Answer to Question #10351 in Economics of Enterprise for tracy brown
company. It expresses the length of time, in days, that it takes for a company
to convert resource inputs into cash flows. Cash conversion cycles for small
businesses are predicated on four central factors:
1) the number of days it takes customers to pay what they owe;
2) the number of days it takes the business to make its product (or complete its service);
3) the number of days the product (or service) sits in inventory before it is sold;
4) the length of time that the small business has to pay its vendors.
The following formulas may be used to determine these factors:
Accounts receivable days - divide the receivables balance by the last 12 months' sales, then multiply the result by 365 (the number of days in a year).
Inventory days - take the inventory balance, divide it by the last 12 months' cost of goods sold, and then multiply the result by 365.
Accounts payable days - take the company's payables balance, divide it by the last 12 months' cost of goods sold, and then multiply the resulting figure
by 365.Average inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
Cash conversion cycle =Average inventory/(Annual cost of goods sold:365)+Average
accounts receivable/(Annual sales:365)-Average accounts payable/(Annual sales:365) = 75,000/(360,000:365)+160,000/(600,000:365)-25,000/(600,000:365) = 148 days.
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