• Posted on: May 21, 2012 by: mardle0312

    Working capital can be termed as the cash conversion cycle of any organisation. In the ideal world cash should be received from debtors before it is paid to creditors and companies (Apple, Microsoft and many others) which have a cash model with this scenario are in a very healthy state to make acquisitions, pay for research and development (R&D) and pay high dividends to shareholders, whilst not worrying about servicing the little debt they have. However, many companies are not able to follow this course and need to manage their cash flows on a daily basis just to survive.

    Figure 1: Working Capital: Cash Recovery

    Cost Conversion Cycle

    Source: CashPerform

    These cash flows can be traced to four specific cash chains, as outlined in the table above:

    • The supply chain or purchase-to-payment (P2P)
    • The inventory chain or inventory-to-cash (I2C)
    • The demand chain or order-to-cash (O2C)
    • The newly termed reverse supply chain or returns, refurbished items that may not involve cash (R2C)

    The supply chain is days purchases payable (DPO), which refers to the time it takes you to pay suppliers, normally outlined in the terms and conditions of the purchase contract. The inventory chain is the days inventory outstanding (DIO), meaning the time it takes to convert inventory to cash. The demand chain is the days sales outstanding (DSO), which refers to the time it takes a customer to pay you, and finally the reverse supply chain is regarded as nil in days as it should be self- financing.

    Please take a minute to complete the timing column in the table and then total it to determine your cash conversion cycle on the basis of: CCC = DSO + DIO – DPO. Ideally it will be a negative number; cash being received faster than paying it out. However, this is often not the case. If your CCC is a positive number do you have some ideas as to why?

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