Working capital metrics for a firm Days Inventory Held 40 d

Working capital metrics for a firm:

Days’ Inventory Held = 40 days

Days Sales Outstanding =50 days

Days Payable Outstanding = 20 days

Management wants the firm to achieve the industry average Cash Conversion Cycle of 50 days. After careful examination, you determine that the only component of the Cash Conversion Cycle that you can control is Days Sales Outstanding. If you were able to lower the Days Sales Outstanding to achieve management’s stated goal of a 50 day Cash Conversion Cycle, calculate the new level of accounts receivable that will exist on the firm’s balance sheet. Assume that the firm has annual revenues of $10M. Please show work

Solution

Cash conversion cycle = Days’ Inventory Held + Days Sales Outstanding - Days Payable Outstanding

50(Industry average) = 40 + X - 20

New sales outstanding X = 30.

Days Sales Outstanding = accounts receivable / (annual revenue/ 365 days)

30 = accounts receivables/ 27397.26

= 821,917.808.