Question

A firm wants to reduce its cash conversion cycle. Which of the following steps would reduce its cash conversion cycle?

		The company reduces its average inventory without increasing its sales.
		The company increases its days sales outstanding (DSO).
		The company starts paying its bills sooner, which reduces its average accounts payable without reducing its sales.
		Statements A and B are correct.

Answer 1

Correct statement:

• The company increases its days sales outstanding (DSO)

REASON:

• The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.
• Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis, and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. Days sales outstanding is an element of the cash conversion cycle and is often referred to as days receivables or average collection period.