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There are a number of reasons why Toys® could see a decrease in there cash position while sales are rising. While sales are rising, there could be increased amounts of money being put into raw materials, labor and other expenses. A business has to put up funds for all the expenses, so while manufacturing and selling procedures of the products the company has already invested quite a lot of money. Then if sales increase at the same time, the company has to invest a lot more money they don’t have causing even a larger amount not being paid out the time it’s invested. Some other reasons for a lower cash position at the time of rising sales are holding larger amounts of inventory and over manufacturing products.
Recommendations to management on ways to reduce the cash gap
There are three specific ways to manage the cash gap, “increase the payables period; decrease the collections period; or increase inventory turnover”. By increasing payables time, it will allow the company more time to receive money while there getting paid on the accounts receivables. Decreasing collection times on receivables will allow the company to get money faster, therefore, the gap is not so large. In some larger companies the do not allow customers but to pay exactly when goods are sold, so there is no cash gap and money is received on time, eliminating the cash gap all together in this situation.
The last way to manage the cash gap is increase the amount of good sold over a period of time. More products out over a shorter period of time increases the ability to get receivables back earlier. Instead of speading the factory rate out at slower rates, increase the amount being produced over a shorter per ...