Corporate Finance

274
Corporate Finance

(in days)

1998 1999 2000

Raw material holding period 34 38 41
Production 4 4 4
Finished goods 36 52 39
Debtors 65 70 51

Gross working capital cycle 140 164 135

Less: Credit available from creditors 69 80 67

Net working capital cycle 70 83 68

The operating cycle of some prominent companies is as shown:

(in days)

Company Gross operation cycle Net operation cycle

Hindustan Lever 89 4
Wipro Ltd 119 79
Reliance Industries 60 0
TISCO 182 91
TELCO 107 23

The cash conversion cycle is a good measure of how well management is employing its tangible capital base.
Rising cash conversion cycle often indicates deterioration in cash flows, while declining cash conversion
cycle generally signals improving cash flows.
The cash conversion cycle not only highlights the drivers of working capital, but also sheds light on the
dynamics of the supply chain. It quantifies the time between the cash payment to suppliers and cash receipt
from customers. The three components of cash conversion cycle are:

• Days sales outstanding


• Days in inventory


• Days payable outstanding

DPO Cash conversion cycle

Supplier

paid

Customer

purchase

Payment

received

Days in inventory DSO

Inventory

purchase

Dell Computer sells and services personal computers. The company markets directly to its customers
and builds computers after receiving a customer order. This model enables Dell to have much smaller
investment in working capital than its competitors. Given here is the days’ supply of inventory for Dell and
its competitors: