Question

2. Cash conversion cycle

Cash management is a very important function of managers. Companies need to manage their operations in a way that they can sustain growth and yet not run out of cash.

Consider the case of the Red Hamster Manufacturing Corporation:

Red Hamster Manufacturing Corporation has forecasted sales of $24,000,000 for next year and expects its cost of goods sold (COGS) to remain at 80% of sales. Currently, the firm holds $3,100,000 in inventories, $2,300,000 in accounts receivable, and $2,400,000 in accounts payable.

Approximately how long does it take Red Hamster Manufacturing to convert its raw materials to its finished products and then to sell those goods? (Note: In all calculations, assume that there are 365 days in a year.)

58.93 days

50.09 days

41.25 days

61.88 days

On average, it takes ___________ from the time a sale is made until the time cash is collected from customers.

Red Hamster Manufacturing relies on customer credit when it buys raw materials from its suppliers. On average, it takes __________ after the firm purchases materials before it sends cash to its suppliers.

Answer 1

On Approximately how long does it take Red Hamster Manufacturing to convert its raw materials to its finished products and then to sell those goods?

Answer: 58.93 days

Inventory conversion period = ( 365 / Cost of Goods Sold ) * Inventory = [365 / ( 24,000,000 x 80 % ) ] * 3,100,000 = 58.93 days

On average, it takes 34.98 days from the time a sale is made until the time cash is collected from customers.

Average collection period = ( 365 / Sales ) * Accounts Receivable = ( 365 / 24,000,000 ) * 2,300,000 = 34.98 days

On average, it takes 45.62 days after the firm purchases materials before it sends cash to its suppliers.

Payables deferral period = ( 365 / Cost of Goods Sold ) * Accounts Payable = ( 365 / 19,200,000 ) * 2,400,000 = 45.62 days.