Question

3.1 Drake Ltd is looking at methods to manage its cash efficiently. Inventory stays in the...

3.1 Drake Ltd is looking at methods to manage its cash efficiently. Inventory stays

in the storeroom an average of 90 days before it is sold. Accounts receivable

are collected in 60 days and accounts payable are settled after 30 days. The

company’s annual sales amount to R25 million.

Assume 365 days in a year.

REQUIRED:

3.1.1 Calculate the cash-conversion cycle. (3)

3.1.2 Calculate the resources needed to support the cash-conversion cycle. (3)

3.1.3 Discuss how management can reduce the cash-conversion cycle. (3)

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Homework Answers

Answer #1

The Cash-conversion cycle

The Cash-conversion cycle = Average collection period + Days ales in inventory – Average payables period

= 60 Days + 90 Days – 30 Days

= 120 Days

The amount of resources needed to support the cash-conversion cycle

The amount of resources needed to support the cash-conversion cycle = Annual Sales x [Cash-conversion cycle / 365 Days]

= R25,000,000 x [120 Days / 365 Days]

= R8,219,178.08

The management of the Drake Ltd can reduce the cash-conversion cycle by decreasing the average collection period & Days sales in inventory and by increasing the Average payables period.

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