FINANCIAL ANALYSIS

Financial Management and Analysis

Executive Summary

To evaluate the effectiveness of company management, Cash conversion cycle is very useful tool. Through analyzing the trend of each activity ratios, one can gain enough knowledge in operating efficiency of a firm. At the same time, working capital management is also an important item for business since it is related to the management of assets and liabilities in such a ways that company would not find any difficulty in meeting their debts payments. Any company that fails to properly manage their working capital will result in borrowing additional fund from bank, so that they can pay their short term obligation and this borrowing will have certain cost which also has to be bear by company, overall increasing expenses. Hence, this statement shows that liquidity is an important element for management since it has direct connection with the profitability. Similarly, Cash Conversion Cycle highlights areas where managers can make further improvement and if need arise can reduce cash amount that is tied up in current assets. Rather decreasing sales and decreasing cost per unit sold, management can reduce cash that is invested in current assets via shortening the cash conversion cycle. In this paper, the focus would on cash conversion cycle (operating cycle) and its significance in determining the working capital needed by a company along with the different strategies a firm may follow in order to finance its working capital requirements.

EXECUTIVE SUMMARYII

CASH CONVERSION CYCLE (OPERATING CYCLE)1

Calculating the Cash Conversion Cycle2

Significance in determining the Working Capital needed by A Company2

Relationship between Cash Conversion Cycle and Working Capital3

Significance - Working capital and CCC3

STRATEGIES FOR FINANCING WORKING CAPITAL4

Selling Accounts Receivable5

Credit with Suppliers5

Equity Issuance6

Debt Issuance6

Hybrid Financing6

REFERENCES7

Financial Management and Analysis

Cash Conversion Cycle (Operating Cycle)

In normal businesses, companies usually purchase inventories on credit and this inventory is further used to develop products. Once the product is developed, companies sell these products either on cash or sometimes on credit. Sales made on credit results in account payables and account receivables, since there is no cash transaction and this process continue till company has collected their account receivables and has settled their account payables (Ehrhardt, 2012, p. 557).

The duration of time between purchases of inventory, sell goods on credit, collect account receivables and payment to supplier termed as cash conversion cycle. This cash conversion cycle basically measures the “Time” i.e. in days. In order words, how long company has been taking time to convert its resource inputs into cash-flows. Furthermore, according to finance theories, cash conversion cycle shows the duration that it takes to sell its inventory, collect their receivables and settle their bills.

A thumb rules, lower the number of cash conversion cycle, better it will be for company as company would be having ample cash for further investment in equipments or infrastructure or other profitable project in order to increase their investment return. Beside this, company would also be borrowing lesser amount in order to finance their operation. This measure is also beneficial for comparing against competitors and ...