Cash top management should put into consideration.
Cashconversion cycleThe receivables collection period (DSO) for thehotel is 30 days. Payable deferral period (DPO) is 60 days (htt). The cash conversioncycle is given by the formula:Cash conversion cycle is given by adding receivablecollection period to day inventory outstanding and then subtract payabledeferral period.
DSO represent day sales outstanding, DIO is day’sinventory outstanding and DPO is the day’s payable outstanding.The day’s inventory outstanding (DIO) is calculatedas follows:DIO= average inventories*365/cost of goods sold.Average inventories (per annum) = (1088684+1052351)/2=1070518Cost of sales=709556.DIO=1070518/709556=2The cash conversion cycle =30+2-60=-28 daysSuggestionsin relation to cash conversion cycleThe cash conversion cycle for this firm is a processwhere the inventories are purchased on credit and converted to sales made oncredit terms, and then collections in cash form are made in stipulated time.
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itis a measure of how long the company’s cash is tied up in the inventory beforeit is sold and payments from clients are collected. The cashconversion cycle for the hotel is a negative 28 days. The negative cashconversion cycle implies that the hotel has an exceptionally good workingcapital management system.
When conducting the cash flow analysis of the firm,the cash conversion cycle can be a very important metric that the topmanagement should put into consideration. A negative cash conversion cycle isvery desirable unlike the negative cash flows.The management should continue setting a system thatensures no payment for inventory is made until the final products associatedwith the said inventory are paid. If this is achieved, efficiency use ofworking capital is noted. Negative cash conversion cycles have a directpositive impact with the cash flows (DAS, 2015). A lot of company’sfinances are not tied on working capital are therefore available to meet otherexpenses and payments.
The inventory conversion period for the hotel is 2days. This should be maintained since the majority of inventory items haveshorter expiry periods. The receivables collection period of 30 days should bethe maximum. The firm should establish strict debt collection department toavoid the instances of bad debts. Payable deferral period of 60 days isreasonable as compared to the 30 days the company collects from thereceivables. Any negotiations to increase the payable deferral period should beencouraged in cases when the company is experiencing the cash flow relatedproblems (nobanee, 2009).The management is in a position to manipulate thecash conversion cycle to the benefit of the company. The finance departmentneeds to ensure that cash conversion cycle is shortened so that the financialresources allocated to them are not tied up in the production process for morethan required periods.
The production department manager should ensure a fastproduction process while maintaining low costs. Sales and marketing departmenttoo should ensure continuous, fast flow of clients in the hotel. Payment tocreditors should be delayed as much as possible without necessarily incurringthe late payment charges and penalties. The effects of the said measures arethat more working capital is freed and the firm, clients and suppliersrelationship is properly maintained.Information related toreceivable collection period, payable deferral period, inventory and cost ofsales was extracted from http://leysin.redhotelsim.com/779c9.
The table belowcontains workings related to cash conversion cycle; cash conversion cycle DSO DIO DPO Cash conversion cycle =DSO+DIO-DPO 30 2 60 – 28 Average inventories opening inventories closing inventories Average inventories = (opening + closing)/2 1,088,684 1,052,381 1,070,533 days inventory outstanding(DIO) average inventories cost or sales DIO=Average inventories/cost of sales 1,070,533 709,556 2 Works Cited (n.d.). Retrieved from http://leysin.redhotelsim.com/779c9 DAS, S. (2015). impact of cash conversion cycle on cash holdings.
accounting, 1-16. nobanee, h. (2009).
working capital management and firm’s profitablity:an optimal cash.