The cash conversion cycle is a method used to measure the productiveness
of a company’s performance and management strategies and overall condition of
the hotel. This method measures how quick a hotel can convert resource
inputs into cash flows and long much time required to sell inventory and
collect receivables, as well as the length of time the hotel can afford to pay
expenses without incurring penalties.
Based on No Season Hotel’s
annual financial report, we calculated the Cash Conversion cycle in year 2.The
formula for calculating Cash Conversion Cycle is as follows; (Inventory holding
period + Receivables collection period) – Payables deferral period.
As the Receivables collection
period is 30 days and the Payables deferral period is 60 days, we need to find
out inventory holding period. Formula for Inventory holding period is as
follows; Average inventory/ Cost of goods sold.
Average inventory = (ending inventory + beginning inventory) / 2. Cost
of goods sold = (Total Revenue – Total Gross Operating Profit)/12.
Beginning Inventory: Year 2
Jan Inventory – Year 1 Dec Inventory = 41655 SFr.
Ending Inventory: Year 2 Dec
Inventory – Year 1 Dec Inventory = 660567 SFr.
Average Inventory = (41655
SFr + 660567 SFr)/2 = 351111 SFr.
Cost of goods sold = (22412226
SFr – 10372719 SFr)/12 = 1003333.92 SFr.
351111 SFr/1003333.92 SFr =
0.35 * 30days = 10.5 days
Therefore Cash Conversion
Cycle in year 2 is 10.5 + 30 – 60= -19.5 days.
Based on this hotel’s financial analysis,Hotel No
Season has a negative cash cycle of -19.5 days, which is very desirable and
better than average in the industry. A negative cash cycle means that hotel
don’t pay for inventory or materials until or after the product is sold and
products is selling faster. It means hotel can use the working capital as
effectively as possible and have available cash for other plans and investments
such as spending the fund on new services and refurbishing facilities which can
benefit the hotel by attracting more customers and building a stronger presence
among competitors which in return generates greater revenue.
To continue to achieve negative cash cycle and high
liquidity, good credit period with suppliers is necessary. Try to negotiate
with suppliers to allow longer payment time as money will stay with us longer
and make up cash deficiency caused by delayed inflows. On the other hand, it is
necessary to apply a strict payment policy and collecting payables promptly, as
soon as possible.
Strategies Hotel No Season can implement to improve
cash flow would be;
customers discount if they pay bills before deadline, getting cash as early as
possible helps to increase cash flow.
unnecessary assets from inventories, it helps to spend less money on maintaing
In Conclusion, Hotel No Season is on the right track
based on management strategy, it has a negative cash cycle of -19.5 days. This
negative cash cycle is desirable and the pros and cons of it is more
probability of making investments due to availability of cash in hand and the
unsatisfied creditors which may affect our partnership. In comparison to the
competitors, is result is above average. In the coming operating years, we will
implement more strategies to increase liquidity and cash flow so that money can
be spend on areas which offer higher return on investment.