Question
Describe the cash conversion cycle, its funding requirements, and the key strat-egies for managing it. The cash conversion cycle has three components: (1) average age
Describe the cash conversion cycle, its funding requirements, and the key strat-egies for managing it. The cash conversion cycle has three components: (1) average age of inventory, (2) average collection period, and (3) average payment period. The cycle's length determines the time that resources are tied up in the firm's day-to-day operations. The firm's investment in short-term assets often consists of both perma-nent and seasonal funding requirements. The seasonal requirements can be financed using either an aggressive (low-cost, high-risk) strategy or a conservative (high-cost, low-risk) strategy. The cash conversion cycle funding strategy ultimately depends on management's disposition toward risk and the strength of the firm's banking re-lationships. To minimize its reliance on negotiated liabilities, the financial manager seeks to (1) turn over inventory as quickly as possible; (2) collect accounts receivable as quickly as possible; (3) manage mail, processing, and clearing time; and (4) pay accounts payable as slowly as possible. Use of these strategies should minimize the length of the cash conversion cycle.
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