Tag: Cycle

Accounting Processing Cycle Value-Added Deduction Tax Return
A brief analysis of the accounting processing cycle of value-added tax deduction tax return essay. To be able to effectively implement the purpose of tax reduction and fee reduction and reduce. The pressure on the capital cost of enterprises, the State Administration of Taxation issued relevant documents. The accounting processing cycle of value-added tax retained tax returns in the year. Clarifying the calculation method of value-added tax retained tax returns for enterprises, applicant conditions, etc. To provide an effective basis for the implementation of value-added tax retained tax returns. However, when the accounting processing cycle of the actual value-added tax deduction. And the tax return of the enterprise stands affected by various factors. It is prone to various risk problems and accounting processing problems.

Here are the articles to explain, the accounting processing cycle of value-added tax deduction tax return essay.

Based on this, the following will be a brief discussion, analyzing the accounting treatment methods. And common risk issues under different conditions of value-added tax retention and tax return. Put forward suggestions for common risk prevention measures to strengthen risk prevention. And control of value-added tax retention and tax return processing.

Keywords:
- value-added tax;
- retention tax return;
- deduction tax return;
- accounting processing;
- accounting processing cycle;
- risk prevention
The pilot implementation of value-added tax retention. The tax returns can allow enterprises to enjoy the tax reduction and fee reduction policy. With the help of the implementation of value-added tax retention and tax return. It can effectively alleviate the cost pressure on enterprises and enable them to make full use of their capital. Since value-added tax retention and tax return is a new business. The relevant documents do not put forward clear requirements for the accounting processing of value-added tax retention and tax return.

Therefore, it is easy to hide risks during the processing process, which affects the effect of the accounting processing cycle. Therefore, when enterprises are piloting the work of value-added tax retention and tax return. They should pay more attention to the accounting treatment of value-added tax retention. Tax return and the prevention of risk issues.

The main precautions for a value-added tax deduction and tax return

(1) Clarify the concept of incremental tax deduction

Due to the coexistence of multiple value-added tax rates in our country. There are certain differences in the applicable tax rates between enterprises. The tax inversion may occur in the accounting process of value-added tax deduction and tax return. Therefore, to be able to carry out efficient accounting processing of value-added tax deductions and tax returns. The concept of incremental tax deductions must first clarify. And the accounting processing cycle must carry out according to the requirements of the tax return.

Before an enterprise conducts the processing of value-added tax retention and tax return, general value-added tax taxpayers and professional processing agencies can understand the relevant notification documents issued by the State Administration of Taxation, correctly understand the concept of incremental tax retention and tax deduction, and carry out accounting processing cycle and value-added tax retention and tax return operations by the relevant notification documents of the State Administration of Taxation, to reduce the probability of tax risks and failure to process applications in the accounting processing cycle process of value-added tax retention and tax return and ensure the orderly advancement of value-added tax retention and tax return work.

(2) Pay attention to the conditions for applicants for tax returns with tax credits

The value-added tax retention tax return has certain requirements for the applicant’s credit evaluation and violations of laws and regulations. Therefore, when processing the application for a value-added tax retention tax return. We must pay attention to the analysis of the applicant’s conditions to ensure that the applicant’s conditions meet the requirements. Judging from the documents issued by the State Administration of Taxation. There are strict requirements and regulations on the conditions for the tax return of the retained tax credit for general value-added tax taxpayers.

Only taxpayers with a credit rating of C or above allow applying for the tax return of the retained tax credit. And general value-added tax taxpayers must also ensure that they have not committed illegal and illegal tax operations. Within 36 months of applying for the tax return of the retained tax credit. And their application for the tax return of the retained tax credit will approve and enjoy the value-added tax return policy. Suppose the tax credit rating and tax behavior of the general value-added tax taxpayer meet the application requirements when applying for a tax return. But the subsequent tax credit rating drops, and the application conditions cannot meet.

In that case, the tax authority will not recover the tax return. In addition, due to the coexistence of multiple tax policies in our country. There can be different tax treatment plans for the same tax situation. Therefore, when taxpayers apply for value-added tax retention and tax return. They must pay attention to whether taxpayers have also enjoyed other tax preferential policies. And properly handle the application for value-added tax retention and tax return.

