MA2-491 - With that in mind it is understandable that a...

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MA2-49 Financial analysts, potential investors and parties interested in a company’s financial situation pay special attention to its net working capital. A company with a positive net working capital (more current assets than current liabilities) can be identified as being liquid, which means that it has sufficient funds to take care of the short terms debts within the year (Easton, Halsey, McAnally,Hartgraves & Morse, 2010). It should be noted that current assets and current liabilities are not always incurred at the same time. Easton et al., defines the operating cycle as the time frame between paying cash for goods and receiving cash from customers. During the operating cycle cash is spent on inventory which remains in the company until sold. Once the inventory is sold there is usually a 30 to 90 days wait period for cash to be received as payment for the sales. This cycle determines how much net working capital a company needs to operate.
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Unformatted text preview: With that in mind it is understandable that a company would like to reduce its cash conversion cycle. According to Easton et al., a company can apply various measures in order to reduce operating cycles. For example they can implement better collection procedures, reduce inventory levels or increase trade credit to minimize cash investment for inventory. These actions however could affect a companys relations with both suppliers and customers. Better collection procedures could interfere with a customers own operating cycle forcing them to make adjustments. A reduced inventory level could interfere with the companys ability to supply a customers need in a prompt manner while minimizing cash payments for inventory could affect the suppliers side of the equation....
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