FIN/375 » Assignment / Cash Conversion
Purpose of Assignment
One downfall of many small businesses is the inability to keep sufficient cash on hand and to calculate the amount of liquid cash that is necessary for day-to-day operations. This assignment asks you to calculate cash conversion and to determine the funds necessary for the maintenance of business health.
Assignment Steps
Complete Parts 1 and 2 of the Cash Conversion Cycle. Use Microsoft® Excel® to record your calculations. Note: formulas for the cash conversion cycle are included in the document.
Write a 350- to 525-word paper in which you complete the following:
- Explain the difference between permanent and temporary working capital, and describe what a firm could do to minimize risk.
- Evaluate how small adjustments made to total cash conversion can have a large impact upon the financial health of a company.
- Describe Economic Order Quantity (EOQ Using the EOQ formula and an example product for your business, determine the optimal quantity of the item to purchase that will help to minimize the annual total costs of keeping that item in inventory.
- Describe what a Just-in-Time (JIT) inventory system is and its significance in reducing inventory costs.
- Show all cash conversion cycle calculations in a spreadsheet, and attach it as an Appendix.
Format your paper consistent with APA guidelines.
Click the Assignment Files tab to submit your assignment.
| Title
ABC/123 Version X |
1 |
| Cash Conversion Cycle
FIN/375 Version 3 |
1 |
University of Phoenix Material
Cash Conversion Cycle
The HDL, Inc. balance sheet and income statement for the year ending 20xx are as follows:
Balance Sheet
(In millions of Dollars)
ASSETS
Cash $6.0
Accounts Receivable 14.0
Average Inventory 12.0
Fixed Assets, net 40.0
——–
TOTAL ASSETS $72.0
=====
LIABILITIES AND EQUITY
Accounts Payable $10.0
Salaries and Benefits Payable 2.0
Other current Liabilities 10.0
Long-term debt 12.0
Equity 38.0
——–
TOTAL EQUITY $72.0
=====
Income Statement
(In millions of Dollars)
Net Sales $100.0
Cost of Sales 60.0
Selling and admin. Expenses 20.0
Other Expenses 15.0
——–
EARNINGS AFTER TAXES $5.0
=====
Part 1 of 2:
A. determine the length of the inventory conversion period.
B. determine the length of the receivables conversion period.
C. determine the length of the operating cycle.
D. determine the length of the payables deferral period.
E. determine the length of the cash conversion cycle.
F. what is the meaning of the number that you calculated in part E?
Formulas:
| Inventory Conversion Period (ICP) | Average Inventory | |
| ————————- | ||
| Cost of Sales/365 | ||
| Receivables Conversion Period (RCP) | Accounts Receivable | |
| ————————- | ||
| Net Sales/365 | ||
| Operating Cycle (OC) |
ICP + RCP |
|
|
Payables Deferral Period (PDP) |
Accounts Payable + Salaries & Benefits | |
| ——————————————————- | ||
| Cost of Sales + Selling and admin. Expenses/365
|
||
| Cash Conversion Cycle | OC – PDP |
Cash conversion cycle exercise — part 2 of 2 (Show your work in the Excel template):
You have made some calculations on the cash conversion cycle — so you are a little comfortable with that process. Now, let’s say that you are in upper management, and you want to “tighten your ship” a little to increase your cash flow just on current operations. You ask for the following, reasonable goals:
1) A 10% decrease in average inventory.
2) A 10% decrease in accounts receivable.
3) A 10% increase in accounts payable.
While these adjustments are small and reasonable, redo your calculations and see just how much of a difference these small adjustments can make on the total cash conversion cycle.
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