Financial Management Concept 2022

FINANCIAL MANAGEMENT 1
FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT 2
Contents
Part 1:.........................................................................................................................................3
Part 2:.........................................................................................................................................4
Part 3:.........................................................................................................................................6
Part 4:.........................................................................................................................................7
Part 5:.......................................................................................................................................10
References................................................................................................................................11

FINANCIAL MANAGEMENT 3
Part 1:
Any small business would be very cautious about the liquidity in its business operations. It is
of an utmost importance which means that the company must have enough cash so that it is
able to pay the short term bills in the future. It is due to this reason that the owners of any
business are very stringent about the cash conversion cycle. This is the concept which deals
with the monitoring of cash to receive the cash for the inventory that it sells. A main thing in
this is the accounts payable period. The longer this period is, the shorter is its cycle.
The cash conversion cycle is the one which is calculated using the data which is available on
the balance sheet of the company and the income statements of the company. It comprises of
mainly 3 parts, the first one being inventory days that tells us the number of days from which
the inventory has been sitting in the warehouse, the second one is the account receivable days
which indicates the number of days it takes the customers to pay off the invoices and settle
their payments. The third is the account payable days which indicates the number of days it
takes to pay the suppliers for the purchases that it has made. Generally, the company wants
that the day’s inventory and the accounts receivables days must be low and the accounts
payable days should be high.
The following is the formula for the purposes of calculating cash conversion cycle:
CCC equals (Inventory days) plus (Accounts receivable days) minus (Accounts payable days)
This concept works like this. Whenever any item or the product goes into inventory, then the
clock starts clicking. The more the number of days in which this product is sold, the longer
the period of the cycle gets. When this product or the item is sold, then the number of days it
takes to pay off the customers would be added to the above. This is of course assuming that
the credit sales has been made by the company. The longer the customer stakes to pay, the
longer the cycle gets. Then finally, the number of days that it takes to pay he accounts