Question

Sheridan’s Masonry management estimates that it takes the company 24 days on average to pay its suppliers. Management also knows that the company has days’ sales in inventory of 49 days and days’ sales outstanding of 32 days. How does Sheridan’s cash conversion cycle compare with the industry average of 64 days?

Sheridan’s cash conversion cycle is enter the cash conversion cycle in days days.

Sheridan’s cash conversion cycle is ___ than the industry average. The firm is equally ___ efficient than other firms in the industry in managing its working capital.

Answer 1

The conversion cycle of Sheridan is :

The formula of conversion cycle is :

= Days sales outstanding + Days inventory outstanding - days payables

= 49 days + 32 days - 24 days

= 57 days

The cash conversion cycle is less than the industry average. The firm is equally more efficient than other firms in the industry in managing its working capital.

As the cash conversion cycle is low, it indicates that less funds are tied in the inventory of the business. The company can buy inventory sell it and receive cash from its customers in less time.