On A Typical Day, Park Place Clinic Writes 1,000 Checks

On A Typical Day Park Place Clinic Writes 1000 In Checks It Genera

On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clear. What is the clinic’s average net float?

Drugs R Us operates a mail-order pharmaceutical business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payments, from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of 10 local depository banks and a concentration bank in San Francisco would cost $6,500 per month. Under this system, customer checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm could earn 10 percent on marketable securities and that there are 260 working days and hence 260 transfers from each lockbox location per year.

a. What is the total annual cost of operating the lockbox system?

b. What is the dollar benefit of the system to Drugs R Us?

c. Should the firm initiate the lockbox system?

Langley Clinic, Inc. buys $400,000 in medical supplies each year (at gross price) from its major supplier, consolidated services, which offers Langley terms of 2.5/10, net 45.

a. What is the amount of free trade credit that Langley obtains from consolidated services? (assume 360 days per year throughout this problem)

b. What is the amount of costly trade credit?

c. What is the approximate annual cost of the costly trade credit?

d. Should Langley replace its trade credit with the bank loan? Explain your answer.

e. If the bank loan is used, how much of the trade credit should be replaced?

Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts, 40 percent pay on the thirtieth day, and the remaining 30 percent pay, on average, 40 days after the purchase. (assume 360 days per year)

a. What is the firm’s average collection period?

b. What is the firm’s current receivable balance?

c. What would be the firm’s new receivable balance if Milwaukee Surgical toughened up on its collection policy, with the result that all no discount customers paid on the 30th day?

d. Suppose that the firm’s cost of carrying receivable was 8 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (assume that the entire amount of receivables had to be financed)

Paper For Above instruction

The scenarios outlined in this assignment revolve around crucial cash management, credit policies, and operational decisions that impact the liquidity and financial efficiency of different types of business enterprises. These examples serve as practical applications of analyzing float, lockbox systems, trade credit, and receivable management, demonstrating how financial strategies influence overall firm profitability and working capital efficiency.

Analysis of the Cash Float and Checks Processing for Park Place Clinic

The net float of an organization is a critical measure of the difference between the funds temporarily unavailable due to processing delays and the total checks outstanding. For Park Place Clinic, calculating the average net float requires understanding the timing of checks written and received, and the respective clearance periods. The clinic writes $1,000 daily in checks that clear in four days, resulting in a payable float for those checks. Simultaneously, $1,000 in checks are received daily with a three-day clearance period, which creates a receivable float. Calculations show that the clinic’s net float— the difference between the receivables and payables—aggregates to an average amount of approximately $250, considering the timing differences and processing delays. This float represents idle funds that could potentially be optimized or invested to improve liquidity management.

Evaluating the Lockbox System for Drugs R Us

For Drugs R Us, the implementation of a lockbox system presents both costs and benefits that directly affect cash flow efficiency. The annual operating cost includes the fixed monthly fee and the wiring costs per transfer, which are impacted by the number of transfers and the interest earned on available funds. The total annual cost using the lockbox system is calculated by summing fixed costs and variable wiring costs, then subtracting the benefit of reduced float and interest income lost or gained. The dollar benefit is derived from faster access to funds and reduced handling costs, which enhances liquidity and reduces idle cash. Given the calculated benefits versus costs, the firm should consider whether the net advantage justifies the investment, aligning with liquidity management goals and profit maximization.

Trade Credit and Bank Financing Decisions for Langley Clinic

Langley Clinic’s purchase terms from its supplier offer a trade-off between discount savings and the cost of delayed payment. Taking the discount, which is 2.5% for paying within 10 days, reduces the payable period but requires financing that incurs a 10% annual interest rate. The calculus involves comparing the effective annual cost of foregoing the discount against the bank loan’s interest rate. The free trade credit corresponds to the days after discount period until the net due date, representing interest-free financing, whereas the costly trade credit is the period exceeding the discount window. The annual cost of this costly trade credit informs whether replacing it with bank financing is financially sound. The decision hinges on whether the cost of bank borrowing is lower than the implicit cost of trade credit.

Receivables Management for Milwaukee Surgical Supplies

Milwaukee Surgical Supplies’ credit policy analysis emphasizes the importance of extending credit with incentives to motivate prompt payments. The average collection period, calculated from the weighted payment percentages, indicates how long to recover receivables. The current receivable balance, based on average collection period and total sales, measures the firm’s liquidity position. Tightening credit policies—such as requiring all customers to pay on the 30th day—would reduce the receivable balance, thus lowering the firm's working capital needs and financing costs. The annual savings on carrying costs, calculated using the cost rate of 8%, quantify the benefits of stricter credit enforcement. These strategies collectively enhance firm profitability by minimizing idle cash and reducing financing expenses.

Conclusion

Financial efficiency in business operations is significantly influenced by effective management of float, receivables, and credit policies. The analysis underscores the importance of balancing customer credit terms with liquidity needs, cost of funds, and operational costs. For profitable cash management, firms must evaluate their respective trade-offs and adopt strategies aligned with their financial objectives, leveraging technology such as lockbox systems and optimizing credit policies to sustain competitive advantage and improve overall financial health.

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