Cash conversion cycle: an essential tool for the financial evaluation of the company

Abstract

This article studies the cash conversion cycle as an indispensable tool for the financial evaluation of the company. The cash conversion cycle indicates the time it takes since the merchandise is purchased, sold and re-collected. There is the possibility to increase profitability by reducing the collection period of accounts receivable, reducing the inventory conversion period, and extending the payment period. Therefore, the shorter its cash conversion cycle, the more liquidity the entity would have; On the other hand, a low turnover in accounts receivable indicates that the company is taking a long time to recover its sales on credit, hence, the success of the company also depends on the effectiveness of managing its inventory. Therefore, every company should keep in mind that the level of inventory turnover reflects the progress of projected sales, varying, depending on the type of company, being different in both production and sales; A clear example is a comparison between a supermarket and a trucking company. Also, the turnover of how many payable shows the time needed to settle account payments. Therefore, a quick payment allows the company to enjoy the discount and maintain a good reputation with suppliers.