How to Decrease Cash-to-Cash Cycle for an Electronics Manufacturing Company
What can an electronics manufacturing company do to improve its liquidity and reduce its Cash-Cash-Conversion cycle based on the given data?
To decrease the Cash-to-Cash Cycle, the company needs to focus on reducing the time it takes to convert inventory and receivables into cash while managing payables effectively. Let's analyze each option: a. Launching an inventory reduction program world-wide to reduce their inventory to 55 Days Inventory Outstanding: This option aims to reduce the Days Inventory Outstanding (DIO) from 65 to 55. By reducing inventory, the company can free up cash and improve liquidity. This would decrease the Cash-to-Cash Cycle. b. Providing discounts to their customers to pay faster in order to reduce their world-wide receivables to 20 Days Receivables Outstanding: This option aims to reduce the Days Receivables Outstanding (DRO) from 30 to 20. By incentivizing customers to pay faster, the company can accelerate cash inflows and reduce the Cash-to-Cash Cycle. c. Negotiating with their suppliers to provide larger committed contract quantities in exchange for increasing their days payables to a level of 65 Days Payable Outstanding: This option aims to increase the Days Payable Outstanding (DPO) from 50 to 65. By extending the payment period to suppliers, the company can delay cash outflows and improve liquidity. This would decrease the Cash-to-Cash Cycle. d. Sharing forecast information with suppliers: This option aims to improve communication and collaboration with suppliers. By sharing forecast information, suppliers can better plan their production and delivery, reducing lead times and improving inventory management. This could potentially decrease the Cash-to-Cash Cycle. Out of the given options, option c. negotiating with suppliers to increase days payables to 65 Days Payable Outstanding would decrease the Cash-to-Cash Cycle the most. By extending the payment period, the company can delay cash outflows and improve liquidity, resulting in a lower Cash-to-Cash Cycle.