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The Hamlin Corporation: Working Capital Management, Ratios and Cash Conversion Cycle

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The Hamlin 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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Solution Summary

This solution explains the required steps in calculating the cash conversion cycle and related ratios, with the help of a practical case. All mathematical computations are provided.

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

Inventory conversion period+Receivables Collection Period - Payables Deferral Period
=57+35-25
= 67 days

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

Investment in Accounts receivables= ...

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