Cash Conversion Cycle

This video shows how to calculate the length of a company's cash conversion cycle.
The cash conversion cycle is the number of days between when a company pays its suppliers cash for inventory and when it collects cash from its customers. Thus, it is calculated as follows:
Cash Conversion Cycle = Days to Sell Inventory + Days Sales Outstanding - Days Payable Outstanding
Days to Sell Inventory is the number of days it takes for the company to sell its inventory. Days Sales Outstanding (also known as the Average Collection Period) is the number of days it takes the company to collect cash from its customers. Days Payable Outstanding is the number of days it takes the company to pay its suppliers cash for inventory.
-
Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD.
Edspira’s mission is to make a high-quality business education accessible to all people.
-
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS & OTHER FREE GUIDES
* eepurl.com/dIaa5z
-
MICHAEL’S STORY
* www.edspira.com/about/
-
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: podcasts.apple.com/us/podcast...
* Spotify: open.spotify.com/show/4WaNTqV...
* Website: www.edspira.com/podcast-2/
-
CONNECT WITH EDSPIRA
* Website: www.edspira.com
* Instagram: / edspiradotcom
* LinkedIn: / edspira
* Facebook: / edspira
* Reddit: / edspira
*TikTok: / edspira
-
CONNECT WITH MICHAEL
* LinkedIn: / prof-michael-mclaughlin
* Twitter: / prof_mclaughlin
* Instagram: / prof_mclaughlin
* Snapchat: / prof_mclaughlin
*TikTok: / prof_mclaughlin
-
HIRE MCLAUGHLIN CPA
* Website: www.MichaelMcLaughlin.com/hire-me

[@tgod2433]

This was really helpful, especially the timeline explanation at the end. Thank you.

[@Edspira]

Glad it was helpful!

[@davidloo9497]

Finally - someone explains this in a coherent way with an excellent example (timeline) AND tells you the WHY behind the importance of CCC. Thank you!

[@Edspira]

I put a lot of time into making that video, so your comment made my day. Thank you!

[@user-ek7sf2pm1u]

The timeline was incredibly helpful in understanding the concept, thank you!

[@mikeungad0508]

simply put. explained very well in a very short clip. Keep doing moe videos Edspira..

[@usmanashraf9079]

love this channel for always having such wonderful conceptual explanations....

[@Edspira]

Glad you enjoy it!

[@rubjay6390]

really helpful sir, watching multiple of your vids to guide me through financial accounting

[@azlifestyle5316]

Perfect explanation, dude. PS love how enunciate your words, entertaining and educational.

[@Edspira]

I appreciate that!

[@abdulrehmankhan9584]

Excellent way to explain. Thank you

[@xindy7126]

Thank you for all you do 😁👍🏼

[@erinwhite9120]

I just need to say this is so very helpful- thank you!!

[@Edspira]

You are so welcome!

[@keshavkapoor4594]

Great video, especially the time line explanation!!

[@Edspira]

Glad you liked it!

[@bastiensuinot1378]

very clear explainations thanks dude

[@amberliwentee402]

Can't agree more, the timeline explanation is really helpful, it explain why DSO + DIO - DPO... thank you! :)

[@davidizaguirre3421]

Thanks man, for the clear explanation!!

[@Edspira]

No problem!

[@mayankmittal8107]

so well explained, thanks very much for the teaching.

[@Edspira]

Glad it was helpful!

[@MyFinancialFocus]

This is name of the game when it comes to cash flow. Maintaining liquidation is key!

[@juancardec3849]

Thank you for the informative video

[@radleyboi]

Simple and quite straightforward

[@Edspira]

Thank you!

[@bmanq2234]

Clear explanation as usual!

[@Edspira]

Glad it was helpful!

[@rizalitocacapit7621]

very simple and clear presentation

[@Edspira]

Thank you so much 🙂

[@oo-nj7kg]

thank you very much!

[@Edspira]

You're welcome!

[@wellingtonmoreira115]

Thanks for share it

[@yinyin7614]

Excellent video.

[@Edspira]

Glad you liked it!

[@rishiupadhya]

Very nicely explained

[@Edspira]

Thank you so much 🙂

[@enriquemauriciocuellarlope580]

Very well explained! Im looking for a way to incorporate changes in unearned revenue accounts into the cash convertion cycle to reduce it. how could I do that?

[@nalcow]

Good info

[@moazelsawaf2000]

Thank you so much ❤❤

[@Edspira]

You're welcome 😊

[@supercupcake119]

Would this be a positive or negative conversation come and why?

[@nickfleming3719]

So what you're saying is that you can actually have a negative cash conversion cycle, it just means you can scale. I was thinking about that in terms of the definition that's given for the cash conversion cycle and it didn't make sense. "it takes negative days to generate cash from working capital investments?"

[@ofir-bar-softr]

Hey Nick, you are right. It is possible to have a negative cash conversion cycle. Many tech companies who have a SaaS product do just that. Think about it for a moment: If companies pay and then get paid, their CCC is positive. If they get paid before, their CCC is negative. So how do companies get to negative CCC? If we take the tech company example, their days inventory is zero, since they hold software and charge for it immediately. Their collection time is negative, since they charge in advance. If you add that all up, you can get a negative CCC. If you have a negative CCC, you dont need external financing to grow. However you dont have to be a tech company. For example, Amazon squeezes their payable do much, that even though they have a collection and inventory period, the payables far outweight the other two mentioned, creating a negative CCC, making amazon to not require external financing.

[@adityajoshi3888]

What if the answere comes in negative for eg 14+49-73 = -10

[@roshanghadigaonkar8267]

Then its a hell lot better..!!

[@keshavkapoor4594]

Then it means you got cash 10 days before when you’re due to pay your suppliers.

[@dandan8370]

So how is it not collecting its cash in 36 days because thats its average for when its recieves its AR?

[@Edspira]

The company needs to sell the inventory (which takes time) and then collect the receivable (which takes time). Thus, the time to receive the cash is the sum of the time to sell the inventory plus the time to collect the receivable

[@tomarjoseph2348]

How did you get 19

[@Stsebastian8900]

i was not given the days, so how do i work it out? i was only given balance sheet and sales account

[@Dean444ful]

Very late reply but in case anyone else is wondering you take accounts receivable and divide it by sales and then multiply it by the number of days in the year (365). Then you take inventory and payables and divide them both by cost of sales and multiply it by 365. That gives you the days and then just do the same thing he did in the video.

[@Stsebastian8900]

@@Dean444ful Yer very late, to late. Good for me i found out some where else.

[@TheAnthoox]

@@Stsebastian8900 Lol, be grateful a random person actually took the time to tell you this. A simple Google search would've given you the answer as well.

[@Stsebastian8900]

@@TheAnthoox no and no.

[@motas92]

@@Stsebastian8900 hope you keep failing for being such an ass!

[@sihatafnan5450]

background color choice was pretty poor.It's tough to understand the texts