Question

Please write at least three well composed paragraphs that explain the cash realization cycle. What role does inventory turnover and receivable collection play in the realization of cash for a business?

Answer 1

Cash realization cycle is the length of time between a firm’s purchase of inventory and and recipt of cash from accounts receivable. It is the time required for a business to turn purchase into cash receipts from customers. Cash realization cycle represents the number of days a firm’s cash remains tied up within the operation business. A cash flow analysis using cash realization cycle also reveals in, an overall manner, how efficiently the company is managing it’s working capital.

A higher inventory turnover decreases the cash realization cycle. A lower cash realization increases the cash realization cycle. The cash realization cycle measures the number of days it takes a company to generate and collect revenue from its inventory assets.

When the days inventory outstanding is low, it reduces cash realization cycle. This means a company is able to collect cash from revenues quickly, the business is able to use its working capital in other areas. When the day inventory outstanding is high, cash realization cycle. This means it takes company longer to collect cash from revenues, which causes potential cash issue to arise when it company needs working capital.