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Cash Conversion Cycle

Transcript: Cash Conversion Cycle Definition Definition: The Cash Conversion Cycle (CCC) is an important business metric that indicates the average number of days it takes to purchase inventory, and then convert it into cash. Days Inventory Outstanding Days inventory outstanding (dio) Days inventory outstanding is the average time to convert inventory into finished goods and sell them. DIO= (Average Inventory / Cost of Goods Sold) x 365 days Days sales outstanding days sales outstanding (dso) The average amount of time in days that your accounts receivable are waiting to be collected. DSO= (Accounts Receivable / Net Credit Sales) x 365 days Days payable outstanding Days payable outstanding (dpo) The average length of time it takes a company to purchase from its suppliers on accounts payable and pay for them. DSP= Accounts Payable / (Cost of Goods Sold / 365) CCC Equation and interpretation CCC Equation Cash Conversion Cycle (CCC) = DIO + DSO - DPO If done every year, a business can use the CCC to compare it's current performance to past performances. It can also be compared to other companies in the same industry. Faster inventory to sales processes have a lower CCC which is desirable to a higher CCC. The CCC is also a way to asses how efficiently working capital is being managed. Resources Resources

Cash Conversion Cycle

Transcript: understand the options understand the risks Delivery cycle Options... Worst Case Don't know how much needed from bank Sales forecasts not secure key projects on hold Look at each area with others from your team Be open minded and listen (to both staff & customers) Agree on 2-3 possibilities per area& work out an action plan for each Develop 3 scenarios for each - best case, worst case & reality Once you have a plan, review your forecasts in light of these changes Communicate to your team, customers and... Be proactive with your bank manager! Sales Cycle Actions: Best Case Bill & Payment Cycle Bill & payment cycle Production/Inventory Cycle How does this affect your business? Cash to grow your business cash to pay your staff cash to pay your debtors cash to pay the bank interest Cash Conversion Cycle How could you reduce your production/inventory time by 20%? Could you procure some parts pre-assembled? Could you source your inventory from alternate suppliers? Could you change to 2 x shifts? What could you actually do to shorten this time? Scenario Planning Cashflow... Once again, time to think outside the box What other means could you use to reduce your delivery time to your customers? Could you use alternate transport? Could you print/produce closer to your market? Could you use technology to deliver your product or service? Scenario planning cash conversion cycle Middle of the Road Sales Cycle Delivery Cycle Time to get clever and look at both bills & payments How can you encourage your clients to pay sooner? Could you get a part payment up front & rest on delivery? Can you push your payments out to 45-60 days without any cost? Do you have someone who is measured on debtors days & cashflow? Production cycle The time it takes for $1 of operational and COG expense to return to you as cash collected from your customer! How long does it take from enquiry to closing the deal? Could you package it differently? Could you review how many steps & reduce these by 30%? How can you shorten this time? Current challenges

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