Business – 10.2 Analysis of published accounts – Financial efficiency ratios | e-Consult
10.2 Analysis of published accounts – Financial efficiency ratios (1 questions)
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Two effective methods for shortening the cash conversion cycle (CCC) are:
- Reducing inventory levels – By adopting lean inventory techniques such as just‑in‑time (JIT) ordering, the firm holds less stock, which lowers the Days Inventory Outstanding (DIO). This frees up cash that would otherwise be tied up in unsold goods.
- Accelerating receivables collection – Implementing stricter credit controls, offering early‑payment discounts, or using factoring can shorten the Days Sales Outstanding (DSO). Faster cash inflows reduce the need for external financing.
The combined effect on the CCC can be illustrated as follows:
| Component | Current (days) | After Improvement (days) |
| Days Inventory Outstanding (DIO) | 60 | 45 |
| Days Sales Outstanding (DSO) | 45 | 30 |
| Days Payables Outstanding (DPO) | 30 | 30 |
| Cash Conversion Cycle | 75 | 45 |
By reducing DIO and DSO, the firm shortens its CCC from 75 days to 45 days, releasing cash for other productive uses and improving overall financial efficiency.