Question

Marshall Inc. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction in inventory conversion period and a 10% in DSO. She also anticipates that the payables deferral period would remain unchanged at 35 days. What will be the company's cash conversion cycle before and after the new policies being implemented? Round to the nearest whole day.

Answer 1

Cash Conversion Cycle = Inventory Days + Receivable Days - Payable Days

Payable days will remain constant at 35 days. Therefore, we need to calculate inventory days and receivable days under old policy. After that we can simply reduce the inventory and receivable days by the given percentages to arrive at the cash conversion cycle under the new policy:

Before policy change
Annual Sales	$        36,500,000
Daily Sales	$              100,000
Annual COGS	$        27,375,000
Inventory Days	120
Receivable Days	80
Payable Days	35
Cash Conversion Cycle	165

After policy change
Annual Sales	$        36,500,000
Daily Sales	$              100,000
Annual COGS	$        27,375,000
Inventory Days	96
Receivable Days	72
Payable Days	35
Cash Conversion Cycle	133