Why might a company want to reduce its cash conversion cycle and what are the financial implications of reducing the cash cycle? Can you think of a reason why a company may NOT want to reduce the cash cycle? Please answer in 2-3 paragraphs
The cash conversion cycle is a process that expresses the time taken for a company to convert its investments in inventory and other resources into cash flows from sales. It is also called the Net Operating Cycle or Operating cycle. It takes into account how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills without incurring penalties.
The company might opt to reduce its cash conversion cycle due to following reasons:
The financial implications on reducing the cash conversion cycle would be:
However, the company may not sometimes opt to reduce the cycle due to following reasons:
However, it's better for the company to have a shortercycle rather than a long cash conversion cycle.
Why might a company want to reduce its cash conversion cycle and what are the financial...
Helena Furnishings wants to sharply reduce its cash conversion cycle. Which of the following steps would reduce its cash conversion cycle? a. Everything else being same, the company decreases its average inventory. b. Everything else being same, the company increases the credit period provided to customers. c. Everything else being same, the company pays faster to its suppliers. d. All of the statements above are correct. e. None of the statements above are correct.
Why would your company want to reduce its accounts payable policy? Select One A. Reducing their payables will increase their available cash B. Reducing their payables will slightly increase demand C. Reducing their payables will anger their suppliers D. None of the above
Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days. The company carries average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. It uses a 365-day year. The firm buys on terms of net 30 days, and it pays on time. The CFO believes he can reduce the average inventory to...
P15-1 Cash conversion cycle Metal Supplie ion cycle Metal Supplies is concerned about its cash management. On day's sales in inventory (duration of inventory on shelf) is 90 days. Accounts receivable are collected in 90 days, while accounts are collected in 90 days, while accounts payable are paid in 60 days. Metal Supplies has annual sales of upplies has annual sales of $ 14 million; cost of goods sold total $9.5 million, and purchases are $5 million. (Note: Use a...
For a hypothetical economy in the growth portion of its business cycle, why might you want to implement a fiscal policy which would contract the rate of growth in the economy?
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...
QUESTION 2 Cash Conversion Cycle Wolfgang Electricals estimates that it takes the company 31 days on average to pay off its suppliers. It also knows that it has days' sales in inventory of 54 days and days sales' outstanding of 34 days. What is its cash conversion cycle?
Why is understanding the relationship between the cash conversion cycle (CCC) and net working capital important to the contemporary business executive? Explain ways in which executive decisions regarding the CCC and net working capital can affect a company, both adversely and beneficially. Support your response with a specific example from the business world.
Why is understanding the relationship between the cash conversion cycle (CCC) and net working capital important to the contemporary business executive? Explain ways in which executive decisions...
P14-1 (similar to) 13 Question Help 0 Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 84 days, and accounts receivable are collected in 31 days. Accounts payable are paid approximately 25 days after they arise. The firm has annual sales of about $36 million. Cost of goods sold are $19 million, and purchases are $13 million. a. Calculate the firm's operating cycle. b. Calculate the firm's cash conversion cycle....
CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain's 2016 sales (all on credit) were $272,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $8,160. It turned over its inventory 4 times during the year, and its DSO was 35 days. The firm had fixed assets totaling $32,000. Chastain's payables deferral period...