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Managing the cash conversion

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Explain to management why monitoring and managing the cash conversion cycle is important to the overall profitability of the company.

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Operating Cycle is defined as the time duration, which the firm requires to manufacture and sell the product and collect cash. Thus operating cycle refers to the acquisition of resources, conversion of raw materials into work-in-process into finished goods, conversion of finished goods into sales and collection of sales. Larger is the operating cycle, larger will be the investment in current assets.

In practice, firms are acquiring resources on credit. To that extent, firm's need to raise working finance is reduced. Net Operating Cycle is used for the difference between operating cycle (or gross operating cycle) and the payment deferral period (or the period for which creditors remain outstanding).

Operating Cycle (OC) = Inventory Conversion Period + ...

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This discusses the importance of monitoring and managing the cash conversion

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See Also This Related BrainMass Solution

Working Capital Management: Cash Conversion Cycle, Accounts payable, etc.

The Corporation has an inventory conversion period of 57 days, a receivables collection period of 35 days, and a payables deferral period of 25 days. Its annual credit sales are $5,000,000, and its annual credit purchases are $3,500,000.

a. What is the length of the firm's cash conversion cycle?

b. What is the firm's investment in accounts receivable?

c. What is the firm's level of accounts payable?

d. Calculate the company's inventory turnover ratio.

e. Identify three ways in which the company could reduce its cash conversion cycle? What are possible risks in reducing it?

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