The cash conversion cycle, an important measurement tool
The ‘Cash Conversion Cycle (CCC) is an important measurement tool to decide where your capital is located. Simply concluded: it shows you how fast you can turn purchased goods into money from customers.
Pactically explaining the CCC
We can best explain this cycle using the following figure. You buy raw materials, which creates a supplier debt (Accounts Payable). Of course you also have to pay your staff, amongst other things. You process the raw materials into a finished product. Your production process is therefore also part of this cycle. This creates a stock (Inventory). You will sell these to your customers. The entire sales process is part of the CCC. If you can close a deal, an account receivable is created. As soon as your customer pays, money flows in (Cash). You can reinvest this in the organization. This completes the circle.
Why is it important to keep this cycle as short as possible?
You can compare your stock, for example the stock in the warehouses, with a mountain of money. The products have a certain value. You can no longer use that capital to pay wages, invest, pay bills, and so on. It´s money you can’t do anything with.
How do you calculate the Cash Conversion Cycle?
You take the number of days that your production process takes and add the days in stock. This is your stock rotation. This is how you get the DIO or Days In Inventory. You add your customer credit to this. The DSO or Days Sales Outstanding. In other words; how many days do your customers need to pay your invoices? You can deduct your supplier credit from this sum. How long do you get, or take the time to pay your own suppliers?
Tip: How can I improve my CCC?
There are several things that influence the Cash Conversion Cycle. The supplier credit, for example. Negotiate well with your own suppliers. Do not pay them too quickly and make use of your payment term. In addition, the production and sales process play an important role. Can you still optimize it?
You will often be able to make a difference by using a good credit & collection process. Ensure smooth payment from your customers. Focus on debtor management.
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