The document discusses the cash conversion cycle (CCC), which describes the flow of cash through a company as it purchases inventory, sells products to customers, and collects payment. The CCC has three components: inventory conversion period, average collection period, and payables deferral period. It also discusses calculating a target CCC and actual CCC, as well as cash budgeting and cash management techniques to efficiently use cash and maintain appropriate target cash balances.

1. 3) - CashConversionCycle:
Cash is liquid asset required for every kind of usage. Every company use the cash in a flow
of usage called a cycle. Cash Conversion Cycle is a flow of cashin which a company
purchases or produces its product, sell that productto the customer and converts the sales
into cash. The CCC has three components;Inventory Conversion Period, Average Collection
Period and Payables Deferral Period.
3.1) - Target/ Theoretical Cash Conversion Cycle:
A target CCC is the combination of three components:
a) - Inventory Conversion Period: ICP are the number of days in which an organization
converts its inventory into sales. Thoseproducts which were purchased or produced by
the organization are sold out in a specific period of time. The lesser these days are, the
more will be the sales. In other words, these are the days required for conversion of
inventory into sales.
b) – AverageCollection Period: ACP is the number of days in which organization
collects the cash from the customers. In other words, ACP means days required for
conversion of sales into cashor days required for conversion of Accounts Receivables
into cash.
c) – PayablesDeferral Period: PDP is the number of days given by the supplier to the
organization for payments. These days are required for conversion of Accounts
Payables into cash outflows. PDP is the ACP of suppliers. If organization is trading
concern then PDP is for finished goods otherwise PDP is for raw materials.
d) – The CCC:
Cash Conversion Cycle = Inventory Conversion Period + AverageCollection Period –
PayableDeferral Period
3.2)- Practical/Actual CashConversionCycle:
Actual CCC is the one which is calculated at the end of the year. Every organization set
their standard CCC at the beginning of the year, later on the budgeted CCC is compared
with actual CCC. The components of actual CCC are calculated as under:
a) Inventory Conversion Period = Total Inventory / Cost of Goods Sold/ Days
b) - Average Collection Period = Accounts Receivables / Sales/365
c) - Payables Deferral Period = A/C Payables / Purchases/ days OR A/C payables/CGS/365

2. 4) - CashBudget:
Cash is most commonly used asset in every organization. There must be a properschedule
for the usage of cash and acquisition of cash. Cash budget is a tool to measure the usage of
cash on monthly and weekly basis.
Monthly budget:
Descriptions June July August
Septembe
r
Novembe
r
Decembe
r
GrossSales *** *** *** *** *** ***
Receiptsfrom Sales:
1-5 months *** *** *** *** *** ***
6-12 months *** *** *** ** *** ***
Otherreceipts ** *** *** *** *** ***
Total Cash
received
Payments:
Expenses: *** *** *** *** *** ***
Purchases: *** *** *** *** *** ***
Total Cash paid
Netcash inhand
5) - CashManagementand TargetCashbalances:
Cash is required for daily operations and contingencies. There should be properway to
manage the cash in an efficient way. Since cash is liquid asset and it is used in each area of
life there should be a proper toolof managing the cash. For are some areas of cash
management.
I) - Reasonsforholding cash:
There are different reasons for cash holding. All these reasons are categorized in three
heads:
- TransactivePurpose: When cash is held for daily operations, such as purchases, sales,
advertisement and productions etc. This Transactive purposeis called transaction
balances. Sometimes cash is kept for covering the difference of cashinflow and outflow.
In order to keep a balance for precautions is called precautionary balances.
- BankingPurpose: Bank needs cashas bank charges and minimum account balances.
Cash is required for maintaining minimum balances and making charges for banks.
- SpeculativePurpose: A special amount of balance is also required for investment
opportunities. Sometimes a productive use of cash arises in the market but business
faces shortage of cash, due to which business losses the opportunity. If organization
keep a special amount of balance then it can avail such opportunities.

3. II) - CashManagementTechniques:
For efficient use of cash there are different techniques. Some of them are discussed as
under:
- Synchronizing CashFlows: Synchronizing is the process ofdesigning the stream of
cash flows in such a way to keep a special balance of cash. If cash flows are equal then
company may not be able to keep balance. A budget is designed to organize the gap of
inflow and outflow.
- Speeding up the cheque-clearing process: An unclear cheque is nothing more than a
paper. If the process ofcheque clearance is designed then the organization can covert
there cash into accounts with speed. The bank accounts are fast updates and the payment
is made.
- ManagingFloats: Float is the difference of pass bookand cash book. Sometimes the
cash bookis overstated. The company makes payment on the basis of cash bookbut
pass bookis appeared with different balance. In order to cover such a float, company
keeps a balance to equalize the gaps.
- Speeding Collections: The most important task of the business is to recover the cash.
Company grows on sales but it runs on cash. The collection of cash must be properly
managed to run the company. It can be improved by direct credit system or lock box
systems. In both of these systems cash is sent to bank directly rather than sending it to
the company.
- Cash Accounts: Maintenance of cash account is very important to have a good
command over the cash management. Cash account is prepared on daily basis for
finding the net balances on cash. If company knows how much cash is needed then it
will be able to arrange that. Cash account lets the company know how much cash is
available.
- Petty Control: Daily expenses also waste a handsome amount of cash. A petty budget is
prepared to control over the cash. If a petty budget is prepared then the extra amount is
used in a better alternative of usage otherwise the cash is always misused.