[lokalboy69]

How does extending credit affect working capital requirements and the cash conversion period cycle?

[rehmanvohra]

When credit is extended the receivables take a longer period to settle their accounts. As a result, the accounts receivable balance increases and so does the receivable period. It is clear that an increase in receivable days increases the cash conversion cycle. However, other factors may also come into play. There may be changes in the inventory days. If the increased sales increases the inventory turnover rate, the period of days in inventory might also reduce. This may reduce the cash conversion cycle.

The moral of the story is not to concentrate only one one factor. Also take into account the other items of the cash cycle and then form a reasoned judgment.