FSA Case Final

Corporate Policy toward Vendor Payments Case Study
Dr. David Perkins
Abilene Christian University
#1 Solution: Year 1 Year 2 Year 3 Year 4 #2 Solution:*
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Quick Ratio - 0.8 0.8 0.7 0.6 Decreasing
example liquidity
2.1 1.4 1.3 Decreasing

Current Ratio liquidity
3.4 3.8 4.1 Increasing liquidity

# Receivables Turns
12.5 13.1 13.5 Increasing liquidity

# Inventory Turns
14.3 8.1 5.5 Decreasing

# Payables Turns liquidity
29 28 27 Increasing liquidity
DRO

DIO
26 45 67 Decreasing
DPO liquidity

CCC
2. These liquidity measures above are conflicting since “extending or deferring payment will
result in conflicting liquidity measures.” (Perkins & Tippens, 2016). Even though the quick ratio,
current ratio, and days payables outstanding (DPO) indicate decreasing liquidity, the cash
conversion cycle (CCC), days receivables outstanding (DRO), and days inventory outstanding
(DIO) indicate increasing liquidity.
Despite the quick and the current ratios evidencing decreasing liquidity, the current ratio
was at a value of 1.3 in year 4. With the current ratio, “higher is generally considered better, but
too high may indicate inefficient use of assets” (Cagle, Campbell & Jones 2013). The current
ratio decreased yearly, but remained above 1 each year, which indicates that CiM has sufficient
current liabilities to cover its current assets. Even though it was higher previously, this indicates
that CiM was inefficiently using its assets before, and is more efficiently using its assets now.
Additionally, the components of the CCC conflict in terms of liquidity. Overall, the CCC
shows what occurs with the business’s inventory, receivables, and payables (Cagle, Campbell &
Jones, 2013). The DRO and DIO indicate increasing liquidity. On its own, an increasing DPO
signals decreasing liquidity; however, the increasing DPO drives the CCC down which indicates
increasing liquidity. Even though the DPO increased over the period, this was a strategic decision
in order to shorten the CCC. The increasing DPO drove CiM’s CCC down over the entire period,
and “the shorter the CCC, the more liquid the company’s working-capital position” (Cagle,
Campbell & Jones, 2013). CiM’s decreasing trend in CCC demonstrates that its working-capital
position has become more liquid over the period. Overall, these trends indicate increasing
liquidity.
However, a shorter CCC does not necessarily indicate better liquidity. The CCC is made
up of the DRO, DIO, and DPO. A decreasing DRO and DIO result in a shorter CCC and indicate
improving liquidity. A smaller DRO means the company is collecting its receivables quicker, and
a shorter DIO suggests the company is selling inventory faster or more efficiently managing its
inventory. An increasing DPO indicates that the company is paying vendors slower. This could
indicate a strategic decision to delay payments to vendors in order to retain cash, resulting in
improved liquidity. If an increasing DPO is not due to a strategic decision, this can indicate
decreasing liquidity. The DPO can increase because of delayed vendor payments due to a lack of
cash on hand. If the company’s DPO increases due to an inability to pay vendors, the decreasing
CCC does not indicate improved liquidity.
3. Even if a company delays payments to vendors for a strategic purpose, there are consequences.
The direct costs of delaying payments to vendors are the forfeited discount price and potential
loss of vendors. Payments to vendors that do not adhere to the terms of the payment directly
increase the cost of goods sold because the payments do not qualify for the discounted price
negotiated under the payment terms. The delayed payment to vendors may cause vendors to end
their business arrangements with the company. Vendors want to collect their receivables as soon
as possible. If the vendor’s business is strained from delayed payment, then the vendor will be
forced to find business elsewhere.
The indirect costs of delaying payments to vendors place a heavy toll on the vendor’s
business, which may result in higher costs for the buyer. Delaying payments to vendors with the
one-sided goal of improving the receiving company’s CCC, is not a great strategy for
maintaining friendly relationships with vendors. Vendors deal with the consequences of longer
aging receivables and potential shortages of cash. Strained vendor relations can result in a supply
of low-quality products or raised prices, in the vendors’ attempt to improve their cash balances.
The buyer’s employees will also spend additional time dealing with vendors that are seeking
payment for orders. Dealing with unhappy vendors can place a strain on employees and lead to
higher employee turnover as a result of increased workplace stress.
The hidden costs associated with delaying payments to vendors is the bad reputation
developed from untimely payments and the damage inflicted on small businesses. A bad
reputation in business leads to a less competitive supply of vendors and increased costs. Small
businesses that lack negotiating power will bear the full costs of delayed payments. They will not
