The document discusses the cash cycle, which is a measure of the number of days it takes a firm to purchase inventory, sell that inventory, and collect payment from customers. Specifically: 1) The cash cycle is calculated by adding the stock turnover ratio in days and the debtors turnover ratio in days. 2) It represents the continuous process of purchasing inventory on credit from suppliers, selling that inventory on credit to customers, and collecting payment from debtors. 3) A cash cycle of 62 days for a firm means it takes 38 days to sell inventory and another 24 days to collect payment from customers, for a total of 62 days to convert inventory into cash. A lower cash cycle is preferable.

1. 20.6
THE CASH CYCLE

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The firm’s Cash Cycle is the process of:
 Turning stock into sales (as measured by the Stock Turnover Ratio in
Days)
 Collecting amounts owing from debtors (as measured by the Debtors
Turnover in Days)
20.6 THE CASH CYCLE
Supplier Business Customer Debtors
How many days does it
take to turn purchases
of stock into sales?
Stock Turnover
in Days
How many days does it take to collect
amounts owing from debtors?
Debtor
Turnover in
Days

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 So the Cash Cycle is calculated by:
Stock Turnover
in Days
Debtor
Turnover in
Days
Cash Cycle = +
How many days does it
take to turn purchases
of stock into sales?
How many days does it
take to collect amounts
owing from debtors?
20.6 THE CASH CYCLE

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Cash
Cycle
 The firm’s Cash Cycle analyses the continuous process of:
Stock Turnover
in Days
Debtor
Turnover in
Days
1. Purchasing stock
from suppliers on
credit
2. Selling stock to
customers on credit
3. Collecting the cash
owing from debtors
Measured by…
Measured by…
20.6 THE CASH CYCLE
1. Purchasing stock
from suppliers on
credit
2. Selling stock to
customers on credit
Measured by…
Stock Turnover
in Days
Debtor
Turnover in
Days
3. Collecting the cash
owing from debtors
Measured by…
1. Purchasing stock
from suppliers on
credit
2. Selling stock to
customers on credit
Measured by…
Stock Turnover
in Days
Debtor
Turnover in
Days
3. Collecting the cash
owing from debtors
Measured by…

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Example: a firm has the following ratios…
 The firm’s Cash Cycle is:
Stock Turnover
in Days
Debtor
Turnover in
Days
Stock Turnover
in Days
Debtor
Turnover in
Days
Cash Cycle = +
38 days 24 days
38 days 24 days
62 days=
20.6 THE CASH CYCLE

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Cash
Cycle
 The firm’s Cash Cycle of 62 days means that:
1. Purchasing stock
from suppliers on
credit
2. Selling stock to
customers on credit
3. Collecting the cash
owing from debtors
It takes 38
days to sell
stock
It takes
another 24
days to collect
the cash
Stock Turnover = 38 days Debtors Turnover = 24 days
0 days 38 days 62 days
20.6 THE CASH CYCLE

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to interpret the figure…
Cash Cycle = 62
days<
The firm takes 62 days to
sell stock and collect cash
from debtors
The firm takes 54 days to
sell stock and collect cash
from debtors
Bad result. The
firm is taking
more time to
convert stock
into cash
<
The firm takes 75 days to
sell stock and collect cash
from debtors
Good result. The
firm is taking
less time to
convert stock
into cash
STO =
38 days
DTO =
24 days
0 days 62 days
STO =
32 days
DTO =
22 days
0 days 54 days
Cash Cycle = 54
days
Cash Cycle = 75
days
STO =
47 days
DTO =
28 days
0 days 75 days
20.6 THE CASH CYCLE

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ12 X
SQ13 X
Ex20.4 not (d) X