Cash conversion cycle across industries

Abstract

The purpose of this research is to assess whether the Cash Conversion Cycle differs between industries, by looking at Days Inventory Outstanding, Days Sales Outstanding and Days Payables Outstanding. This research provides an overviewof Cash Conversion Cycle in two different industries and discusses how each component influences Cash Conversion Cycle. It uses a sample of 172 data points (43 firms) from multinational companies operating worldwide. Based on data retrieved from Bloomberg and from the annual reports of 23 Fast-Moving Consumer Goods companies and 20 major airline companies, a univariate and bivariate (correlation) analysis was done. The analyses for both industries cover four years, from 2009 to 2012, a time span that includes a period of economic downturn. The findings suggest that Cash Conversion Cycle differs between industries. It also differs depending on the size of the company. While its components – Days Inventory Outstanding, Days Sales Outstanding and Days Payables Outstanding – directly affect Cash Conversion Cycle, there are also other factors at play, such as inventory costing system, bargaining power with suppliers and customer credit policies. The economic downturn, and particularly the specificities of each industry make this overview relevant. The research addresses managers who should take Working Capital Management decisions, which can extend or reduce Cash Conversion Cycle, as it contributes to a better understanding of how the size of a firm, its inventory system, liquidity, and payables are associated to the Cash Conversion Cycle and consequently affect companies’ profitability.