Reference no: EM131049191
In a perfect world, a firm would prefer to have a positive operating cycle, negative operating cycle, and positive cash conversion cycle. Negative cash conversion cycle.
Positive operating cycle would indicate that the firm has surplus credit and extra inventory left every year, so it is quite normal and most acceptable, concerning solvency and liquidity of the firm. Negative cash cycle indicates that firm can delay its payment to suppliers more than the extent it wishes to receives from its customers, again a positive liquidity sign, since payment to suppliers can be delayed almost as much as possible.
Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator.
Since the operating cycle leaves a consumer with extra inventory and credit every year it goes back into the business. Whereas the Negative Cash cycle delays the payments and receives its customers.
(In a perfect world, a firm would prefer to have a positive operating cycle, negative operating cycle, and positive cash conversion cycle. negative cash conversion cycle. What might we learn by comparing the CCC between firms within the same industry?)
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