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Working Capital Management: Cash Conversion Cycle All firms follow a working capital cycle in which they purchase or produce inventory hold it for time, and
Working Capital Management: Cash Conversion Cycle All firms follow a working capital cycle" in which they purchase or produce inventory hold it for time, and then sell it and receive cash. The sele t 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 is the length of time funds are bed inventory conversion period+Average collection period - Payables deferral period The-Select- | 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 -Select- is calculated as follows: 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 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 recelvables faster, or defer its payable longer without hurting sales or increasing operating costs, its-Select would be reduced, and its profits and stock price would be improved. This demonstrates that goad 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 cyele. Winston's 2015 sales (all on credit) were $169,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.67 times during the year. Its receivables balance at the end of the year was $13,188.88 and its payables balance at the nd of the year was $7,397.58. Using this information calculate the firm's cash conversion cycle. Round your ans ver to the nearest whole. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations would decline, its interest expense days
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