A Firm 's Health Within Its Industry Essay

1355 Words Dec 14th, 2016 6 Pages
To measure a firm’s health within its industry, there is also a need to analyze their short-term financing policies. By measuring these, one can determine what portion of the company’s sales cycle needs to be financed by cash. For obvious reasons, shorter cash cycles are more healthy for a company. To minimize cash cycle, there should be initiative on the corporate level to minimize inventory and receivables periods and maximize payable periods.

Short-term financing Ex-1
As seen in the table above (Short term financing Ex-1), Costco’s inventory period has grown over the past 5 years. This is coupled with a fluctuating receivables period that is also slightly growing. These two periods led to a growing Operating Cycle which, in general, is bad for a business. Costco, until this year, has done a good job at combating this by increasing their payables period. But, in the last year, while inventory and receivable periods have marginally shrunk, payables period has drastically decreased. This caused cash cycle to increase from 3.56 days in 2015 to 8.75 days in 2016. Costco now has to finance with cash for more than twice as long as they did last year. This is an issue that needs to be addressed by the firm.
There are three ways that this cash cycle issue can be addressed:(1) They can revert to the inventory policy used in the past. (2) The company can change their receivable policy. This is more difficult to do because it is already low. Additionally, the receivables that…

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