Bank Loans, & Leasing Vs. Buying Most Essay

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Bank Loans, & Leasing vs. Buying

Most companies acquire their inventory on credit which results into accounts payable and sell their products on credit which results into accounts receivables where in both cases there is no involvement of cash. Cash Conversion Cycle (CCC) therefore is a matrix that determines the length of time in days taken by a company to sell its inventory, and the duration of time taken to collect receivables and the duration of time taken by a company to pay its bills.

Cash Conversion Cycle is calculated as the Average Inventory Collection Period + Average Receivables Processing Period -- Average Payables Period. For instance if company 'X' has an average Inventory Collection Period of 85 days, an Average Receivables Processing Period of 55 days and an Average Payables period of 70 days then CCC will be (85+55-70)days which will be 70 days.

The length of time a company takes to recover cash from its activities is important and a shorter period is preferred by most companies as it indicates good cash flow and availability of cash for other investment purposes.

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A longer period is unhealthy for companies and implies that cash is tied up and the company cannot undertake some of its core operations due to cash flow problems.

A company can shorten the cash Conversion Cycle by decreasing Inventory Days on Hand by increasing efficiency in its manufacturing process or decrease Average Collection Period by providing incentives to those who pay on time or sooner by giving small discounts to attract earlier payments or device a more reliable collection method or the company can as well increase the Days Payable Outstanding by holding onto the suppliers' payments. All these measures will increase the available….....

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