A firm wants to reduce its cash conversion cycle.Which of the following actions will reduce its cash conversion cycle?
A)The firm reduces its DSO.
B)The firm increases its inventory.
C)The firm reduces its accounts payable.
D)All of these are actions that will reduce its cash conversion cycle.

Question

Quizplus · Accepted Answer

The cash conversion cycle is the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. To reduce the cycle, a company should try to increase the speed with which it collects cash and reduce the amount of time it holds inventory and pays its bills. Of the given options, reducing the DSO (days sales outstanding) by collecting payments from customers more quickly, is the most effective way to reduce the cash conversion cycle. Increasing inventory or reducing accounts payable, on the other hand, will increase the cash conversion cycle.

A Firm Wants to Reduce Its Cash Conversion Cycle