decision making is a very important function of the management of the company. The management is required to take into consideration both the qualitative and quantitative factors into consideration before making a final call. While considering the quantitative factors, the management goes for the option which earns highest profit and provides least cost. But sometimes these options do not provide long term success. Therefore t is important that the company also takes into consideration other qualitative factors also. The management needs to check if the alternative would provide long term benefits. They should also take into consideration the impact of suck decision on the customers and community. The availability of factors also plays a vital role in decision making process.

Therefore, based on the discussion we would suggest the management to opt for the alternative proposed by Jennifer Saunders.

Part 1:

When the management is proposed with a special order, it has to take into consideration various factors before making the final decision. In the given case the company has been approached for a special order of 25000 bikes, we have to make the decision accordingly:

When the annual factory capacity is 100000 units:

When the annual capacity for production of bikes is 100000 units and the regular production is required for 72000 units, it leaves FreeWheels with a spare capacity of 28000 units. The special order constitutes of 25000 units. Therefore, the management can fulfil the whole special order without compromising with the current demand. Under such circumstances the price to bid should be minimum the variable costs which are being incurred due to acceptance of special order. In this case this is $ 140 per unit.

When the production capacity is 100000 unit
Spare capacity	=	100000-72000
	=	28000
Special order for	=	25000
Cost statement for special order
Direct Material Cost	1875000
Direct Labour Cost	875000
Variable Factory Overhead	250000
Fixed Factory Overhead	500000
Total Manufacturing Cost		3500000
Units		25000
Bid Price		140

When the annual factory capacity is 90000 units:

When the annual capacity for production of bikes is 90000 units and the regular production is required for 72000 units, it leaves FreeWheels with a spare capacity of 18000 units. The special order constitutes of 25000 units. Therefore, the management cannot fulfil the whole special order without compromising with the current demand. Under such circumstances, the price to bid should be minimum the variable cost incurred and loss of profits due to stop in production of regular products. Therefore, the management should bid a minimum of $191.80 per unit for the special order when the annual capacity is 90000 units.

When the production capacity is 90000 unit
Spare capacity	=	90000-72000
	=	18000
Special order for	=	25000
Loss of Profits from 7000 units	=	1295000
Cost statement for special order
Direct Material Cost	1875000
Direct Labour Cost	875000
Variable Factory Overhead	250000
Fixed Factory Overhead	500000
Total Manufacturing Cost		3500000
Loss of profits from existing demand (7000*185)		1295000
Total Cost		4795000
Units		25000
Bid Price		191.8

Part 2:

The annual capacity to produce bike of FreeWheels is100000 units, and the company current produces 72000 units per annum. This leaves the company with a spare capacity of 28000 units. Now if the company is offered to produce any units till 28000 units, the company should accept the offer even at a minimum bid offer as it won’t be required to make any capital investments. Only the variable costs which would be involved in the production of the units of this new order. In the given case the company has been offered to produce 25000 units. The spare capacity available with the company is for 28000 units, this means that the magnet can opt for the production of this special order.

The price which should be charged for this order should only be the costs which are being incurred because if acceptance of this order, in this case which are the variable costs related to production only. Therefore the management should charge anything above $140 per unit for the special order.

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.

Ramírez, C. Z. (2018). The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach. Accounting in Europe .