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Corporate finance

Working capital management Cash conversion cycle Return on capital Economic value added Just In Time (business) Economic order quantity Discounts and allowances Factoring (finance)

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Cash conversion cycle, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business. The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.

• Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing Period (in days) - Average Payables Processing Period (in days)

with:

• Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
• Average Receivables Processing Period (in days) = Accounts Receivable / Average Daily Credit Sales
• Average Payable Processing Period (in days) = Accounts Payable / Average Daily Credit Purchases

A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay.

It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers. Examples are typically companies that employ Just In Time practices such as Dell, and companies that buy on extended credit terms and sell for cash, such as Tesco.

The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.

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