Working Capital Management

Working Capital Requirements

To compensate for its weak sales and marketing efforts, Ideko has sought to retain the loyalty of its retailers in part by maintaining a very lax credit policy. This policy affects Ideko’s working capital requirements: For every extra day that customers take to pay, another day’s sales revenue is added to accounts receivable (rather than received in cash).


From Ideko’s current income statement and balance sheet (Ideko - Financial Statements), we can estimate the number of days of receivables:

\[\begin{align*} & \text{Accounts Receivable Days} = {\text{Accounts Receivables} ($) \over \text{Sales Revenue} ($/yr)} * 365 \text{ days/yr} \end{align*}\] \[\begin{align*} = {18,493 \over 75,000} * 365 \text{ days} = 90 \text{ days} \end{align*}\]

The standard for the industry is 60 days, and you believe that Ideko can tighten its credit policy to achieve this goal without sacrificing sales.

You also hope to improve Ideko’s inventory management. Ideko’s balance sheet lists inventory of $6.165 million. Of this amount, approximately $2 million corresponds to raw materials, while the rest is finished goods.

Given raw material expenditures of $16 million for the year, Ideko currently holds (2/16) x 365 = 45.6 days’ worth of raw material inventory. While maintaining a certain amount of inventory is necessary to avoid production stoppages, you believe that, with tighter controls of the production process, 30 days’ worth of inventory will be adequate.