Cash Conversion Cycle

The HDL, Inc. balance sheet and income statement for the year ending 20xx are as follows:

Balance Sheet

(In millions of Dollars)

ASSETS

Cash$6.0

Accounts Receivable14.0

Average Inventory 12.0

Fixed Assets, net40.0

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TOTAL ASSETS$72.0

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LIABILITIES AND EQUITY

Accounts Payable$10.0

Salaries and Benefits Payable2.0

Other current Liabilities10.0

Long-term debt12.0

Equity38.0

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TOTAL EQUITY$72.0

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Income Statement

(In millions of Dollars)

Net Sales$100.0

Cost of Sales60.0

Selling and admin. Expenses20.0

Other Expenses15.0

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EARNINGS AFTER TAXES$5.0

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Part 1 of 2:

A. determine the length of the inventory conversion period.

B. determine the length of the receivables conversion period.

C. determine the length of the operating cycle.

D. determine the length of the payables deferral period.

E. determine the length of the cash conversion cycle.

F. what is the meaning of the number that you calculated in part E?

Formulas:

Inventory Conversion Period (ICP)

Average Inventory

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Cost of Sales/365

Receivables Conversion Period (RCP)

Accounts Receivable

-------------------------

Net Sales/365

Operating Cycle (OC)

ICP + RCP

Payables Deferral Period (PDP)

Accounts Payable + Salaries & Benefits

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Cost of Sales + Selling and admin. Expenses/365

Cash Conversion Cycle

OC - PDP

Cash conversion cycle exercise -- part 2 of 2 (Show your work in the Excel template):

You have made some calculations on the cash conversion cycle -- so you are a little comfortable with that process. Now, let's say that you are in upper management, and you want to "tighten your ship" a little to increase your cash flow just on current operations. You ask for the following, reasonable goals:

1) A 10% decrease in average inventory.

2) A 10% decrease in accounts receivable.

3) A 10% increase in accounts payable.

While these adjustments are small and reasonable, redo your calculations and see just how much of a difference these small adjustments can make on the total cash conversion cycle.