Cash Conversion Cycle Example Problems

Given here are two simple cash conversion example problems illustrating the calculation of the operating efficiency of an organization. In other words it is stated as the number of days that a company take in converting its inventory into cash. Go through the below operating cycle examples and get a clear concept on how to calculate the net operating cycle.

Operating Cycle Example

Example 1:

Let us consider the cash conversion cycle example problem: A company makes widgets in warehouse for 12 days which takes 17 days to collect on the sale of each widget and takes 15 days to pay invoices to company vendors. Calculate cash conversion cycle?

Solution:

We can calculate the Net Operating Cycle using the given formula.

Formula:

Net Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding

Substituting the values in the formula,

Net Operating Cycle = 12 + 17 - 15 = 14 days Therefore, Company generates cash from its assets within 14 days.

Example 2:

Let us consider the operating cycle example: Calculate and analyze the cash conversion cycle for Hewlett-Packard with days sales outstanding as 52.51, days inventory as 27.27, days payables outstanding as 55.51.

Solution:

Substituting the values in the given formula, Cash conversion cycle for HPQ = 52.51 + 27.27 – 55.51 = 24.27 Therefore, the value of Net Operating Cycle is 24.27


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