Working capital metrics for a firm: Days’ Inventory Held = 40 days Days Sales Ou
ID: 2825686 • Letter: W
Question
Working capital metrics for a firm:
Days’ Inventory Held = 40 days
Days Sales Outstanding =50 days
Days Payable Outstanding = 20 days
Management wants the firm to achieve the industry average Cash Conversion Cycle of 50 days. After careful examination, you determine that the only component of the Cash Conversion Cycle that you can control is Days Sales Outstanding. If you were able to lower the Days Sales Outstanding to achieve management’s stated goal of a 50 day Cash Conversion Cycle, calculate the new level of accounts receivable that will exist on the firm’s balance sheet. Assume that the firm has annual revenues of $10M. Please show work
Explanation / Answer
Cash conversion cycle = Days’ Inventory Held + Days Sales Outstanding - Days Payable Outstanding
50(Industry average) = 40 + X - 20
New sales outstanding X = 30.
Days Sales Outstanding = accounts receivable / (annual revenue/ 365 days)
30 = accounts receivables/ 27397.26
= 821,917.808.
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