2. Cash conversion cycle

Cash management is a very important function of managers. Companies need to manage their operations in a way that they can sustain growth and yet not run out of cash.

Consider the case of the Extensive Enterprise Corporation:

Extensive Enterprise Corporation has forecasted sales of $29,000,000 for next year and expects its cost of goods sold (COGS) to remain at 70% of sales. Currently, the firm holds $2,900,000 in inventories, $1,800,000 in accounts receivable, and $2,500,000 in accounts payable.

Approximately how long does it take Extensive Enterprise to convert its raw materials to its finished products and then to sell those goods? (Note: In all calculations, assume that there are 365 days in a year.)

41.71 days

49.53 days

57.35 days

52.14 days

On average, it takes from the time a sale is made until the time cash is collected from customers.

Extensive Enterprise relies on customer credit when it buys raw materials from its suppliers. On average, it takes after the firm purchases materials before it sends cash to its suppliers.