In: Finance
What is the cash conversion cycle of this company? Please show your working.
Annual Sales: €35,000
Average Accounts Receivables: €750
COGS: €20,000
Average Inventories: €3,000
Average Trade Payables: €1,500
Solution: Cash Conversion Cycle calculation measures how long cash is tied up in inventory and other resources input into cash. we divide it into 3 parts
1st Part: Inventory : it represent how long will company take to sell this inventory
2nd part: it represent the current sales and the amount of time it takes to collect the cash from these sales.
3rd part: it represent when company will pay to his vendors for purchased goods.
Cash Conversion Cycle= Days Inventory Outstanding+Days of Sales Outstanding + Days Payable Outstanding
Days Inventory Outstanding= Average inventory/Cost of goods sold*365
= 3000/20000*365=54.75 days Round of 55 days
Days of Sales Outstanding= AccountReceivable/ Net credit Sale*365
= 750/35000*365=7.82 days = 8 days
Days Payable Outstanding= Accounts Payable/ Cost of goods sold*365
= 1500/20000*365= 27.37= 27 days
According to Formula= 55+8-27=36 days
High Cash conversion cycle means companyis inefficient to measure the cash.
Low cash conversion cycle means company is efficient in managing cash
Conclusion: Answer is 36 days