What can be done to shorten the cash conversion cycle?

Expert Answers
Michael Ugulini eNotes educator| Certified Educator

To shorten the cash conversion cycle a business can implement better inventory management so that they do not have substantial dollars tied up in inventory that sits in a warehouse for too long before it eventually sells. In this way, a company will have more cash on hand to carry on their business initiatives - the money is not sitting as stock somewhere in a warehouse, a backroom, or on overstocked shelves on the selling floor. Efficient inventory management contributes to better cash conversion.

Another way a company can shorten the cash conversion cycle is to collaborate with their suppliers to see if they can negotiate different payment terms, which allows them to keep more cash on hand for longer periods of time. For example, a supplier may wish to be paid in 30 days. A company may be able to negotiate payment terms whereby they don't have to pay for 45 or 60 days, or something similar. Therefore, they have more cash available to conduct their daily operations.