Solve The M2 Assignment 2 Submission By The Due Date
solve The Following M2 Assignment 2 Submissionby The Due Date Assigned
Norma’s Cat Food of Shell Knob ships cat food throughout the country. Norma has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Iowa.
If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars will the cash management system free up? Justify your answers. If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.
Paper For Above instruction
Effective cash management is crucial for companies aiming to optimize liquidity, reduce costs, and enhance overall financial efficiency. Norma’s Cat Food initiative to implement a new cash management system exemplifies strategic efforts to improve cash flows through quicker collection of receivables and delayed payments to suppliers. By analyzing the specific context and financial implications, we can determine the potential benefits, income generation, and viability of implementing the system.
Analysis of Cash Flow Improvements and Freeing Up Funds
The primary advantage of the new system lies in its ability to shorten the cash collection cycle by two and one-half days and postpone payments by half a day. This means that the company will hold onto cash for an additional two days, effectively increasing liquidity. Given daily collections of $5 million, the additional cash held due to faster collections can be calculated as:
- Additional free cash flow from accelerated collections = $5 million/day × 2.5 days = $12.5 million
Similarly, delaying disbursements by half a day will retain cash for an additional half-day, thereby freeing up funds as follows:
- Additional free cash flow from deferred payments = $3 million/day × 0.5 day = $1.5 million
Adding both components, the total amount of funds that the cash management system could potentially free up is:
Total Free Up Funds = $12.5 million + $1.5 million = $14 million
This accumulated leverage of cash is instrumental in optimizing working capital and can be used to fund operational needs or reduce borrowing.
Income Generated on Freed-Up Funds
Assuming an annual effective interest rate of 8%, the additional funds freed through improved cash management will generate interest income. To determine this annual income, we consider the average funds are held for a year, but since these cash inflows and outflows happen repeatedly, we recognize that the €14 million savings effectively generate income over the year.
Interest income is computed as:
Interest Income = Freed-up funds × Annual interest rate = $14 million × 8% = $1.12 million
This annual interest income reflects the benefits of efficient cash management, contributing positively to the firm's profitability.
Cost-Benefit Analysis of the New System
The implementation cost of the new system is $800,000 annually. When comparing this expense with the potential income generated from the freed-up cash, the benefits appear substantial:
- Annual interest income from freed-up funds: $1.12 million
- Annual system cost: $800,000
Net financial benefit would be:
Net Benefit = Interest Income - Cost of System = $1.12 million - $800,000 = $320,000
Since this net benefit is positive, it indicates that the system would generate a financial advantage for the company. Implementing it would enhance liquidity and profitability, provided other operational factors such as implementation risks and disruptions are managed effectively.
Conclusion
Based on the analysis, the proposed cash management system would free up approximately $14 million annually, yielding an interest income of about $1.12 million at an 8% rate. The annual cost of $800,000 results in a net gain of approximately $320,000, suggesting that the implementation would be a financially sound decision. This strategic move aligns with best practices in cash flow management and would likely improve Norma’s Cat Food’s overall financial health and operational flexibility.
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