Cash Management

By Wednesday, May 29, 2013 solve the following problem. 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.

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.

Answer:

If Norma’s Cat Food has a daily collection of $5 million and a $3 million per day disbursement before implementing collection centers on the world this would only free up $3 million. By implementing the local collection centers around the world she can speed up the collection of payments by two and one half days which would yield

5 million daily collections x 2.5 days speed up = $12,500,000 additional collection

3,000,000 daily disbursements x .5 days slow down = $1,500,000 delayed disbursements =

$14,000,000 freed up funds

If the company can earn 8 percent per annum on freed-up funds the income will be $14,000,000 freed up funds x 8% interest rate = $1,120,000 interest on freed up cash

If the annual cost of the new system is $800,000 the income of $1,120,000 is more than the cost of 800,000 for the new system