Describe the impact that aggressive action aimed at minimizing a firm\'s cash co

Question

Describe the impact that aggressive action aimed at minimizing a firm's cash conversion cycle (CCC) would have on the following financial ratios: inventory turnover, average collection period and average payment period. What are the key constraints on aggressive pursuit of these strategies with regard to inventory, accounts receivable and accounts payable? Describe the impact that aggressive action aimed at minimizing a firm's cash conversion cycle (CCC) would have on the following financial ratios: inventory turnover, average collection period and average payment period. What are the key constraints on aggressive pursuit of these strategies with regard to inventory, accounts receivable and accounts payable?

Explanation / Answer

If a firm aggressively minimized its cash conversion cycle, its inventory turnover will increase, average collection period will decrease and average payment period will increase. The key constraint concerning inventory is the need to prevent stockouts that might cause lost sales. Accounts receivable policies must ensure that too-tight credit policies cause customers to turn to competitors. Accounts payable policies must insure that good relations with vendors are maintained with longer payment periods.

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