Helena Furnishings wants to sharply reduce its cash conversion cycle. Which of the following steps would reduce its cash conversion cycle?
A. The company increases its average inventory without increasing its sales.
B. The company reduces its DSO.
C. The company starts paying its bills sooner, which reduces its average accounts payable without reducing its sales.
D. Statements a and b are correct.
E. All of the statements above are correct.
B
Statement a is false. If inventory increases, and sales do not, more cash is being "tied up" in inventory so the cash conversion cycle is increased, not reduced. Statement b is true. If the company reduces its DSO, it is collecting its accounts receivables more efficiently, so it reduces the cash conversion cycle. Statement c is false. If the company pays its bills sooner, it uses its cash to pay off accounts payable, and this increases its cash conversion cycle.