Essay on Cape Chemicals

912 Words 4 Pages
Cape Chemicals Implementation of one day delivery coupled with unenforced accounts receivable terms has lead Cape Chemicals to tremendous growth. Unfortunately, these policies have also caused cash flow deficiencies in the form of high inventory and lack of receivables collected. Being that inventory and accounts receivables make up most of the working capital factor, high ratios of either in comparison to sales can prove to be detrimental. This case does an excellent job in providing an example of this situation. With that being said, if no drastic changes are made, Cape chemicals runs the risk of growing itself out of business. Scenario one, assuming high growth and business as usual, shows the shape that Cape Chemicals is in. …show more content…
The reason for this is in the working capital. Low growth requires significantly less working capital, which leads to higher free cash flows, and ultimately less debt. Less debt means smaller interest and principle payments, which again translates in to higher free cash flows. Since low growth was clearly a step in the right direction, it makes up the third scenario along with some changes in working capital, variable, and fixed costs. As aforementioned, the workforce has tripled in recent years. We are not explicitly told what costs this labor falls under- cost of goods sold, general administrative, or selling? Since direct labor is a huge aspect of cost of goods sold, I make the assumption that the workforce tripled under that cost. I believe that a reduction in labor costs, materials, and overhead can be achieved leading to a 3% decrease in variable costs. It is not unrealistic for fixed costs to get a trim of 2% as well. Working capital can be decreased by simply implementing the accounts receivable terms. Currently, the average account is 18 days past due. Enforcing 30 day terms would lead to a decrease of 37.5%. Granted, Cape Chemicals does run the risk of driving away some not-so-prompt paying customers. I do not believe it would drive many customers away, as they are simply taking advantage of a lengthy payment. It is likely that other companies are not granting such generous terms, so customers do not have a real reason to leave. Low growth also allows

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