Question

Briefly explain the impact on a company’s Cash-to-Cash (C2C) cycle if they experience the following changes: i. An increase in accounts payable turnover ii. An increase weeks payable iii. An increase in weeks receivable iv. An increase in weeks in inventory

Answer 1

Cash Conversion Cycle is defined as the length of time (in days) needed to transform inventory purchases into actual cash receipts. It takes into consideration the company’s time commitment towards collecting receivables and paying its suppliers, and is an important measure of a company’s internal liquidity.

Days in Inventory Outstanding (DIO) + Days in Sales Outstanding (DSO) – Daysin Payales Outstanding = Cash Conversion Cycle

Impact on a company’s Cash-to-Cash (C2C) cycle if they experience the following changes:

i. An increase in accounts payable turnover :

When the turnover ratio is increasing, the company is paying off suppliers at a faster rate than in previous periods

Cash Conversion Cycle will reduce due to daysin payables outstanding were drecasing

iv. An increase in weeks in inventory

higher, or quicker, inventory turnover decreases the cash conversion cycle(CCC).When the days inventory outstanding is high, it increases the CCC.

ii. Increase in weeks payable

Decreases cash conversion cycle because no of days payables outstanding is increasing

iii. Increase in weeks receivable

increases cash conversion cycle beacuase no of days receivables outstanding is increasing