Question

Hatfield donuts limited has an average payment period of 40 days, an average Collection period of 50 days, and turns its inventory around 10 times per year if management is able to change its average collection period favorable by 9 days. Calculate the new cash conversion cycle

Answer 1

Given, average payment period=creditors period=40 days

Collection period=average receivable period=50 days

Given, Inventory turnover ratio=10

average Inventory period=365/Inventory turn over ratio=365/10=36.5 days (365 days in a year)

Cash coversion cycle=Average collection period+Average inventory period-average payment period

Old Cash conversion cycle=50+40-36.5 =53.5 days

==> If average collection period favours by 9 days, then collection period becomes 41 days (50-9)

New Cash conversion cycle=41+40-36.5=44.5 days