Reductions in the Cash Conversion Cycle (CCC)
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Foster Inc. carries an average inventory of $1,000,000. Its annual sales are $10 million, and its receivables conversion period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $863,000 with no affect on sales. By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in the cash conversion cycle
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Solution Summary
This solution provides the students with a firm understanding of how cash conversion cycle works.
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Average inventory= $1,000,000 (given)
Annual Sales= $10 million (given)
Inventory conversion period= (average inventory/sales)*365
Inventory conversion period=($1,000,000/10,000,000)*365
Inventory conversion period= 30 days
Creditors period= 30 days (given)
Receivables turnover ratio = ...
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