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Cash Conversion Cycle Problem

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Coffee Mill Inc. has calculated its inventory conversion period as 53 days, its accounts receivable collection period as 40 days, and its accounts payable deferral period as 20 days. Coffee Mill's working capital financing needs average $50,000 per day.

(a) Calculate Coffee Mill's Cash Conversion Cycle.

(b) If Coffee Mill were to shorten its inventory conversion period by 10 days, what effect would this have on the Cash Conversion Cycle?

(c) What effect (in dollars) would (b) have on Coffee Mill's total working capital needs?

Please explain your answers in detail.

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Solution Summary

This solution helps with cash conversion cycle problems. it involves calculating cash conversion cycle, the effects of inventory conversion on cash conversion cycle, and the effects on total working capital needs. Step by step calculations are provided.

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(a) Calculate Coffee Mill's Cash Conversion Cycle.

Cash conversion cycle is the total time from the date the company makes payment for its inventory till it receives cash from the related sales. It is calculated as
Cash conversion cycle = AR days + ...

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