Cash Conversion Cycle – Home Depot Inc. versus Lowe’s Companies Inc.
In the section, the cash conversion cycle of two companies is compared which reflects the financial performance of these publicly traded businesses to collect cash, generate sales and pay their creditors. In the below mentioned table, the cash conversion cycle is computed by the addition of Days Sales Outstanding (DSO) ratio to Days in Inventory (DI) and exclusion of the Payable Period (PP) ratio from that sum.
It is also clear that liquidity management and cash generation, “Lowe's Companies” tends to outperform “Home Depot” because it is paying late to its trade creditors (as agreed with them). This efficiency of the former also originates from the fact that “Lowe's Companies” do not extend any trade credit to its clients by making cash based sales only. “Home Depot” is unable to generate its inventory quickly to sales compared to “Lowe's Companies”. Additionally, it repays its creditors more rapidly than the latter. However, a close analysis of cash conversion cycle depicts that both of these companies operate close to each other while completion of cash inflow and outflow cycle is concerned .
Negative Working Capital
In other words, businesses like restaurants (Amazon, McDonald’s and Wal-Mart), broadcasting firms and wireless communications etc, they tend to make cash-based sales and convert inventories to sales quickly than any other average company and also, take a little bit longer period to pay their creditors where they fewer receivables to collect and efficient selling of inventories .
The Use of Electronic Money or Currency
Practically, it is observed that the electronic money has replaced the use of traditional and physical currency with the use of internet based technology . One of the biggest advantages of using the electronic currency is the increased convenience to make micro-payments which is not only simple but cheaper as well . Another advantage is that companies receiving their payments through electronic money, there is less need for them to introduce tight internal controls regarding cash management because money is directly credited to the company’s bank account. There will be less possibility about the occurrence of human error in counting, theft or stealing activity for cash management. However, despite these advantages, there are some problems with electronic currency that of security which remains a major concern hurting the customer confidence. Skillful hackers may break into the company’s system and could transfer funds to their accounts in an illegal manner.
References
Grinberg, R. (2011). Bitcoin: An Innovative Alternative Digital Currency. Hastings Science & Technology Law Journal , 160-161.
Herpel, M. (2010). 2011 Observations On The Digital Currency Industry. Social Science Electronic Publishing, Inc , 4-6.
Lyroudi, K., & Lazaridis, J. (2000). THE CASH CONVERSION CYCLE AND LIQUIDITY ANALYSIS OF THE FOOD INDUSTRY IN GREECE. Social Science Research Network , 2-6.
Nathan, N. (2012, November 26). Firms With Low Working Capital Can Be Good Investment Bets. Retrieved December 17, 2014, From The Economic Times: Business News: Http://Articles.Economictimes.Indiatimes.Com/2012-11-26/News/35365231_1_Capital-Year-Telecom-Companies-Anand-Tandon
