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In January 2015, Tyler was named treasurer of Walker Speed-O. He decided that he could best orient himself by systematically examining each area of the companys financial operations. He began by studying the firms short-term financial activities.

Walker Speed-O, located in southern California, specializes in a furniture line called Splash. Of high quality and contemporary design, the furniture appeals to the customer who wants something unique for his or her home or apartment. Most Walker Speed-O furniture is built by special order because a wide variety of upholstery, accent trimming, and colors is available. The product line is distributed through exclusive dealership arrangements with well-established retail stores. Walker Speed-Os manufacturing process virtually eliminates the use of wood. Plastic and metal provide the basic framework, and wood is used only for decorative purposes.

Walker Speed-O entered the plastic-furniture market in late 2007. The company markets its plastic-furniture products as indooroutdoor items under the brand name Future. Future plastic furniture emphasizes comfort, durability, and practicality and is distributed through wholesalers. The Future line has been very successful, accounting for nearly 40 percent of the firms sales and profits in 2014. Walker Speed-O anticipates some additions to the Future line and also some limited change of direction in its promotion in an effort to expand the applications of the plastic furniture.

Tyler has decided to study the firms cash management practices. To determine the effects of these practices, he must first determine the current operating and cash conversion cycles. In his investigations, he found that Walker Speed-O purchases all its raw materials and production supplies on open account. The company is operating at production levels that preclude volume discounts. Most suppliers do not offer cash discounts, and Walker Speed-O usually receives credit terms of net 30. An analysis of Walker Speed-Os accounts payable showed that its average payment period is 30 days. Tyler consulted industry data and found that the industry average payment period was 39 days. Investigation of six California furniture manufacturers revealed that their average payment period was also 39 days.

Next, Tyler studied the production cycle and inventory policies. Walker Speed-O tries not to hold any more inventory than necessary in either raw materials or finished goods. The average inventory age was 110 days. Tyler determined that the industry standard, as reported in a survey done by Furniture Age, the trade association journal, was 83 days.

Walker Speed-O sells to all its customers on a net-60 basis, in line with the industry trend to grant such credit terms on specialty furniture. Tyler discovered, by aging the accounts receivable, that the average collection period for the firm was 75 days. Investigation of the trade associations and California manufacturers averages showed that the same collection period existed where net-60 credit terms were given. Where cash discounts were offered, the collection period was significantly shortened. Tyler believed that if Walker Speed-O were to offer credit terms of 3/10 net 60, the average collection period could be reduced by 40 percent.

Walker Speed-O was spending an estimated $26,500,000 per year on operating-cycle investments. Tyler considered this expenditure level to be the minimum he could expect the firm to disburse during 2015.

His concern was whether the firms cash management was as efficient as it could be. He knew that the company paid 15 percent annual interest for its resource investment. For this reason, he was concerned about the financing cost resulting from any inefficiencies in the management of Walker Speed-Os cash conversion cycle. (Note: Assume a 365-day year and assume that the operating-cycle investment per dollar of payables, inventory, and receivables is the same.)

Final Part II

Walker Speed-O II

In January 2015, Tyler was named treasurer of Walker Speed-O. He decided that he could best orient himself by systematically examining each area of the companys financial operations. He began by studying the firms short-term financial activities.

Walker Speed-O, located in southern California, specializes in a furniture line called Splash. Of high quality and contemporary design, the furniture appeals to the customer who wants something unique for his or her home or apartment. Most Walker Speed-O furniture is built by special order because a wide variety of upholstery, accent trimming, and colors is available. The product line is distributed through exclusive dealership arrangements with well-established retail stores. Walker Speed-Os manufacturing process virtually eliminates the use of wood. Plastic and metal provide the basic framework, and wood is used only for decorative purposes.

Walker Speed-O entered the plastic-furniture market in late 2007. The company markets its plastic-furniture products as indooroutdoor items under the brand name Future. Future plastic furniture emphasizes comfort, durability, and practicality and is distributed through wholesalers. The Future line has been very successful, accounting for nearly 40 percent of the firms sales and profits in 2014. Walker Speed-O anticipates some additions to the Future line and also some limited change of direction in its promotion in an effort to expand the applications of the plastic furniture.

Tyler has decided to study the firms cash management practices. To determine the effects of these practices, he must first determine the current operating and cash conversion cycles. In his investigations, he found that Walker Speed-O purchases all its raw materials and production supplies on open account. The company is operating at production levels that preclude volume discounts. Most suppliers do not offer cash discounts, and Walker Speed-O usually receives credit terms of net 30. An analysis of Walker Speed-Os accounts payable showed that its average payment period is 30 days. Tyler consulted industry data and found that the industry average payment period was 39 days. Investigation of six California furniture manufacturers revealed that their average payment period was also 39 days.

Next, Tyler studied the production cycle and inventory policies. Walker Speed-O tries not to hold any more inventory than necessary in either raw materials or finished goods. The average inventory age was 110 days. Tyler determined that the industry standard, as reported in a survey done by Furniture Age, the trade association journal, was 83 days.

Walker Speed-O sells to all its customers on a net-60 basis, in line with the industry trend to grant such credit terms on specialty furniture. Tyler discovered, by aging the accounts receivable, that the average collection period for the firm was 75 days. Investigation of the trade associations and California manufacturers averages showed that the same collection period existed where net-60 credit terms were given. Where cash discounts were offered, the collection period was significantly shortened. Tyler believed that if Walker Speed-O were to offer credit terms of 3/10 net 60, the average collection period could be reduced by 40 percent.

Walker Speed-O was spending an estimated $26,500,000 per year on operating-cycle investments. Tyler considered this expenditure level to be the minimum he could expect the firm to disburse during 2015.

His concern was whether the firms cash management was as efficient as it could be. He knew that the company paid 15 percent annual interest for its resource investment. For this reason, he was concerned about the financing cost resulting from any inefficiencies in the management of Walker Speed-Os cash conversion cycle. (Note: Assume a 365-day year and assume that the operating-cycle investment per dollar of payables, inventory, and receivables is the same.)

To Do: Parts 1-10

1. Assuming a constant rate for purchases, production, and sales throughout the year, what are Walker Speed-Os existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need?

2. If Tyler can optimize Walker Speed-Os operations according to industry standards, what will Walker Speed-Os operating cycle (OC), cash conversion cycle (CCC), and resource investment need to be under these more efficient conditions?