Question

Find the cash conversion cycle for XYZ in 2018. If the industry averages are 30 days for sales to cash, 75 days for inventory to sales, and 30 days for purchase to payment, where is XYZ performing better or worse than the industry? How does the XYZ cash conversion cycle compare to the industry? Should XYZ address any or all of these differences and why?

Financial Statements for XYZ Corp.

Balance Sheet for Period Ending December 31.

Assets	2017	2018
Cash and Marketable Securities	40	15
Accounts Receivable	160	80
Inventories	250	370
Total Current Assets	450	465
Gross Plant and Equipment	675	855
less: Accumulated Depreciation	250	300
Net Plant and Equipment	425	555
Total Assets	875	1020
Liabilities and Equity
Accounts Payable	15	30
Short-term Bank Loans	35	40
Accrued Liabilities	55	60
Total Current Liabilities	105	130
Long-Term Debt	265	360
Common Stock	180	180
Retained Earnings	325	350
Total Equity	505	530
Total Liabilities and Equity	875	1020

Income Statement for the Period Ending December 31.

	2018
Sales	1500
Cost of Goods Sold	1272
Gross Profit Margin	228
Administrative Expense	40
Marketing Expense	30
Research and Development	20
Depreciation	50
Earnings before Interest and Taxes	88
Interest Expense	39
Income before Taxes	49
Income Taxes @ 40%	20
Net Income	29

Answer 1

Answer:

Days Inventory Outstanding = Average Inventory * 365 / Cost of Goods sold
Average Inventory = ($250 + $370) / 2
Average Inventory = $310

Days Inventory Outstanding = $310 * 365 / $1,272
Days Inventory Outstanding = 89 days

Days Sales Outstanding = Average Accounts Receivable * 365 / Sales
Average Accounts Receivable = ($160 + $80) / 2
Average Accounts Receivable = $120

Days Sales Outstanding = $120 * 365 / $1,500
Days Sales Outstanding = 29 days

Days Payable Outstanding = Average Accounts Payable * 365/ Cost of Goods sold
Average Accounts Payable = ($15 + $30) / 2
Average Accounts Payable = $22.50

Days Payable Outstanding = $22.50 * 365/ $1,272
Days Payable Outstanding = 6 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 89 days + 29 days – 6 days
Cash Conversion Cycle = 112 days

Days Inventory Outstanding:
As the company’s days inventory outstanding is more than the Industry, it is performing worse.

Days Sales Outstanding:
As the company’s days sales outstanding is lesser than the Industry, it is performing better.

Days Payable Outstanding:
As the company’s days payable outstanding is lesser than the Industry, it is performing worse.

Cash Conversion cycle:
Industry’s Cash Conversion cycle = 75 days + 30 days – 30 days
Industry’s Cash Conversion cycle = 75 days

As the company’s cash conversion cycle is more than the Industry, it is performing worse.

The Company should address the difference for days inventory outstanding and days payable outstanding, as it will reduce the cash availability for working capital.