Introduction
The settlement of financial transactions is an imperative task to ensure the adequate functioning of the company and compliance with all procedural rules and regulations. Organization Capers, Inc. has some tasks regarding cash turnover cycles and conversion of funds. The Chief Financial Officer (CFO) is responsible for taking all actions to ensure that the organization’s future goals are sufficiently achieved. These also include the calculation of financing for the new Capers, Inc. project. which will have significant long-term consequences. Thus, as CFO, I must make all the necessary calculations to ensure an understanding of the future direction of economic policy.
Cash Conversion Cycle
The cash conversion cycle (CCC) reflects a company’s working capital management efficiency. This indicator should include such vital stages as the period of inventory conversion, collection of receivables, and deferment of accounts payable. For Capers, Inc., the conversion period for funds is 60 days, with a deferral of accounts payable of 30 days.
To calculate CCC, it is necessary to add to the inventory conversion period the time allotted for collecting accounts payable and subtract the delay if provided (Kolias et al., 2020). Considering the company’s information, we can say that the CCC will be 60-30 – 30 days. This period determines how quickly Capers, Inc. can realize investments by turning them into inventories or cash. Reducing this period is crucial because it will indicate greater efficiency of the organization in the context of financial transactions.
Inventory Turnover Evaluation
This indicator demonstrates how effectively a company can regulate and manage existing reserves. This parameter can be calculated by dividing the cost of goods sold (COGS) by the average amount of inventory available. Data from Capers, Inc. show that annual sales are $4,000,000.
However, information regarding the company’s profit and how many days the funds are converted will also be needed (Kurganov et al., 2022). This period in the organization is 60 days and will need to be divided by 365, which means the number of days in a year. One unit, which means one year, is divided by the number that came out due to calculations to obtain the total amount. Thus, in a year, the company’s inventory turnover is 6.25 times.
Investment in Receivables
Calculating a firm’s average investment in accounts receivable is done by determining how much of the company’s capital is invested in debt. Since Capers, Inc.’s annual sales volume is $4,000,000, the investment can be calculated by dividing this amount by 365 days a year and multiplying by the debt repayment period (Karipova et al., 2020). This period is set as 30 days, which can provide sufficient results for timely payments. Thus, the calculated investment amount will be equal to 328,767 US dollars. It is essential for a company to accurately track the collection period of receivables as this is imperative to reduce the period of conversion into cash. This process can significantly increase the company’s liquidity and affect profits if adequately regulated.
Nominal Interest Rate on the Loan
The nominal interest rate on a loan for Capers, Inc. is 10%. This parameter characterizes the cost of borrowing money from a bank. Considering some side factors that may affect the lending cost is vital. A more accurate picture of what funds an organization will have to pay is calculated using an annual percentage rate, which can provide a complete picture of the company’s economic operations.
Calculating this indicator is essential for understanding the possibilities of financing a new project requiring $1,500,000. The annual interest rate can be calculated based on information about interest expenses, which must be divided by the difference in the amount and the compensation balance (Gospodarchuk & Suchkova, 2019). The resulting amount should be divided by the loan term calculated by year, obtaining 33.33%. This can significantly add to the company’s payout picture when combined with a nominal interest rate broken down into multiple annual payments.
Success of CCC
The effectiveness and success of Capers, Inc.’s CCC must be determined in the context of the industry in which the organization operates. Considering the calculated indicators, we can say that the company’s CCC is at a reasonably high level, as evidenced by the thirty days. Thus, it can be said that the cycle’s success coincides with the company’s goals and allows the planned project to be implemented promptly. Due to this organization of work, it is possible to achieve quick conversion, which allows one to start work with a slight delay after the funds arrive (Gospodarchuk & Suchkova, 2019). As noted above, a low cycle time helps increase liquidity, positively affecting Capers, Inc.’s financial capabilities.
Conclusion
Financial performance is vital to facilitate the smooth functioning of an organization’s systems. Indicators of Capers, Inc. are in an optimal position to carry out activities related to the construction of a residential complex. One of the critical parameters is inventory turnover, which, according to calculations and company operating amounts, is equal to 6.25 times a year. Thus, we can say that the economic situation is stable and can fully meet Capers, Inc.’s needs.
References
Gospodarchuk, G. & Suchkova, E. (2019). Financial stability: Problems of inter-level and cross-sectoral equilibrium. Equilibrium (Toruń ), 14(1), 53–79. Web.
Karipova, A., Kabdullina, G., Kenesheva, G., Tursumbaeva, M., Kapysheva, S., & Nurgalieva, Z. (2020). Monitoring of industrial enterprises’ performance in emerging economy: a case study. Entrepreneurship and Sustainability Issues, 8(2), 1177–1196. Web.
Kolias, G., Arnis, N., & Karamanis, K. (2020). The simultaneous determination of cash conversion cycle components. Accounting and Management Information Systems, 19(2), 311-332. Web.
Kurganov, V. M., Gryaznov, M. V., Dorofeev, A. N., & Aduvalin, A. A. (2022). Methodology for rationing material resources for buses. Intelligence. Innovations. Investment, 1(1), 102–116. Web.