Question

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.

Answer 1

The cash conversion cycle (CCC) is a process where the company purchases inventory, sells the inventory on credit (Accounts Receivable), and then collects the account receivable and turns it into cash. CCC represents the number of days a firm's cash remains tied up within the operations of the business. The cash conversion cycle is a measure of working capital efficiency.

The cash conversion cycle is also referred to as the cash cycle, asset conversion cycle or net operating cycle.

CCC= Days outstanding of (Inventories+ Sales - Payable)

Like for example

Future Retail has:

a	Net Operating Revenue		17,000
b	COGS		12,800
c	Avg Inventory		3516
d	Avg Receivables		171
e	Avg Payables		2490
f	DIO	c/b*365	100.26
g	DSO	d/a*365	3.67
h	DPO	e/b*365	71.00
	CCC	f+g-h	32.93

DIO is on higher side, since it has to maintain higher inventory levels because of the nature of retail business.

It can increase the payable period by asking more credit from suppliers that will reduce the cash cycle.

Even it can concentrate on the fast moving item for sale so that it will reduce the inventory level and overall cash cycle.