In general, firms prefer a The management at Extensive Enterprise wants to conti
ID: 2795016 • Letter: I
Question
In general, firms prefer a The management at Extensive Enterprise wants to continue its internal discussions regarding its cash management One of the finance team members presents the following case to her cohorts: Which of the following responses to the CFO's statement is most accurate? Case in Discussion Blue Ostrich Manufacturing Company's management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company's management expects that it will take to manufacture and sell its products and 40 days to receive payment from its customers. Blue Ostrich Manufacturing Company's CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 90 days. The CFO's approximation of the length of the bank loans should be accurate, because it will take 90 days for the company to manufacture, sell, and colledt cash for its goods. All these things must occur for the company to be able to repay its loans from the bank The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time 50 days Is it possible for a firm to have a negative CCC? YesExplanation / Answer
The cash conversion cycle is calculated as:
CCC = DIO + DSO - DPO
where DIO = days inventory outstanding
DSO = days sales outstanding
DPO = days payable outstanding
The CCC is also referred to as the cash cycle.
In general firms prefer lower/smaller CCC as this results in more efficient operations
The second statement is more accurate because as we can see from the above equation loan on basis of CCC can be reduced to lesser number of days by the amount of DPO
Yes it is possible for a firm to have a negative CCC when it has very short DIO and DSO and a long DPO. This may happen when a firm is a high end buyer and has products with very less competition and thus can dictate terms to buyers as well as suppliers