By: Rick Weis
Providing audits to clients is what I’m trained to do. But what I also love to do is help my clients evaluate their effectiveness and efficiency to optimize success and future growth. Asking clients questions to diagnose where opportunities lie for improvement is also a critical part my job.
If you asked management of most companies, they would tell you they look at and monitor the common key performance indicators (KPIs) such as inventory, accounts receivable and sometimes accounts payable turnover. However, most will only look at these ratios in isolation and not in combination. Converting these ratios into days and reviewing them in combination, will produce what is known as the cash conversion cycle (CCC).
The calculation is simple, take the number of days it takes inventory to turnover, plus the days it takes accounts receivable to turnover, then subtract the days it takes accounts payable. This will produce the number of days it takes $1 to go through the complete operations cycle.
The CCC metric is a good and easy way to test the effectiveness and efficiency of operations as well as the health of the company. If a company can work to decrease the amount of days, they can become less reliant on financing as well as be able to put the cash back into the business quicker to help fuel growth. The metric is also a good evaluation tool for investors and companies looking for investors as it can be used to draw comparisons between competitors or other targets and speaks to how well run and efficient the company is.
While it is still crucial to dissect and analyze each component of the CCC in order to determine where improvements can be made, it is also just as important to review the sum of the parts. As many companies already look at the ratios, I would highly recommend going the extra step to see how efficient your operations cycle is at moving cash through operations. We have added the CCC metric to several clients KPIs and it has allowed them to see how efficient operations for running from a more holistic standpoint and frames the cycle into figures everyone can understand and strive to help improve.
This type of dialogue is helpful to get the ball rolling on innovative ways to positively impact the operations cycle, and stimulate process improvements. Please feel free to contact me at firstname.lastname@example.org, or our team if you would like to discuss cash conversion cycle analysis or benchmarking of over KPIs within your industry or in general.