Question

Increased Efficiency, Inc. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 65% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 40 days. What effect would these policies have on the company's cash conversion cycle

Answer 1

Answer and Explanation:

The cash conversion cycle refers to the cycle which includes the days inventory outstanding and days sales outstanding and deduct the days payable outstanding

The cash cycle = Days inventory outstanding + days sale outstanding - days payable outstanding

The computation is shown in the attachment below:

As we can see in the attachment the new proposed policy i.e 234.19 days would decrease the cash conversion cycle by 24.27 days as compared with the current proposal policy i.e 258.46 days