Question

American Products is concerned about managing cash efficiently. On the​ average, inventories have an age of

8484

​days, and accounts receivable are collected in

3939

days. Accounts payable are paid approximately

3333

days after they arise. The firm has annual sales of about

​$3737

million. Cost of goods sold are

​$2020

​million, and purchases are

​$1616

million.

a.  Calculate the​ firm's operating

cycle.

b.  Calculate the​ firm's cash conversion

cycle.

c.  Calculate the amount of resources needed to support the​ firm's cash conversion cycle.

d.  Discuss how management might be able to reduce the cash conversion cycle.

a. American​ Products' operating​ cycle, OC, is

nothing

days.  ​(Round to the nearest whole​ number.)

Answer 1

a.  Calculate the​ firm's operating cycle.

Firm's operating cycle = days in inventory + days receivables = 84 + 39 = 123 days

b.  Calculate the​ firm's cash conversion cycle.

Firm's cash conversion cycle = Firm's operating cycle - payables in days = 123 - 33 = 90 days

c.  Calculate the amount of resources needed to support the​ firm's cash conversion cycle.

Amount of resources needed = Average inventory + Average receivables - average payables = 84/365 x Costs of goods sold + 39 / 365 x Sales - 33 / 365 x purchases = 84/365 x 20 + 39/365 x 37 - 33/365 x 16 = $  7.11 million

d.  Discuss how management might be able to reduce the cash conversion cycle.

• Reduce the credit period offer to the customer
• Introduce some discount on cash sales, this may incentivize people to shift from credit to cash sales
• Increase the credit period with suppliers and vendors
• Hold lesser inventory, shift to techniques like vendor manage inventory, Just-In-Time.