Given below is the 'Cash Conversion Cycle'. (The diagram shows a cycle: Cash → Stock of goods → Sales → Debtors → Cash.) (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. Give the meaning of ABC analysis technique of inventory control.

Question

Accepted Answer

(i) The Cash Conversion Cycle shown — Cash → Stock of Goods → Sales → Debtors → Cash — belongs to a **Trading Business**. In a trading concern, goods are purchased ready-made and sold without any manufacturing process.

(ii) Cash Conversion Cycle for a **Manufacturing Business**:
Cash → Raw Material Stocks → Work in Progress → Finished Goods → Sales → Debtors → Cash

The manufacturing cycle is longer because it includes additional stages of production (raw materials → WIP → finished goods) before the sale takes place.

**ABC Analysis of Inventory Control:**
ABC Analysis is an inventory control technique based on **Pareto's Principle** (80/20 rule). It classifies inventory items into three categories based on their consumption value:

- **A Items** (High Value): Typically 10-20% of items accounting for 70-80% of consumption value. These require very strict control, accurate forecasting, and frequent review.
- **B Items** (Moderate Value): Typically 15-25% of items accounting for 10-20% of consumption value. These require moderate control and periodic review.
- **C Items** (Low Value): Typically 65-75% of items accounting for only 5-10% of consumption value. These require minimal control and can be ordered in bulk.

ABC analysis helps management focus its control efforts on the most valuable items (A category) while applying simpler controls to less significant items.