(3) Calculate the return of the incremental tax credit

When the value-added tax retains for a tax return, the tax amount can calculate scientifically to avoid tax risks. And ensure the implementation of the purpose of the tax reduction and fee reduction policy. The calculation of the tax return amount of the incremental retained tax credit can obtain by multiplying the three data of the incremental retained tax credit. The proportion of input, and the tax return rate that ordinary value-added tax taxpayers can enjoy. Judging from the research on relevant national tax policies, the tax return rate that ordinary taxpayers of value-added tax can enjoy is 60%. While taxpayers of advanced manufacturing can enjoy a 100% tax return rate.

Therefore, when calculating the value-added tax deduction tax return amount, we should pay attention to the analysis of the taxpayer’s industry, distinguish whether the taxpayer belongs to a general taxpayer or an advanced manufacturing taxpayer, determine the tax return rate that it can enjoy, and then scientifically calculate the amount of tax return that the taxpayer should receive based on the actual situation and related policies.

(4) Other precautions for value-added tax retention and tax return

In addition to the above common precautions for the processing of value-added tax retention and tax return. There will be various situations in the accounting processing cycle process of value-added tax retention and tax return. If you don’t pay attention to it, it will affect the accounting processing cycle results and create tax risks. Therefore, when processing the value-added tax retention tax return, it is necessary to combine relevant policy documents and pay attention to the processing requirements of the value-added tax retention tax return to process the value-added tax retention tax return application scientifically.

Accounting processing cycle of value-added tax deduction and tax return

(1) Accounting processing and analysis of the tax deduction amount retained by ordinary taxpayers at the end of the period

The main accounting processing cycle situations encountered by general taxpayers in the value-added tax deduction and tax return stand divided into five common processing situations, such as the processing of the tax deduction at the end of the period, the processing of the tax deduction for the relocation of the business location, the processing of the tax deduction for asset reorganization, the processing of the tax deduction during the liquidation period, and the processing of the tax deduction for the tax payable.

In the process of accounting for the tax deduction at the end of the value-added tax period for general taxpayers, the “Interim Regulations on Value-added Tax” indicate that the tax payable obtain after subtracting the input tax amount from the current sales tax amount of the general taxpayer. If in the calculation process of the tax payable by ordinary taxpayers, the current sales tax amount is not enough to deduct. The remaining tax amount can carry forward and deduct in the next processing process.

For example

For a general tax-paying company, the taxpayer’s outstanding value-added tax account credit balance before June 1, 2022, was 120,000 yuan, and the purchase price of the business occurred in June was 4 million yuan, of which the value-added tax was 680,000 yuan, the price of the product sold was 2 million yuan, and the current sales tax was 340,000 yuan. During the processing of value-added tax deduction and tax return, since the amount of tax deduction generated after June cannot offset the amount of tax owed before, the current sales tax amount of 340,000 yuan is the value-added tax deduction at the end of the month. There is no need to transfer it to the unpaid value-added tax for processing, and it can stand directly retained until the next month for the deduction.

(2) Accounting treatment of the tax deduction for the relocation of the business location of the general taxpayer

In the process of processing the value-added tax deduction and tax return for ordinary taxpayers, the problem of changes in the taxpayer’s business location will also encounter. It learns from the relevant announcement of the State Taxation Bureau that when the business location of ordinary taxpayers changes, after the industrial and commercial department has registered the change, if the competent tax authority changes, it is necessary to do a good job of cancellation and re-registration of the business location. At the same time, ordinary taxpayers can continue to deduct the amount of input tax that has not stood deducted before the tax stood canceled after re-registration.

For example

A company’s previous business location was in Area B of City A. Due to the company’s business development, it moved to Area C of City A for production. Before the relocation, the company had 150,000 input taxes that had not stood deducted. After the company has completed the tax cancellation and re-registration, the newly relocated tax authority in Area C confirms the amount of input tax that has not stood deducted and it is correct, the company can continue to use the 150,000 input tax that has not stood deducted for the deduction.

(3) Analysis of the accounting treatment of the tax deduction for the reorganization of assets of general taxpayers

The relevant announcement of the State Administration of Taxation stipulates that after the general taxpayer undergoes asset reorganization, transfers all assets and liabilities to the new general taxpayer, and performs tax cancellation and re-registration by the announcement, the amount of input tax that has not stood deducted before the asset reorganization can still carry forward to the new general taxpayer for the deduction.

For example

Company A and Company B are both ordinary taxpayers. When Company A restructures its assets and transfers all assets and liabilities to Company B, Company A still retains 200,000 value-added tax credits that have not stood deducted. During the tax cancellation process, Company A does not need to re-transfer this part of the tax amount, and Company B only needs to declare and deduct 200,000 TAX credits by the original process.

