Which of the following would increase a company's cash conversion cycle?

Question

Accepted Answer

Increasing inventory holding period. Increasing the inventory holding period lengthens the cash conversion cycle because the company's cash is tied up in inventory for a longer time before it can be converted back to cash through sales. The cash conversion cycle equals days inventory outstanding plus days sales outstanding minus days payable outstanding.

Collecting receivables faster would decrease the days sales outstanding component, thereby shortening the cash conversion cycle rather than increasing it. Paying suppliers more slowly would increase days payable outstanding, which is subtracted in the formula, so it would actually decrease the cash conversion cycle. Reducing the production cycle time would speed up inventory turnover and decrease the inventory holding period, shortening the cycle.

The cash conversion cycle is a key working capital management concept on the DSST exam. Companies aim to minimize this cycle to free up cash for other uses. Understanding how each component - inventory days, receivable days, and payable days - affects the overall cycle helps in analyzing a company's operational efficiency and liquidity management.

DSST Principles of Finance: Question of the Day

Get a free DSST Principles of Finance question every day

Ready for the full DSST Principles of Finance? Earn 3 college credits.