The Cash Conversion Cycle
The cash conversion cycle (CCC) is a metric that expresses the number of days it takes for a company to convert its investments in inventory and other resources, into cash flow, from sales.
While the cash conversion cycle differs by industry, it remains a metric to watch daily.
The Importance of Time in the Cash Conversion Cycle
The Cash Conversion Cycle is also called the Net Operating Cycle or simply Cash Cycle. The CCC aims to measure how long each net input Rand (or Dollar or Euro!) is tied up in the production and sales process before it gets converted into cash received.
Importantly, the CCC takes into account how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills.
The CCC helps evaluate the efficiency of operations and management
The Cash Conversion Cycle is one of several metrics that help evaluate the efficiency of a company’s operations and management.
As a business leader, you should watch the trend of your company’s CCC values. A trend of decreasing or steady CCC values over multiple periods is a good sign. However, a trend of rising CCC values should lead to more investigation and analysis based on other factors.
The 4 Main Components of the Cash Conversion Cycle
The CCC includes the sales cycle, the make/production & inventory cycle, the delivery cycle, as well as the billing & payment cycle.
Undoubtedly, most businesses will have some aspect of each of the cash cycle components. Even service firms have a form of inventory if they have underutilized their staff. What might differ, is the sequence of the components, with some cycles overlapping others or occurring in a different order.
When Michael Dell was growing his company rapidly, he reached a point in the mid-90’s when he ran out of cash. He was “growing broke”, like many other businesses scaling up quickly. He brought in a new CFO, Tom Meredith. Meredith calculated Dell Inc.’s cash conversion cycle to be 63 days. That meant it took 63 days from the time Dell spent a dollar on anything until it flowed back through the business as cash.
Focusing on one cash improvement initiative every quarter, Meredith drove the CCC down significantly. It ended up being negative 21 days a decade later. This means the company received a dollar 21 days before it had to be spent on anything. As Dell grew faster, it generated cash instead of consuming it. Subsequently the CEO had sufficient cash to contribute to taking the company private in 2013.
Strategies to improve your Cash Conversion Cycle
Does your cash flow and Cash Conversion Cycle need a look at, or even a make-over? Or do you need ideas and strategies to improve your CCC?
CoLAB has a unique #bestpractical cash flow tool that will give you unique insight into the financial performance of your business, leading to improvement in profit, cash and business value.
Keen to chat? Make an appointment for a free 20-minute chat with Barend Cronjé, CoLAB CEO and Master ScalingUp practitioner.
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