Describe some measures a firm can take to decrease its cash conversion cycle. Can the cash conversion cycle be negative? Explain.
Cash conversion cycle:
A cash conversion cycle represents the total time taken by the operating sequence of a company. It identifies the net time utilized to change the raw materials to finished goods, collection of debtors and payment generated to the creditors.
Answer and Explanation: 1
Cash conversion cycle can be shrunk to some extent by the engagement of the following methods:
- Encouragement of cash sales.
- Earlier collection of the bills to be received.
- Postponing the bills to be paid.
- Quick transformation of raw material into finished commodity.
Yes, the cash conversion cycle can be negative. It indicates the following:
- The bills payable is paid with a huge lag.
- The production of goods is taking place quickly.
- Cash from the debtors are collected quickly.
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fromChapter 17 / Lesson 2
How can a business owner know how long it takes to make money on purchased supplies or products? In this lesson, we'll examine the two different methods for calculating the length of time it takes to make a profit: the operating cycle and the cash conversion cycle.