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Working Capital Management - Cash Conversion Cycle

Staples is a retailer that sells office supplies and products. According to its financial statements for fiscal years 2008 and 2007: 1. Staples' inventory conversion period in 2008 was 38.68 days, meaning it took on average 38.68 days to convert inventory into sales. 2. Its receivables collection period, or days sales outstanding, in 2008 was 15.49 days, meaning it took 15.49 days on average to collect payment from customers. 3. Its payables deferral period in 2008 was 41.21 days, meaning it took 41.21 days on average to pay its suppliers.

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96 views2 pages

Working Capital Management - Cash Conversion Cycle

Staples is a retailer that sells office supplies and products. According to its financial statements for fiscal years 2008 and 2007: 1. Staples' inventory conversion period in 2008 was 38.68 days, meaning it took on average 38.68 days to convert inventory into sales. 2. Its receivables collection period, or days sales outstanding, in 2008 was 15.49 days, meaning it took 15.49 days on average to collect payment from customers. 3. Its payables deferral period in 2008 was 41.21 days, meaning it took 41.21 days on average to pay its suppliers.

Uploaded by

std_12520
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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WORKING CAPITAL MANAGEMENT

Staples: Selected Financial Data


Fiscal Year Ended

February 2, February 3, January 28,


2008 2007 2006

Sales $ 19,372,682 $ 18,160,789 $ 16,078,852


Cost of goods sold and occupancy costs 13,822,011 12,966,788 11,496,234

Gross profit 5,550,671 5,194,001 4,582,618

Source: Company 10K, March 4, 2008 Income Statement

February 2, February 3,
2008 2007

ASSETS
Current assets:
Cash and cash equivalents $ 1,245,448 $ 1,017,671
Short-term investments 27,016 457,759
Receivables, net 822,254 720,797
Merchandise inventories, net 2,053,163 1,919,714
Deferred income tax asset 173,545 141,108
Prepaid expenses and other current assets 233,956 174,314

Total current assets 4,555,382 4,431,363

February 2, February 3,
2008 2007
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,560,728 $ 1,486,188
Accrued expenses and other current liabilities 1,025,364 1,087,030
Debt maturing within one year 23,806 215,165

Total current liabilities 2,609,898 2,788,383

Source: Company 10K, March 4, 2008 Balance Sheet

1. Inventory Conversion Period the average time required to convert materials


into finished goods and then to sell the finished goods.

Inventory
Inventory Conversion Period
Sales per day

2,053,163
Staples2008 Inventory Conversion Period 38.6836 days
19,372,682 / 365

2. Receivables Collection Period (a.k.a. Days Sales Outstanding) the average


length of time required to convert the firms receivables into cash post sale.

Receivables Receivables
Days Sales Outstanding
Average Sales Per Day Annual Sales/365

Working Capital Management 1


822,254
Staples2008 Days Sales Outstanding 15.4921 days
19,372,682 / 365
3. Payables Deferral Period the average length of time between the purchase of
materials and labor and the payment of cash for the materials and labor.

Payables
Payables Deferral Period
Purchases per day
1,560,728
Staples2008 Payables Deferral Period 41.2143 days
13,822,011/ 365

Strategies for Shortening the Cash Conversion Cycle:


1. Reduce Inventory Costs1
Improve logistics and production processes just-in-time inventory.
2. Reduce Receivables Collection Period
Bill customers more frequently convert monthly receivables to bi-weekly
receivables.
Utilize a lockbox plan have checks sent to P.O. boxes located within the
customers region where a local bank can deposit checks upon receipt.
Automatic electronic transfers accept electronic wire transfers or automatic
electronic transfers.
3. Increase Payables
Use trade credit pay suppliers slowly if the terms are acceptable.
Increase accruals if possible pay employees monthly. Note: Companies
generally have little control over accruals.

1
Note: The twin goals of inventory management are 1) to ensure available inventories needed to sustain
operations and 2) to reduce the costs of carrying inventory. Inventory costs include: storage and handeling,
insurance, property taxes, spoilage, and obsolescence.

Working Capital Management 2

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