How familiar are you with the cash conversion cycle?
It’s a working capital accounting metric that shows the amount of time it takes a company to convert investments in inventory into cash. The concept is simple, but its importance is crucial.
The cash conversion cycle is used to determine the average number of days it takes to purchase supplies, convert them into inventory, sell them, and collect payment.
To measure the metric, a business owner needs to know three things:
- Days of Inventory Outstanding (DIO): The average number of days it takes a company to convert raw material into sales. The lower, the better.
- Days Sales Outstanding (DSO): The average number of days a company takes to collect payment after a sale is made. Again, the lower, the better.
- Days Payable Outstanding (DPO): The average number of days it takes a company to pay for supplies purchased. Unlike the DIO and DSO, a company wants its days payable outstanding to be high, not low.
Once you have your DIO, DSO, and DPO, you can calculate the CCC. The formula for that is:
Cash Conversion Cycle (CCC) = DIO + DSO – DPO
Why should the cash conversion cycle be important to you?
The cash conversion cycle helps determine the efficiency of a business. Tracking it can help you analyze operations and develop strategies to improve the time it takes to convert supplies into cash. After all, the faster an invested dollar is recuperated, the sooner it can be reinvested. Do you have a financial expert to help you track your CCC and help your business grow faster? If your organization is missing that person, Miami CFO can provide executive-level financial management skills to make a difference for your organization. Use this link to schedule a meeting and start the process: https://calendly.com/miami-cfo.