have as much cash on hand as they used to, for paying bills and other costs associated with their
business. Loans taken out to meet cash demands will increase costs for the vendor.
4. The Institute of Management Accountants (IMA) exists to advocate and push for exceptionally
high standards throughout the profession of management accounting, which they do by writing
policies dealing with ethical codes within the profession for ethical business practices. The IMA
Statement of Ethical Professional Practice was released in 2017 as a tool to guide policy and
practice, with updates that work to be most applicable with the current ethical climate. The IMA
sets the expectation that members are responsible for complying with and upholding their
standards: Competence, Confidentiality, Integrity, and Credibility (IMA, 2017). In the analysis
of the policy enacted by CiM Corp. Chief Financial Officer, we recognized a lapse in compliance
with the Credibility and Integrity Standards.
The policy was centered around a goal to improve liquidity by decreasing the overall
Cash Conversion Cycle. This policy is not unethical in its nature; the questionable practices
arose as they enacted and executed the policy, which increased their goal for Days Payable
Outstanding to 85 days. The Credibility clause of IMA’s statement notes the necessity of
objective and fair communications across business practices, which includes comprehensive
reports regarding any delays or deficiencies regarding information, timeliness, and processing
(IMA, 2017). Karla received numerous calls in CiM’s finance department from vendors
pleading CiM’s payment on invoices, which led us to believe that there was a lack of
communication regarding their new policy. CiM could have executed this policy as a negotiation
with their vendors, but their unilateral agreements to break their commitments did not display
sound ethics in their business practices. Furthermore, the IMA seeks members to act in a way
that positively affects their organization’s environment. After the policy was executed, multiple
CiM employees left the organizations with comments about a negative work environment
causing stress.
5. Based on our research and previous analyses, we recommend that Karla begins the discussion
with her boss and says the following: As seen by these ratios, there are conflicting results. The
trends seen in the current and quick ratios indicate a decline in liquidity, while the decreasing
CCC shows significant improvement in the company’s liquidity. Given the static nature and the
difficulty in determining the reason behind changes in these ratios, the current and quick ratios
are assessed with the CCC, which remedies these disadvantages (Cagle, Campbell & Jones,
2013). Thus, taken as a whole, these ratios indicate great improvement in the company’s
liquidity. However, policies can have unintended consequences, and some of these consequences
have occurred.
As originally expected, more vendors called to discuss the new policy. What was not
expected was how many of these calls would occur, the nature of these calls, and the toll that
they had on employees throughout the company. Many of our vendors are outraged over the
policy change, believing that the new policy goes against the agreements we made with them.
Several have severed their relationships with CiM, placing significant pressure on our supply
chain and employees to find alternative suppliers without halting production. The vendors who
have stayed with the company thus far are also beginning to consider leaving because our
smaller suppliers are unable to obtain credit with DJX, and the ones that do are surprised by the
expense of financing. These strained vendor relations are also resulting in higher employee
turnover. In my own department, two colleagues have left due to stress and low morale. Finally,
the company’s public image is beginning to be tarnished. We have recently had several quality
issues with our product, caused by a mixture of our original vendors trying to make the new
policy work and of new suppliers being accepted before the quality of their materials is
determined.
In the short term, CiM has successfully handled all of these problems as they arise, but
without changes, these problems will eventually become uncontrollable. I fear that without a
compromise, CiM’s image will be irreparably damaged to vendors, consumers, and potential
employees. However, there are ways to satisfy all parties without giving up the improvement the
company has made in its CCC. First, CiM can improve the CCC by tightening consumer credit
policies. If the company collects payments from customers faster our DRO, and therefore our
CCC, will improve. Second, the corporation can begin switching over to a just-in-time inventory
method, which will improve DIO. Third, CiM can compromise with the suppliers. Instead of
waiting till long after the agreed-upon payment date, the business can simply wait to pay the day
before or on the agreed-upon day. Another option is to pay within the discount period. Currently
