An Analysis of Cash Conversion Cycles
Look up and use the formulas for the components of the cash conversion cycle for the following scenario (see questions below the financial statements):
Hewy, Dewy, and Lewy Inc. balance sheet and income statement for the year ending 20xx are as follows:
(in millions of Dollars)
Accounts Receivable 14.0
Fixed Assets, net 40.0
TOTAL ASSETS $72.0
LIABILITIES AND EQUITY
Accounts Payable $10.0
Salaries and Benefits Payable 2.0
Other current Liabilities 10.0
Long-term debt 2.0
TOTAL EQUITY $72.0
(in Millions of Dollars)
Net Sales $100.0
Cost of Sales 60.0
Selling and admin. Expenses 20.0
Other Expenses 15.0
EARNINGS AFTER TAXES $5.0
a. determine the length of the inventory conversion period
b. determine the length of the receivables conversion period
c. determine the length of the operating cycle
d. determine the length of the payables deferral period
e. determine the length of the cash conversion cycle
f. what is the meaning of the number that you calculated in part e?
Now, lets say that you are in upper management, and you want to “tighten your ship” a little to increase your cash flow just on current operations. You ask for the following goals — which are very reasonable:
1) a 10% decrease in average inventory.
2) a 10% decrease in accounts receivable.
3) a 10% increase in accounts payable.