Question

5. What is a firm cash cycle? How the cash cycle and cash turnover of a firm are related? What

should a firm’s objectives with respect to its cash cycle and cash turnover be?

Answer 1

Cash Cycle - The flow of cash in the entire value chain beginning from the purchase of raw material from the supplier and ending with the receipt of cash from the goods sold by the firm is known as cash cycle.

The metrics takes into account the, average number of days a company takes to turns its inventory to sales + average numbers of days a company takes to collect the receivables - average the number of days a company takes to pay back its payables.

The shorter the number of days in the cycle, more is the availability of cash with the firm and the firm can manage their financial needs in a better way.

Cash Turnover - Cash turnover is number of cash cycles completed in one accounting period. The cash turnover is ideal for the companies that do no offer credit sales. The cash conversion and cash turnover is directly related with each other.

Firms Objective - the firm should aim to minimize the number of days it takes to convert its inventors into sales and also it should minimize the days it takes to receive cash from the sales, on the other side the firm should try to get better negotiation for the time frame to payback the credits to the supplier. This will ensure better availability of cash flow in the firm and the firm will not be in a position to look for debt from outside sources.