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Conversely a long cash conversion cycle indicates

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Unformatted text preview: is the difference between the available balance and the book or ledger balance. balance Disbursement float Collection float Plays an important role in the 2 types of Plays cash cycles viz. Disbursement & Receipt cycles cycles 39 Disbursement cycle It is the total time between when an obligation occurs It and when the payment is cleared from the bank. and Activity Obligation to supplier Invoice from supplier Send cheques Payment clears the bank Day 0 10 25 35 FLOAT Total cycle time = 35 days Main objective is to increase the cycle time. 40 Methods of delaying payments Increasing Increasing Mail floats by mailing cheques from locations not close to parties. from Increasing Increasing Clearance float by disbursing cheques from a remote bank. cheques Increasing Increasing Processing float by purchasing with credit cards. with 41 Receipt cycle It is the total time between products /services are It delivered and when payment from the customer clears the bank. clears Activity Begin services to customer Issue Invoice to customer Receive payment Payment clears the bank Day 0 30 62 66 FLOAT Total cycle time = 66 days Main objective is to shorten the cycle. 42 Methods to shorten overall cycle Invoicing customer as soon as possible and monthly Invoicing reminders. reminders. Evaluating financial soundness of customers before Evaluating extending credit. extending Rewarding early payments with discounts Shorten Collection float Lock boxes Concentration banking 43 Marketable Securities Short term investment instruments. They They can be easily converted into cash in a short period of time. short Characteristics A ready market and safety of principal Little or no loss in th...
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