Reference no: EM133014890
Question - You are a risk consultant hired to help ABC Pty Ltd, a fashion clothing distribution business, to better manage its risks better. ABC sources clothes from one overseas supplier, and it has one customer, which is a major retailer. Most of its products are made from cotton sourced from overseas. Finished goods take one (1) month from the date of order to be made, and three (3) months for transportation and storage before they are sold on credit to ABC's customer. ABC has two (2) months to pay its supplier from the date of order. Its customer has one (1) month to pay from the date of purchase.
Recently, ABC's customer has been failing to pay on time due to falling sales, and its supplier is taking longer to manufacture due to a fire in their factory. Moreover, a drought is causing a global shortage of cotton.
Required - Answer ALL of the following questions:
-Explain the concept of liquidity risk.
-Calculate the Cash Flow Conversion Cycle (CCC) for ABC in days. What will happen to the liquidity of ABC if ABC's customer takes longer to pay?
-Describe what other risks are present for ABC and how these are related to liquidity risk.
-Discuss what actions ABC could take to reduce its liquidity risk and build greater operational and financial resilience.
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