Essay: Cash Conversion Cycle

Essay: Cash Conversion Cycle
April 11, 2011 Comments Off on Essay: Cash Conversion Cycle Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The cash conversion cycle reflects the time duration between cash being paid and received in the operations of a business. The three components of the cash conversion cycle are merchandise inventory, accounts payable and accounts receivable. The cash cycle starts with the purchase of raw material after which the time period for this inventory and accounts payables starts.

The company pays for the purchased inventory and the accounts payable time period is over. The next phase is the manufacturing of finished products and selling of finished goods, the inventory period will continue so long as the goods are not sold. When these goods are sold the inventory period will come to an end and the receivables period starts and the company has to receive cash from the customers to whom goods were sold. After this cycle is complete the same process starts all over again with the purchase of goods, payment to suppliers, sale of goods and receipts from customers (Berman, Knight and Case 2006).

The cash conversion cycle in retailing companies is quite similar to the cash conversion cycle mentioned above with the exception of raw material. Instead of raw material the retailing company purchases and sells finished goods. Retailing is a customer driven business which relies heavily on cash flows to meet the demands and requirements of customers. In order to achieve an optimum level of cash flows a company needs to maximise the payable period and minimise the receivable period. A company applies various techniques to minimise the receivables period and maximise the payables period (Reynolds, Cuthbertson and Bell 2004).

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