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Encyclopedia > Cash conversion cycle

Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business. The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material. For other uses, see Cash (disambiguation). ... Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business. ... Various denominations of currency, one form of money Money is any good or token that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. ... Invest redirects here. ... Look up material in Wiktionary, the free dictionary. ... Various denominations of currency, one form of money Money is any good or token that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. ... material is the substance or matter from which something is or can be made, or also items needed for doing or creating something. ...


Basic formulae

Cash Conversion Cycle = (Average Stockholding Period) + (Average Receivables Processing Period) – (Average Payables Processing Period)


where:

  • Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
  • Average Receivables Processing Period (in days) = Accounts Receivable / Average Daily Credit Sales
  • Average Payable Processing Period (in days) = Accounts Payable / Average Daily Credit Purchases

A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay. Image File history File links No higher resolution available. ...


It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers. Examples are typically companies that employ Just In Time practices such as Dell, and companies that buy on extended credit terms and sell for cash, such as Tesco. Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. ... Dell Inc. ... Tesco plc is a UK-based international grocery and general merchandising retail chain. ...


The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.


External links

  • ACCOUNTING TURNOVER RATIOS AND CASH CONVERSION CYCLE
  • The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece
  • Measuring the Cash Conversion Cycle in an International Supply Chain


  Results from FactBites:
 
Cash conversion cycle - Wikipedia, the free encyclopedia (346 words)
Cash conversion cycle, also known as asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is a figure used in the financial analysis of a business.
The cash conversion cycle is the number of days between paying for raw materials and receiving the cash from the sale of the goods made from that raw material.
Conversely, a long cash conversion cycle indicates that capital is tied up while the business waits for customers to pay.
Cash Flow Profits And The Cash Conversion Cycle - Business articles (948 words)
The cash conversion cycle is simply the duration of time it takes a firm to convert its activities requiring cash back into cash returns.
The lower the cash conversion cycle, the more healthy a company generally is. If you compare the results of the cycle over time and see a rising trend it is often a warning sign that the business may be facing a cash flow crunch.
When evaluating cash flow, those factors directly affecting profit, revenue and expenses, are easy to understand and their affect on cash is straight forward; decreases in costs or increases in profit margin results in less cash going out or more cash coming in, and increased profits.
  More results at FactBites »

 
 

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