Why Cash Conversion Cycle is important?

Cash Conversion cycle improved results by part time CFO

#cash conversion cycle, #cashflow, #working capital

The cash conversion cycle measures the time (in days) it takes for a company to convert its invested efforts into cash (from sales). This metric calculates the time it has to;

* Collect receivables (AR),

* Hold inventory to sell (Inventory), and

* Pay its vendors (AP).

It is calculated as:

Days Sales Outstanding + Days Inventory Outstanding - Days Payables Outstanding

CCC = (DSO) + (DIO) - (DPO)

DSO = Average Accounts Receivable / Total Credit Sales * 365 Days

DIO = Average Inventory / COGS * 365 Days

DPO = Average Accounts Payable / Total COGS * 365 Days

If it takes 30 days to receive cash from a sale, 150 days from the day inventory purchased to sell the goods and 60 days to pay to vendors, the CCC is 30 + 150 - 60 = 120 days.

For companies selling goods, during holiday preparation months or any other high-volume periods, you may need to borrow cash or increase your line of credit usage to be able to buy the amount of products you need to sell during the peak periods. For service industries, you may need to pay to your staff sooner than you get paid by your clients. A Fractional CFO can help you manage the CCC and improve your cash flow and financial performance. With Fractional CFO help, you can reduce your interest expenses by improving your CCC. Since Fractional CFOs work with many industries, they have expertise on payment terms and can convince your vendors to offer better payment terms and clients to pay sooner (with automation or other financial or non-financial incentives).

Shorter CCC means efficient cash flow management, easier access to loans & capital and lower interest expenses.