Case 1: New Finance Manager

It is October 1, 2023. You have just been hired to be the finance manager at Crocs, Inc., working for Dylan, one of the product managers. Dylan is responsible for all aspects of the one version of Crocs. Its as if Dylan is the general manager of his own small business within the larger company. As the general manager, Dylan must produce a budget for 2024, which he will present to his boss at a meeting sometime in the third week of October. Therefore, he needs your assistance to determine the cashflows for 2024. He must have your results submitted no later than Monday, October 23 at 10:00 p.m. to give him time to incorporate your work into his overall presentation.

The reason Dylan is confident that you can find some improvements is because he is also new to this product line and knows that the previous manager was running the business suboptimally. For example, the previous manager (well call him J to save him from embarrassment), has been paying invoices late, even though doing so incurs a 1% penalty for late payment!

As you might expect working at Crocs, Dylans product line is a line of footwear. These shoes are produced in China and transported by container ship to a company warehouse in Los Angeles from which they are delivered to retailers around the country. Each container can hold 6,000 units (i.e. pairs of shoes). From reviewing the reports for the past year, you can see that the inventory averages $500,000 and that there is no seasonality to the business. Also, they reorder when inventory reaches $50,000. Each order is for 6 containers (36,000 pairs), even though the lead time is usually just 17 days. In fact, it has never taken more than 20 days for a delivery to be available for distribution from your warehouses to the retailers. Dylan believes inventory is too high, after all, the industry average is just 60 days inventory held.

Beyond inventory, credit policies are the other area of concern. Paying a 1% penalty for paying late cannot be the best policy. Terms from your vendor are 2/5 net 30. Traditionally, taking the discount is always the best option. The question is, what would that be worth over the course of 2024? The invoice (and inventory) for the final shipment J ordered will arrive on October 1, 2023. After that one is paid, whatever new policy you and Dylan decide on will take effect.

Trade credit extended to customers is also a concern. Currently, J offers customers 2/10 net 30. Of course, whenever credit is employed, there will be some defaults. For this product, 5% of invoices go unpaid. Of the customers who pay their invoices, half of them take the discount, and the other half pay on the 30th day. The Crocs brand is so strong everyone agrees that sales will not be affected by any change to credit policy. While on paper requiring cash at delivery would yield the optimal cash flow for Crocs, it is simply not practical. The most restrictive policy that is workable is net 15. Requiring payment within 15 days should also bring down defaults to 3%, instead of 5%.

Unfortunately, the previous finance manager (whose job you have now taken) had already taken a new position with another company prior to your arrival at Crocs. She did leave you some notes indicating that she recognized there were problems with inventory levels and had begun to work on finding a solution. She figured out the holding cost is $6 per unit. She had started gathering data on order costs. It takes the inventory manager less than 10 minutes (9 minutes to be exact) to place the order with the factory in China. Shipping costs are $3,500 per container to get the shoes from China to the warehouse in LA. It takes a member of the receiving department a day (8 hours) to inspect and store all the shoes. The fully burdened rate for everyone in operations is about $40/hour.

What Dylan needs you to do is review inventory levels and trade credit (regarding both vendors and customers) to look for improvements and to come up with a value for those changes, that he can commit to delivering in 2024. You will need to present your recommendations and calculations to Dylan in a way that makes it easy for Dylan to understand where the savings came from and how you calculated the values so that he will be able to answer any questions his boss has about the numbers.

Dylan has shared with you that his bosss finance person is a stickler for the time value of money. All of the changes you come up with will have to be discounted back to 1/1/24. And what really matters is the change in that NPV from the way things are being done now versus how they will be done when your recommendations are implemented. In other words, you will need to show the NPV for cashflows for 2024 if J were still in change. Then calculate the NPV for the new cashflows with your changes.

Your first meeting with Dylan is Wednesday. To make a good impression on your new boss, you need to be ready for a productive discussion. You will need to think hard about what questions you have. What else do you need to know to determine the recommendations and valuations that Dylan needs?

The value chain looks like this: Retail Price 99 Wholesale Price 59 Cost (all in) 10 The P&L for this line is as follows: Net Revenue* 5,015,000 COGS 850,000 Expenses 2,000,000 Net Profit 2,165,000 *Net Revenue is net of bad debt expenses, i.e. this is the total revenue actually collected. Corporate headquarters has instructed finance managers to use 6% for the discount rate for 2024.

how would i do this. i dont need the answer i just need to know how i would do this