Jahnzeb 37167

Company Intel ltd

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Advantages
A positive cash conversion cycle augurs well for the business.

 If the conversion cycle from the debtor side is good it means less of bad debts

associated with it. The company would therefore not have to depend on external

agencies or input a large amount of uncollectible in their financials.

  The firm can design the incentive system to cater to its cash conversion cycle. For

example, if the collection period from the debtors is to be reduced, the firm can offer

discounts for instant or early payments

 Older inventory remaining in storage houses poses a risk to the company both in terms

of high retention cost, chances of spoilage and lowering of quality. If the company can

ensure a healthy inventory conversion rate, it can help in improving the general quality

of production and the business.

 On the other side, a short conversion rate on the payables side ensures that the firm can

make use of the incentives that will be offered from the suppliers for instant payments.

Also, it improves the relationship and the firm can take benefit of shorter production

cycle than compared to its competitors

Disadvantages
 In order to ensure that the cash conversion cycle is always positive, there is a tendency

from the business to clear the dues to the suppliers at the earliest. These lets go of the

use that the business can do with the funds left with it. It can instead use the funds that

will be eventually paid to help with the other functions that can improve the various

aspects in which it is lagging.

 The cash conversion cycle is not the best measure of the efficiency of the business. It just

talks about the period in which the dues get cleared which is a good measure of the

liquidity and the operational viability of the business. However, there are so many

aspects that are not covered. Generally, an improved cash conversion cycle compared to
 the competitors is seen as a good sign by the management. However, it can create

unwanted complacency in how the business would be conducted in the future.

 Also, the standards of the cash conversion cycle in the industry is subject to variation

depending on the market conditions and changes in the business environment. To

continue to stick to the traditional definition and acceptable standard will be foolhardy.

There needs to be a committee that should continually evaluate how the conversion

cycle is moving and whether there needs to be a change to better match up to the

changes all around.