Final answer:
To achieve a negative cash conversion cycle, a firm should aim to increase both its accounts payable period and its inventory turnover. This helps the firm to have cash on hand before paying for their inventory, which is crucial for efficient working capital management and reinvesting in growth. Option C is correct.
Step-by-step explanation:
The cash conversion cycle (CCC) measures how fast a company can convert cash on hand into even more cash on hand. This cycle affects the liquidity and may demonstrate how efficiently a company manages its working capital.
A negative cash conversion cycle occurs when a company's payable period extends longer than its inventory period plus its receivables period. This essentially means that the company receives cash from sales before it needs to pay for the inventory it’s sold.
To achieve a negative cash conversion cycle like Amazon and eBay, a company would want to C. Increase its account payable period and its inventory turns. Increasing the account payable period allows a company more time to pay its suppliers, which leads to a longer cash holding period. Increasing inventory turns mean the company is selling and replacing inventory more rapidly, which minimizes cash tied up in inventory.
Effective management of the cash conversion cycle can contribute significantly to a firm's efficiency and is an important aspect of reinvesting. When businesses reinvest their cash flow wisely in growth opportunities, they can generate additional profits and create a sustainable financial model. Therefore, it is essential for businesses to monitor their CCC and employ strategies to optimize it.