Which of the following would be the best explanation for the worsened cash conversion cycle at the company?1 pointIncreased competition, requiring better payment terms being offered to distributorsLower operational efficiency, leading to higher inventory holdingsLower demand for the product, leading to higher inventory holdingsWorsened payment terms to suppliers If you were to consider the impact of organized retail (more shopping happening at chains like D-Mart) on this company, which of the following seems least plausible?*1 pointGreater bargaining power of large organized buyers translating into reduced marginsGreater bargaining power of organized buyers translating into worsened accounts receivable (organized buyers will demand better payment terms)Greater competitive threat, as organized buyers introduce "white label" brands- ie their own proprietary brands in competition with the company's productsLower expenses on advertising, since most purchasing will happen at large stores where customers will in any case see a full range of options
Question
Which of the following would be the best explanation for the worsened cash conversion cycle at the company?1 pointIncreased competition, requiring better payment terms being offered to distributorsLower operational efficiency, leading to higher inventory holdingsLower demand for the product, leading to higher inventory holdingsWorsened payment terms to suppliers If you were to consider the impact of organized retail (more shopping happening at chains like D-Mart) on this company, which of the following seems least plausible?*1 pointGreater bargaining power of large organized buyers translating into reduced marginsGreater bargaining power of organized buyers translating into worsened accounts receivable (organized buyers will demand better payment terms)Greater competitive threat, as organized buyers introduce "white label" brands- ie their own proprietary brands in competition with the company's productsLower expenses on advertising, since most purchasing will happen at large stores where customers will in any case see a full range of options
Solution
The cash conversion cycle of a company is the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It is calculated as the sum of the days inventory outstanding, days sales outstanding, and days payable outstanding.
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The worsening of the cash conversion cycle could be due to several reasons. If there is increased competition, the company might have to offer better payment terms to distributors, which could lengthen the days sales outstanding. This would worsen the cash conversion cycle.
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Lower operational efficiency leading to higher inventory holdings could also worsen the cash conversion cycle. If the company is not able to manage its inventory efficiently, it could end up with a lot of unsold inventory, which would increase the days inventory outstanding and worsen the cash conversion cycle.
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Lower demand for the product leading to higher inventory holdings could also worsen the cash conversion cycle. If the demand for the product decreases, the company might end up with a lot of unsold inventory, which would increase the days inventory outstanding and worsen the cash conversion cycle.
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Worsened payment terms to suppliers could also worsen the cash conversion cycle. If the company has to pay its suppliers sooner, it would decrease the days payable outstanding and worsen the cash conversion cycle.
Regarding the impact of organized retail on the company, the least plausible scenario would be lower expenses on advertising. Even if most purchasing happens at large stores, the company would still need to advertise its products to attract customers. The presence of a full range of options at large stores could actually increase the need for advertising, as the company would need to differentiate its products from those of its competitors.
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