Question

Given below is the ‘Cash Conversion Cycle’.

(i) Identify the type of business to which the above cash conversion cycle belongs.
(ii) Draw a ‘Cash Conversion Cycle’ for another type of business other than that identified in (i) above.

Hint:

Manufacturing businesses deal with inventory; service businesses deal with time and expertise. Their cash cycles differ accordingly.

Answer 1

(i) Type of Business:
The above cash conversion cycle belongs to a Manufacturing Business.
This is evident because the cycle includes the steps:
Cash → Raw Materials → Work in Progress → Finished Goods → Debtors → Cash,
which are typical stages involved in production and sales in a manufacturing setup.

(ii) Cash Conversion Cycle for a Service Business:



In a Service Business, there is no physical inventory. The cycle usually involves:
Cash → Services Provided → Debtors (if service is on credit) → Cash.