A Weighted Cash Conversion Cycle

Abstract

0 One principle of finance is to collect cash as quickly as possible and postpone the outflow as long as possible. This cash management principle is based on the traditional concepts of the cash operating cycle (OC) and the cash conversion cycle (CCC) shown in Richards and Laughlin (RL) [8]. The CCC is based on accrual accounting information and is indirectly related to a firm's valuation. That is, a short CCC vis-a-vis a lengthy CCC usually indicates the firm is receiving cash quickly while paying suppliers close to the due date. The result is a higher present value of the net cash flows and the value of a firm, or vice versa. Likewise, the shorter the CCC, the more efficient the internal operations of a firm and the closer the availability of net cash flow, which suggests a more liquid condition of the firm, or vice versa. The cash conversion cycle is an additive function. It measures the number of days funds are committed to inventories and receivables, less the number of days that payment to suppliers is deferred.1 The CCC focuses only on the length of time funds are tied up in the cycle and does not take into consideration the amount of funds committed to a product as it moves through the operating cycle. A primary aim here is to take into account both the timing of the flows and the amount of funds used in each segment of the cycle by introducing the concept of aweighted cash conversion cycle (WCCC).