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Effect on Cash Conversion Cycle

A firm is considering the following changes: increasing inventory variety which will increase average inventory by $10,000, and offering more liberal sales terms which will result in average receivables increasing to $65,000. These actions are expected to increase sales to $800,000 per year, and cost of goods will remain at 75%. Because of the increased purchases, average payables will increase to $35,000. What effect will these changes have on the cash conversion cycle?

Solution Preview

The effect on cash conversion cycle is to be seen for each item separately. Cash conversion cycle is Accounts Receivable Days + Inventory Days - Accounts Payable Days

Sales are ...

Solution Summary

The solution explains the effect on cash conversion cycle of some actions taken by the company.