Problem
DOLLAR BILL'S, a retail store in New York City, buys its inventory on credit. Upon purchase, it is given 30 days in which to pay its suppliers. It sells all of its merchandise on credit. It extends 60 days of credit to its customers. Its inventory turnover rate is 60 days.
Situation I
Using the Cash Conversion Model, measure DOLLAR BILL'S financing cycle in both days and money ($US) using the following assumptions:
i. Sales of $730,000
ii. Gross Margin of 30%
iii. Financing Rate 6.5%
Situation II
Recent management decisions have had the following impact:
i. DOLLAR BILL has renegotiated its credit line so that it has 35 days to pay its suppliers
ii. It now extends 45 days of credit to its customers,
iii. It has an inventory turnover rate of 45 days.
All other factors remain the same. Has DOLLAR BILL'S financing cycle improved or declined? Quantify the change in days and in dollars.