(4) Accounting treatment and analysis of the number of tax credits retained by general taxpayers during the liquidation period

In the process of paying taxes on the operation of an enterprise, in the case of bankruptcy and liquidation of the company due to poor management or other factors, the accounting treatment of value-added tax deduction and tax return shall consider based on the “Notice of Certain Value-added Tax Policies”. It stands clearly stated in the relevant policy notice that when the general value-added tax taxpayer liquidates and cancels the company’s assets, the tax deduction amount will not process for a tax return, and the company’s inventory cannot transfer out as the input tax amount.

Therefore, during the liquidation period of ordinary taxpayers, the processing of the value-added tax deduction can only convert into inventory costs for calculation. At the same time, when the company calculates the taxable income, the company’s value-added tax deduction can deduct. By the relevant announcements and notices of the State Taxation Bureau, the issue of value-added tax retention and tax return can stand effectively dealt with, and the accounting processing of value-added tax retention and tax return can stand done well to avoid tax problems during the processing operation.

(5) Accounting treatment of the tax deduction amount of the tax payable by ordinary taxpayers

In the process of paying taxes for general value-added tax taxpayers, there will also stand value-added tax arrears. When this situation stands encountered in the accounting processing of value-added tax withholding tax return, the accounting processing operation of the amount of tax payable by general taxpayers and the amount of tax withholding tax deduction can carry out based on the relevant notice of the State Taxation Bureau to avoid tax problems during the accounting processing process.

In the relevant documents issued by the State Taxation Bureau for the accounting and processing of tax deductions for general taxpayers, there are clear regulations on the order and scope of the deduction of value-added tax arrears by the input tax amount. When the input tax amount stands deducted from the value-added tax arrears, the tax amount stands mainly deducted by the chronological order in which the company’s tax arrears occur, that is, the tax arrears that occur first stand deducted, and the tax arrears that occur later stand deducted afterward.

The value-added tax arrears

What can deduct are mainly bad debts, tax arrears, and late fees for tax arrears, and the actual deduction amount is based on the notice issued by the competent tax authority. If during the accounting process of the tax deduction for the tax payable by ordinary taxpayers, the tax deduction at the end of the period is less than the total amount of tax payable, the tax deduction at the end of the period shall use as the actual tax deduction.

At the same time, according to the corresponding calculation method, the bad debts and tax arrears, and late fees that can deduct from the tax deduction at the end of the period stand calculated, and the accounting processing of the tax deduction for the tax payable carry out rationally, to avoid the probability of risk problems in the process of value-added tax deduction and tax return, and ensure the quality and efficiency of accounting processing.

Prevention of the risk of value-added tax retention and tax return

(1) The risk and prevention of incorrect calculation of the incremental tax deduction amount

In the process of value-added tax deduction and tax return. Incorrect calculation of the incremental tax deduction amount is a common processing risk problem. Which will have a direct impact on the application for a value-added tax deduction and the processing results. Therefore, when calculating the amount of incremental tax deduction, special attention should pay to the accuracy of the calculation results to avoid the failure of the application for incremental tax deduction due to errors in the calculation results.

The calculation of the incremental tax credit can consider the taxpayer’s application conditions. Accountants should have a clear understanding of the rolling calculation method of the incremental tax credit. Judging from the relevant documents issued by the State Administration of Taxation. General value-added tax taxpayers can enjoy a 60% tax return rate. While individual advanced manufacturing companies can enjoy a 100% tax return rate.

Therefore, when enterprises calculate the incremental tax credit, they must also conduct calculation and analysis by their industry policies to ensure the accuracy of the calculation results of the incremental tax credit and control the risk of accounting for the incremental tax credit. If an enterprise has problems in the calculation process of value-added tax deduction and tax return, it can also request advice from the competent tax authority or a professional tax processing service agency promptly to prevent and control the occurrence of accounting and processing risks of incremental tax deduction in advance.

(2) Risks and precautions that the taxpayer’s prescribed standards have not been met

In the process of value-added tax retention and tax return, there will also be a risk of value-added tax retention and tax return due to non-compliance with the taxpayer’s prescribed standards, which will affect the implementation of value-added tax retention and tax return. Therefore, when carrying out the work of value-added tax retention and tax return, the taxpayer’s credit rating, violations of laws and regulations, and the enjoyment of relevant tax incentives should be understood and analyzed to assess whether the taxpayer meets the application criteria for value-added tax retention and tax return.

