Top Hat Industries is trying to improve cash management. The company currently h
ID: 2712244 • Letter: T
Question
Top Hat Industries is trying to improve cash management. The company currently has the following information regarding its cash management: •
Average inventories age is 120 days
• Accounts Payable are paid 60 days from invoice date
• Accounts Receivable are collected in 90 days
• Annual sales are $25,000,000
What is Top Hat’s operating cycle?
What is Top Hat’s cash conversion cycle?
What is the resource amount needed to cover the cash conversion cycle?
How could management positively affect the cash conversion cycle?
Explanation / Answer
Operating Cycle = Days' Sales of Inventory + Days Sales Outstanding
= 120 +90
=210 days
2.Cash Conversion Cycle= Operating Cycle- Account Payable Outstanding Days
= 210-60
=150 days
3.Resource amount required
to Cover CCC = (Total Annual Outlays/365)*CCC
=($25,000,000/365)*150
Total Resources required = 10273973
4.Reducing Either the average age of inventory or Collection period, Increasing the average payment period or a combination of these can bring the Cash conversion cycle positively by the management