All companies needs to manage their own cashflow, if they are good at managing a company they should be also good at managing their money coming in vs going out of the company 💰🔺💰🔻.

They also need to know how can they use their cash to generate more cash in terms of either CAPEX or others.

All companies have something called inventories. 📜 Inventories for example like a fashion clothes shop 👕👔🎽, they may buy or manufacture clothes but where did all the materials comes from?

Well they must have some sort of supplier 🤝 to buy from before they can sell finished products. So calculating the days where the money goes to the supplier and then sell it to end customers is a cycle.

A cycle consists of mainly 4 things, “Cash” 👉 “Payables” 👉 “Inventory” 👉 “Receivables” and back to cash.

Every company also has something called trade payables and
trade receivables.

📍 Trade payables mean the amount billed to a company (invoice) by its suppliers for goods delivered to or services consumed by the company.

E.g: Company A orders raw materials from supplier B and receives an invoice for company A to pay at a later date.

📍 Trade receivables mean the amount billed by a business to its customers when it delivers goods or services to them.

E.g: Customer came into the shop and bought clothes with his credit card and the company will receive payment at a later date.

In the world of investing and stock market we call this cycle “Cash Conversion Cycle” (CCC). Cash conversion cycle is a metric that shows the amount of time it takes for a company to convert its investments in terms of inventory into cash.

To calculate this cash conversion cycle we need to take a look at a few variables.
📎 Days of Sales Outstanding (DSO)
📎 Days of Inventory Outstanding (DIO)
📎 Days of Payables Outstanding (DPO)

Calculation as below ➕➖
Cash Conversion Cycle (CCC) = Days of Sales Outstanding (DSO) + Days of Inventory Outstanding (DIO) – Days of Payables Outstanding (DPO)

🤔 Example Company A has a Days of Sales Outstanding (DSO) of 6.3 days, Days of Inventory Outstanding (DIO) of 56.3 days and Days of Payables Outstanding (DPO) of 49.5 days

Thus the cash conversion cycle for company A would be 💨 13.1 days
📌 Cash Conversion = 6.3 + 56.3 – 49.5 = 13.1 days

Now I know that this may seem all very confusing but I will explain more on my next English post on how to calculate DSO, DIO and DPO and where to find it in the annual report but for this post we will only focus mainly on calculating the cash conversion cycle.

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