FIN 375 Week 3 Daily Cash Flow and Working Capital Management Example

Bikes on the Floor, Cash in the Drawer: Managing the Bike Shop's Cash Conversion Cycle, Inventory Turns, Supplier Terms and Daily Cash Routines

[Student Name]

University of Phoenix

FIN/375: Financial Management in the Small Business

Week 3 Assignment

[Instructor Name]

[Date]

The bicycle shop and all figures are composites written for a model paper; methods and research findings come from the sources listed.

The bike shop's cash forecast showed a late-winter shortfall and a $125,000 credit line to cover it. Much of that need comes from money sitting on the sales floor in bikes. The owner wants to know how much cash could be freed by managing inventory and supplier payments better, and what daily habits would keep cash under control. In a shop that sells bikes, working capital is mostly bikes, and every bike that sits unsold for a year is cash the owner cannot use. This paper analyzes the shop's working capital.

The Cash Conversion Cycle

The cash conversion cycle measures how long cash is tied up between paying suppliers and collecting from customers. It is found by adding inventory days to collection days and subtracting the days the business takes to pay its suppliers (Brigham & Houston, 2022). The shop's average inventory last year was about $520,000 against cost of goods sold of $1.34 million, about 142 days of inventory. Receivables are nearly zero because customers pay by card, which settles in two days. Payables averaged about $165,000, or 45 days. The cash conversion cycle is about 99 days: the shop pays for a bike and waits more than three months, on average, to get its money back.

Where the Cash Is Tied Up

Totals hide the problem. An analysis by category shows that e-bikes turn about 4.5 times a year, conventional road and gravel bikes about 2.2 times and mountain bikes about 1.6 times. Within mountain bikes, larger and smaller frame sizes and higher-end models turn less than once a year. At year end, bikes more than twelve months old totaled about $110,000 at cost, about a fifth of inventory.

An ABC Classification

The owner grouped bike models into three classes. Class A models, about 20% of models, produce 65% of bike sales and turn quickly; Class B models, 30% of models, produce 25% of sales; Class C models, half the models, produce only 10%. Class A models get weekly reorder reviews with a reorder point set to cover two weeks of peak sales plus the supplier's lead time. Class B models are reordered monthly. Class C models are ordered only against customer requests or when a supplier offers closeout pricing.

Markdown Policy for Aging Stock

Old bikes tie up cash and lose value as new model years arrive. The owner set a policy: bikes unsold after 180 days are marked down 15%, after 270 days 25%, and after a year sold at cost at a clearance event or to a used-bike reseller. Recovering $110,000 of old stock at an average of 85% of cost would release about $94,000 of cash and reduce the risk of further write-downs.

Supplier Terms and Discounts

The main bike supplier offers preseason terms of net 90 with an extra 3% discount if paid within 30 days. Taking the discount means paying 60 days early to save 3%, an annualized return of about 18.8%. The shop's credit line costs about 9%, so borrowing to take the discount is worthwhile when the line has room. Parts suppliers offer 2/10 net 30 on some orders; forgoing that discount costs about 37% a year, so the bookkeeper will take it whenever cash allows.

The owner also asked two e-bike suppliers for net 60 terms instead of net 30 in exchange for committing to spring volumes. One agreed, adding about 20 days of payables on e-bike purchases.

Card Processing and Deposits

Card fees average 2.7% of sales, about $70,000 a year. The owner compared processors and moved to one charging interchange plus a fixed margin, saving about 0.3 points, roughly $8,000 a year. Deposits settle to the bank in two days; the new processor settles next day, which slightly improves daily cash.

Daily and Weekly Cash Routines

The bookkeeper reconciles card settlements daily and reviews the bank balance each morning. Every Monday the owner and bookkeeper review the week's expected receipts and payments against the cash forecast, decide which payments to make and whether to draw on or repay the credit line. Cash from the few customers who pay in cash is deposited daily, and two people count it at closing, a basic control small business guides recommend for any cash handling (Scarborough & Cornwall, 2019).

Protecting Sales While Cutting Stock

Cutting inventory has a risk: a customer who cannot find a popular model in the right size may buy elsewhere. The ABC rules protect Class A models with safety stock, and the shop will use its suppliers' distributor warehouses, which can ship most models within three days, to cover sizes it no longer stocks. Staff will offer to order a bike for delivery within the week rather than letting the customer leave empty-handed.

The Effect on Cash

If the markdown policy clears old stock and the ABC rules reduce average inventory by about $80,000 over the year, days of inventory fall from 142 to about 120. With longer e-bike terms, days of payables rise from 45 to about 50. The cash conversion cycle falls from 99 to about 70 days, releasing roughly $100,000 of cash on a permanent basis. The March shortfall in the cash forecast would shrink from about $62,000 to near zero, and the credit line would serve as insurance rather than a necessity.

Research on Working Capital

Deloof (2003) found that firms with fewer days of inventory and receivables tended to be more profitable, suggesting that shortening the cash conversion cycle creates value. For a small shop, the effect is even more direct: every dollar not tied up in old bikes is a dollar the owner does not have to borrow.

Conclusion

The bike shop's cash is tied up mainly in slow-moving inventory, with a cash conversion cycle of about 99 days. Classifying models, setting reorder and markdown rules, negotiating longer terms, taking discounts that are cheaper than borrowing and building daily cash routines could cut the cycle to about 70 days and free about $100,000, nearly eliminating the late-winter shortfall.

References

Brigham, E. F., & Houston, J. F. (2022). Fundamentals of financial management (16th ed.). Cengage.

Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008

Scarborough, N. M., & Cornwall, J. R. (2019). Essentials of entrepreneurship and small business management (9th ed.). Pearson.