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Basic Financial Management

Notes The following Figure shows the operating cycle.

Debtor
Sales

Cash

Finished goods

Raw Materials
Work-in-Process

Cash Conversion Cycle

The amount of time a ﬁrm’s resources are tied up calculate by subtracting the average payment
period from the operating cycle. In other words the time period between the dates from when

pays it suppliers to the date till it receives the cash from its customers.
Calculation of Cash Conversion Cycle (CCC)
CCC = OC – APP
where, OC = Operating Cycle APP = Accounts Payable Period OC = AAI + ARP.
AAI = Average Age of Inventory ARP = Account Receivables Period.

From the ﬁnancial statements, it can be determined as the constituents of Cash Conversion Cycle

i.e., AAI, ACP, APP:
Average Inventory
AAI =
Cos t of Goods sold / 365
Average Accounts Re ceivables
ARP =
Annual Sales / 365

Averagae Accounts Payables
APP =
Cos t of Goods Sold / 365

8.3 Factors Affecting Working Capital Management

A business undertaking should plan its operations in such a way that it should have neither
too much nor too little working capital. There are no set of rules or formulae to determine the
working capital requirements of a ﬁrm. The total working capital requirement is determined by a

wide variety of factors. A brief description of the general factors inﬂuencing the working capital
needs of a ﬁrm is as follows:

1. Nature of Business: The amount of working capital is basically related to the nature of
business. The proportion of current assets needed in some lines of business activity varies
from other lines. For instance, trading and ﬁ nance ﬁ rms have a very small investment in

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