Week 3: Financial Planning & Cash Management Section B
Master the Cash Conversion Cycle, Sources & Uses, and Cash Budgeting for Section B problems.
🔄 The Cash Conversion Cycle (CCC)
📐 The Core Formulas
= Inventory Days + Receivables Days − Payables Days
📊 Turnover Ratio Formulas
| Inventory Turnover | COGS ÷ Average Inventory |
| Receivables Turnover | Sales ÷ Average Receivables |
| Payables Turnover | COGS ÷ Average Payables |
Note: Average = (Beginning + Ending) ÷ 2
📥📤 Sources and Uses of Funds
Changes in balance sheet items represent cash flows:
| Change | Classification | Why? |
|---|---|---|
| Asset ↑ (Increase) | USE | Buying assets uses cash |
| Asset ↓ (Decrease) | SOURCE | Selling assets provides cash |
| Liability/Equity ↑ | SOURCE | Borrowing or issuing equity provides cash |
| Liability/Equity ↓ | USE | Paying down debt uses cash |
- If you're SPENDING cash → it's a USE
- If you're RECEIVING cash → it's a SOURCE
💰 Cash Budgeting
Collection Timing (45-Day Example)
If customers pay in 45 days and quarters are 90 days:
- 45 days = ½ quarter
- Collections this quarter: ½ of current quarter sales + ½ of last quarter sales
Payment Timing (36-Day Example)
If you pay suppliers in 36 days:
- 36 days = 2/5 of quarter (36÷90)
- Remaining = 3/5 of quarter (54 days paid same quarter)
- Payments this quarter: 3/5 of current quarter purchases + 2/5 of last quarter purchases
🧮 Cash Conversion Cycle Calculator
Enter Financial Data
📥📤 Sources & Uses Practice
Classify Each Change
Based on the balance sheet changes below, identify if each is a Source or Use of funds:
| Item | Change | Classification |
|---|---|---|
| Cash | +£500,000 | |
| Inventory | +£1,300,000 | |
| Accounts Receivable | +£300,000 | |
| Accounts Payable | +£550,000 | |
| Long-term Debt | −£500,000 | |
| Retained Earnings | +£1,550,000 |
✏️ Practice Problem: Complete Cash Budget
Scenario: Quarterly Cash Budget
Build a cash budget for Q2 with the following information:
- Q1 Sales: £50,000 | Q2 Sales (forecast): £60,000
- Collection Period: 45 days (half collected same quarter)
- Q1 Purchases: £30,000 | Q2 Purchases: £36,000
- Payment Period: 36 days (3/5 paid same quarter)
- Other Q2 Expenses: Wages £10,000, Rent £5,000, Interest £2,000
- Beginning Cash (Q2): £8,000
- Minimum Cash Balance: £5,000
Q2 Collections
With 45-day collection period (half a quarter):
- From Q1 sales: 50% × £50,000 = £25,000
- From Q2 sales: 50% × £60,000 = £30,000
- Total Collections = £55,000
Q2 Payments for Purchases
With 36-day payment period (2/5 = 40% carries to next quarter):
- From Q1 purchases: 40% × £30,000 = £12,000
- From Q2 purchases: 60% × £36,000 = £21,600
- Total Purchase Payments = £33,600
Q2 Net Cash Flow
| Collections | +£55,000 |
| Purchase Payments | −£33,600 |
| Wages | −£10,000 |
| Rent | −£5,000 |
| Interest | −£2,000 |
| Net Cash Flow | +£4,400 |
Ending Cash Position
| Beginning Cash | £8,000 |
| Net Cash Flow | +£4,400 |
| Ending Cash | £12,400 |
| Minimum Required | £5,000 |
| Surplus/(Deficit) | +£7,400 |
Conclusion: No external financing needed. The company has a £7,400 surplus above minimum.
📘 Tutorial 3: Collection & Payment Timing
45-Day Collection Period
Customers take 45 days to pay after a sale
🔑 The Key Insight
1 Quarter = 90 days
So 45 days = ½ of a quarter
Interactive: When Does a Sale Get Collected?
Sale on Day 1 → Collected on Day 46
✓ Collected in THIS quarter
(Day 46 is before Day 90)
Therefore: Collections Each Quarter
Quick Reference
❓ Test Your Understanding
1. A company has Inventory Days of 45, Receivables Days of 30, and Payables Days of 60. What is the Cash Conversion Cycle?
2. When Accounts Payable increases by £100,000, this represents:
3. With a 45-day collection period and quarterly (90-day) periods, what proportion of Q2 sales will be collected in Q2?
4. A negative Cash Conversion Cycle means:
5. When calculating Inventory Turnover for the Cash Cycle, you should use:
6. In a cash budget, if the Cumulative Surplus is negative, this indicates:
📋 Week 3 Exam Checklist
Before moving on, make sure you can:
- ☐ Calculate Cash Conversion Cycle from raw financial data
- ☐ Interpret what positive vs negative CCC means for the business
- ☐ Classify balance sheet changes as Sources or Uses of funds
- ☐ Convert collection/payment periods to quarterly proportions
- ☐ Build a complete cash budget with collections, payments, and financing needs
- ☐ Identify when external financing is required from cash budget
- ☐ Always show: Formula → Substitution → Calculation → Interpretation