3. 3: Working Capital Management: Cash Conversion Cycle

All firms follow a "working capital cycle" in which they purchase or produce inventory, hold it for a time, and then sell it and receive cash.

The____?_____ (choose one for the answer: operating cycle or cash conversion cycle or payables deferral period) is the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital. The equation for this is as follows:

Inventory conversion period + Average collection period Payables deferral period

The__?_____ (Choose one of the following: inventory turnover ratio or inventory conversion period) is the average time required to convert raw materials into finished goods and then to sell them. It is calculated as follows:

Inventory/(Cost of goods sold/365)

The ____?____ (Choose one of the following: average collection period or receivables turnover ratio or receivables aging schedule) is also known as the days' sales outstanding. It is the average length of time required to convert the firm's receivables into cash, that is, to collect cash following a sale. It is calculated as follows:

Receivables/(Sales/365)

The payables deferral period is the average length of time between the purchase of materials and labor and the payment of cash for them. It is calculated as follows:

Payables/(Cost of goods sold/365)

If a firm can sell goods faster, collect receivables faster, or defer its payable longer without hurting sales or increasing operating costs, its ___?___ (Choose one of the following: monthly cash budget or cash conversion cycle or payables deferral period) would decline, its interest expense would be reduced, and its profits and stock price would be improved. This demonstrates that good working capital management is important to a firm's financial position and performance.

Quantitative Problem: Winston Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash conversion cycle. Winston's 2015 sales (all on credit) were $110,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.07 times during the year. Its receivables balance at the end of the year was $13,197.75 and its payables balance at the end of the year was $7,420. Using this information calculate the firm's cash conversion cycle. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations. Round your answer to the nearest whole number. ___?____days