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Unformatted text preview: s the
amount of time a firm’s resources are tied up. It has
three components: (1) average age of inventory, (2)
average collection period, and (3) average payment
period. The length of the cash conversion cycle
determines the amount of time resources are tied up
in the firm’s day-to-day operations. The firm’s
investment in short-term assets often consists of
both permanent and seasonal funding requirements.
The seasonal requirements can be financed using
either a low-cost, high-risk, aggressive financing
strategy or a high-cost, low-risk, conservative
financing strategy. The firm’s funding decision for
its cash conversion cycle ultimately depends on
management’s disposition toward risk and the
strength of the firm’s banking relationships. To
minimize its reliance on negotiated liabilities, the
financial manager seeks to (1) turn over inventory
as quickly as possible, (2) collect accounts receivable as quickly as possible, (3) manage mail, processing, and clearing time, and (4) pay accounts
payable as slowly as possible. Use of these strategies
should minimize the cash...
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