Answer to Question #242657 in Other for A.A

Question

Adams & Adam They own three large warehouses from where they sell smaller hardware
tools and equipment (e.g. hammers, nails, chain saws, jack-hammers, paint) to the
public. They usually buy large amounts of inventory on credit to make use of bulk
discounts, and keep very little cash on hand. Every year they arrange a massive
clearance sale to get rid of old stock.
Adams & Adams has a moderate working capital approach to determining the
appropriate balance between the short-term and long-term financing needed by
the firm. What makes this approach particularly challenging for Adams & Adams is
the difficulty they have in determining the exact lifespan of their equipment –
depending on the market and the season, they can be either extremely busy or
very quiet.
Explain why this uncertainty will make it difficult for Adams & Adams to follow the
moderate working capital approach. How can they better manage their inventory
and cash flow to ensure that they will not run the risk of bankruptcy?

Answer 1

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