In the challenging journey of managing and scaling up a business, understanding your Cash Conversion Cycle (CCC) can provide key insights into your financial health, and notably, your cash flow. Cash is the oxygen that fuels growth and the CCC is a key performance indicator that measures how long it takes for a pound spent on anything ( Rent, Marketing , Payroll, etc ) to make its way through your business and back into your pocket
It's a metric that quantifies the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
To lay a foundation, let's define the CCC: It is calculated as the Days Sales Outstanding (DSO) plus the Days Inventory Outstanding (DIO), minus the Days Payables Outstanding (DPO). In layman's terms, it measures how long it takes a company to turn its inventory into sales and its sales into cash, offset by how long it takes to pay its suppliers.
So, how can a shorter CCC improve your cash flow, especially in a fast-growth organisation? Let's explore this concept further.
Fast-growth organisations, by their very nature, often find themselves in a precarious position with cash flow. With rapid expansion, the need to invest in inventory, hiring, marketing, and R&D intensifies. Yet, the return on these investments doesn't materialise immediately, creating a cash flow gap. A shorter CCC helps bridge this gap. The faster you convert your stock into sales, and sales into cash, the quicker you'll have cash in hand to fund your growth operations.
Amazon, for instance, famously operates with a negative CCC. As reported by The Wall Street Journal in 2020, Amazon generally collects cash from its customers before it pays its suppliers, effectively financing its operations with other people's money. This astute financial strategy has played a significant role in Amazon's aggressive growth.
Using the Cashflow Story software we are able to help organisations improve their working capital position and their cash position by focusing on turning sales into cash, managing the stock position and getting customers to pay more quickly. The example below demonstrates what happens when we have taking our eye of the ball and the cash impact for a £40m revenue company when it has allowed its working capital dats to grow from 164 days to 185 days, meaning it has a negative cash impact of £1.85m.