CiM is missing out on prompt payment discounts with this new policy, and with these discounts
our amount of cash on hand could increase. Currently, under the new policy, our cash has
steadily decreased each month. Ultimately, there are ways to improve CiM’s liquidity and CCC
that will keep all parties satisfied and leave the company’s name untarnished.
6. As we suggested Karla mention, policies can definitely have unintended consequences just as
normal everyday decisions can have unintended consequences. Unintended consequences flow
by a myriad of names, in the healthcare industry, “unintended consequences are called ‘side
effects’” (Duncan, 2015). Forbes does a great job of communicating the term unintended as often
something that is not predictable until the action is enacted or the pill is swallowed, but that is
often not the case in business. Businesses abide by legislative and societal boundaries that
distinguish ‘good’ behavior from ‘bad’. Businesses have ethical codes and deadlines in order to
keep product moving and people employed. These factors foster a calculated approach to
conducting business, but often vital secondary factors get overlooked when chasing financial
results. This is probably a result of cognitive bias as we missed the forest for the trees.
One of the co-authors of this case analysis has personally experienced a policy that had
an unintended consequence in their personal life. When working in retail, the company the co-
author worked at began to judge individual stores based on the rate of customers' emails that
were tracked at checkout. A store had to maintain a high rate of email capture in order to be
eligible for bonuses. Additionally, employees with low email capture rates were at risk of being
let go. Based on this, the employees began to enter fake emails during checkout when customers
refused to provide their own email. The company ended up receiving more email addresses as a
result of this policy; however, these email addresses were not the customer email addresses that
the company wanted.
As common sense would tell us, there is no foolproof way to make decisions without any
unintended consequences, but there are some guidelines that people in business can utilize in
order to avoid causing more harm than good. Here are some tips leaders can use to improve their
decision making in regard to predicting outcomes and avoiding unintended consequences.
1. Think holistically: In this case, our company produces goods made from raw materials.
Our decisions impact those that buy our goods and those whose materials we buy. Our
supply chain is impacted by a change in policy if that part of our business touches theirs.
2. Be collaborative but also independent: Be inquisitive with those members of the business
which the policy touches but careful to avoid groupthink.
3. Avoid information overload: It can be a challenge to keep things straight with many
different variables at play, keep things as simple as possible and maintain clarity of mind
as that is going to lead to the best decision.
4. Consider other stakeholders: Businesses are interconnected entities, and as such, their
points of contact with other businesses affect other entities within the industry and the
people that make them successful as a result. Considering other points of view, such as
those of employees, suppliers, and customers (among others) is a vital task in
understanding how a decision may impact others.
5. Monitor the results: Not all unintended consequences can be predicted or avoided, so it is
important to monitor newly implemented policies. If it is discovered that these policies
have unintended consequences, leadership should evaluate their findings to determine if
the policy should be updated or removed.
References
Cagle, C.S., Campbell, S. N., & Jones, K. T. (2013, May 1). Analyzing Liquidity Using the Cash
Conversion Cycle. Retrieved From https://www.journalofaccountancy.com/issues/2013/
may/20126764.html
Duncan, R. D. (2015, June 22). Unintended Consequences: Minimizing the ‘Oops Factor’ In
Decision Making. Retrieved from https://www.forbes.com/sites/rodgerdeanduncan/
2015/06/22/unintended-consequences-minimizing-the-oops-factor-in-decision-making/#5
969f68b671b
Institute of Management Accountants. (2017, July). IMA Statement of Ethical Professional

Practice. Retrieved from https://www.imanet.org/-/media/b6fbeeb74d964e6c9fe
654c48456e61f.ashx
Perkins, D., & Tippens, K. (2016, May 2). The Hidden Dangers of Vendor Payments. Retrieved
from https://sfmagazine.com/post-entry/may-2016-the-hidden-dangers-of-vendor-
payments/
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Corporate Policy toward Vendor Payments Case Study

Dr. David Perkins

Abilene Christian University

#1 Solution: Year 1 Year 2 Year 3 Year 4 #2 Solution:*

2.1 1.4 1.3 Decreasing

3.4 3.8 4.1 Increasing liquidity

12.5 13.1 13.5 Increasing liquidity

14.3 8.1 5.5 Decreasing

107 96 89 Increasing liquidity

111 79 49 Increasing liquidity

Institute of Management Accountants. (2017, July). IMA Statement of Ethical Professional

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