1. Suppose your startup has $9.00 million in sales, $3.00 million of inventories, $4.50 million of receivables, and $2.75 million of payables. Your cost of goods sold is 25% of sales, and you borrow funds to finance your operations at 7%.

What is the formula for the cash conversion cycle?

Cash conversion cycle = Inventory conversion period + Average collection period Payables deferral period

Identify how each period is estimated.

PeriodFormulaInventory conversion period Average collection period Payables deferral period

Complete the following table by computing all periods and the cash conversion cycle.

DaysInventory conversion period Average collection period Payables deferral period Cash conversion cycle

Suppose now that you were able to lower your inventories and receivables by 9% and at the same time increase payables by 9% without changing your sales and costs.

The firms cash conversion cycle became _____ days.

You were able to free up _____ in cash and your pre-tax profits will ____ by ______ .

2. Suppose your startup has $9.00 million in sales, $3.00 million of inventories, $4.50 million of receivables, and $2.75 million of payables. Your cost of goods sold is 25% of sales, and you borrow funds to finance your operations at 7%.

The startups cash conversion cycle is _____ days.

Suppose now that you were able to lower your inventories and receivables by 15% and at the same time increase payables by 15%. Given that your sales and costs have not changed, your startups cash conversion cycle became _____ days.

As a result of the 15% change in inventories, receivable and payables, you were able to free up _____ in cash and your pre-tax profits will ____ by ____ .