Question

If a firm wants to decrease its cash conversion cycle, which of the following actions should...

  1. If a firm wants to decrease its cash conversion cycle, which of the following actions should it take? Assume everything else is equal.

a.

Loosen credit terms to increase the firm's sales.

b.

Delay payments made to suppliers so that the firm pays late.

c.

Purchase more raw materials to increase the average inventory the firm maintains.

d.

Increase the amount the firm borrows from its bank.

e.

Decrease the common equity on the firm's balance sheet.
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Answer #1

Cash conversion Cycle = Receivable Days + Inventory Days - Payable days

Loose credit terms will increase the days receivable, hence will increase the cash conversion cycle. Delaying payments to suppliers will increase the payable days hence will be helpful in decreasing the cash conversion cycle. Increasing inventory will also not be useful because it increases the number of days the inventory stays with us. Increasing the amount borrowed does not achieve anything for cash conversion cycle. It just gives us access to more cash. So, does decreasing the common equity. Hence, the answer is b.) Delaying the payments to suppliers.

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