Introduction to Corporate Finance

CASH CONVERSION, INVENTORY

AND RECEIVABLES MANAGEMENT*

18-1 The cash conversion cycle

18-2 Cost trade-offs in short-term financial management

18-3 Inventory management

18-4 Accounts receivable standards and terms

18-5 Collecting, monitoring and applying cash to receivables

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• Professor Dubos J. Masson, CCM, CertCM, of Pepperdine University and The Resource Alliance, assisted in preparation of the first editions
  of this chapter for the US edition.

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what companies do

CASH IN HAND

A report by Professor Tim Mazzarol of the University of

Western Australia, first published in The Conversation,

examines what we can learn from the literature on

cash management among small and medium-sized

enterprises. Professor Mazzarol notes, ‘One of the most

important issues for small businesses is their ability to

manage cash flow. This is regularly illustrated in the

Telstra Sensis Business Index of small- to medium-sized

enterprises (SMEs). This survey of 1800 firms usually finds

a lack of sales; cash flow management and profitability

are amongst the top concerns of owner-managers.’

Professor Mazzarol goes on to note that

relatively little academic research has been

conducted in recent years on cash management

cycles; but he does identify five key lessons to be

learned from the research that has been undertaken:

First, you should monitor your cash conversion

cycle by tracking debtors and creditors and

setting measures of how long it should take

to receive payment from customers and make

payments to suppliers.

Second, you should also recognise that

cash flow management is an integral part of

your firm’s financial system and will impact on

its working capital requirements and overall

financial performance.

Third, there is a potential relationship

between the firm’s profitability and its

working capital requirement and each firm

may have an optimal level of working capital.

Fourth, each industry may have different

factors influencing liquidity levels.

Finally, manage your firm’s cash flow and

working capital requirements towards a future in

which you no longer need debt financing.

Source: ‘Managing cash flow in the small firm: what does the

academic literature tell us?’ The Conversation, 1 January 2013. http://

theconversation.edu.au/managing-cash-flow-in-the-small-firm-what-does-

the-academic-literature-tell-us-11460. Accessed 4 January 2013. Used

under Creative Commons Attribution No Derivatives license.