The firms investment in short term assets often

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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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This document was uploaded on 01/19/2014.

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