A negative cash conversion cycle
A) means that the operating cycle exceeds the average payment period.
B) means that the average payment period exceeds the operating cycle.
C) indicates that the firm is shortening its average payment period and lengthening its average collection period.
D) is easy for a manufacturing firm to attain.

Question

Quizplus · Accepted Answer

A negative cash conversion cycle occurs when the operating cycle (time it takes to convert inventory to cash) is less than the average payment period (time it takes to pay suppliers). This means that the company is able to collect cash from customers before it has to pay its suppliers, resulting in a negative cash cycle. Therefore, option B is correct as it states that the average payment period exceeds the operating cycle. Option A is incorrect as it is the opposite of what a negative cash conversion cycle represents. Option C is incorrect as it implies that the company is actively shortening its payment period, which may not necessarily be the case. Option D is also incorrect as a negative cash conversion cycle can be difficult to attain, especially for manufacturers who may have longer production cycles.

A Negative Cash Conversion Cycle