At the same time, taxpayers themselves should also strengthen their attention to the improvement of the tax credit. Maintain their tax credit, and avoid the occurrence of illegal tax evasion and tax evasion during the tax payment process. Which leads to the inability to meet the value-added tax deduction and tax return standards. If the taxpayer’s situation can adapt to multiple tax policies. The final tax method should still base on the optimal solution.

And after choosing the corresponding tax policy, we must also pay attention to the compatibility of other tax policies. With the value-added tax deduction and tax return policy to avoid tax risks in the process of tax accounting. In addition, since the newly established corporate tax credit rating is M-level. It does not meet the requirements for value-added tax retention and tax return. So special attention should pay to the criteria for evaluating taxpayers.

(3) The content of the time regulations ignores risks and precautions

In the accounting processing process of value-added tax deduction and tax return. It is also easy to deal with risks due to inattention to time regulations. The relevant documents issued by the State Taxation Bureau are clearly stated. That is the general value-added tax taxpayer has already applied for a total tax deduction. And then the tax deduction amount generate. The tax deduction amount calculated in the previous application can no longer use for secondary purposes.

Therefore, in summary, there are only two processing opportunities for value-added tax retention tax returns in a year at most. General value-added tax taxpayers can apply for an incremental value-added tax return in any month. After meeting the requirements for value-added tax retention and tax return. The specific application time is based on the taxpayer’s situation.

In addition, if taxpayers file tax return exemption and tax return declaration at the same time. The tax authorities will give priority to the tax return exemption requirements they apply for. Therefore, to avoid such risks during the processing of tax return business. Taxpayers should have a general understanding of different tax return businesses. And pay attention to the application time of each tax return business.

(4) Failure to obtain the application materials in a timely and accurate manner, risk prevention

From the analysis of the calculation formula of the value-added tax deduction amount. It can be found that in addition to the prescribed application materials and certificates. The input tax amount on other deduction certificates cannot be used as the value-added tax deduction tax return application certificate.

Therefore, to avoid the risk of value-added tax retention and tax return due to incomplete collection of application materials, it is necessary to collect relevant documents during the process of value-added tax generation, collect and organize the declaration materials promptly, and ensure that the submitted application materials and certificates are true and reliable, in line with the requirements of the relevant declaration regulations of the State Administration of Taxation, and the application materials and certificates shall not be forged.

Once it is found that the applicant has used illegal means to falsify the application materials. And defrauding the incremental tax deduction amount will bear corresponding legal responsibilities. Through the improvement of the reliability and authenticity of the value-added tax retention tax return application materials. High-quality accounting processing work is carried out.

Conclusion

In summary, when the value-added tax retained tax credit is returned. Attention should be paid to clarifying the concept of the incremental retained tax credit. Reviewing whether the applicant conditions for the tax return of the retained tax credit are up to standard. And carefully calculating the return of the retained tax credit to ensure that the value-added tax retained tax return is correct.

At the same time, corresponding accounting processing should be carried out according to the different value-added tax retention. And tax return conditions of ordinary taxpayers and attention should be paid to the calculation of incremental value-added tax retention. And tax return errors in the process of value-added tax retention and tax return. Insufficient application conditions for taxpayers, time regulations are ignored, and the application materials are not accurate enough. Comprehensive and other risks prevention, scientific development of value-added tax retention, and tax return work. Promote the implementation of the national tax reduction and fee reduction policy.

A brief analysis of the accounting processing cycle of value-added tax deduction tax return essay; Photo by Markus Winkler on Unsplash.
August 18, 2022
Software Development Life Cycle Agile and Phases with Models
What is the Software Development Life Cycle Agile and 7 Phases with Models? Software development lifecycle refers to the systematic process of building software that ensures that the software developed is of the right quality and consistent with the functional requirements. The details are given on exactly what expect so that the customer can get a program that works according to their expectations. The process of developing the software should complete within the predetermined budget and time. Also, The entire project lifecycle divides into phases each outlining the deliverables that should be met before the project moves to a higher hierarchy of development.

Here is the article to explain, 7 types Phases and Models of Software Development Life Cycle Agile

The process of software development divided into stages are as listed and illustrated below:
1. Requirement analysis
2. Feasibility study
3. Design
4. Coding
5. Testing
6. Install/deploy
7. Maintenance
Software Development Life Cycle Phases lists

Requirement Analysis;

The requirement phase is the first phase in the development of software; which is usually managed by the senior members of the team in collaboration with the stakeholders’ industry experts. Also, The senior team members assure the stakeholder of the viability of the project as they analyzed all the risks that involve. At this stage, the team requires to come up with detailed and concise requirements; which will help the team members to finalize the work within the required timeline.

