Free Essay

Cash Cycle

In: Business and Management

Submitted By mpozzuto1
Words 355
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The cash conversion cycle is defined as “a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers.” (Cash Conversion Cycle - CCC, 2012). This measures the amount of time it takes to sell inventory, collect receivables, and how long a company has to pay its debts.

Lawrence Sports is currently operating under the following credit and payment arrangements. They receive their supplies from two suppliers, Gartner and Murray. The credit terms they have with Gartner include a 40% payment upon purchase of materials, with the balance due the following week. The terms they have with Murray are similar, with 15% due upon purchase and the balance due the following week. Lawrence offers the following credit terms to Mayo Stores, the retailer who sells their goods; They collect 20% upon the sale, with 80% due the following week.

The cash conversion cycle is calculated by calculating the DIO (Days inventory is Outstanding) adding the DSO (Days of Sales Outstanding), and subtracting the DPO (Days Payable Outstanding.)

Many companies offer terms of credit in either net 30 or net 45. Lawrence Sports is setting itself up for failure by having to pay its credit obligations in only 10 days, while leaving their cash conversion to a mere 14 days. It is recommended that Lawrence renegotiate their credit terms with both suppliers to require payments in the net 30 range, or longer if possible. This renegotiating will allow Lawrence to collect from Mayo Stores before needing to pay Gartner and Murray, which will in turn allow them to eliminate their current line of credit and the fees and interest associated with this account.

Bibliography
Cash Conversion Cycle - CCC. (2012). Retrieved July 25, 2012, from Investiopedia.com: http://www.investopedia.com/terms/c/cashconversioncycle.asp#axzz21g66FDAY
Emery, D., Finnerty, J., & Stowe, J. (2007). Corporate Financial Management (3rd ed.). Morristown, NJ: Wohl Publishing.

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