Carraway Seed Company Inc. has for many years cultivated and sold what are known as heritage plants and seeds. For example, the company has sought out older varieties of tomato plants that are no longer grown by commercial vegetable farmers because they either take too long to mature, do not ship well, or do not hold up for long on the store shelf. The company has recently been considering ways to reduce its investment in working capital in order to make itself more profitable. At present the firm has an inventory conversion period of 90 days and offers credit terms of 30 days that the majority of its customers take full advantage of. The company purchases its inventory items on credit terms that allow it 45 days to pay but has always followed a policy of making cash payments for invoices as soon as they are received, so the accounts payable deferral period is typically only five days.
a. What are Carraway’s operating and cash conversion cycles?
b. If Carraway were to decide to take full advantage of its credit terms and delay payment until the last possible date, how would this impact its cash conversion cycle?
c. What would be your recommendation to the company with regard to its working capital management practices and why?