Discussion_7th and Peer to peer responses

RESPONSE FOR THE DISCUSSION:

In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company. Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions:

· Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

· Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.

150 +

Author: Hemanthavalli Balusu 

Cash Conversion Cycle (CCC):

Cash Conversion Cycle (CCC) is a financial metric which is used to indicate the time taken by a business to convert its inventory investments and other business resources into cash flow obtained from sales. It is also known as the net operating cycle or the cash cycle.  CCC is a quantitative measure and a reliable indicator of the efficiency of a given business. CCC helps in determining the period in which each input dollar in a given business is tied to the production processes before it can be converted into cash.

 

Businesses that take a longer time to convert investments into cash would have higher CCC than businesses that take relatively less time. High CCC is an indicator of inefficiency since it would mean that the business is not efficient enough to convert the cash quickly. On the other hand, low CCC is an indicator of high efficiency, since the business processes are efficient enough to convert the cash quickly (Nwude, Agbo & Ibe, 2018). Therefore, if a company has a declining CCC over a given time period, then it is a sign of its efficiency.

 

Similarly, if a company has rising CC over a given time, then it is a sign of inefficiency and should lead to a thorough investigation of the operational processes. However, it is important to note that depending on the inventory management and other related processes. CCC is applicable only for selected sectors. Also, CCC can differ from one sector to another, due to the nature of business n each sector being different (Doruk & Ergün, 2019). Hence, the CCC of a business from one sector cannot be compared to the CCC of another business from a different sector.

 

Inventory management as being an element of working capital:

Inventory may be the asset that is main of company which facilitates the transformation of cash profits. Inventory management is really an element of working capital management because the running of a stock having a stock of products can be a cost that is added to the area of the owner regarding the company. Therefore, the additional cost into the title of stock needs management and monitoring so that you can allow decision making that is informed. Inventory management is actually an element of the producer’s relation aided by the client as an effective stock can only just be achieved whenever the producer knows the demand associated with the customers by making accurate and prompt decisions. Inventory management is rightly called the blocked capital that is working of the company which will be placed to use during the time of crisis or as soon as the market demand is overwhelmingly high. Inventory management not merely facilitates the integration associated with a business that is whole but also keeps the customers pleased by satisfying their needs. Also, really helps to minimize the expense of operating a listing and in addition to that, additionally causes the maximization of profit. A vendor utilizing the prepared stock to ship could be the key up to a consumer that is delighted

 

How CCC helps in decision-making?

As discussed above, CCC helps in determining how much time a business will take in converting its investments into cash. Therefore, investors can determine how much time their invested capital would take to come out as pay-outs. This will help investors in deciding their investments on a prospective investment opportunity (Zakari & Saidu, 2016). Companies or businesses which have a longer CCC would most likely be a bad investment. Also, CCC can help companies in modifying their credit policies when it comes to their methods of credit purchase.

 

Cash budget:

A cash budget of a business is the expected cash amount and spending of cash at a given time period (like a year, month, or week). This includes all the cash inflows and outflows of a business, which in turn might is used to determine the cash positions of a company in the future. Sales and production forecasts of a business are used to determine the cash budget.

 

Along with this, the necessary collections and accounts receivable amount is also taken into consideration. A cash budget is a useful financial tool that helps in determining whether a business has enough cash to operate. In case if a business does not have a sufficient cash budget, it must raise an additional amount by issuing stock. A cash budget is prepared after all the sales; purchases and expenditure of capital are made. This is because the cash budget takes into consideration all of these factors for determining the position of the cash (Mishra, 2018).

 

Applications of cash budget for decision making:

As discussed above, a cash budget helps in determining whether a business has enough cash to fund its operations. The cash budget of a company helps in determining how much cash the company has left. This in turn helps the company in determining whether they need to take on more debt for raising liquidity or not. If a company does not have a sufficient cash budget, it can issue bonds or take loans. For smaller companies, the cash budget is very important. It helps in determining the amount of credit a company can give out to its customers without having to face any problems in liquidity. In times of high expenditure, a cash budget helps a business in avoiding any unwanted expenditure. This in turn helps in the prevention of any cash shortage during the period. It also helps businesses in prioritizing their bill payments in a budget period.

 

 References

Doruk, Ö. T., & Ergün, B. (2019). The role of macroeconomic constraints on cash conversion cycle: Evidence from the Turkish manufacturing sector. Asia-Pacific Journal of Accounting & Economics, 1-12.

Mishra, C. R. A (2018) STUDY ON BUDGET AND BUDGETARY CONTROL: ANALYSIS OF CASH BUDGET.

Nwude, E. C., Agbo, E. I., & Ibe, C. (2018). Effect of cash conversion cycle on the profitability of public listed insurance companies. International Journal of Economics and Financial Issues, 8(1), 111.

Zakari, M., & Saidu, S. (2016). The impact of cash conversion cycle on firm profitability: evidence from Nigerian listed telecommunication companies. Journal of Finance and Accounting, 4(6), 342-350.