Cash cycle and cash turnovers, Finance Basics

Cash Cycle and Cash Turnovers

Cash Cycle refers to the amount of time which elapses from the point whenever the firms create a cash outlay to purchase raw materials to the point while cash is collected from the sale of finished goods produced by those raw materials.

Cash turnover on another hand refers to the frequency of a firm's cash cycle throughout a year.

Example

XYZ Ltd. currently purchases all its raw materials at credit and sells its merchandise at credit.  The credit terms extended to the firm currently needs payment throughout thirty days of a purchase whilst the firm currently needs its customers to pay throughout sixty days of a sale.  Conversely, the firm on average takes of 35 days to pay its accounts payable and the average collection period is of 70 days.  On average, of 85 days elapse among the point a raw material is purchased and the point the ended goods are sold.

Required

Find out the cash conversion cycle and the cash turnover.

Solution

The following chart can assist further understand the problem:

458_Cash Cycle and Cash Turnovers.png

The cash conversion cycle is provided in the following formula as:

Cash conversion = Inventory conversion + Receivable collection - Payable deferral

          Cycle                    period                           period                           period

For our example:

Cash conversion cycle  =        85 + 70 - 35 = 120 days

Cash turnover      =        360 / Cash conversion cycle

                            =        360/120

                            =        3 times

Note that cash also conversion cycle can be specified by the following formulae as:

Cash conversion cycle  = 360 [(inventory/cost of sales) + (receivable / sales) - ((payable + accruals)/cash operating expenses)]

Posted Date: 1/31/2013 8:06:27 AM | Location : United States







Related Discussions:- Cash cycle and cash turnovers, Assignment Help, Ask Question on Cash cycle and cash turnovers, Get Answer, Expert's Help, Cash cycle and cash turnovers Discussions

Write discussion on Cash cycle and cash turnovers
Your posts are moderated
Related Questions
Growth Rates Most Recent Fiscal Year Fiscal Year (-1) Fiscal Year (-2) Fiscal Year (-3) Annu

The Bim-Bom Company is expected to pay a dividend of $3.10 per share at the end of the year, and that dividend is expected to grow at a constant rate of 4.00% per annum.  The compa

Venture Capital Venture capital is a form of investment in new small risky enterprises utilized to get them started via specialists called venture capitalists. Venture capital

1-Suppose you deposit $ 5 000 in the bank. How much can you raise after 10 years when discount rate is 5% for the first four years and then rises to 7% annually? 2 -A used car co


Struggling with your final year projects, terms paper writing, research paper writing, thesis writing, engineering and programming projects? Experts are available 24x7 to help you

If banks expect an unusually large increase in withdraws from checking deposit accounts in the near future, what would happen to the federal funds rate, borrowed reserves and nonbo

What are depository institutions? Depository institutions: intermediaries along with an important proportion of their funds derived through customer deposits as consists of: co

the nominal fee interest rate in your account is 7% your semi-annually rate of interest APY will be?

Asset Based Valuation  This method acquires into account the entire business along with reference to its assets and then divides the resultant value via the number of shares i