Cash Conversion Cycle

Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days.  The firm's annual sales are $3 million.  Assume there is no difference in the investment per dollar of sales in inventory receivables and payables; and assume a 365-day year.

• Calculate the firm's cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion cycle.
• Find the firm's cash conversion cycle and resource investment if it makes the following changes simultaneously:
  1. Shortens the average age of inventory by 5days.
  2. Speeds the collection of accounts receivable by an average of 10 days.
  3. Extends the average payment period by 10 days.
• If the firm pays 13% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b?
• If the annual cost of achieving the profit in part c is $35,000, what action would you recommend to the firm?  Why?