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The major determinants of the cash conversion cycle include inventory turnover, accounts payable as well as accounts receivable. According to the available literature, accounts payable constitute a liability while inventory turnover and accounts receivable constitute short-term assets. Essentially, the fundamental principle in the cash conversion cycle is how these short-term assets and the liability can be gainfully used to generate cash for the business. 

For example, a company that sells popular products clears its stock much faster and orders another stock. In this way, it can use its assets and liabilities to generate enough money for further investments. This would make a successful or healthy business. However, if the inventory turnover is low such that cash remains tied up in unsold stock, then the health of the business is said to deteriorate. In fact, the business may be forced to sell at a loss so as to clear the stock. Alternatively, when customers do not pay the business on time, they will deprive the business of the money to invest. This would then mean that the business operates on minimal stock as it lacks cash to obtain more goods. In the same manner, the business may opt to delay payments to its suppliers so that it can invest the money elsewhere. This will significantly improve the business health.

A typical example is a case of McLure’s Maple Syrup in New Hampshire. During the onset of the global economic melt-down in 2008, the company was torn between paying its suppliers on time and acquiring more stock. The feeling at the moment was that it could raise sizeable amount of money by using suppliers’ money to invest for a while. However, there was also uncertainty, if customers had a zeal to purchase, considering that people had begun to feel the pinch of the recession. Indeed, it was a tricky decision that the firm had to make in order to stay afloat in the market and weather the storm of economic recession.

Code: Sample20

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