Feasibility Study;

In this stage, the steps required in bringing the project to life define and document. The software requirement specification process conduct includes all the parameters that should consider in the design during the project lifecycle. On feasibility, five parameters consider. Also, These parameters are economic, legal, operation, technical, and scheduling.

Design;

This stage involves the preparation of documents as per the specification so that what expects comes out so that the coding process can process from here. The overall look of the program visualizes at this stage.

Coding;

Coding at this point, the developers are preoccupied with writing the codes. The codes write into units, and each coding task assigns to a specific developer. Also, The coding guidelines have to follow in this stage and the application of the relevant programming tools. As well as This is the long and most time-consuming phase of software development.

Testing;

Testing is complete after the coding process is complete. The software deploys to the testing environment where the team starts testing the functionality of the system guided by the functional requirements of the customers or the stakeholders. The purpose of this phase is to ascertain that the software is performing as expected. Also, This is an iterative process as stakeholders get to interact with the program; and, they take it to the developer for modification. The process continues until the software is performing as per the expectations.

Deployment/Installation;

Next is the deployment of the software. Also, Deployment performs with authority from the project manager after they have ascertained that the project can work as required.

Maintenance;

Deployment gives the customer the chance to use now the software that has been developed. However, the development team does not get off the scene as they will require to be there in case some bugs need fixing arising from scenarios that were not dealt with during the testing stage. In addition, they may require to do a system upgrade to a new version of the software with time as well as enhance new features of the software. As well as All this produces in the maintenance phase of software development.

Just like the work breakdown structure, the software design lifecycle is vital in the development stage of the software in that it offers the basis for project planning, cost estimation, and scheduling. It also provides a framework for the different tasks and deliverables and provides a mechanism for tracking the progress of the project.

References; Work Breakdown Structure (WBS) in Software Development. Retrieved from https://www.ukessays.com/essays/project-management/work-breakdown-structure-wbs-in-software-development-4526.php?vref=1

Software Development Life Cycle Agile and Phases with Models; Image by Free-Photos from Pixabay.
October 22, 2021
Cash Conversion Cycle Working Capital Meaning and Definition
Cash Conversion Cycle Working Capital, its example, importance, Meaning, and Definition; It is a formula in management accounting that measures how effectively a company’s managers manage their working capital. CCC measures the length of time between purchasing inventory from a company and receiving cash from its account. CCC uses management to see how long a company’s cash has been tied to its business.

Cash Conversion Cycle Working Capital, it’s Meaning and Definition, also their formula examples, importance.

What is Cash Conversion Cycle (CCC)? The Cash Conversion Cycle, also known as the Net Operating Cycle or Working Capital Cycle, shows the time span between a company’s payment of raw materials, storage, storage, and receipt of cash from the final sale of finished goods. Simply put, the cash conversion cycle is a measure of operational efficiency and describes the time it takes a company to hide its investment in inventory and other inflows in cash flow. This determines by adding the number of days required for each phase of the cycle.

To understand it better, let’s take an example. Suppose a company holds raw materials for an average of 60 days, receives a loan from a material supplier for an average of 15 days, the production process takes an average of 15 days, finished products keep in process for 30 days, and a debtor grants an average loan of 30. day. So, the total time it takes the company to generate cash from its operations is 120 days; 60 – 15 + 15 + 30 + 30 days. That represents by the working capital cycle.

In equation form, the cash conversion process can express as follows:

Cash conversion cycle = R + W + F + D – C, where;
- R as = storage time of raw materials
- W as = retention period in progress (Work-in-progress)
- F as = storage time of finished product (Finished goods)
- D as = recovery phase (debtor)
- C as = credit term of the supplier (creditor or vendor)
What is the definition of a cash conversion cycle (CCC)?

Cash Conversion Cycle (CCC) is a metric that expresses the time (measured in days) it takes a company to convert its investment in inventory and other resources into cash flow from sales. Also known as the net operating cycle or simply the cash cycle, the CCC seeks to measure how long each incoming net dollar tie-up in the production and sales process before being converted into cash.

This metric takes into account how long it took a company to sell its inventory, how long it took to collect its receivables, and how long it took to pay its bills. CCC is one of several quantitative metrics that helps assess the effectiveness of a company’s operations and management. A downward trend or constant CCC value over some period of time is a good sign, while an increasing value should lead to further investigation and analysis based on other factors. It should note that the CCC only applies to certain sectors that depend on inventory management and related activities.

