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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Which change would shorten a firm's cash conversion cycle, other things remaining constant?

Collecting receivables faster shortens the cash conversion cycle because receivable days fall while the other components stay unchanged. Paying suppliers earlier, extending credit to customers or holding finished goods longer all lengthen the cycle by raising days or reducing payable days.

  1. APaying suppliers earlier to earn a cash discount
  2. BStretching the debtors' collection period
  3. CIncreasing the finished goods holding period
  4. DCollecting receivables faster through a tighter credit policyCorrect

Explanation

CCC = inventory days + receivable days - payable days. Faster collection lowers receivable days and so shortens the cycle. Paying suppliers earlier cuts payable days and lengthens it; the other two options also increase it.

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