Give the meaning of 'cash conversion cycle'. How does the nature of business influence its cash conversion cycle ? Explain with the help of a diagram. 'Angel Investment' not only brings in funds but also an invaluable mentor to the business. In the light of this statement state any three features of angel investors.

Question

Accepted Answer

**Cash Conversion Cycle (CCC):**
The Cash Conversion Cycle is the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. It reflects how long a business's cash remains tied up in its operating activities.

**Influence of Nature of Business on CCC:**

**Trading Business:** The CCC is shorter because the business buys ready-made goods and sells them directly. The cycle is: Cash → Stock of Goods → Sales → Debtors → Cash. There is no manufacturing stage, so the cycle is simpler and quicker.

**Manufacturing Business:** The CCC is longer because the business must purchase raw materials, process them into finished goods, and then sell them. The cycle is: Cash → Raw Material Stocks → Work in Progress → Finished Goods → Sales → Debtors → Cash. The additional production stages increase the time cash is locked in operations.

**Service Business:** The CCC may be very short or even negative if services are paid for in advance or at the time of delivery.

The longer and more complex the production process, the more working capital the business requires to sustain its operations.

**Features of Angel Investors:**

1. **High-Risk Tolerance:** Angel investors are willing to invest in early-stage ventures with high risk and uncertain returns, unlike traditional lenders who require collateral.

2. **Mentorship and Guidance:** Beyond capital, angel investors provide invaluable mentorship, industry connections, and strategic guidance to help the business grow.

3. **Equity-Based Investment:** Angel investors typically invest in exchange for equity ownership in the company, sharing both the risks and rewards of the business.