An Optimal Cash Conversion Cycle

International Research Journal of Finance and Economics. March (120), 13-22, 2014

12 Pages Posted: 14 Aug 2012 Last revised: 31 Dec 2017

See all articles by Haitham Nobanee

Haitham Nobanee

University of Oxford; Abu Dhabi University; University of Liverpool

Maryam Al Hajjar

Abu Dhabi University

Date Written: March 13, 2014

Abstract

The traditional link between the cash conversion cycle and the firm's profitability is that shortening the cash conversion cycle increases firm's profitability. On the other hand shortening the cash conversion cycle could harm the firm’s operations and reduce profitability. This could happen when taking actions to reduce the inventory conversion period, a firm could face inventory shortages; when reducing the receivable collection period a firm could lose its good credit customers; and when lengthening the payable deferral period a firm could harm its own credit reputation. However, identifying optimal levels of inventory, receivables, and payables where total holding and opportunities cost are minimized and recalculating the cash conversion cycle according to these optimal points provides more complete and accurate insights into the efficiency of working capital management. In this regard, we suggest an optimal cash conversion cycle as more accurate and comprehensive measure of working capital management.

Keywords: Working Capital Management, Optimal Cash Conversion Cycle, Cash Conversion Cycle, Receivable Collection Period, Inventory Conversion Period, Payable Deferral Period, Weighted Cash Conversion Cycle, Net Trade Cycle

JEL Classification: G30, G32, L25, O25

Suggested Citation

Nobanee, Haitham and Nobanee, Haitham and Al Hajjar, Maryam, An Optimal Cash Conversion Cycle (March 13, 2014). International Research Journal of Finance and Economics. March (120), 13-22, 2014, Available at SSRN: https://ssrn.com/abstract=2128662

Haitham Nobanee (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Abu Dhabi University ( email )

Abu Dhabi
United Arab Emirates

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

Maryam Al Hajjar

Abu Dhabi University ( email )

PO Box 59911
Abu Dhabi, Abu Dhabi 59911
United Arab Emirates

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