2 the cash conversion cycle central to short term

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Unformatted text preview: ability and risk? CHAPTER 14 LG2 Working Capital and Current Assets Management 601 14.2 The Cash Conversion Cycle Central to short-term financial management is an understanding of the firm’s cash conversion cycle.3 This cycle frames discussion of the management of the firm’s current assets in this chapter and that of the management of current liabilities in Chapter 15. Here, we begin by demonstrating the calculation and application of the cash conversion cycle. Calculating the Cash Conversion Cycle operating cycle (OC) The time from the beginning of the production process to the collection of cash from the sale of the finished product. Hint A firm can lower its working capital if it can speed up its operating cycle. For example, if a firm accepts bank credit (like a Visa card), it will receive cash sooner after the sale is transacted than if it has to wait until the customer pays its accounts receivable. cash conversion cycle (CCC) The amount of time a firm’s resources are tied up; calculated by subtracting the average payment period from the operating cycle. A firm’s operating cycle (OC) is the time from the b...
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This document was uploaded on 01/19/2014.

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