Question

Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC. Why do you believe CCC is important to a firm’s profitability?

Answer 1

Cash Conversion Cycle is the amount of time the company's cash is tied up in operational activities like manufacture, sales , realisation of debtors and also includes the credit period it gets from its creditors. Lower the cash coversion cycle the lower will be the working capital requirement. It is also a measure of company;efficiency.

If a company has lower cash conversion cycle its profitability would increase because there is less requirement to borrow money to meet working capital requirement and also lower CCC will help to increase sales.