How Cash Conversion Cycle Can Improve Your Business performance!

Cash Conversion Cycle (CCC) is a tool that you can use to gain an insight into the value of your business

This is simply a measure of how long it takes to convert your income into cash. Once cash is in the hands of your company, it can be used to pay bills, fund payrolls, cover operating expenses, invest in new projects, or simply pay dividends to shareholders.

This can serve as a useful benchmark, for example, when looking at the profitability of a business unit. An opportunity is defined as the amount of revenue you expect to come in from sales to that unit, minus the amount of expenses that you expect it to generate. This is simply profit for that business unit.

Once a CCC is determined, it’s a simple matter of dividing your expense pool by the cash flow you expect to produce.

The formula to calculate the cash conversion cycle

Cash Conversion Cycle = days inventory outstanding + days sales outstanding - days payables outstanding.

How insights from Cash Conversion Cycle can improve business performance.

1. How can your business convert in 60 days?

With a high CCC, you may have a limited amount of time to cash out the business. The number of days can be shortened through careful planning and the management of cash. It can also be lengthened through cash-intensive spending. Either way, you’re always aware.

2. How much has cash been flowing out of your business?

The high CCC implies a cash-rich environment. This means that in the past, most if not all of your operating cash has not been consumed. If this is the case, you may be able to use the cash to fund new projects or build additional capabilities. Or, you may be stuck with little to no cash for the short term and you may be in a cycle with no easy entry into the cash flow.

3. How quickly is cash flowing into the business?

With a quick CCC, more cash has been flowing into the business, suggesting the need (or desire) to invest more cash in a new project or capacity-building project.

4. What business models will be more successful in the short-term

The short-term performance of your business indicates the potential path of the cash flow cycle. It should be noted that it’s not uncommon for businesses to see a short-term CCC spike. Most of the time, a dip in the CCC is simply due to lower cash being used to fund costs.?

5. What business models will be more successful in the long term

Long-term performance can mean the success of a business, its growth, and the development of its core competencies. A CCC that is too low (or too high), suggests that you may have limited time to convert the business. If this is the case, the CCC can help you prioritize investments. If a high CCC, it may be best to spend the capital or focus on short-term projects to increase cash flow.

Tips and ideas for using CCC with your business and financial data

1. The CCC can inform a lot about what happens in the business. It can indicate whether there is a short-term cash problem that might be alleviated by investing or spending capital. It can also reveal where there might be a need to refocus on a core competency. The higher the CCC, the more capital should be directed toward core competencies, with cash-intensive, short-term spending being the exception to the rule.

2. A lower CCC than your industry average can indicate that the cost of producing that item might be higher than the business as a whole. This provides an opportunity to re-engineer to cut costs. If the inventory and sales are high, this may be a sign that there is a need to invest in the ability to get products to the market faster (in order to reduce inventory levels).

3. A spike in a long-term CCC can indicate there is a strategic opportunity you might want to consider. This will likely depend on a number of factors including how long you think your CCC might take to recover back to average levels. If a spike is low and lasting for a long period of time, this signals that there may not be a strategic value in the current business model and cash needs may require a refocusing on the business model.

4. A high long-term CCC can indicate that there is a strategic path and that it might take longer to recover. This could signal a need to build a cash pool that will allow for investment, but it is still something you might want to consider.

5. A long-term high CCC can indicate that there are a number of different options to refocus the business. While there could be a strategy involved, you have the flexibility to make these changes. If there is a long-term cash issue, this could be a good time to refocus the business on a different model.

Conclusion

In conclusion, understanding and managing your company's cash conversion cycle is essential to maximizing your profits. By reducing the amount of time it takes to convert your inventory into cash, you can improve your bottom line. Implementing some or all of the strategies discussed in this article can help you achieve that goal. So what are you waiting for? Start improving your cash conversion cycle today!

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