Working Capital Management and Firm's Profitability: An Optimal Cash Conversion Cycle
Posted: 10 Sep 2009 Last revised: 12 Aug 2012
Date Written: September 10, 2009
The traditional link between the cash conversion cycle and the firm's profitability is that shortening the cash conversion cycle increases firm's profitability. On the other hand shortening the cash conversion cycle could harm the firm’s operations and reduces profitability. However, identifying optimal levels of inventory, receivables, and payables where total holding and opportunities cost are minimized and recalculating the cash conversion cycle according to these optimal points provides more complete and accurate insights into the efficiency of working capital management. In this regard, we suggest an optimal cash conversion cycle as more accurate and comprehensive measure of working capital management.
Keywords: working capital management, optimal cash conversion cycle, cash conversion cycle, receivable collection period, inventory conversion period, payable deferral period, weighted cash conversion cycle, net trade cycle
JEL Classification: G3, G32, L25, O25
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