Question

Given the following information for Q1 and Q2 and Import Co, LLC, determine of it's quarterly cash conversion cycle is improving? Do you see any concerns, please explain why or why not? Two way to do the quarterly CCC, use 90 day cycle.

Q1			Q2
Sales	$3,825,000		Sales	$3,850,000
COGS	$2,150,000		COGS	$2,300,000
Avg Inv	$745,000		Avg Inv	$690,000
Avg AR	$920,000		AR	$950,000
AP	$875,000		AP	$925,000

Answer 1

Cash conversion cycle	Days in inventory + Average collection period - Average payable period
Calculation of cash conversion cycle for Quarter 1
Days in inventory	Inventory/Cost of goods sold per day
Days in inventory	745000/((2150000)/90)
Days in inventory	745000/23888.89
Days in inventory	31.19	days
Average collection period	Accounts receivable/Sales per day
Average collection period	920000/(3825000/90)
Average collection period	920000/42500
Average collection period	21.65	days
Average payable period	Accounts payable/Cost of goods sold per day
Average payable period	875000/23888.89
Average payable period	36.63	days
Cash conversion cycle	31.19+21.65-36.63
Cash conversion cycle	16.21	days
Calculation of cash conversion cycle for Quarter 2
Days in inventory	Inventory/Cost of goods sold per day
Days in inventory	690000/((2300000)/90)
Days in inventory	690000/25555.56
Days in inventory	27.00	days
Average collection period	Accounts receivable/Sales per day
Average collection period	950000/(3850000/90)
Average collection period	950000/42777.78
Average collection period	22.21	days
Average payable period	Accounts payable/Cost of goods sold per day
Average payable period	925000/25555.56
Average payable period	36.20	days
Cash conversion cycle	31.19+21.65-36.63
Cash conversion cycle	13.01	days
Cash conversion cycle in Q1 is 16.21 days and cash conversion cycle in Q2 is 13.01 days
This indicates that cash conversion cycle is improving as lower the cash conversion cycle the more efficient company is in converting its investment in inventory to cash.
In this case since CCC is improving there is no concerns as company is quickly able to convert cash and invest back in its inventory.