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Cash Conversion Cycle

Cash conversion cycle Problem
. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day basis).

On average, the company has $12,000,000 in inventory and $8,000,000 in accounts receivable.

The company is looking for ways to shorten its cash conversion cycle (calculated on a 365-day basis).

Their CFO has proposed new policies which would result in a 20 percent reduction in both average inventories and accounts receivables.

The company anticipates that these policies will also reduce sales by 10 percent.

Accounts payable will remain unchanged.

What effect would these policies have on the company's cash conversion cycle?

a. 40 days shorter
b. 22 days shorter
c. 13 days shorter
d. 22 days longer
e. 40 days longer

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Solution Preview

The cash conversion cycle is calculated as Average Collection Period + Inventory Holding Period - Payable Period.
The Average Collection period = Average Receivables/Per Day Sales
Inventory Holding Period = Average Inventory/ Per Day ...

Solution Summary

The solution explains the calculation for cash conversion cycle and the effect on the cash conversion cycle of changes in current assets and liabilities