a. Calculate the firm’s operating cycle and cash conversion cycle.
ACTIVITY 8
1. Buenaflor is concerned about managing cash efficiently.
On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables and that there is a 365-day year.
a. Calculate the firm’s operating cycle.
b. Calculate the firm’s cash conversion cycle.
c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.
d. Discuss how management might be able to reduce the cash conversion cycle.
2. Camp Manufacturing turns over its inventory eight times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are $3.5 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables and that there is a 365-day year.
a. Calculate the firm’s operating cycle and cash conversion cycle.
b. Calculate the firm’s daily cash operating expenditure. How much in resources must be invested to support its cash conversion cycle?
c. If the firm pays 14% for these resources, by how much would it increase its annual profits by favorably changing its current cash conversion cycle by 20 days?
