A QUANTITATIVE ANALYSIS OF INSOLVENCY RESULTING FROM INEFFECTIVE CASH CONVERSION CYCLE MANAGEMENT

Abstract

This research paper investigates the role of the cash conversion cycle (CCC) in working capital management and its impact on corporate performance and insolvency risk. The metric measures the duration required for a company to convert investments in inventory and receivables into cash flows from sales. The study emphasizes that an efficient CCC is vital for maintaining liquidity and profitability, while a prolonged CCC can lead to liquidity challenges and increased bankruptcy risks. The evaluation and calculation of CCC was studied with hypothetical example, while empirical analysis using data from U.S. non-financial firms showed significant negative correlation between longer CCCs and financial performance. The correlation between the indicators are found to be strong, hence reducing receivable collection periods and managing inventories effectively can enhance companies' operational efficiency, prevent financial distress and ensure long-term solvency and profitability.