Understanding the Impact of the Cash Conversion Cycle
Optimizing the Cash Conversion Cycle (CCC) affects your companies bottom-line, your cash flow and influences the amount of external funds needed to run your business. While many concentrate solely on revenues and expenses to manage cash flow, it’s usually not optimizing of the CCC that often leads to a cash crunch in your business.
The CCC is equal to the time it takes to sell inventory and collect from customers less the time it takes to pay your vendors. Effective CCC management is the result of a company selling what people want to buy, resulting in cash cycling through the business quickly. If too much inventory builds up, cash is tied up in goods that cannot be sold, causing a business to slash prices and reducing profit margins. If there is difficulty in collecting payments, essentially creating a loan to the end customer, cash is not available to re-invest in the business whether in the form of investing or paying down a loan and reducing loan expenses.
Companies also benefit from slowing down the payments to vendors, as it allows them to make use of cash longer. As a business owner this is a Catch 22, slowing down your payables while hoping that others pay you quickly.
To read the full article, please click here: Understanding the Impact of the Cash Conversion Cycle