CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company's cash conversion cycle lengthens from 35 days to 55 days over two years, driven by slower collection of receivables. The change will most likely indicate that the company:
A longer cash conversion cycle most likely means the company requires more financing for working capital. Cash is tied up in receivables for more days before it is recovered, which strains liquidity and increases funding needs.
- Arequires more financing for working capitalCorrect
- Bhas improved its liquidity management
- Cis receiving more trade credit from suppliers
Explanation
A longer cash conversion cycle means cash is tied up in operations for more days, so more external or internal financing is needed. Better liquidity management would shorten the cycle, and extra supplier credit would reduce it.
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