American products is concerned about managing cash efficiently.On the average, i

Question

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 that there is a 365 day year. A. Calculate the firms operating cycle B. Calculate the firms cash conversion cycle. C. Calculate the amount of resources needed to support the firms cash conversion cycle. D. Discuss how management might be able to reduce the cash conversion cycle.

Explanation / Answer

American Products is concerned about managing cash efficiently. On 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’s operating-cycle investments are $30 million per 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.

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a.         Operating cycle                     =    Average age of inventories

=    90 days + 60 days

=    150 days answer

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b.         Cash Conversion Cycle        =    Operating cycle - Average payment period

=    120 days answer

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c.         Resources needed                 =    (total annual outlays ¸ 365 days) x CCC

=    [$30,000,000 ¸ 365] x 120

=    $9,863,014 answer

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d.         Shortening either the average age of inventory or the average collection period, lengthening the average payment period, or a combination of these can reduce the cash conversion cycle.

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