I understand how increasing the days of inventory will increase the cash conversion cycle, but do not understand how the increase in days of A/P would decrease the cash conversion cylce.
Wouldn’t it make sense that the cash conversion cycle would increase with more days in A/P because it takes longer to convert the A/P to cash?
Explain to me the answer with intuition.
I wrote an article on the cash conversion cycle that may be of some help here: http://financialexamhelp123.com/cash-conversion-cycle/
Great article indeed, I am still drawing that timeline every time I run into CCC questions.
@S2000: I recently ran into a question that asked for the effect of a change in the ‘payable turnover ratio’ on the CCC. It took me while to figure out that #DaysPayables=365/A/P_Turnover, because I just hastily read the article and did not pay attention to the exact definition of #DaysXXXX (of course, IF I had read the curriculum carefully enough before…). I could imagine others having a similar problem and I wonder if it would make sense to add maybe just 2-3 lines with the definition of #daysXXXX?
Take a look, Tartaglia.
Fantastic, thanks for adding that in there!!
And thanks also for the entire website, highly useful!!!
My pleasure.
Really good great article and easy to understand. thanks for sharing
You’re quite welcome.
By that chart you showed in your article, increasing the A/P could technically increase days of inventory on hand, which could thus increase the cash conversion cycle.
Could you explain this to me in more detail? I am still confused by the intuition of how A/P would decrease the cash conversion cycle.
I’m not sure how: the green period (days of payables) and the red period (days of inventory on hand) are independent of each other.
If the green period increases, the CCC decreases; if the green period decreases, the CCC increases. The red period doesn’t change.