Difference between revisions of "AE1"

Revision as of 18:57, 22 June 2017

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

where

• AE11 = The average number of days it takes a company to collect cash generated from sales
• AE12 = The average number of days worth of Inventory the company holds on its books.
• AE13 = The average number of days the company takes to pay its invoices.

Unit of measure: Days (Calendar days)

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.

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