Question

Acme’s CFO has determined that, given Acme’s current levels of Working Capital and the rising interest rate trends that make financing more expensive, Acme must improve its Working Capital position. Acme’s Vice President of Operations has been tasked with this initiative. Which of the following financial levers (actions, improvements) should she take, that will help drive the working capital reduction required by the CFO? Group of answer choices

A.Contracting with shipping companies that have improved low-sulfur fuel so that she can reduce Acme’s carbon footprint
B.Directing her Sourcing managers to source products from more socially responsible suppliers
C.Negotiating with suppliers to change the contract terms so as to increase Acme’s Days Payable
D.Raising all direct workers’ salary to the minimum wage
E.Reviewing the Indirect Cost Allocation to the major product lines

Answer 1

To improve Acme's working capital position, the Vice President of Operations should focus on negotiating with suppliers to extend the terms of payment (Days Payable), which allows the company to maintain cash longer and improve liquidity.

Step-by-step explanation:

The Vice President of Operations at Acme should focus on actions that directly impact working capital. Since working capital is defined as current assets minus current liabilities, improvements often involve managing inventories, receivables, and payables more efficiently. In this scenario, option C, Negotiating with suppliers to change the contract terms so as to increase Acme’s Days Payable, stands out as the financial lever that would directly improve the working capital position. By increasing the days payable, Acme can hold onto its cash longer, reducing the immediate cash outflow and improving its short-term liquidity.

Other levers, such as raising workers' wages or reviewing indirect cost allocation, do not directly impact current liabilities and therefore are less effective at improving the working capital position in the short term. Adjusting payment terms to defer outflow is a strategic move that allows the company more flexibility and possibly better interest rates, particularly important when interest rates are on the rise.