Question

# Increased Efficiency, Inc. is looking for ways to shorten its cash conversion cycle. It has annual...

Increased Efficiency, Inc. is looking for ways to shorten its cash conversion cycle. It has annual sales of \$36,500,000, or \$100,000 a day on a 365-day basis. The firm's cost of goods sold is 65% of sales. On average, the company has \$9,000,000 in inventory and \$8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 40 days. What effect would these policies have on the company's cash conversion cycle?

I got 24 days and would like to confirm my answer. Thank you

CCC = Days of Sales Outstanding PLUS Days of Inventory Outstanding MINUS Days of Payables Outstanding.

DSO = AVERAGE RECEIVABLES/NET SALES *365

OLD DSO :(BEFORE POLICY) = 8000000/36500000*365 = 80 DAYS

NEW DSO : WITH POLICY = 6400000/32850000*365 = 71 DAYS (71.11)

INVENTORY OUTSTANDING = AVERAGE INVENTORY/NET SALES*365

OLD DIO :(BEFORE POLICY) =9000000/36500000*365 = 90 DAYS

NEW DIO : WITH POLICY =7200000/32850000*365= 80 DAYS

PAYABLE DEFFERAL PERIOD = AVERAGE CREDITORS/ COST OF GOODS SOLD*365

40 =AVERAGE CREDITORS/ 23725000*365

AVERAGE CREDITORS= 23725000*40/365 =2600000

WHICH REMAIN SAME BEFORE AND AFTER POLICY

CASH CONVERSION PERIOD BEFORE POLICY = 80+90-40 = 130 DAYS (2.81 TIMES A YEAR)

CASH CONVERSION PERIOD AFTER POLICY = 87+71-40 = 118 DAYS (3.09 TIMES A YEAR)

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