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To further demonstrate the relationship between the cash conversion cycle and working capital, let me provide you with a real life ex. An aviation company that operates out of Scottsdale has a seasonal business cycle. Summers are very busy with work for the U.S government and many hours of aircraft time are provided to the Office of Aircraft Services (OAS). The problem is that OAS will only pay its receivables in 120 days. This creates a working capital issue for the company because there are numerous expenses involved with operating aircraft. For the first 120 days, the company is racking up expenses but receiving little or no income leaving the company short of cash to pay its bills, employees, purchase fuel, supplies, etc. To solve this problem, the company began factoring its receivables every year at the beginning of the busy season. The finance company that factors the receivables charges 15%. To make up this cost the company charges OAS an additional 15% (it's the government, they don't care). The finance company pays the aviation company for all invoices within 24 hours, then bills the OAS. Everyone is happy. OAS has its aircraft, the aviation company is being paid immediately and the finance company is making a good return.

Given this scenario describe the aviation company's cash conversion cycle.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M939880

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