1. avatar says

    Dear John,

    Please I require some explanation on cash conversion cycle and the calculation of the ratios. I listened to your F9 lectures but I am still struggling to understand these.

    Inventory days = 15
    Receivable days =10
    Payable days = 14

    Cash conversion cycle is 11 days.

    This is how I interpret this, in 25 days I get cash, however the first 14 days out of the 25 days I have to pay out cash, so I still need to wait 11 days to get cash back? but I really still need to wait the whole 25 days to get back cash regardless of the fact that the first 14 days I pay out cash. Please help as I am really confused!

    Also for the ratios, say receivables days 24,000/50,000 (Receivables/Sales)This just tells me that receivables is 48% of total sales. when I multiply it by 365 days then what does that mean? I don’t see how it means it takes 175.2 days to collect sales. Rather, I interpret this as receivables are outstanding for 175.2 days out of the whole year.

    Please help explain from different angles, I’m sure I will get it once you explain vividly to me John M.

    Thank you for your assistance.

    • Profile photo of John Moffat says

      In future please post questions either under the relevant lecture, or (if you want me to answer) in the Ask ACCA Tutor forum for F9. This question has nothing to do with relevant cash flows for DCF.

      The operating cycle is the time that you are without the cash – i.e. the time between receiving the cash and paying out the cash.
      Our bank balance only falls when we pay out to buy the materials, which is in 14 days. The bank balance goes up again when we receive the cash from our customers from selling the goods, which is in 25 days. So we are without the cash for 11 days.

      If we have sales of 50,000, the the sales per day are 50,000/365.
      If the receivables are 24,000 at the end of the year, then it means we are owed for sales for 24,000 / sales per day. That comes to 175.2 days. So it means that we are allowing customers to take 175.2 days to pay us.

      • avatar says

        Thanks. Well i tried to, but it kept logging me off. And i have to be logged on to post a comment. This was the only page that didn’t log me off.

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