Sample Business Essay on Online marketing in UK

Online marketing in UK

Introduction

The concept of Cash Conversion Cycle (CCC) has been used widely in the business world to estimate the extent of financial stability that a company attains over time. The proponents of the Cash conversion cycle argue that the faster a company is able to convert her inventory into cash, the more stable the company becomes with regard to her financial security. In regard to this aspect, companies that take longer days to cover their inventories into cash stand a higher risk of losing business operations to their competitors (Padachi, 2006). The foundation of arguments adopted by the proponents of the concept of CCC has been investigated by a number of economists and financial analysts (Raheman, Afza, Qayyum, & Bodla, 2010). A lot of publications such as Nobanee, Abdullatif, & AlHajjar, (2011) and Nobanee, (2009) support the fact that the proponents to the concept have based their arguments on the fact that the amount of cash a company has or is able to acquire over a given period of time determines the company’s purchasing power and overall control over her inventory. The more a company is able to purchase, thus, the more successful it becomes in the business world (Raheman & Nasr, 2007). Uyar, (2009), states that observations on companies’ CCC also help in analyzing how best it is able to compete against her competitors in a stiffly competed business world as well as maintain a steady cash flow, which is the lifeblood of every company.

According to Samiloglu & Demirgunes, (2008) the amount of cash flow a company has determined how best the company is adapted to the business world. Besides, steady cash flow registered by a company also determines how effective it can compete against her competitors as () records. Company auditors look at the CCC of the companies in an attempt to rate their performance against other companies in the same line of operations as well as project the future performance and expansion of the company in their lines of operations. This paper has two main sections dealing with the concept of cash conversion cycle as used in the business world. In this regard, I have discussed the concept of cash conversion cycle of a company as well as highlighting the various aspects related to the concept that are related to companies improvements in performance and financial management.

Cash conversion cycle has three main phases that describe the full process of inventory conversion into cash. The initial stage looks into the levels of the current inventories by establishing how long it can take for the company to sell her inventory to prospective customers (Vijayakumar, 2011). The status of this stage is determined by focusing on the days sales outstanding calculations. The second phase is characterized by the amount of current sales as well as the amount of time taken for the company to collect all her cash from the sale made. Calculation of this phase utilizes the use of days’ sales outstanding calculation. The third and the last stage is represented by the amount of current outstanding payables, i.e., it is characterized by the determination of how much the company owes its current vendors in terms of inventories and commodities purchased and when the company is scheduled to pay off her vendors (Vishnani & Shah, 2007). This phase is calculated using the days’ payable outstanding formula.

In general, a formula has been established by economists to help estimate companies cash conversion cycles in a bid to help them estimate and project the performance of various companies in the in the future. The famous formula that has been widely applied by economists to do the calculation is described using the three aspects described in the previous section of this paper. The calculation takes into account the three phases: days inventory standing, days sales outstanding and days payable outstanding aspects as described below;

Cash Conversion Cycle = DSO + DIO – DPO

The formula described above has been used to carry out sample calculations on cash conversion analyses for company X

Part I

Assume that a company has $20 million in revenue and its cost of goods sold is 70% of its sales. Additionally, the firm has $3 million of inventories, $2 million in payables, and $2 million in receivables. What’s the firm’s cash conversion cycle (CCC)? What does this indicate? Do you think that the company should improve its CCC? If so, what are some ways that it can do that? If not, why do you think that’s the case?

Using the formula: Cash Conversion Cycle = DSO + DIO – DPO, we can easily calculate the CCC of company X as shown below;

DSO= {2000000 (70÷100)}/ 365 days= 3833

DIO= 3000000 ÷ 365= 8214

DPO= 2000000 ÷ 365= 5476

CCC= 3833+ 8214- 5476 =6571 days

According to the observations of famous economists such as Zubairi, (2010) a lower value of the Cash Conversion Cycle represents effective management and utilization of the companies’ resources in order to turn her inventories into ready cash. The more cash a firm is able to acquire from the sales of her inventories, the more financially the firm becomes and hence increased ability invest in other inventories by making more purchases Zubairi, (2010). However, in order to effectively evaluate the competitiveness of a company in relation to the others, the CCC should be calculated for all competitors and used for comparison. This will help in decision making to determine whether the company is making money from its inventories or inventories not moving to generate income as required for effective and profitable business operations.

