Metal Supplies is concerned about its cash management. On average, the day’s sales in inventory (duration of inventory on shelf) is 90 days. Accounts receivable are collected in 90 days, while accounts payable are paid in 60 days. Metal Supplies has annual sales of $14 million, cost of goods sold of $9.5 million, and purchases of $5 million. Use a 365-day year.
a. What is Metal Supplies’ operating cycle (OC)?
b. What is Metal Supplies’ cash conversion cycle?
c. What is the amount of resources needed to support Metal Supplies’ cash conversion cycle?
d. What suggestions would you give Metal Supplies to reduce its cash conversion cycle?