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

Question

Quizplus · Accepted Answer

Delaying payments to suppliers will increase the number of days the firm can hold onto its cash before paying it out, thereby decreasing the cash conversion cycle. Loosening credit terms is likely to increase the collection period, increasing the cash conversion cycle. Purchasing more inventory will also increase the cash conversion cycle by increasing the number of days inventory is held. Increasing the amount borrowed from the bank may provide short-term liquidity but may also increase interest expenses and lead to a higher cash conversion cycle in the long run. Decreasing common equity on the balance sheet will not directly impact the cash conversion cycle.

If a Firm Wants to Decrease Its Cash Conversion Cycle