Question

How does the cash conversion cycle relate to the concept of time value of money?

Discuss the implications of a negative cash conversion cycle

Answer 1

Cash conversion cycle the cash conversion cycle is a metric that expresses the length of time of in days that it takes for a company to convert resource inputs into cash floors the cash conversion cycle attempts to measure the amount of time each mat input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell the inventory the amount of time needed to collect receivables and the length of time the company is afforded to pay it's bill without incurring penalties usually company acquires inventory on credit which results in accounts payable a company can also sell products on credit cell resulting in accounts receivable cash therefore is not a factor until the company paste the accounts payable and collect the accounts receivable the cash conversion cycle measures the time between the cash outlay and the cash received the cash conversion cycle cycle cannot be observed directly in cash flows which are affected by financing and investing activities as well rather the cycle refers to the time span between the firm's disbursement and the collection of cash the cash conversion cycle is a metric used to gauge the effectiveness of a company's management and consequently the overall health of the company the calculation measures how fast the company can convert cash on hand into inventory and accounts payable through sales and accounts receivable and then back into cash by combining this activity ratios the measurement indicates the efficiency of Management ability to employee short term Assets and liabilities to generate cash for the company.

The cash conversion cycle entails the liquidity risk associated with growth by measuring the length of time that a firm will be deprived of cash if it increases its investment in resources in an effort to evaluate sales it can be specially used for investors who wish to draw comparison between Cruise competitors as low as cash conversion cycle signifies a well managed company and that can be used to help evaluate potential investment why the cash conversion cycle applies to companies in an industry the cycle is extremely important for retailers and similar businesses as their operation consists of buying inventory is and selling them to consumers The Matrix does not apply to companies for which this is not the case and important destruction is that cycle applies to firms that buy and sell on account while cash only forms only accommodate data from sales operation in the equation the cash conversion cycle is calculated according to the cycle of cash through receivables inventory payable and eventually back to cash the measurement of its own does not carry much meaning it should generally be used to track a company over 7 consecutive time periods in compared to multiple competitors by tracking the cash conversion cycle overtime patterns of bettering or working value can be more telling than a single periods cash conversion cycle value taken out of contest.

Caches to company as oxygen is to human body if there is not enough circulating you have a problem on your Hansa cash conversion cycle is a snapshot of the way I companies working capital is being used a like a negative cash flow a negative cash flow cycle is a good thing and accompanying can achieve one of its accounts payable and account receivable practice encouragement the lower the cash cycle the better it looks for a company finances so negative cash cycle is very desirable and negative cash cycle is one of in which you don't pay for your inventory or materials and 10 after you have sold the final product associated with them this means you are using your working capital as efficiently as possible and have available cash for other things not all companies can achieve the negatives cash cycle due to the nature of their products or consumers for the ones that can good credit and their suppliers is a must the longer a supplier allows you to go without payment the easier achieving negative cycle will be the only side of the equation is collecting payment as soon as possible for your consumers a strict payment policy helps you achieve that. A negative cash conversion cycle indicates that the operating cycle exceeds the average payment period average payment period exceeds the operating cycle for Miz shortening its average payment period and lengthening its average collection period lengthening is average collection period and lengthening its inventory period.