Cash Conversion Cycle, Cash Budget, and the Four Key Factors in a Firm’s Credit Policy
Please read chapters 15 of Fundamentals of Financial Management, Concise Edition,10th Ed. and answer the following questions.
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Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.
What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets, and how might a cash budget be used when a firm is negotiating a loan from its bank?
What are the four key factors in a firm’s credit policy? How would a relaxed policy differ from a restrictive policy? Give examples of how the four factors might differ between the two policies. How would the relaxed versus the restrictive policy affect sales? Profits?
Your initial response should be a minimum of 200 words. Be sure to incorporate the weekly readings, citing the sources using proper APA (including in-text citations and references in your response).
Then write a follow up response in support of your initial response as well as a response in opposition of your initial response. It follow up response should be a minimum of 125 words.
Cash Conversion Cycle Discussion Post
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Cash Conversion Cycle Discussion Post
The Cash Conversion Cycle (CCC) can be conceptualized as the timescale it takes for a company to convert funds used for accounts receivables, payables, and inventory into cash flows through sales. The company’s profitability will improve if its CCC is reduced because the lower CCC implies locking funds for a shorter timescale. These financial resources could be plowed back into the business via investments, thus generating more revenues (Brigham & Houston, 2021). Therefore, reducing CCC would augment the firm’s profitability.
A cash budget can be theorized as a month-long table illustrating cash disbursements, receipts, and balances. It can help the company recognize when it has surplus cash, which could prompt it to lower its cash on hand by putting in new investment projects. Favorable circumstances for daily cash balance compared to the monthly cash balance include providing everyday cash checking and establishing any course of action to help meet the daily necessities. Disadvantages of daily cash budgets over the monthly cash balance include more inconveniences in setting up cash proclamations regularly and issues in bargaining with the financial intermediaries in advance (Brigham & Houston, 2021). Cash budgets help establish the shortages when the company requires the cash and how the enterprise can bargain with the commercial bank.
The four salient factors in a company’s credit policy include credit period, discounts, collection policy, and credit standards. A restricted policy might incorporate a shorter credit period, while a relaxed policy might allow over thirty standard days. A restricted policy specifies a lower discount percentage, while a relaxed one offers higher discounts. A restricted policy could incorporate a more stringent credit standard, while a relaxed policy allows credit issuance. The restrictive policy include...