Which strategy helps optimize the cash conversion cycle?

Which strategy helps optimize the cash conversion cycle?

• A. Extending customers' payment terms without consideration
• B. Shortening supplier payment terms without negotiation
• C. Holding more cash and reducing spending
• D. Faster collections, extended payables, and better inventory management

Answer: (D)

The cash conversion cycle measures how long a company’s cash is tied up in its core operations—from paying for inventory to collecting cash from sales. Optimizing it means speeding up cash inflows, slowing down cash outflows, and turning over inventory more quickly. Faster collections reduce the time customers take to pay, extended payables delay the cash outflow to suppliers, and better inventory management lowers the time inventory sits in stock. Together, these actions shorten the cycle and improve liquidity, which is why the strategy that combines quicker collections, longer payables, and more efficient inventory management is best. Extending customer terms without regard can push up the time to collect; shortening supplier terms without negotiation reduces the time you can delay payments; and simply holding more cash isn’t addressing the cycle’s four key flow measures.

The cash conversion cycle measures how long a company’s cash is tied up in its core operations—from paying for inventory to collecting cash from sales. Optimizing it means speeding up cash inflows, slowing down cash outflows, and turning over inventory more quickly. Faster collections reduce the time customers take to pay, extended payables delay the cash outflow to suppliers, and better inventory management lowers the time inventory sits in stock. Together, these actions shorten the cycle and improve liquidity, which is why the strategy that combines quicker collections, longer payables, and more efficient inventory management is best. Extending customer terms without regard can push up the time to collect; shortening supplier terms without negotiation reduces the time you can delay payments; and simply holding more cash isn’t addressing the cycle’s four key flow measures.