Your firm is concerned about managing cash efficiency. On average, the firm holds inventories 180 days,...
Your firm is concerned about managing cash efficiency. On average, the firm holds
inventories 180 days, pays its suppliers in 30 days, and collects the accounts receivables
in 120 days. The firm has annual credit sales of $150 million, annual inventories $100
million, and annual credit purchase $90 million.
(1) Calculate the firm’s operating cycle
(2) Calculate the firm’s cash cycle
(3) Calculate the amount of cash needed to support the firm’s cash cycle
(4) Discuss how management might be able to reduce the cash cycle. What is the benefit of
reducing cash cycle?
Homework Answers
(a)-The firm's operating cycle.
The firm's operating cycle = Average collection period + Average days of inventory
= 120 Days + 180 Days
= 300 Days
(b)-The firm's cash conversion cycle.
The firm's cash conversion cycle = Firm's operating cycle – Average payables period
= 300 Days – 30 Days
= 270 Days
(c)-The amount of resources needed to support the firm's cash conversion cycle.
The amount of resources needed to support the firm's cash conversion cycle = Annual sales x [Cash conversion cycle / 365 Days]
= $150,000,000 x [270 Days / 365 Days]
= $110,958,904.11
(d)-The management can decrease or reduce the cash conversion cycle by increasing the accounts payables period days and by decreasing the average collection period and the Average days of inventory.
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