Ben\'s Bulk Barns is a wholesale wholefoods merchant and is investigating severa

Question

Ben's Bulk Barns is a wholesale wholefoods merchant and is investigating several mechanisms to reduce its cash conversion cycle. The first is a new inventory control and ordering system which will reduce average age of inventory from 85 days down to 50 days. The second policy change it is considering is introducing a discount for its credit customers who pay their account in full earlier. This is likely to reduce the average collection period from 52 days down to 28 days. If both changes are implemented, what will Ben's Bulk Barns cash conversion cycle be if its average payment period remains at 31.7 days?

Explanation / Answer

Answer:

Cash conversion cycle = Days inventory outstanding (DIO) + Days sales outstanding (DSO) - Days payable outstanding (DPO)

Given:

If both changes are implemented:

Days inventory outstanding (DIO) = Average age of inventory = 50 days

Days sales outstanding (DSO) = Average collection period = 28 days

Average payment period remains at 31.7 days

Days payable outstanding (DPO) = Average payment period = 31.7 days

Hence,

Cash conversion cycle = 50 + 28 - 31.7 = 46.3 Days

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