Question

Consider an electronics manufacturing company that wants to improve its liquidity and reduce its Cash-Cash-Conversion cycle. Currently, they average 50 Days of Inventory Outstanding, 40 Days of Receivables Outstanding (also called Days Sales Outstanding), and 45 Days Payable Outstanding.

Which of the following outcomes would decrease the Cash-to-Cash Cycle the most?

Group of answer choices

a. Implementing a debit card payment policy (using discounts if customers use debit instead of credit) which they believe will reduce their Days Receivables Outstanding to 30 Days

b. Pressuring their suppliers to extend payment terms to increase overall Days Payables Outstanding to 60 Days

c. Using a pull system to reduce its system-wide inventory levels to 30 Days Inventory Outstanding

Answer 1

Option c, using a pull system to reduce inventory levels to 30 Days Inventory Outstanding, would decrease the Cash-to-Cash Cycle the most, from 45 days to 25 days.

Step-by-step explanation:

The question concerns steps an electronics manufacturing company can take to improve its liquidity and reduce its Cash-to-Cash Conversion cycle. The three options provided are: a) implementing a debit card payment policy to reduce Days Receivables Outstanding to 30 days, b) pressuring suppliers to extend payment terms and increase Days Payables Outstanding to 60 days, and c) using a pull system to reduce Days Inventory Outstanding to 30 days.

To determine which option would decrease the Cash-to-Cash Cycle the most, we need to calculate each scenario:

1. Current Cash-to-Cash Cycle: 50 (Inventory) + 40 (Receivables) - 45 (Payables) = 45 days
2. Option a: 50 (Inventory) + 30 (Receivables) - 45 (Payables) = 35 days
3. Option b: 50 (Inventory) + 40 (Receivables) - 60 (Payables) = 30 days
4. Option c: 30 (Inventory) + 40 (Receivables) - 45 (Payables) = 25 days

Given these calculations, implementing a pull system to reduce inventory levels to 30 days (Option c) would decrease the Cash-to-Cash Cycle the most, down to 25 days.