Question

Your firm currently has an operating cycle of 90 days. You are analyzing some operational changes...

Your firm currently has an operating cycle of 90 days. You are analyzing some operational changes which are expected to decrease the accounts receivable period by 4 days and decrease the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 8 to 9 times per year. If all of these changes are adopted, what will be your firm's new cash cycle?

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Answer #1
New operating cycle  
New operating cycle = 90 Days - 4 Days - 5 Days  
New operating cycle = 81 Days  
Change in Accounts Payable Period  
Change in Accounts Payable Period = (365 Days / 8 Times) - (365 Days - 9 Times)
Change in Accounts Payable Period = 46 Days - 41 Days  
Change in Accounts Payable Period = 76 Days  
Firm's new cash cycle
Firm's new cash cycle = New operating cycle - Change in Accounts Payable Period  
Firm's new cash cycle = 81 Days - 5 Days  
Firm's new cash cycle = 76 Days  
Hence, the Firm's new cash cycle will be 76 Days
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