Evaluating financial performance - identify and describe the use and value of conversion period ratios to the entrepreneur

5 important questions on Evaluating financial performance - identify and describe the use and value of conversion period ratios to the entrepreneur

What do conversion period ratios measure?

conversion period ratios measure the average time in days required for non cash current assets and selected current liabilities to create or demand cash.

What is the cash conversion cycle? (c3)

the cash conversion cycle is the amount of time taken to buy materials and produce a finished good plus the time needed to collect sales made on credit minus the time taken to pay suppliers for purchases on credit.

Inventory to sale conversion period?

inventory to sale conversion period= average inventories/ (cost of goods sold/ 365)
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Purchase to payment conversion period?

purchase to payment conversion period = (average payables + average accrued liabilities) / (cost of goods sold / 365)

The cash conversion cycle?

cash conversion cycle= inventory to sale conversion period + sale to cash conversion period - purchase to payment conversion period

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