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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

A firm's inventory conversion period is 50 days, receivables collection period is 40 days and payables deferral period is 30 days. What is its cash conversion cycle, and what does a shorter cycle indicate?

The cash conversion cycle is 60 days, calculated as 50 plus 40 minus 30. A shorter cycle means funds are tied up in inventory and receivables for less time, so the business needs less working capital finance and manages liquidity more efficiently.

  1. A120 days; the firm needs more working capital finance
  2. B60 days; the firm's cash is locked up for less timeCorrect
  3. C60 days; the firm needs more working capital finance
  4. D20 days; the firm's cash is locked up for less time

Explanation

Cash conversion cycle = inventory days + receivable days - payable days = 50 + 40 - 30 = 60 days. A shorter cycle means cash is tied up in operations for fewer days, reducing the working capital financing need. The 120 days option adds payables instead of deducting them.

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