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Cash Conversion Cycle: An Illustration Besides Using The Exhaustion Method.
Published by slang April 14th, 2006 in CCCGO TO MAIN PAGE FOR ALL TOPICS COVERED UNDER CASH CONVERSION CYCLE/CASH OPERATING CYCLE
There are few ways of computing the components of the Cash Conversion Cycle.
One way is to use the exhaustion method. (Refer to my earlier article on this). This is mainly for internal use for management reporting.
There is another common way which is illustrated as below:
Illustration:
The financials are for Quarterly Results:
DSO= (AR/Sales) x 90 days,
DIO= (INV/COS) x 90 days,
DPO= ( AP/COS) x 90 days,
DSO+DIO-DPO = CCC (Cash Conversion Cycle) or DWC (Daily Working Capital)
| Company | Sales | Cost of Sales (COS) | Inventory (INV) | Accounts Receivables (AR) | Accounts Payables ( AP) | DSO | DIO | DPO | CCC |
| AAA | 2,737 | 2,103 | 1,166 | 1,760 | 1,382 | 58 | 50 | 59 | 49 |
| BBB | 1,441 | 1,257 | 724 | 654 | 1,075 | 41 | 52 | 77 | 16 |
| CCC | 8,347 | 7,879 | 2,223 | 4,018 | 1,611 | 43 | 25 | 18 | 50 |
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