The Greek Connection Had Sales Of 32 Million In 2012

The Greek Connection Had Sales Of 32 Million In 2012 And A Cost of G

The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below: THE GREEK CONNECTION Balance Sheet As of December 31, 2012 (in $ thousand) Assets Liabilities and Equity Cash Accounts receivable Inventory $ 2,000 3,950 1,300 Accounts payable Notes payable Accruals $ 1,500 1,000 1,220 Total current assets $ 7,250 Total current liabilities Long-term debt $ 3,720 3,000 Net plant, property, and equipment $ 8,500 Total liabilities Common equity $ 6,720 9,030 Total assets $ 15,750 Total liabilities and equity $ 15,750 a. Calculate The Greek Connection’s net working capital in 2012. b. Calculate the cash conversion cycle of The Greek Connection in 2012. c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 had it matched the industry average for accounts receivable days? d. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30. e. The supplier offers terms of 1/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45? f. The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?

Paper For Above instruction

The financial analysis of The Greek Connection provides insight into its liquidity management, efficiency, and credit strategies for the year 2012. This paper aims to elucidate the company's net working capital, cash conversion cycle, industry comparison of receivable days, and the costs associated with trade credit terms. Additionally, it evaluates the collection period for the Manana Corporation to contextualize receivable management practices in corporate finance.

Calculating Net Working Capital

Net working capital (NWC) is a measure of a company's short-term liquidity, computed as the difference between current assets and current liabilities. Based on the balance sheet data, current assets total $7,250 thousand, and current liabilities (sum of accounts payable, notes payable, and accruals) also sum to $5,720 thousand ($1,500 + $1,000 + $1,220). Therefore, NWC = $7,250,000 - $5,720,000 = $1,530,000. This positive NWC indicates that The Greek Connection had sufficient short-term assets to cover its short-term obligations, reflecting sound liquidity management in 2012.

Calculating the Cash Conversion Cycle (CCC)

The cash conversion cycle measures the time period between cash outflows for inventory and receivables and cash inflows from sales. It comprises three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payables Outstanding (DPO).

• Days Inventory Outstanding (DIO) = (Inventory / Cost of Goods Sold) × 365 = ($1,300,000 / $20,000,000) × 365 ≈ 23.73 days.
• Days Sales Outstanding (DSO) = (Accounts receivable / Credit sales) × 365 = ($3,950,000 / $32,000,000) × 365 ≈ 45.07 days.
• Days Payables Outstanding (DPO) = (Accounts payable / Cost of Goods Sold) × 365 = ($1,500,000 / $20,000,000) × 365 ≈ 27.38 days.

Thus, the CCC = DIO + DSO - DPO = 23.73 + 45.07 - 27.38 ≈ 41.42 days.

Impact of Industry Average Accounts Receivable Days

If The Greek Connection adopted the industry average of 30 days receivable days, the new DSO would be 30 days. The recalculated CCC would be:

CCC = 23.73 + 30 - 27.38 ≈ 26.35 days.

This reduction indicates an improvement in receivables management, leading to a shorter cycle and improved liquidity.

Cost of Trade Credit Without Discount (3/5, Net 30)

Under standard trade credit terms of 3/5, Net 30, paying after 30 days means forfeiting the 3% discount offered if paid early. The cost of not taking the discount is calculated as:

Cost = (discount % / (1 - discount %)) × (365 / (net days - discount days))

= (0.03 / (1 - 0.03)) × (365 / (30 - 5)) ≈ 0.0309 × 14.33 ≈ 0.443 or 44.3% annually.

This indicates a significant cost penalty for delaying payment beyond the discount period.

Effective Annual Cost of Forgoing the 1/10, Net 45

With terms of 1/10, Net 45, choosing to pay on day 45 instead of taking the 1% discount results in an additional cost. The effective annual rate (EAR) is calculated as:

EAR = [(1 + (credit cost / (1 - discount)))]^(365 / (net days - discount days)) - 1

Credit cost = 1%, discount period = 10 days, payment period = 45 days.

EAR ≈ (1 + 0.01 / (1 - 0.01))^(365 / (45 - 10)) - 1 ≈ (1 + 0.0101)^13.44 - 1 ≈ 1.143 - 1 ≈ 0.143 or 14.3% annually.

This demonstrates a high annualized cost of forgoing early payment discounts, emphasizing strategic considerations in trade credit management.

Average Collection Period for The Manana Corporation

The collection period is derived by dividing accounts receivable by daily sales. Given sales of $60 million and average receivables of $2 million:

Collection period = (Accounts receivable / Annual sales) × 365 = ($2,000,000 / $60,000,000) × 365 ≈ 12.17 days.

This efficient collection period suggests effective receivables management, contributing positively to liquidity and cash flow.

Conclusion

The financial metrics analyzed reveal that The Greek Connection maintained positive liquidity in 2012, with a manageable cash conversion cycle. Its receivables management could be improved by aligning with industry standards, potentially reducing the CCC and enhancing liquidity. The analysis of trade credit costs underscores the importance of strategic payment practices to minimize financial costs. Comparing it to The Manana Corporation's efficient collections demonstrates that effective receivables management remains crucial for liquidity optimization. Overall, these insights inform better financial decision-making and highlight areas for operational improvement.

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