Cash conversion cycle
The text identifies three principal components that jointly comprise the cash conversion cycle.
The cash conversion cycle is defined as the average length of time a dollar is tied up in current
assets, and it is determined by the interaction between the inventory conversion period,
receivables collection period, and the payables deferral period. Ideally, a company wants to
minimize the cash conversion cycle as much as possible. In some circumstances, a firm has a
comparative advantage in working capital management because of the nature of its business. We
will look at the cash conversion cycles of companies and their implications.
You will answer ALL of the following questions in this topic
a. Write down the annual sales and cost of goods sold for the most recent two years.
b. Go to the firm’s balance sheet. Write down the balances shown for the firm’s inventories, accounts receivable, and accounts payable.
c. Using the information from parts a and b, calculate its inventory turnover, accounts receivable turnover, and accounts payable turnover.
d. Calculate production cycle, collection cycle, and accounts payable cycle.
e. What is the company’s cash conversion cycle?
f. Discuss the results that you receive in one paragraph. Should the company decrease cash conversion cycle?
