Question

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NEED ANSWER ASAP / ANSWER NEVER USED BEFORE

Explain the cash conversion cycle (CCC). Describe the CCC for your employer or company in an industry in which you're interested. What are some specific things that your company could do to decrease your cash conversion cycle? Let's be sure to describe, in pretty specific terms, the CCC for our company and what could be done to shorten it.

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Answer 1

What is Cash Conversion Cycle (CCC) -

In layman language - Cash Conversion Cycle represents how many days does it take to pay for and generate cash from sale of Inventory. It is also known as Operating Cycle

Following below are the tools to calculate the Cash conversion cycle:

1. CCC = DSO (Days sales outstanding) + DIO (Days Inventroy outstanding) - DPO (Days Purchase outstanding)

Where = DSO = (Debtors at the beginning + Debtors at the end of year)/ 2 X 365

Revenue durinng the year

2. DIO = ((Opening Inventory + closing Inventory)/ 2 ) / COGS/ 365

These two components are ususally called as Operating cycle = DSO + DIO. It usually represent tells how many days company takes to process its inventory and collect cash from sales.

3. DPO = ((Opening accounts payables+ closing accounts payables) / 2) / COGS /365

It represents how many days company would take to repay it accounts payable in hand.

Live scenario

I worked for a security provider service company where we don't have major inventory or stock and major source of revenue is sales / services from man-guarding services to its clients. we usually have a high credit period of sales for our major customers which may vary to 90 days as well.

However, for purchases we usually have 30 - 60 days payment terms / credit period. This some time results in negative operating cycle as collections usually take more days and we need to release payment to our payables/ creditors in maxium 60 days. So it may result in financing from bank in order to maintain operating cycle.

So, in order to improve our Cash Conversion Cycle - we need to align or maintain customer credit period in line with purchase / payable terms. This will reduce our dependency on outside financing.

Hope, I will be able to example the same in easy language.