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
For the set of activities shown in the table below, draw the total expenses vs. time curve using the following data: The labor rates are as follows: Labor # 1 (L1) rate = 30

Source of Finance for the Sole Proprietor Some sources of capital---Discuss a) Savings b) Assistance from friends or relatives c) Proceeds from sale of assets d) Ba

Definition of 'Capital Budgeting': The process in which a business calculates whether projects such as building a new plant or investing in a long-term risk are worth pursuing

Price Earnings Ratio Valuation P/E ratio is traditionally employed for valuation of shares however it is an important ratio in the valuation of business. The P/E ratio is the

State the Realised and Expected Return Return is not as simple a notion as it appears to be as it's not guaranteed, it is mostly expected, and it may or may not be realized.

The Audiology Department at Randall Clinic offers many services to the clinic’s patients. The three most common , along with cost and utilization data, are as follows: Service Var

Book Value and Market to book value per share Book value per share (BVPS)  = Net worth Equity/No. of ordinary shares It is called also liquidity ratio that show


Financial management is very important for any organization as at the end what does matter is the money. An effective financial management is of high importance for ensuring the be

The operating and cost data of ABC Ltd. are: Sales Rs. 20,00,000 Vari