Question

The following month of April (30 days) financial information was reported by three furniture building companies. Calculate the cash-to-cash cycle time for each of the following furniture building companies: Craig Custom Couch Builders, Tom's Tables, and Jefferson Emerald Design. Which company managed its cash flow best in April?

	Net Revenue	Cost of Revenue (%)	Raw Goods Inventory	WIP Inventory	Finished Goods Inventory	Account Receivable	Accounts Payable
Craig Custom Couch Builders	11000	0.8	540	268	280	2680	4100
Tom's Tables	18000	0.75	680	140	600	3210	3200
Jefferson Emerald Design	8000	0.85	240	200	180	2200	2400

Answer 1

Answer:

April has 30 days

So, no of days in the period = 30

Calculation of cash-to-cash cycle time

Craig Custom Couch Builders:

Net Revenue = 11000

Cost of Revenue = 80% of Net Revenue = 11000 * 80% = 8800

Inventory = Raw Goods Inventory + WIP Inventory + Finished Goods Inventory

= 540 + 268 + 280 = 1088

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

No. of days Inventory outstanding = (Inventory / Cost of Revenue) * No of days in the period

= (1088 / 8800) * 30 = 3.71 days

No. of days Inventory outstanding = (Accounts Receivable / Revenue) * No of days in the period

= (2680 / 11000) * 30 = 7.31 days

No. of days Payable outstanding = (Accounts Payable / Cost of Revenue) * No of days in the period

= (4100 / 8800) * 30 = 13.98 days

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

= 3.71 days + 7.31 days - 13.98 days = -2.96 Days

Tom's Tables:

Net Revenue = 18000

Cost of Revenue = 75% of Net Revenue = 18000 * 75% = 13500

Inventory = Raw Goods Inventory + WIP Inventory + Finished Goods Inventory

= 680 + 140 + 600 = 1420

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

No. of days Inventory outstanding = (Inventory / Cost of Revenue) * No of days in the period

= (1420 / 13500) * 30 = 3.16 days

No. of days Inventory outstanding = (Accounts Receivable / Revenue) * No of days in the period

= (3210 / 18000) * 30 = 5.35 days

No. of days Payable outstanding = (Accounts Payable / Cost of Revenue) * No of days in the period

= (3200 / 13500) * 30 = 7.11 days

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

= 3.16 days + 5.35 days - 7.11 days = 1.40 Days

Jefferson Emerald Design:

Net Revenue = 8000

Cost of Revenue = 85% of Net Revenue = 8000 * 85% = 6800

Inventory = Raw Goods Inventory + WIP Inventory + Finished Goods Inventory

= 240 + 200 + 180 = 620

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

No. of days Inventory outstanding = (Inventory / Cost of Revenue) * No of days in the period

= (620 / 6800) * 30 = 2.74 days

No. of days Inventory outstanding = (Accounts Receivable / Revenue) * No of days in the period

= (2200 / 8000) * 30 = 8.25 days

No. of days Payable outstanding = (Accounts Payable / Cost of Revenue) * No of days in the period

= (2400 / 6800) * 30 = 10.59 days

Cash-to-cash cycle time = No. of days Inventory outstanding + No. of days Inventory outstanding - No. of days Payable outstanding

= 2.74 days + 8.25 days - 10.59 days = 0.40 Days

As per the above calculation cash-to cash cycle time is

Craig Custom Couch Builders = -2.96 days

Tom's Tables = 1.40 days

Jefferson Emerald Design = 0.40 days

We know cash to cash cycle time is the time between when a business pays to it's suppliers and when the business receives payment from it's customers

In case of Craig Custom Couch Builders, the cash to cash cycle time is -2.96 days that means they are paying the suppliers first even though they have not received cash from customers

In case of Tom's Tables, the cash to cash cycle time is 1.40 days that means they are receiving from the customers first then they are paying to suppliers after 1.40 days

In case of Jefferson Emerald Design, the cash to cash cycle time is 0.40 days that means they are receiving from the customers first then they are paying to suppliers after 0.40 days

So Tom's Tables has managed its cash flow best in April