16 Chapter model
Working Capital Management
Disregarding profits, how much capital does GFI have tied up in working capital?
(C of GS / day) * (CCC)
If the cost of capital is 10%, then it costs GFI $35,000 per year to carry working capital.
This chapter deals with working capital management. Two useful tools for working capital managem
the cash conversion cycle and (2) the cash budget.
This spreadsheet model shows how these tools
help manage current assets and presents them on separate worksheets.
THE CASH CONVERSION CYCLE (Section 16.2)
The cash conversion cycle focuses on the length of time between when the company must make pay
when it receives cash inflows.
The cash conversion cycle is determined by three factors: (1) The inv
conversion period, which is the average time required to convert materials into finished goods and th
(2) The receivables collection period, which is the length of time required to convert th
receivables into cash, or how long it takes to collect cash from a sale.
(3) The payables deferral perio
is the average length of time between the purchase of materials and labor and payment for them.
conversion cycle is determined by the following formula:
Calculate the cash conversion cycle for Great Fashions Inc. Sales are $1,216,666 and costs of goods
$1,013,889, while inventories are $250,000, accounts receivable are $300,000, and payables are $150,
Based on a 365-day year, calculate the CCC.
It takes 90 days to make and sell dresses and another 90 days to collect cash after the sale, or a tota
days between spending money and collecting cash.
However, the company delays its own payments
Therefore, the net days the firm must finance its labor and purchases is 90 + 90 − 54
= 126 day
is the cash conversion cycle.