Question

After reading through Chapter 16 regarding managing global operations and the cash conversion cycle, I understand that the cash conversion cycle or CCC expresses the time it takes for a company to covert their investments into inventory. I know that the CCC is also an important tool in determining how efficient a company is at turning their inventory into sales and then into cash. The question I have from this section is how does the cash conversion cycle affect working capital and what is the relationship between the two?

Answer 1

Answer :

Undearstanding the Terms of Working Capital and Cash conversion cycle :

• Working Capital is the difference between Current assets and current liabilities in a company.
• and Cash conversion cycle is the time working capital components take to convert into cash.
• For Example : how fast or slow, the cash is received from Account receivable or debtors .

Effects of Cash Conversion cycle on working capital :

• Cash Conversion cycle is a measure of time which is taken by a company's working capital to convert in to cash.
• The faster the working capital converts into cash , the shorter the Cash Conversion cycle.

See below formula :

• Cash Conversion cycle ( in Days) = Days inventory outstanding + Days receivable outstanding - Days payable outstanding .
• the shorter the Cash Conversion cycle, the healtheir the company's financial position is .

Relationship between Cash Conversion cycle on working capital:

• Cash Conversion cycle and working capital are connected as they both indicate about company's liquidity .
• working capital is having its componenets as company's short term assets and liabilies, such as Account receivables and Account payables, which keep converting into cash during its operational cycle.
• Cash Conversion cycle also tells about the duration of these components such as how fast a receivable amount is received or how soon a payable amount is paid.
• Cash is also the main element of both the concepts.

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