Cash Conversion Cycle and Cash Budget
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The document discusses managing working capital through the cash conversion cycle and cash budgeting. The cash conversion cycle measures the time between paying for inputs and collecting cash from sales. It has three components: inventory conversion period, average collection period, and payables deferral period. A cash budget forecasts cash receipts, payments, and balances over time by projecting collections, purchases, expenses and the resulting net cash flow. An example cash budget is provided for a company over the last half of 2013.
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The document discusses working capital, which refers to the capital required to finance short-term operating needs of a business, such as inventory and receivables. It defines working capital as the difference between current assets and current liabilities. Managing working capital is important as it affects a firm's cash flows and ability to meet short-term obligations. The document also outlines different types of working capital and factors that influence working capital needs, such as the nature of the business and production cycles.
C7
This document discusses short-term financial planning and working capital management. It covers key topics such as:
1) Definitions of working capital, current assets, current liabilities, and the risk-return tradeoff of short-term financing options.
2) The hedging principle of matching temporary assets with temporary financing and permanent assets with permanent financing.
3) Tools for managing working capital like cash conversion cycle, operating cycle, and cash cycle calculations and analysis.
4) Short-term financial policies regarding flexibility of current asset investment levels and sources of current asset financing.
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The document discusses the statement of cash flows, including its purpose and components. It explains that the statement of cash flows reports an entity's cash flows during a period and fulfills purposes like predicting future cash flows and evaluating management decisions. It describes the three sections of the statement of cash flows - operating, investing, and financing activities - and provides examples of cash inflows and outflows that would be included in each section. The document also covers the direct and indirect methods for preparing the statement of cash flows and includes examples of classwork problems preparing the statement of cash flows.
Week 6 Slides (3) (1).pptx
Here is a graphical representation of the break even analysis using the data provided:
Units Sold
Fixed costs = $5000
Variable cost per unit = $3
Selling price per unit = $5
Total Costs
$5000
$15000
$25000
Total Revenue
$0
$2500
$5000
$7500
$10000
$12500
$15000
$17500
$20000
$22500
Break Even Point
800 units
The break even point is reached at 800 units where total revenue equals total costs. The total fixed costs line is drawn horizontally at $5000. The total costs line is drawn starting from the total fixed costs line
Unit 3 part 2.pptx
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Cash Conversion Cycle and Cash Budget
- 2. How can we effectively managed Working Capital? 16-4. Cash Conversion Cycle 16-5. Cash Budget
- 3. 16-5. The Cash Conversion Cycle The length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital.
- 4. Components of CCC 1. Inventory Conversion Period 2. Average collection Period 3. Payables Deferral Period
- 5. Inventory Conversion Period The average time required to convert raw materials into finished goods and then to sell them. Average Collection Period The average length of time required to convert the firm’s receivables into cash, that is, to collect cash following a sale.
- 6. Payables Deferral Period The average length of time between the purchase of materials and labor and the payment of cash for them.
- 7. Sample Problem: On Day 1, GFI buys merchandise and expects to sell the goods and thus convert to Accounts Receivable in 60 days. It should take another 60 days to collect the receivables, making a total of 120 days between receiving merchandise and collecting cash. However, GFI is able to defer its own payments for only 40 days to it’s suppliers.
- 8. CCC Basic Formula Inventory Conversion Period Average collection Period Payables Deferral Period 60 DAYS 60 (40) 80 DAYSCCC ( ADD ) ( LESS )
- 9. Inventory Conversion Period Average collection Period Payables Deferral Period Inventory Cost of Goods sold/365 Receivables Sales per/365 Payables Cost of Goods sold/365
- 10. 16-5. The Cash Budget A table that shows cash receipts, disbursements and balances over some period. A primary forecasting tool of the firm’s cash flows. Cash budgets can be of any length, daily, quarterly or monthly.
- 11. Steps of Cash Budget: 1. Begin with a sales forecast for each month and a projection of when actual collections will occur. 2. Followed by forecast payments for purchases and forecasted payments for materials, labor, leases, new equipment, taxes and other expenses.
- 12. Steps of Cash Budget: 3. Then subtract forecasted collections from forecasted payments in order to have net cash gain or loss for each month. 4. The gain or loss is added or subtracted from the beginning cash balance, and the result is the amount of cash the firm would have on hand at the end of the month if it neither borrowed nor invested
- 13. XYZ Co. (for the last half of 2013) • Collections during the month • Collections during the 1st month after sale (prior month’s sale) • Collections during the 2nd month after sale (Sales 2 months ago) • Percent Bad Debts • Discount on first month of collections • Purchases(% of next month’s sales) • Lease payments • Construction cost for new plant (Oct) • Target Cash Balance 20% 70% 10% 0% 70% $15 $100 $10 2%
- 14. May June July Aug. Sept. Oct. Nov. Dec. Sales(gross) $200 $250 $300 $400 $500 $350 $250 $200 Collections During the month of sale: 0.2(Sales)(.98) 59 78 98 69 49 39 During the prior month's sales: 0.7 175 210 280 350 245 175 Sales two months ago: 0.1 20 25 30 40 50 35 Total Collections 254 313 408 459 344 249 Purchases: 70% of next month's sales 210 280 350 245 175 140 Estimated Disbursements: Last month Purchases of Materials 210 280 350 245 175 140 Wages and Salaries 30 40 50 40 30 30 Lease payments 15 15 15 15 15 15 Other expenses 10 15 20 15 10 10 Taxes 30 20 Payment for Plant Construction 100 Total Payments 265 350 465 415 230 215
- 15. Net Cash flows: Net Cash flows for month: (Collections-Payments) -11 -37 -57 44 114 34 Cumulative NCF: (prior month cum. NCF plus this month NCF) -11 -48 -105 -61 53 87 Cash Surplus for loan requirement Target Cash Balance 10 10 10 10 10 10 Surplus Cash for Loan Needed: (Cum. NCF minus Target cash Balance) -21 -58 -115 -71 43 77 Maximum Required Loan $-115 Maximum Available Investment $77
Editor's Notes
- Working Capital Management
- 60