Question

b. You have just been appointed Consultant to Criss-Cross Inc. to assess the management of the firm’s financial affairs. A review of the firm’s business cycle reveals that Criss-Cross Inc. manufactures a product which typically sits in the warehouse for 15 days before it is sold. The firm takes another 28 days to collect the monies from the same of this product. In addition, the firm takes 23 days to pay invoices to its suppliers. i. Compute the cash conversion cycle (CCC) for Criss-Cross Inc. ii. How should you advise Criss-Cross Inc to manage its CCC, should the firm lengthen or shorten its CCC? Why? iii. You have also found out that Criss-Cross Inc is given a 45-day credit payment period by its supplier whenever it purchases goods. Discuss Criss-Cross Inc’s performance in managing its CCC (has the firm been managing its CCC optimally?). iv. Discuss two other ways that Criss-Cross Inc could adopt in managing its cash conversion cycle.

Answer 1

Answer i) cash conversion cycle (CCC) = Inventory conversion Cycle +Receivables Conversion Period -Payables Conversion Period

Here, CCC = 15+28 - 23 = 20 days

Answer 2) Company has moderate situation towards its CCC, it should continue or may shorten its cycle.

Answer 3) If company has received payable conversion period of 45 days , the CCC can be revised as

CCC= 15+28-45 = -2 days. i.e 0 day for conversion

clearly indicate , there are chances of rectification in current CCC.

Answer 4) Other way of CCC management are:

• reduction in inventory cycle
• reduction in receivable conversion cycle
• Moderate production ( production as per demand analysis)