Question

Pick a specific industry and post your explanation of the cash conversion cycle in that industry. Identify an example of how it could be shortened

Answer 1

The cash conversion cycle refers to a cash flow calculation that helps in measuring the time it takes a company to convert its inventory and other resource inputs into cash. In other words we can say that cash conversion cycle is calculated on the basis of Inventory days, Receivable days and payable days.

Now let’s take information of an manufacturing company.

Danial manufacturing firm have inventory turnover ratio of 5 times, this firm has average payment of 53 days, it has average collection period of 83 days. This firm has annual sales of $4.4 millions and cost of goods sold of $3.4 millions. Accountant want to calculate cash combersion cycle. (use 365 days).

Explanation;

Cash conversion cycle will be calculated as follow;

Cash conversion Cycle = Inventory days + Receivable days – Payable days

Now let’s calculate inventory days;

Inventory days (365 / 5) = 73 days

Receivable days are given = 83 days

Payable days are given = 53 days

Thus cash conversion cycle will be (73 days + 83 days – 53 days) = 103 days

So overall we can say that manufacturig company have cash convesrion cycle of 103 days.