Business Finance LA1
Business Finance LA1
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 production cycle (also called Days of Sales in Inventory), receivables collection period (also called Number of Days of Credit, Collection cycle, or Days of Sales Outstanding), and the accounts payable cycle (also called Days of Payable Outstanding). 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.
In your initial response to the topic you have to answer all 6 questions.
Go to http://finance.yahoo.com and get a quote for one company of your choice. On the left column, scroll down and select “Income Statement.” Write down the annual sales, cost of goods sold, and depreciation expense for the most recent year. For some companies depreciation expense can be found in Cash Flow statement.
Select the firm’s Balance Sheet. Write down the balances shown for the firm’s inventories, accounts receivable, and accounts payable.
Using the information from parts a and b, calculate its inventory turnover, accounts receivable turnover, and accounts payable turnover. Accounts Payable Turnover formula is Accounts Payable Turnover = COGS/Accounts Payable. You should show your work!
Calculate production cycle (also called Days of Sales in Inventory), collection cycle (also called Number of Days of Credit or Days of Sales Outstanding), and accounts payable cycle (also called Days of Payable Outstanding). You should show your work!
What is the company’s cash conversion cycle? You should show your work! Please note that there is a typo in the textbook. The correct formual is
CCC = DSI + DSO – DPO
Discuss the results that you receive in one paragraph. Should the company decrease cash conversion cycle? Please explain your answer.
In your responses to other students compare the cash conversion cycles of your company with the cash conversion cycle in another student’s posting. What factors are responsible for these differences? Are these differences firm specific or are they consequences of the nature of the businesses in which these firms operate? Please explain your answers.