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1) Cash Conversion Cycle

The document discusses the cash conversion cycle, operating cycle, and days in accounts payable. 1) The cash conversion cycle measures the number of days it takes a company to convert inputs like inventory into cash from sales, by considering the time to sell inventory, collect receivables, and pay bills. 2) The operating cycle measures management efficiency by calculating inventory and receivables turnover in days, without considering the impact on cash. 3) Days in accounts payable measures the average number of days a company takes to pay its suppliers, which is used to calculate the cash conversion cycle by subtracting it from the operating cycle.

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23 views2 pages

1) Cash Conversion Cycle

The document discusses the cash conversion cycle, operating cycle, and days in accounts payable. 1) The cash conversion cycle measures the number of days it takes a company to convert inputs like inventory into cash from sales, by considering the time to sell inventory, collect receivables, and pay bills. 2) The operating cycle measures management efficiency by calculating inventory and receivables turnover in days, without considering the impact on cash. 3) Days in accounts payable measures the average number of days a company takes to pay its suppliers, which is used to calculate the cash conversion cycle by subtracting it from the operating cycle.

Uploaded by

saramumtaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1) CASH CONVERSION CYCLE:

It expresses the length of time, in days, that it takes for a company to convert resource inputs into
cash flows. The cash conversion cycle attempts to measure the amount of time each net input
dollar is tied up in the production and sales process before it is converted into cash through sales
to customers. It looks at the amount of time needed to sell inventory, the amount of time needed
to collect receivables and the length of time the company is afforded to pay its bills without
incurring penalties.
Cash conversion cycle= Operating cycle days in accounts payable
OPERATING CYCLE:
It expressed as an indicator (days) of management performance efficiency, the operating cycle is
a "twin" of the cash conversion cycle. While the parts are the same like receivables and inventory
in the operating cycle, they are analyzed from the perspective of how well the company is
managing these critical operational capital assets, as opposed to their impact on cash.
Operating cycle= Account receivable turnover in days + Inventory turnover in days
Account receivable turnover in days= Average gross receivables x 365/Net sales
= 18730 x 365/92158
= 6836450/92158
=74 days
Inventory turnover in days= Average inventory x 365/Cost of goods sold
= 8660 x 365/48111
3160900/48111
= 66 days
Operating cycle= 74.18+65.70
= 140 days
DAYS IN ACCOUNTS PAYABLE:
Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days
a company takes to pay its suppliers.
The formula for DPO is: DPO =



Purchases per =

= 245
Days in accounts day payable =

= 84 days

Cash conversion cycle= Operating cycle days in accounts payable
Cash conversion cycle = 140 84 = 56

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