Cash Conversion Cycle

Only available on StudyMode
  • Download(s) : 257
  • Published : March 7, 2013
Open Document
Text Preview
ABMF4024 Business Finance

Tutorial 8 Answer

23 December 2010

Question 1
The cash conversion cycle is the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital. Holding other things constant, if you reduce the CCC you are reducing the amount of funds tied up. These funds have a cost; therefore, a reduction in funds will lower the firm s costs and thus raise its profitability. Here we have made an assumption that you can reduce working capital without harming sales.

Question 2
When most of us use the term cash, we mean currency (paper money and coins) plus bank demand deposits. However, when corporate treasurers use the term, they often mean currency and demand deposits plus very safe, highly liquid marketable securities that can be sold quickly at a predictable price and thus be converted to bank deposits. Therefore, cash as reported on the balance sheets generally includes short term securities, which are also called cash equivalents .

Question 3
Tools 1) Use a lockbox 2) Insist on wire transfer from customers 3) Synchronize inflows and outflows 4) Use a remote disbursement account 5) Reduce need for safety stock of cash i. Increase forecast accuracy Procedures 1) Forecast cash inflows, outflow, and ending cash balances 2) Used to plan loans needed or funds available to invest 3) Can be daily, weekly or monthly forecast Monthly for actual planning and daily for actual cash management

ii. Hold marketable securities iii. Negotiable a line of credit

Question 4
Goals of inventory management 1) Reduce inventory cost 2) Make sure u have enough inventory for your company and customer needs Inventory Control System 1) Just-In-Time System 2) Computerized Inventory System 3) ABC System 4) Outsourcing

ABMF4024 Business Finance

Tutorial 8 Answer

23 December 2010

Question 5
ƒ•Š‘˜‡”•‹‘›…Ž‡ ˜‡–‘”›…‘˜‡”•‹‘’‡”‹‘† ƒ›ƒ„Ž‡•†‡ˆˆ‡”ƒŽ’‡”‹‘† ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ †ƒ›• ˜‡–‘”›‡”‹‘† ƒŽ‡•’‡”†ƒ› ‡…‡‹˜ƒ„Ž‡• ƒŽ‡•’‡”†ƒ› †ƒ›• ƒ›ƒ„Ž‡ —”…Šƒ•‡’‡”†ƒ› ‡…‡‹˜ƒ„Ž‡•…‘ŽŽ‡…–‘‹’‡”‹‘†

Question 6
Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P = $1,000,000; COGS = 0.8(Sales); Int erest on bank loan = 8%; CCC = ? CCC = Inventory conversion period + Average collection period Payables deferral period. Inventory conversion period Inventory Cost of goods sold per day $2,000,000 = [(0.8)($15,000,000)]/365

=

=

$2,000,000 $32,876.7123 Receivable s Sales/365

= 60.83 days. Average collection period = =

$3,000,000 $15,000,000 /365

= 73 days. Payables deferral period
Payables Cost of goods sold/365 $1,000,000 = $32,876.7123

=

= 30.42 days. CCC = 60.83 + 73 30.42 = 103.41 days. 2. Lower inventories and receivables by 10% each and increase payables by 10%. Sales and COGS remain the same. Inventory = $2,000,000 v 0.9 = $1,800,000. A/R = $3,000,000 v 0.9 = $2,700,000. A/P = $1,000,000 v 1.1 = $1,100,000. Calculate new CCC: Inventory conversion period = $1,800,000 $32,876.7123

= 54.75 days.

ABMF4024 Business Finance

Tutorial 8 Answer
$2,700,000 $15,000,000 /365

23 December 2010

Average collection period

=

= 65.70 days. Payables deferral period =
$1,100,000 $32, 76.7123

= 33.46 days. New CCC = 54.75 + 65.70 33.46 = 86.99 days §87 days.

Question 7
Annual sales RM50, 735,000 Inventory level RM15, 012,000 Account receivable balance outstanding RM10, 008,000 Payable deferral period 30days

ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡ ƒ•Š‘˜‡”•‹‘›…Ž‡

˜‡–‘”›…‘˜‡”•‹‘’‡”‹‘† ˜‡–‘”›‡”‹‘† —ƒŽ 

‡…‡‹˜ƒ„Ž‡• —ƒŽƒŽ‡• †ƒ›•

†ƒ›•

Annual sales

RM50,735,000 After lowered inventory and a/c receivable by RM1,946,000

Inventory level RM13,066,000 Account receivable balance outstanding...
tracking img