Halcyon Foods: Working Capital Release and Supplier Discount
Halcyon Foods has revenue of $480 million, COGS $360 million, and average balances: receivables $81.5 million, inventory $47.3 million, payables $34.5 million. Its DSO is 62 days, DIO 48 days, and DPO 35 days. A key supplier offers 2/10 net 45 on $18 million of annual purchases. Halcyon's revolving credit facility costs 7.5% pre-tax, and it has a 30% tax rate. The CFO wants to release $20 million of cash over 12 months but does not want to damage supplier relationships or customer sales. Two large customers, representing 28% of revenue, are requesting 90-day terms.
1. Calculate the cash conversion cycle and assess whether the supplier discount should be taken.
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CCC = DSO + DIO − DPO = 62 + 48 − 35 = 75 days. Supplier terms 2/10 net 45: forgoing the discount costs approximately (0.02 / 0.98) × (365 / 35) = 21.3% annualized. The revolver costs 7.5% pre-tax, so taking the discount is value-accretive if liquidity is available.
On $18 million of annual purchases, the discount is $360,000 per year. Paying 35 days earlier requires financing of about $17.64 million for 35 days: $17.64 million × 7.5% × 35 / 365 ≈ $127,000. Net pre-tax benefit is approximately $233,000, or about $163,000 after tax at 30%. The decision is not close on cost of capital. The constraint is short-term liquidity and whether the supplier will extend the discount to all purchases. Take the discount, but fund it from released working capital rather than a permanent revolver draw if possible.
2. Recommend a 12-month plan to release $20 million without damaging supplier or customer relationships.
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Set an explicit trade-off: do not simply stretch payables or tighten all customers. A workable plan: (1) receivables-segment the two large customers requesting 90-day terms; offer a 1% early-pay discount or supply-chain finance only where the margin supports it; target an 8-day DSO reduction on the non-concentrated portfolio, releasing about $10.5 million. (2) Inventory-reduce 12 days of DIO through SKU rationalization and supplier-managed inventory, releasing about $11.8 million, but protect service levels on high-margin SKUs. (3) Payables-take the 2/10 net 45 discount, not a blanket DPO extension; extend terms only with suppliers that agree, targeting 7 days, about $6.9 million.
The combined potential exceeds $20 million. Use the supplier discount as a test of whether treasury is optimizing total cost, not just DPO. Track DSO by customer segment and DIO by SKU class.