Term Paper: Cash Conversion Cycle

Sample Term Paper

According to Brigham the cash conversion cycle is the period of time between the receipts and payments of a company. The inventory conversion period is the time taken to convert raw material into finished goods and sell it, the receivables collection period is the time required to convert the amount of receivables into cash and the payables deferral period is the time taken to make payments for purchase of raw material and labor.

The cash conversion cycle can be calculated by adding the inventory conversion period to the receivables collection period and subtracting the payables deferral period from this sum (Brigham & Ehrhardt, 2001).

Cash Conversion Cycle = Inventory conversion period + Receivables collection period – Payables deferral period

In the current scenario the inventory conversion period is 60 days, the receivables collection period is 60 days and the payables deferral period is 30 days, the cash conversion cycle would be 90 days.

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