Managing Cash Conversion Cycle

Managing Cash Conversion Cycle for Higher Profitability

From the empirical studies above, managing cash conversion cycle is an effort to reduce the period at which it sold its inventory/stock, increase period at which its pay its suppliers as well as minimize the period its collect its receivables from customers that purchase its stocks. Specifically, cash conversion cycle can be managed on the basis of how firm’s devices strategies to defer payable period (AP), quickly sold its inventories and quickly collects its receivables from customers. On this basis, this paper recommends the following strategies firms can deploy to managing its cash conversion cycle from receivables, payables and inventory perspective.

1 Management of Accounts Receivable

• Instituting a policy of cash on delivery (c.o.d.) is an alternative to refusing to do business with slow-paying customers.

• Sending of reminder notices to all overdue accounts at periodic intervals with increasing pressure to make a full or partial payment. If no satisfaction is reached on this informal basis, the firm may consider taking legal action or turning the account over to a collection agency.

• Careful monitoring of the extension of credit terms and always require credit checks on all new noncash

This indicated that shorter the cycle, the more working capital a business generates, and the less it has to borrow. Drawing from this, managing cash conversion cycle is an effort to reduce the period at which it sold its inventory/stock, increase period at which its pay its suppliers as well as minimize the period its collect its receivables from customers that purchase its stocks. The basic idea of managing cash conversion cycle is to improve the speed with which a firm turn materials and supplies into products, inventory into receivables, and receivables into cash (). Specifically, cash conversion cycle can be managed on the basis of how firm’s devices strategies to defer payable period (AP), quickly sold its inventories and quickly collects its receivables from customers. The more a firm defer payments period, reduce inventory conversion period (AR) and reduce receivable conversion period the more it will generating adequate capital/cash to meet day to day business operations. On this basis, this paper recommends the need for a firm to offer discounts to customers who pay their bills rapidly, asking customers to make deposit payments at the time orders are taken, take full advantage of creditor payment terms, use electronic funds transfer to make payments on the last day and adopted just in time approach to increase inventory