Question
A company has an average inventory period of 45 days, an average accounts receivable period of 35 days, and an average accounts payable period of
A company has an average inventory period of 45 days, an average accounts receivable period of 35 days, and an average accounts payable period of 25 days. Calculate the operating cycle and the cash conversion cycle. Discuss what these metrics indicate about the company's cash flow management and operational efficiency. Explain how improvements in inventory management, receivables collection, and payables management can affect these cycles and the overall liquidity position of the company. Consider the impact of reducing the average inventory period by 10 days, the average accounts receivable period by 5 days, and the average accounts payable period by 5 days on the cash conversion cycle. What would be the new cash conversion cycle, and how would these changes potentially improve the company's financial health?
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