Answer to Question #125730 in Economics for Fikile Arrive

Question

Aztec Products wishes to evaluate its cash conversion cycle (CCC). Research by one of the
firm’s financial analysts indicates that on average the firm holds items in inventory for 65
days, pays its suppliers 35 days after purchase, and collects its receivables after 55 days.
The firm’s annual sales (all on credit) are about R2.1 billion, its cost of goods sold represent
about 67 percent of sales, and purchases represent about 40 percent of cost of goods sold.
Assume a 365-day year.
3.1 (7 points) What is Aztec Products’ cash conversion (CCC)?
3.2 (3 points) If Aztec could shorten its CCC by 5 days, would it be best to reduce the
inventory holding period, reduce the receivable collection period, or extend the
accounts payable period? Why?
3.3 (3 points) How should the firm manage its inventory, accounts receivable, and
accounts payable in order to reduce the length of its cash conversion cycle?

Answer 1

1. Cash Conversion Cycle (CCC) is the process or cycle in which a company buys inventory, sells inventory on credit as receivables, and then collects receivables or turns it into cash.

2. Businesses quickly find out that they can manipulate the money conversion cycle to their advantage. What you want to do is shorten the cash conversion cycle so that your money is not tied to the production process longer than necessary. You can shorten the cash conversion cycle by shortening the inventory conversion period and the collection period for receivables.

3. Try to speed up the production process by faster processing and sales of goods and speed up the collection of receivables.

With regard to accounts payable, slow down payments, but do not incur late payment. Shortening the cash conversion cycle will free up more working capital for your business.