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Cash Conversion Cycle + Working capital management

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1. What is the significance to working capital management of matching sales and production? What is the significance to working capital management of matching payables with receivables?

2. By using long-term financing to partially fund current assets, a company may have less risk but lower profits than a firm with a normal financing plan, i.e. matching A/R = 1.5 x A/P. Explain what a "normal financing plan" is and the significance of financing working capital while maintaining appropriate current asset ratios.

3. Answer the following problem and show the calculation: What is the cash conversion cycle for a company with a receivables period averaging 40 days, a payables period averaging 30 days, and an inventory period averaging 60 days?

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Solution Preview

1. Working capital management is about ensuring your cash is "put to work" as efficiently as possible, and managed in a manner that keeps the business from experiencing disruptions or other undesirable outcomes as a result of cash shortage or "running fat" illustrating a scaled model, but not optimized. The concept of matching sales with production is that you do not tie up precious funds used to operate the business unnecessarily as cash it the lifeblood of the business. If sales and production can be matched, the level of inventory and the amount of current assets needed can be kept to a minimum; therefore, lower financing costs will be incurred as a result. Conversely, you're not sitting on a mountain of cash that could be fetching higher return elsewhere. Proper management of this side also reduces the likelihood you'll be forced to ...

Solution Summary

Solution shows how to calculate step by step the components of the cash conversion cycle and explores the component of days sales outstanding. Explores the significance of working capital management of matching sales and production relative to working capital management and the of matching payables with receivables. Explores the concept of using long term financing as to fund current assets and implications relative to a "normal financing plan" and the significance of financing working capital