Question

A firm has an inventory period of 94.2 days, an accounts payable period of 40.4 days, and an accounts receivable turnover rate of 17.6. what is the length of the cash cycle?

Answer 1

The length of the cash conversion cycle is 74.54 days.

Given here, the accounts receivable turnover rate is 17.6.

First , we have to calculate the Days sales outstanding with the formula Days sales outstanding(DSO) = 365/Account receivable turnover

                                                 = 365/17.6

                                                 = 20.74days.

Now we have to calculate the cash conversion cycle, with the formula Cash conversion cycle= DSO + DIO - DPO (DSO=Days sales outstanding, DIO = days inventory outstanding, DPO= days payables outstanding) .                

                                                 = 20.74+94.2-40.4

          Cash conversion cycle = 74.54 Days.

The period (in days) it takes for a business to convert its investments in inventory and other resources into cash flows from sales is known as the cash conversion cycle (CCC). Cash Cycle, aims to quantify the length of time that each net input dollar spends in the production and sales cycle before it is turned into received cash. The CCC is one of a number of quantitative metrics that are used to assess how effectively a company's operations and management are conducted.

Rising CCC numbers should prompt more research and analysis based on other criteria, whereas declining or stable CCC values over several periods are a healthy sign. Keep in mind that the CCC only applies to certain industries that depend on inventory management and related activities.

To learn more about cash conversion cycle, refer this link.

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