How does the Cash Conversion Cycle (CCC) work?

If a company, or its management, takes a long time to collect unpaid accounts, has too much inventory available, or pays its fees too quickly, then the CCC will extend. A longer CCC means it will take longer to make money, which can mean bankruptcy for small businesses. If a company collects unpaid payments quickly, estimates inventory requirements correctly, or pays its bills slowly, it lowers CCC. A shorter CCC means a healthier company.

The additional money can then use to make additional purchases or pay off outstanding debts. When a manager has to pay his suppliers quickly, it calls liquidity, which is bad for the company. When a manager is not able to collect payments fast enough; this knows as liquidity delay, which is also bad for the company.

What is the relationship between the money or cash conversion cycle and working capital?

The company implements various procedures to give operational legitimacy to its tactics and strategies. These practices also play a key role in maintaining or improving a company’s financial and competitive prospects; particularly in valuing working capital, curbing waste, and overseeing the company’s money conversion cycle.

Cash conversion cycle;

A company’s cash conversion cycle consists of the operational path that transactions take to make money for the company. It begins with the review and verification of prospects, assessment of the client’s assets and creditworthiness, and approval of credit for a particular business or range of businesses. After a company ships goods to users, the accounting manager records the underlying claims; also known as customer claims or accounts receivable. The cash conversion cycle of a business also goes through the receipt of customer funds; as well as collection and recovery efforts – when it comes to the customer default, bankruptcy, or insolvency.

Working capital;

Working capital corresponds to the company’s current assets minus current liabilities. In financial terminology, “short term” refers to a period of 12 months or less. For example, short-term debt matures in 365 days, and cash – a short-term asset – is used in the company’s business over the next 52 weeks. Working capital is a liquidity indicator that gives an idea of how much money a company will have over the next 12 months. When people in finance talk about short-term assets and debt, they are talking about short-term resources and debt.

Connection or Relationship;

Although the concepts are different, working capital and cash conversion cycles interact within the operating engine of a company. Businesses need cash to build strategic trading alliances, make money; and, offer items that will enhance their competitive status over time. Cash is a constant element of running a business, but is often more important in the short term because the business must pay its bills and generate income to survive into the future – say, one year, two, five, or ten years.

Importance of Significance;

In a corporate context, discussions about working capital help senior management sow the seeds of economic success by engaging in effective activities every day to put the business on a solid operational footing. For executives, talking about the money conversion cycle is a money saver, an initiative that will help them avoid waste; avoid significant operational losses, and replenish the company’s coffers; all of which will keep the company out of financial trouble and straying from Niagara Falls finances.

Interpretation of the cash conversion cycle;

The cash conversion cycle formula is designed to assess how efficiently a company manages its working capital. As with other cash flow calculations, the shorter the cash conversion cycle; the better it is for the company to sell inventory and get cashback from those sales while paying suppliers.

The cash conversion cycle should compare with companies in the same industry and should follow trends. For example, measuring the transformation cycle of a company in its cycle in previous years can help assess whether its working capital management is deteriorating or improving. Additionally, comparing a company’s cycles to those of its competitors can help determine whether a company’s money conversion cycle is “normal” compared to competitors in the industry.

Explanation;

The meaning that can derive from the company’s money conversion cycle is as follows:
- If a company’s management takes longer to collect its accounts receivable balance, has too much cash, or pays its fees and obligations too quickly; it will prolong the net operating cycle.
- A longer money conversion cycle usually means it will take longer for the company to make money. This can lead to liquidity problems and bankruptcy for small businesses.
- When company management collects outstanding payments from accounts receivable quickly, correctly estimates required inventory levels, or pays bills and invoices slowly; it shortens the net operating cycle.
- A shorter cash conversion cycle usually means a healthier company. This way, the extra money can then use for further purchases or to pay off any outstanding debts.
- When a manager with a longer money conversion cycle has to pay their supplier quickly; it’s called cashing out, which is bad for the company.
- When a manager with a longer money conversion cycle cannot collect payments from debtors fast enough; this knows as liquidity delay, which is also bad for the company.
- If the company’s business model results in a negative money conversion cycle; it means it can manage its working capital efficiently enough that it can, on average, buy stock, sell finished products, and collect the debt before commitments make. is because. This is an ideal situation for business.
Cash Conversion Cycle Working Capital Meaning and Definition; Image by Mohamed Hassan from Pixabay.
July 1, 2021