Financial Theory and Corporate Policy: Pearson International Edition
Explain the cash conversion cycle (CCC). Describe the CCC for your employer or company in an industry in which you're interested. What are some specific things that your company could do to decrease your cash conversion cycle? Let's be sure to describe, in pretty specific terms, the CCC for our com...
Question Bank Including Answers for Chapters 1-13, Corporate Finance
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Week 8: Working Capital Management
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Explain the cash conversion cycle (CCC). Describe the CCC for your employer or
company in an industry in which you're interested. What are some specific things that
your company could do to decrease your cash conversion cycle? Let's be sure to
describe, in pretty specific terms, the CCC for our company and what could be done to
shorten it.
**For full credit reply to the prompt and to another student's response. You should have
two postings for your 20 points.
o Collapse SubdiscussionDevonte Stewart
Devonte Stewart
MondayFeb 22 at 7:28am
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Hi Professor and Class,
The cash conversion cycle is one of several measures of management
effectiveness. It measures how fast a company can convert cash on hand into even
more cash. The CCC does this by following the cash as it is first converted into
inventory and accounts payable, through sales and accounts receivable, and then
back into cash. Generally, the lower this number is, the better for the company.
Although it should be combined with other metrics, the cash conversion cycle can
compare close competitors. The company with the lowest CCC is often the one with
better management.
The CCC combines several activity ratios involving accounts receivable, accounts
payable, and inventory turnover. AR and inventory are short-term assets, while AP is
a liability; all of these ratios are found on the balance sheet. In essence, the ratios
indicate how efficiently management is using short-term assets and liabilities to
generate cash. This allows an investor to gauge the company's overall health.
Suppose the company sells what people want to buy. Cash cycles through the
business quickly. If management cannot figure out what sells, the CCC slows down.
For instance, if too much inventory builds up, cash is tied up in goods that cannot be
sold. This is not good news for the company. To move out of this inventory quickly,
management might have to slash prices, possibly selling its product at a loss. If AR
is handled poorly, it means that the company is having difficulty collecting payment
from customers. AR is essentially a loan to the customer, so the company loses out
whenever customers delay payment. The longer a company has to wait to be paid,
the longer that money is unavailable for investment elsewhere. On the other hand,
, the company benefits by slowing down AP's payment to its suppliers because that
allows it to make use of the money longer.
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Collapse SubdiscussionCamiesha Harmon-Askew
Camiesha Harmon-Askew
SundayFeb 21 at 7:02am
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The cash cycle (also called cash conversion cycle) measures how long it will take to
convert the company‘s cash into inventory and inventory into receivables and the
receivables into cash. It’s a measurement of time that elapses since the actual cash
outflow towards acquisition of raw material to the actual cash inflow as payment from
customer on account of sales. This is also called net operating cycle.
A very long cash conversion cycle implies the excessive capital is blocked in the
cycle.
In order to calculate the cash conversion cycle, we need to calculate the three
individual components as:
, An example from my employer's balance sheet
We have 30 days sales credit period. All our sales take place in credit. We hold
inventory for 15 days and the payments are made to the suppliers within 21 days.
Hence, our cash conversion cycle = 15 + 30 - 21 = 24 days
What can be done to shorten the cash conversion cycle:
1. We can reduce the credit period to our customers. We can introduce some immediate
discount scheme on immediate payment, so that customers get attracted towards cash
sales and not towards credit sale. We have to incentivize the customers to opt for cash
sales rather than credit sales.
2. Inventory holding period has to be reduced: sales have to be faster or we need to reduce
the inventory we hold in our hand. The inventory can be held at the vendor's premises. We
may have to opt for schemes like Vendor managed inventory or Just in Time inventory
models.
3. Credit period from suppliers have to be renegotiated. We can ask for higher credit period
from suppliers.
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o
Collapse SubdiscussionJose Salcido
Jose Salcido
SundayFeb 21 at 9:52pm
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Great Post,
Those are some good examples on how to shorten the cash conversion cycle.
Businesses quickly learn that they can manipulate the cash conversion cycle to their
benefit. What you want to do is shorten the cash conversion cycle so that your
money is not tied up in the production process any longer than necessary. Try to
collect your Accounts Receivables sooner or faster. How quickly your customers pay
has a significant impact on your cash cycle. Companies can shorten this cycle by
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