Question

Pepsi	Last year
Days Sales Outstanding (A/R period)	41.59
Days Inventory (Inventory Period)	41.93
Payables Period (A/P period)	154.33

3. Using this information, compute the Cash Cycle for this company.

Cash Cycle = Days Sales Outstanding + Days Inventory – Payables Period

Questions

• What is the length of this company’s cash cycle? (Show us your work!)
• What information does this give you about the company’s need for cash?
• Do you feel that this company must seek out short-term financing? Please explain your response.
• Discuss whether Martin and Samantha should be concerned about their company’s cash cycle of 73 days.

Answer 1

Cash conversion cycle= Days Sales Outstanding + Days Inventory – Payables Period

=41.59-41.93-154.33

=-70.81

This company has negative working capital which is a good thing. Basically, company able to maintain the suppliers by paying lately which led to better workig capital cycle. Once it have sufficient cash, then only company makes the payments to the suppliers. In this case, I think there is no need to take short term borrowings. Generally, short term loans will be taken to fund the positive/high working capital cycle of the companies.

2. If a company has a working capital cycle of 73 days means, it takes 73 days to convert the raw material to cash in to business. So, to run the business properly with out any liquidity issues, company has to take short term loans to pay for the working capital needs. However, we cant say that the working capital cycle is high/low with out industry averge. Working capital cycle changes from industry to industry.