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Cash Conversion Cycle

SKI may have excessive working capital based on its cash conversion cycle being longer than average and it not being as profitable as other firms in its industry. The cash conversion cycle model focuses on the time between making payments to creditors and receiving payments from customers. For SKI, the cash conversion cycle is calculated at 92 days, suggesting it holds cash longer than necessary without earning a profit on it. Cash should only be held for transactions, precaution, compensating balances, and speculation, which can be reduced through other means like credit lines and marketable securities.

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Wawex Davis
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88 views4 pages

Cash Conversion Cycle

SKI may have excessive working capital based on its cash conversion cycle being longer than average and it not being as profitable as other firms in its industry. The cash conversion cycle model focuses on the time between making payments to creditors and receiving payments from customers. For SKI, the cash conversion cycle is calculated at 92 days, suggesting it holds cash longer than necessary without earning a profit on it. Cash should only be held for transactions, precaution, compensating balances, and speculation, which can be reduced through other means like credit lines and marketable securities.

Uploaded by

Wawex Davis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Is SKI inefficient or just conservative?

• A conservative (relaxed) policy may be appropriate if it leads to


greater profitability.
• However, SKI is not as profitable as the average firm in the industry.
This suggests the company has excessive working capital.
Cash conversion cycle

• The cash conversion model focuses on the length


of time between when a company makes
payments to its creditors and when a company
receives payments from its customers.

Inventory Receivables Payables


CCC = conversion + collection – deferral .
period period period
Cash conversion cycle

Inventory Receivables Payables


CCC = conversion + collection – deferral
period period period
Payables
CCC = Days per year + Days sales – deferral
Inv. turnover outstanding
period
365
CCC = + 46 – 30
4.82
CCC = 76 + 46 – 30
CCC = 92 days.
Cash doesn’t earn a profit, so why hold it?

1. Transactions – must have some cash to


operate.
2. Precaution – “safety stock”. Reduced by line
of credit and marketable securities.
3. Compensating balances – for loans and/or
services provided.
4. Speculation – to take advantage of bargains
and to take discounts. Reduced by credit lines
and marketable securities.

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