Effect of seasonality, sales growth rate, and fiscal year end on cash conversion cycle

The cash conversion cycle (CCC) measures the duration between a firm's outgoing and incoming cash flows. Firms track the CCC metric and employ it as a benchmark since lower CCC values may signal better operational and credit performance. We develop a typification of firms based on the processing lead time and credit periods negotiated with suppliers and customers, and demonstrate how these characteristics interact with sales growth rate, seasonality, and fiscal year end to affect the CCC. Based on our analytical models, we hypothesize that the impact of sales growth rate and the indirect effect of time on CCC can be positive or negative depending on the firm type. We also identify the crucial role that demand pattern in the zone of influence, an interval that we define around the fiscal year end, plays in determining the CCC. We test our hypotheses empirically using a multi-level (random effect) model and a fixed effect model, where the levels of analyses are the specific firm types and individual firms, respectively. Our results, based on quarterly financial data of 58 firms over a 12-year period, confirm the hypothesized effects of sales growth rate, fiscal year end, and seasonality on the CCC. Though frequently used, the CCC is thus a nuanced metric that needs careful interpretation. The findings of the paper are important to facilitate more accurate longitudinal CCC analyses and benchmarking comparisons that account for unique differences in sales growth rate, fiscal year end, and seasonality.