10.3 : Cash Conversion Cycle

Businesses often focus on improving efficiency in inventory management, accounts receivable, and accounts payable to optimize the Cash Conversion Cycle (CCC). A shorter CCC means faster cash recovery, allowing businesses to reinvest in operations or reduce the need for external financing. By reducing Days Inventory Outstanding (DIO), companies can minimize excess inventory and free up cash. Techniques like just-in-time (JIT) inventory systems can help achieve this.

For Days Sales Outstanding (DSO), companies may implement stricter credit policies, offer early payment discounts, or improve collection processes to ensure faster payment from customers. Reducing DSO helps bring cash in sooner, improving working capital.

On the other hand, extending Days Payable Outstanding (DPO) without damaging supplier relationships allows a company to hold onto its cash longer. Negotiating better payment terms with suppliers can be beneficial, but the key is to maintain a balance that doesn't harm relationships or supply chains.

The CCC varies by industry; for example, retail businesses like Walmart may aim for a shorter CCC, while industries with longer production cycles, like manufacturing, may naturally have a longer CCC due to more extended inventory holding periods.