Working Capital Management and Firm's Profitability: An Optimal Cash Conversion Cycle

Posted: 10 Sep 2009 Last revised: 12 Aug 2012

Haitham Nobanee

Abu Dhabi University; University of Liverpool

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2009

Abstract

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

Suggested Citation

Nobanee, Haitham, Working Capital Management and Firm's Profitability: An Optimal Cash Conversion Cycle (September 10, 2009). Available at SSRN: https://ssrn.com/abstract=1471230 or http://dx.doi.org/10.2139/ssrn.1471230

Haitham Nobanee (Contact Author)

Abu Dhabi University ( email )

Abu Dhabi
United Arab Emirates

University of Liverpool ( email )

Liverpool, L69 7ZA
United Kingdom

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