Most financial websites will present these components in a standard ratio comparison, so you need not worry about deriving the ratio independently. The cash conversion cycle, or net operating cycle, simply indicates the duration of time it takes the firm to convert its activities requiring cash into cash returns (Kuczmarski). This ratio is vital since it represents the number of days a firm's cash is occupied within its operations.
Naturally, a firm wants the cycle to be as short as possible. Therefore, a downward trend in this cycle is a positive signal while an upward trend is a negative signal. The reason for this is as follows: As the cash conversion cycle shortens, cash becomes free for other uses such as investing in new capital, spending on equipment and infrastructure, as well as preparing for possible share buy-backs down the road. On the flipside, when the cycle lengthens, cash remains tied up in the firm's core operations, leaving little flexibility for other uses of this cash flow. When using the cash conversion cycle, it is important to pay attention to the trend of its three general components, with special emphasis on the payables processing period. This can help give insights that give both a synopsis of operational efficiency and the justification behind it.
RECOMMENDATIONS
In the following section, we will identify which of the liquidity or efficiency ratios each company is under performing in relation to the industry standards and to determine whether or not the companies have been deteriorating over a five-year trend. In addition, we will offer recommendations for specific changes in working capital strategies for cash and marketable securities, credit policy, inventory, and sources and uses of short term financing in order to produce adequate performance within each company in light of industry standards. Finally, we will present a detailed plan of our working capital strategy based on our recommendations, focusing specifically on a firm's sales, profitability, customer service, quality, and risks.
