Cash-to-Cash Cycle Time
What is Cash-to-Cash Cycle Time?
The Cash-to-Cash cycle is the time between when a business pays its suppliers and when the business receives payment from its customers, usually expressed in days. Keeping active tabs on your Cash-to-Cash Cycle Time will aid you in monitoring your finances as cash flows in and out of your business.Alternate names: Cash Conversion Cycle
How to calculate Cash-to-Cash Cycle Time
It takes a widget manufacturer an average of 60 days to sell its inventory, and then having sold their widgets, takes them an additional 30 days to collect cash. In general the manufacturer pays its suppliers in 75 days. Cash-to-Cash Cycle Time = 60 Days Inventory Outstanding + 30 Days Sales Outstanding - 75 Days Payables Outstanding = 15 days. Note: Calculations for the components: DIO = Average Inventory / COGS X 365 (if values are annual) DSO = Average Accounts Receivable / Revenue Per Day DPO = Average Accounts Payable / COGS Per Day
More about this metric
This KPI is financially important in your efforts to set expectations between a vendor and carrier, establishing a cadence of regular, predictable payments. In an asset-driven industry with products moving through your company quickly, keeping track of cash flows is a financial make or break for your business.
Aside from finances, cash-to-cash cycles can indicate changes in the health of your supply chain. Lower cycle times can symbolize a more profitable, lean business. Additionally, the metric can be a sign of how efficiently you’re using your assets and resources to deliver reliably.
Ideally, you should shoot for low cash-to-cash cycle times. However, your target number should result from a balanced consideration of supplier and customer needs.
Cycle times that are too low may leave you with insufficient inventory or with late payments to suppliers. Your target metric should reflect your aim to meet the needs of all parties involved.
Monitoring Cash-to-Cash Cycle Time will benefit both your asset management performance and financial tracking abilities.
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