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Learning Team Assignment: Xtreme Toys Case Study

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Introduction

Learning Team Assignment: Xtreme Toys Case Study Nathan Church Megan Leite-Ferraz David Oxley Sue Oxley Michael Shannon FIN 475 March 24, 2004 Xtreme Toys Case Study Imagine the excitement of the management team at Xtreme Toys at their recent board meeting when told about the company's increased sales statistics. However, joy soon turned to bewilderment when confronted by the company's shrinking cash flow situation. Convinced that the figures must have been misstated, the board members appointed a team from the finance accounting department to investigate. The following paper details the team's findings, including their recommendations on what actions the company should adopt to reduce its cash gap predicament. The Situation Xtreme Toys is a small manufacturing company in Southern California that has experienced rapid expansion in sales over the past year. The expanding sales have caused intense pressure for increased inventory production, combined with a receivables buildup that is now draining the company of its cash resources. With management focused on increasing sales as the best way for the company to prosper, insufficient resources were dedicated to working capital management. ...read more.

Middle

Rather than look to historical data to set perceived desirable levels, the decisive test should be one of receiving the best return for outlay. The current 62 days it is taking for customers to pay is simply too long. One solution that presented itself is to encourage customers to pay earlier by offering an incentive of a cash discount for early payment. However, even offering a 2% discount for payment within 30 days would equate to an annualized discount far greater than the company's current 8% cost of financing. Consequently, after analysis we would not recommend that course of action. However, customer accounts that remain delinquent beyond 30 days could have a penalty of 8% imposed on them. The 8% is a means by which the company's financing costs are passed directly to the late paying customers. Alternatively, to circumvent the delay entirely, the company could factor receivables to a finance company. Factoring would transfer any risks of possible customer defaults and high administrative costs, and would enable quick transfer of cash into the company accounts. ...read more.

Conclusion

As identified in the commentary and analysis in the body of this paper, if the company: * Stretches accounts payable from an average of 40 to 50 days, this will immediately achieve half of the cycle day target. Of course, the team proposes that any supplier concerns are addressed through consultation and communication to ensure continued good terms with key suppliers. * Secondly, a 5 to 10 day reduction in the average time accounts payable remain outstanding should be achieved by providing an incentive for customers to pay early. A key objective will be to reduce accounts receivable delays to something less than accounts payable. * Finally, by looking closely at production options, the team believes the most worrying 113-day average inventory carrying time could be significantly reduced. The project team calculates that by implementing the recommended changes, at least to the extent of a 20-day improvement, will save the company $29,778 annually in financing charges. Additionally, as if the finance charges were not sufficient, the cash conversion cycle time reduction will also free up nearly $400,000 in lines of existing credit that can potentially be deployed to improve production and/or increase sales. Xtreme Toys 1 ...read more.

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