From the excerpt, it is evident that money is held in the stock up to the time when it is sold. It infers that invested cash, or money that was used to purchase this stock is not available, and cannot be used for any other purpose (Brigham & Houston, 2012). Therefore, business must maintain short cash conversion cycle in order to reduce costs associated with inventory storage and depreciation and maintain business liquidity at a higher point.
In a nut shell, the cash conversion cycle measure the time in days that the company takes to convert its input resources into cash flows. That is, it reflects the period of time in days that the company takes to sell its stock, collect all cash receivables, and settle its bills (Whittington, 2012). It is conventionally agreed that a company that takes the shortest time is at its bets operations. This is because the cash becomes free as the cash conversion cycle shortens, and the company can invest it, use it for other activities such as purchasing new equipment, infrastructure to boost the returns. Cash conversion cycle is also significant in assessing the efficiency of the management and competitor comparison (Graham & Smart,