Cash conversion cycle American Products is concerned about managing cash efficie

Question

Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and, a 365-day year.


a. Calculate the firm’s operating cycle.

b. Calculate the firm’s cash conversion cycle.

c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.

d. Discuss how management might be able to reduce the cash conversion cycle (be brief).

Explanation / Answer

a) operating cycle: Days of inventory outstanding(DIO) + days of sales outstanding(DSO) - days of payable outstanding(DPO) Receivables turnover ratio = 365/60 = 6.083 DSO = 365 / 6.0833 = 60.00 Operating Cycle = 90 + 60 - 30 = 120 days b) cash conversion cycle (net operating cycle) = 90 + 60 - 30 = 120 days C) resources required: 30,000,000 / (365/120) = 9,865,175 D) you can improve by increase time you take to pay other people, shorten the time you give other people to pay you and reduce your inventory

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