Question

Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $45,625,000, or $125,000 a day on a 365-day basis. The firm's cost of goods sold is 60% of sales. On average, the company has $7,500,000 in inventory, $5,750,000 in accounts receivable, and $2,750,000 in accounts payable. Its CFO has proposed new policies that would result in a 25% reduction in both average inventories and accounts receivable, and a 10% increase in average accounts payable. She also anticipates that these policies would reduce sales by 5%. What effect would these policies have on the company's cash conversion cycle? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Answer 1

	Present (P)	Formula	Proposed
Annual Sales per day	125,000	(1-5%)*Present annual sales	118,750
COGS	75,000	60%*Annual sales per day	71,250
Inventory	7,500,000	(1-25%)*Present inventory	5,625,000
A/C receivable	5,750,000	(1-25%)*Present A/C receivable	4,312,500
A/C payable	2,750,000	(1-10%)*A/C payable	2,475,000

Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payable outstanding

= (Average Inventory/COGS per day) + (Average A/C receivable/sales per day) - (Average A/C payable/COGS per day)

	[A]	[B]	[C]	[A] + [B] -[C]
Cash conversion cycle	Days Inventory O/S	Days Sales O/S	Days Payables O/S
Formula	Inventory/COGS	A/C receivable/sales	A/C payable/COGS
Present	100.00	46.00	36.67	109.33
Proposed	78.95	36.32	34.74	80.53

With the proposed changes, the CCC will decrease by 109.33 - 80.53 = 28.81 days.