The CCC of 6571 days indicates a worse performance in the operations and management of the company calling for an immediate and appropriate intervention measures to be taken in improving the company’s performance. The company is required to improve its CCC in order to improve its performance and competition against its competitors. The management is required to increase her cash inflow in order to increase her investments and equity turnover. We cannot virtually conclude that the performance of company X is worse without making comparisons with her competitors’ CCC. However, the number of days for the CCC is quite long and needs to be reduced by reducing the number of days taken to convert inventories into cash. A number of economists and business researchers have conducted researches into finding the various ways through which companies can reduce their CCC (Raheman & Nasr, 2007). According to Uyar, (2009), the number of days in the CCC can be reduced by reducing the number of days it takes to gather cash from the customers and delaying the payables. This move can be effected by making close follow- ups for all inventories given out to the customers in order to reduce the period for which customers hold money away from the company after purchase. In addition, the company can also capitalize in stocking goods that can be easily sold off. This will considerably reduce the number of days it takes for inventories to be converted into cash thereby reducing the company’s CCC.

 

 

Part II

Assume that a firm has a payables deferral period of 40 days, an inventory conversion period of 62 days, and an average collection period of 29 days.

  1. What’s the firm’s cash conversion cycle?

CCC= DSO + DIO – DPO

= 62+29-40

=51 days

  1. Assume that all of the firm’s sales are on credit. If the firm has annual sales of $4 million, what’s the accounts receivable investment?

Investments in accounts receivable= ACS (collection period-days)/ 360

= 4,000,000(29/360)

= 322,222.22

  1. How many times a year will the firm turns over its inventory?

Investments in accounts receivable= current year’s cost of goods sold ÷ average inventories

= 4,000,000 ÷ 322,222.22

= 12.4138

Based on the calculation drawn above, the company is able to sell all its inventories 12 times each year. This looks good and pleasing signifying a better performance of the company in terms of business operations.

 

 

Conclusion

In conclusion, I would like to reiterate that cash conversion cycle, CCC, is an accurate measure of companies’ performances in relation to their competitors. The smaller the value of the cash conversion cycle, the more efficient the business operations and management of the company and the more financially stable and competitive it is. Calculations of cash conversion cycles are carried out based on determining factors: days payable outstanding (DPO), days inventory outstanding (DIO) and days sales outstanding (DSO). Companies’ efforts to reduce the period of time taken for the companies to turn their inventories into cash are true efforts to lowering the CCC thereby increasing the companies’ competitiveness.

 

 

 

 

 

 

 

 

 

 

References

Nobanee, H. (2009). ‘Working Capital Management and Firm’s Profitability: An Optimal Cash Conversion Cycle. Retrieved from SSRN: http://ssrn.com/abstract=1471230

Nobanee, H., Abdullatif, M., & AlHajjar, M. (2011). Cash conversion cycle and firm’s performance of Japanese firms. Asian Review of Accounting, 19 (2), 147-156.

Padachi, K. (2006). ‘Trends in Working Capital Management and its Impact on Firms’ Performance: An Analysis of Mauritian Small Manufacturing Firms. International Review of Business Research Papers, 2 (2), 45-58.

Raheman, A., & Nasr, M. (2007). Working Capital Management And Profitability – Case Of Pakistani Firms. International Review of Business Research Papers, 3 (1), 279 – 300.

Raheman, A., Afza, T., Qayyum, A., & Bodla, M. A. (2010). ‘Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan’. International Research Journal of Finance and Economics, 47, 151-163.

Samiloglu, F., & Demirgunes, K. (2008). The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey. The International Journal of Applied Economics and Finance, 2 (1), 44-50.

Uyar, A. (2009). The Relationship of Cash Conversion Cycle with Firm Size and Profitability: An Empirical Investigation in Turkey. International Research Journal of Finance and Economics, 24, 186-193.

Vijayakumar, D. A. (2011). Cash Conversion Cycle and Corporate Profitability- An Emperical Enquiry in Indian Automobile Firms. International Journal of Research in Commerce, IT and Management, 1 (2), 84-91.

Vishnani, S., & Shah, B. (2007). Impact of Working Capital Management Policies on Corporate Performance An Empirical Study. Global Business Review, 8, 267-281.

Zubairi, H. J. (2010). Impact of Working Capital Management and Capital Structure on Profitability of Automobile Firms in Pakistan. Retrieved 2010, from http://ssrn.com/abstract=1663354