Define each of the following terms: e. Inventory conversion period; average collection period; payables deferral period; cash conversion cycle
Define each of the following terms:
Inventory conversion period - It refers to the number of days between the purchase of material from suppliers and sale of the same to the customers. The less the inventory conversion period, the better because there will be fewer chances of obsolescence.
Average collection period - It refers to the number of days between which the sales are made to the customers and the number of days of collection of money from the customers. Lesser the average collection period, the better because it indicates that the company collects its payments at a faster rate.
Payable deferral period - It refers to the time that the company takes to repay its accounts payable for the material purchases. Higher the payable deferral period, the better because it indicates that the company gets more time for utilizing the funds appropriately.
Cash conversion cycle - It is the process in which the company purchases the material from its suppliers, holds it for a time, and then sells the same to its customers to receive cash. It is the period for which the funds are invested in the current assets of a company.