If credit policies become more strict, how would this affect the cash conversion cycle?
Considering that: Cash conversion cycle= trade receivable day supply + total inventory days supply - trade payables trade supply Therefore, if credit policy became more strict, the trade receivable day supply value will go down, decreasing the cash conversion cycle.
strangedays, thanks for responding. I researched the answer and came up with the same answer as you because this would decrease accounts receivable and increase accounts receivable turnover.
Always welcome…Economically speaking (its 10% of the total curriculum) we will both have an increasing marginal utility.
What about credit policy affecting accounts payable??
Similar thing with accounts payable. More strict policy from a supplier implies longer cash conversion cycle. Milos
So, what’s the answer then? > If credit policies become more strict, how would this affect the cash conversion cycle?
Oh, I see what you mean. But credit policy is your own (company) policy not the credit policy of your suppliers. My .02$ Milos
I guess you just want delay as much you can your trade payables supply… this would be your best policy
Yes, but that is not your credit policy that’s your payment policy. Again, my .02$ Milos
Yes I agree with you milos: Credit= receivables= credit policy debit=payables= payment policy
Could really go both ways, and so hopefully it may be more clear on the exam. The question says “credit policies become …” When they talk about the credit crunch, are they only talking about borrowers, or lenders, or both? If I am a supplier, I will check your credit standing to see if I can sell you merchandize on credit, etc. Cheers.
If a company has lenient collections policies this INCREASES accounts receivables, which LOWERS account receivable turnover, which INCREASES number of days receivables, and makes CCC HIGHER. If a company has strict collections policies this DECREASES accounts receivables, which INCREASES accounts receivable turnover, which DECREASE the number of days receivables, and makes the CCC LOWER.