Working Capital Management Cash Management by Imran Khan

What is cash conversion cycle? Cash conversion cycle as discussed in the previous lecture emphasize on the length of time between when the firm makes payments and when it receives cash as inflows.

Items involved in the cash conversion cycle Inventory conversion period: It refers to the average time needed to convert materials into finished goods and then sell these goods out. Inventory conversion period (days)= Inventory/ sales per day

Receivables collection period It refers to the average length of time required to convert a company’s receivables into cash or in other words it is the time required to collect cash following a sale. Also known as Days Sales Outstanding (D. S. O) Receivables collection period= receivables sales/365

Payables deferral period It refers to the average length of time between the purchase of labor and materials and the payment of cash for them.

Summing up the above items When the three items from the previous slides are summed up, it results in cash conversion cycle. Hence, Inventory conversion period+ receivables collection period- Payables deferral period= Cash conversion cycle

Question Medwig Corporation has a DSO of 17 days. The company averages $3500 in credit sales each day. What is the company’s average accounts receivable?