AE1
Difference between revisions of "AE1"
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===Calculation=== | ===Calculation=== | ||
{{math|{{this}}|Days [[link::t:AR|Receivables]] Outstanding|add|Days of [[link::t:INV]]|subs|Days [[link::t:AP|Payables]] Outstanding}} | {{math|{{this}}|Days [[link::t:AR|Receivables]] Outstanding|add|Days of [[link::t:INV]]|subs|Days [[link::t:AP|Payables]] Outstanding}} | ||
| − | where | + | {{where|Days (Calendar days)|[[m:AE11]] = The average number of days it takes a company to collect cash generated from sales |
| − | + | |[[m:AE12]]|The average number of days worth of Inventory the company holds on its books. | |
| − | + | |[[m:AE13]]|The average number of days the company takes to pay its invoices.}} | |
| − | + | ||
| − | |||
Alternative names for {{this}} include: [[t:WC]] Cycle. | Alternative names for {{this}} include: [[t:WC]] Cycle. | ||
Latest revision as of 15:33, 8 December 2021
Cash Conversion Cycle measures the average period it takes a company to acquire and sell Inventory, collect Receivables and pay Payables, demonstrating the efficiency with which cash flows through the business.
Calculation
| Cash Conversion Cycle | |
| = | Days Receivables Outstanding |
| + | Days of Inventory |
| – | Days Payables Outstanding |
- Days of Inventory = The average number of days worth of Inventory the company holds on its books.
- Days Payables Outstanding = The average number of days the company takes to pay its invoices.
Alternative names for Cash Conversion Cycle include: Working Capital Cycle.
Importance
Companies that measure and optimize working capital will be in a better position to prevent a working capital deficit. A working capital deficit can damage the profitability of the business and affect its operations in the short term. In the long term, poor working capital management can compromise a company’s ability to attract potential investors.
A lower number of days indicate a better Cash Conversion Cycle. A negative number is the most desirable as this indicates the company receives cash before paying it, thus eliminating the need to finance purchased materials and services. Reducing the Cash Conversion Cycle frees up cash.
According to a study by REL, a division of The Hackett Group, on average, top-performing U.S. companies have 49% less working capital tied up in operations, collect from customers nearly 18 days sooner, pay suppliers 11 days later, and hold less than half the inventory of median companies.
Community Importance Rating:
Hierarchy
| ID | Name | Level | x |
|---|---|---|---|
| AE | Asset Efficiency | 0 | AE |
| AE1 | Cash Conversion Cycle | 1 | AE1 |
| AE11 | Days Receivables Outstanding | 2 | AE11 |
| AE12 | Days of Inventory | 2 | AE12 |
| AE13 | Days Payables Outstanding | 2 | AE13 |
Process(es)
| ID | Name | Level | x |
|---|---|---|---|
| P | Plan | 1 | P |
| P1 | Plan Supply Chain Operations | 2 | P1 |
| P2 | Plan Source | 2 | P2 |
| P3 | Plan Make | 2 | P3 |
| P4 | Plan Deliver | 2 | P4 |
| S | Source | 1 | S |
| S1 | Source-to-Replenish | 2 | S1 |
| S2 | Source-to-Order | 2 | S2 |
| S3 | Source-to-Engineering-Order | 2 | S3 |
| S4 | Source Returns | 2 | S4 |
| M | Make | 1 | M |
| M1 | Make-to-Stock | 2 | M1 |
| M2 | Make-to-Order | 2 | M2 |
| M3 | Make-To-Engineering-Order | 2 | M3 |
| M4 | Re-Make | 2 | M4 |
| D | Deliver | 1 | D |
| D1 | Deliver-From-Stock | 2 | D1 |
| D2 | Deliver-to-Order | 2 | D2 |
| D3 | Deliver-To-Engineering-Order | 2 | D3 |
| D4 | Deliver Returns | 2 | D4 |
Term(s)
| ID | Name | Clear | x |
|---|---|---|---|
| AP | Accounts Payable | AP | |
| AR | Accounts Receivable | AR | |
| DRP | Distribution Requirements Planning | DRP | |
| DRP-II | Distribution Resource Planning | DRP-II | |
| INV | Inventory | INV | |
| MRP-II | Manufacturing Resource Planning | MRP-II | |
| MRP | Material Requirements Planning | MRP | |
| WC | Working Capital | WC |