Question

Aztec Products wishes to evaluate its cash conversion cycle (CCC). Research by one of the firm’s financial analysts indicates that on average the firm holds items in inventory for 65 days, pays its suppliers 35 days after purchase, and collects its receivables after 55 days. The firm’s annual sales (all on credit) are about R2.1 billion, its cost of goods sold represent about 67 percent of sales, and purchases represent about 40 percent of cost of goods sold. Assume a 365-day year.

3.1 (7 points) What is Aztec Products’ cash conversion (CCC)?

3.2 (3 points) If Aztec could shorten its CCC by 5 days, would it be best to reduce the

inventory holding period, reduce the receivable collection period, or extend the

accounts payable period? Why?

3.3 (3 points) How should the firm manage its inventory, accounts receivable

Answer 1

CCC cash conversion cycle is where the selling of purchased goods is done and the payment is received

Answer to Question 1

Aztech product cash conversion is Days of sales outstanding PLUS days of inventory outstanding MINUS days of payables outstanding 55+65-35 = 85 days

2. If the CCC of 85 days is reduced by 5 days i.e to 80 days , as per my opinion it would be better to reduce the receivable collection period as we can get the money early it would be useful to invest somewhere else or increase our cash in hnad capacity.

3.Firm can manage its inventory by prioritizing your inventory, practice the 80/20 inventory rule , should follow one consistent method for eg either FIFO or weighted average , track all the product information, track to outflow and inflow

Firm should manage its accounts receivable as should properly evaluate the financial and credit history, set clear payment terms ,do electronic invoicing to keep a systematic invoicing , provide multiple payment option so that no customer would face problem