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FIN 4707 - Individual Assignment - (Marks - 10) The Efficiency of Working Capital Management

Satya Nadella, the CEO of Microsoft, was tasked with assessing the company's cash management efficiency by Bill Gates. Nadella analyzed Microsoft's operating cycle and cash conversion cycle compared to its competitors and the industry. Nadella found that Microsoft had longer average payment and inventory periods than its competitors and the industry. He used analytics to predict that offering a 2% cash discount for early payments would reduce Microsoft's collection period and increase annual revenue and investment in working capital. Nadella wanted to determine if Microsoft was optimizing its investment in working capital and calculate the annual cost of its operational inefficiency compared to industry standards.

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57 views2 pages

FIN 4707 - Individual Assignment - (Marks - 10) The Efficiency of Working Capital Management

Satya Nadella, the CEO of Microsoft, was tasked with assessing the company's cash management efficiency by Bill Gates. Nadella analyzed Microsoft's operating cycle and cash conversion cycle compared to its competitors and the industry. Nadella found that Microsoft had longer average payment and inventory periods than its competitors and the industry. He used analytics to predict that offering a 2% cash discount for early payments would reduce Microsoft's collection period and increase annual revenue and investment in working capital. Nadella wanted to determine if Microsoft was optimizing its investment in working capital and calculate the annual cost of its operational inefficiency compared to industry standards.

Uploaded by

Taznina Nur
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIN 4707 | Individual Assignment | (Marks -10)

The efficiency of Working Capital Management

Bill Gates, Chairman of Microsoft inc, is concerned about the firm's high level of investment in short term
assets. Bill is considering the reduction in such investments, which can be achieved by improved
management of cash. Hence, Bill handed over the task of assessing the firm's cash management efficiency
to Satya Nadella, the CEO of Microsoft. Nadella wants to start the assessment by scrutinizing Microsoft’s
operating cycle and cash conversion cycle.

Nadella asked his subordinates for all the relevant information, and he was provided with the followings:

Microsoft Oracle (competitor) Industry


Average payment period 25 45 40
(in days)
Average age of inventory 120 80 85
(in days)
Average collection period 60 35 42
(in days)

 Microsoft associates a cost of $63,000 to extend the payment period to 40 days


 Microsoft associates a cost of $160,000 to reduce inventory age to 85 days

Nadella used big data analytics, and statistical modeling to see the outcome of a 2% cash discount for
payments made within 10 days. The statistical model predicted that such discount would reduce
Microsoft’s collection period to 42 days. In addition, the model predicted the following changes:

Before After
Revenue $13,750,000 Additional sales of $1,250,000
than before
Annual Investment in operating $13,000,000 $14,100,000
cycle
Variable costs 80% of sales 80% of sales
Bad debts n/a n/a

 75% of total sales will use the benefit of the newly introduced 2% discount
 The operating-cycle investment across all working capital accounts will be same

Nadella was not sure if Microsoft was managing an optimum level of investment in short term resources.
However, he knew that current annual (365 days) interest rate in the market was 6.9%, and wanted to
check if there are missing opportunities of earning extra by managing the cash conversion cycle more
efficiently.
Requirements

a) Assuming a constant rate for purchases, production, and sales throughout the year, what are Microsoft
and its competitors existing operating cycle (OC), cash conversion cycle (CCC), and how much is resource
is absorbed in there CCCs?

b) If Microsoft can optimize operations according to industry standards, what would its operating cycle
(OC) , cash conversion cycle (CCC), and how much is resource will be absorbed in its CCC under these more
efficient conditions? What about Oracle?

c) What is the annual cost of Microsoft's operational inefficiency, or in other words, longer CCC?

d) Based on your findings so far, should Microsoft & Oracle try to achieve industry level efficiency? Why
or why not?

Deadline
Answer all the aforementioned questions (with calculations). Turn the assignment in through Classroom)
on or before 19 September, 2021.

N.B. - Each day of delayed submission of any item will be penalized with 1% reduction in the overall
grade. Plagiarism will be met with highest penalty.

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