Cash Management

Scott M Heller

Argosy University

 

Case Scenario

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 (Argosy, 2016).

a.       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.

b.      If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers.

c.       If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.

(Argosy, 2016).

Solutions

a.      Norma speeds up her collections of $5 million by 2.5 days the math would be:

$5,000,000 daily collections x 2.5 days sped up = $12,500,000 additional collections.

Now, she slows down here payments of $3 million by 1.5 days the math is:

$3,000,000 daily disbursements x 1.5 days slowed down = $4,500,000 delayed disbursements.

In the next step one Norma adds the additional collections with the amount of delayed. disbursements and the answer looks like:

$12,500,000 + $4,500,000 = $17,000,000 freed up funds per day.

b.Norma knows that the company can earn an additional 8% per year on funds that were freed up.  For section a it has been determined that there are $17 million in freed up funds.  In order to determine what Norma will make on interest alone the following equation applies:

$17,000,000 freed up funds per day x 365 days in a year = $6.205 billion freed up funds per year.

$6,205,000,000 freed up funds per year x 8% per year interest rate = $496,400,000 interest earned on the freed up funds per year.

c.  Yes, the new $800,000 system should be implemented because it freed up a total of:

$6,205,000,000 freed up funds/year + $496,400,000 interest earned = $6,701,400,000total free funds per year.

If Norma accounts for the yearly cost of the new system:

$6,701,400,000 total free funds per year - $800,000 annual cost of the system = $6.7006billion in free up funds per year. 

All of the above versus without a system that would only yield:

$5 million + $3 million = $8 million x 365 days in a year = $2.92 billion free funds per year + 8% interest rate = $3,153,600,000total freed up funds per year.  The new system would bring about an additional$3,547,800,000. 

Conclusion

The numbers speak for themselves and shows that going with a new system is defiantly the way to go for Norma’s Cat Food of Shell Knob.

 

Reference

Argosy. (2017). Financial Management: Module 2. Argosy University. Retrieved from:

 

            http://myeclassonline.com/re/DotNextLaunch.asp?courseid=12842119&userid=1291363

Attachments:

• 1500958567-HellerSM_M2A2.docx