1. 150 days
2. 120 days
3. 100 days
4. 90 days
Understanding the Working Capital Cycle
The question asks us to calculate the total working capital cycle for a company. The working capital cycle, often called the Cash Conversion Cycle (CCC), measures how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales. A shorter cycle generally indicates better efficiency.
Key Components of the Working Capital Cycle
The calculation involves several time periods related to the company's operations:
- Raw Material Holding Period: The time the company holds raw materials before production begins.
- Production Process Time: The time it takes to convert raw materials into finished goods (also known as Work-in-Progress holding period).
- Finished Goods Holding Period: The time finished goods are stored before being sold.
- Debtors Collection Period: The average time it takes to collect payment from customers after a sale on credit.
- Creditors Payment Period: The average time the company takes to pay its suppliers.
Calculation Steps
The formula for the Cash Conversion Cycle (CCC) is:
$CCC = Raw Material Holding Period + Production Process Time + Finished Goods Holding Period + Debtors Collection Period - Creditors Payment Period$
Alternatively, it can be viewed as:
$CCC = Operating Cycle - Creditors Payment Period$
Where:
$Operating Cycle = Raw Material Holding Period + Production Process Time + Finished Goods Holding Period + Debtors Collection Period$
Applying the Formula to the Given Data
Let's list the values provided in the question:
| Raw Material Holding Period | 60 days |
| Credit from Suppliers (Creditors Payment Period) | 15 days |
| Production Process Time | 15 days |
| Finished Goods Holding Period | 30 days |
| Credit given to Debtors (Debtors Collection Period) | 30 days |
Step 1: Calculate the Operating Cycle
Operating Cycle = Raw Material Holding Period + Production Process Time + Finished Goods Holding Period + Debtors Collection Period
Operating Cycle = 60 days + 15 days + 30 days + 30 days
Operating Cycle = 135 days
Step 2: Calculate the Cash Conversion Cycle (Total Working Capital Cycle)
CCC = Operating Cycle - Creditors Payment Period
CCC = 135 days - 15 days
CCC = 120 days
Conclusion
Based on the calculations, the total working capital cycle for the company is 120 days. This means it takes approximately 120 days for the company's initial investment in raw materials to be converted back into cash, considering the time lags in production, sales, and payments.
Important Questions from Working Capital
Which of the following statements is related to the 'Human Capital Theory'?
Which of the following rules stands true while preparing a schedule of changes in working capital?
(A) An increase in current assets increases working capital
(B) An increase in current assets decreases working capital
(C) An increase in current liabilities decreases working capital
(D) An increase in current liabilities increases working capital
Choose the most appropriate answer from the options given below:
As per which one of the following approaches, a firm finances a part of its permanent working capital with short term financing?
Negative Net Working Capital implies that :
Which one of the following will have a net change in the amount of working capital of a company?
