A juice manufacturer wants to determine the time required to convert a dollar spent on materials into a dollar received in sales. Which of the following metrics would be most appropriate to make this determination?
The metric most appropriate for determining the time required to convert a dollar spent on materials into a dollar received in sales is the cash-to-cash cycle time. Here’s the explanation:
Definition: Cash-to-cash cycle time (C2C) is a key performance indicator that measures the time taken between outlaying cash for raw material and receiving cash from product sales. It reflects the efficiency of a company’s cash conversion process.
Components of C2C:
Days Inventory Outstanding (DIO): The average number of days that inventory is held before it is sold.
Days Sales Outstanding (DSO): The average number of days that receivables are outstanding before they are collected.
Days Payable Outstanding (DPO): The average number of days that the company takes to pay its suppliers.
Importance: This metric helps in understanding the liquidity and operational efficiency of the company. A shorter C2C indicates a more efficient operation, as it shows that the company can quickly convert its investments in inventory and other resources into cash flows.
References
Hopp, W. J., & Spearman, M. L. (2008). Factory Physics.
Stevenson, W. J. (2018). Operations Management.
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