Graded Discussion Board
Corporate Finance (FIN622)
Concept to be tested: “Working Capital Management”
SMH Company uses short term financing to finance its current assets. Company is facing high risk due to fluctuation in market interest rate. In the month of June, its current assets were Rs.25,035,000 (Permanent assets = Rs.7,000,000 and seasonal assets = Rs.18,035,000) and current liabilities were Rs.25,000,000. Now in the month of July, current assets are Rs.25,005,000 (Permanent assets = Rs.7,000,000 and seasonal assets = 18,005,000) and current liabilities are Rs.25,000,000. Company was using the credit policy of 2/15 net 30 but now it intends to change its policy to 3/10 net 30. Keeping in view that debtors are always interested in availing discounts, how this new credit policy will affect cash conversion cycle if there is no change in inventory turnover and sales. Also explain which working capital policy is being used here.
(Note: Your discussion should not exceed 150 words. No calculation is needed; you are only supposed to discuss the scenario.)
In my view new credit policy is 3/10 net 30 will help to increase cycle of cash conversion. It is also needed because company is financing its assets from short term borrowings and interest rate is very fluctuated.
If they have enough cash in time they can payback as soon as possible
You can see
in June company's seasonal assets are 18035000 and in July it goes down 18005000....liabilities are at same number 25000000.
It means due to cash shortage company is unable to pay its debt on time and its assets are the hand of its debtors.
yes i agree with u amir
nd also tell us this working capital policies is account receivable policy ??
is it true ?
it is my thinking wot u say amir
Nope....not account receivable policy
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2/15 net 30 means?
2% discount in 15 day
i think following working capital policies are here aggressive policy is used.
Conservative – Use permanent capital for permanent assets and temporary assets.
• Moderate – Match the maturity of the assets with the maturity of the financing.
• Aggressive – Use short-term financing to finance permanent assets
yes pretty ye me ne b net se search kiya to me b yeh kaha but in our handout huzaifa is rit point and aggressive is the working capital policy used in this question...
we have to answer two questions in this GDB.
First one is about cash conversion cycle.
and Second is about working capital policy.
Credit Policy change krne ki vjha se discount ziada ho gaya hai which is 3% jb k previous Credit Policy mai 2% discount tha and it is mentioned in the scnerio that debtors are always interested in availing discounts, so this new policy will increse cash conversion cycle of the company.
Or rahi bat working capital policy ki tw yahan "Aggressive Working Capital" he use hogi...
Correct Me If I am Wrng :)
cash conversion cycle of the company will improve not increase :)