1 of 14
Model for Working Capital Management
Cash conversion cycle (CCC)
Inventory conversion period
Inventory/Sales per day
AR/Sales per day
AP/COGS per day
Two useful tools for working capital management are (1) the cash conversion cycle and (2) the cash budget.
spreadsheet model shows how these tools are used to help manage current assets.
THE CASH CONVERSION CYCLE (Section 22.1)
The cash conversion cycle model focuses on the length of time between when the company must make payments and when it
receives cash inflows.
The cash conversion cycle is determined by three factors: (1) The inventory conversion period, which is
the average time required to convert materials into finished goods and then to sell those goods.
The inventory conversion
period is measured by dividing inventory by the average daily sales.
(2) The receivables collection period, which is the length of
time required to convert the firm's receivables into cash, or how long it takes to collect cash from a sale. The receivables
collection period is measured by the days sales outstanding ratio (DSO), which is accounts receivable divided by average daily
(3) The payables deferral period, which is the average length of time between the purchase of materials and labor and
payment for them.
The payable deferral period is calculated by dividing average accounts payable by
purchases per day (cost
of goods sold divided by 360 or 365 days).
The cash conversion cycle is determined by the following formula:
Calculate the cash conversion cycle for the Real Time Computer Company.
Annual sales are $10 million, and the annual cost
of goods sold is $8 million.
The average levels of inventory, receivables, and accounts payable are $2,000,000, $657,534, and
$657,534, respectively. RTCC uses a 365-day accounting year.