Financial Intelligence, Revised Edition

30

Homing In on Cash Conversion

In this chapter we’ll take up the cash conversion cycle, which measures how effective a company is at collecting its cash. But there’s one little wrinkle we have to consider first—how fast a company decides to pay the money it owes its vendors.

Accounts payable is a tough number to get right. It’s an area where finance meets philosophy. Financial considerations alone would encourage managers to maximize days payable outstanding (DPO), thus conserving the company’s cash. A change in this ratio is as powerful as a change in the other ratios we’ve been discussing. In our sample company, for instance, increasing DPO by just one day would add about $19 million to the company’s cash balance.

Companies do often use DPO ...