Operating Cycle vs. Cash Conversion Cycle | Financial Statement Analysis

The operating cycle is the sum of (a) days sales outstanding and (b) days sales in inventory. Thus, the operating cycle is the number of days it takes the company to sell inventory and collect cash from customers. This is the total amount of time for which the company must finance its inventory.
When suppliers ship inventory to the company on credit, they are effectively providing financing to the company. Thus, the cash conversion cycle (aka the cash-to-cash cycle or cash operation cycle) is the operating cycle minus days payable outstanding. The cash conversion cycle is the amount of days the company must find other financing (not from suppliers) for the inventory.
For example, assume a company's operating cycle is 70 days. If the company's days payable outstanding is 30 days, this means its suppliers are providing financing for 30 days. Thus, 30 days after purchasing the inventory from suppliers the company must pay cash for that inventory. However, it will still be another 40 days (70 - 30 = 40) before the company receives cash from its customers. The company must therefore find a way to finance the inventory for 40 days (e.g., short-term borrowing).
Companies therefore have an incentive to make the cash conversion cycle as short as possible. The shorter the cash conversion cycle, the less the company needs to rely on short-term borrowing.
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[@ruthstorms4281]

Finally, someone made in understand the connection between the two. THANK YOU

[@Edspira]

No problem my friend 😀

[@masikoanthonius1565]

This channel is soo underated. You explain it way better than my professor, thankyou!

[@Edspira]

Thank you my friend!

[@timmarychev5662]

Great vids, doing good job of explaining things

[@Edspira]

I appreciate that!

[@sanusizulkipli1031]

I have an exam on Financial Analysis later today & your videos really help me a lot. Thank you Sir.

[@vinhnguyen3199]

great video, very easy to understand. Thank you so much

[@Edspira]

You are welcome!

[@hibahmehreen]

Thank you

[@flake8382]

Hey Ed, thanks very much for your videos! I can tell you that you helped me in my final year of University studying Financial Valuation and Analysis already, and I'm now performing quite well in industry. Can I ask two questions? 1) Why are A/R Turnover and A/P Turnover reliable measures? I would have thought there is significant distortion using these ratios, but maybe it makes sense. It's not something I've fully grasped yet so I'll browse your channel for a video on this - If there isn't one though, per chance, would you do a quick short discussing the two measures? 2) What program/s are you using to setup these "blackboards" with the pen markings? I personally would consider using Open Broadcast Software to record my screen and any other inputs as I require, but the application used to actually place the elements and draw on them I'd like to know. Cheers!

[@Edspira]

1) A/R turnover is helpful because it tells you how quickly the company collect credit sales. If it's taking longer and longer to collect credit sales, this is a serious problem (because cash flow is what is ultimately most important to a company). A/P turnover tells you how quickly the company pays its suppliers; among other things, it's helpful when determining whether a company artificially inflated its operating cash flow by delaying payment of its suppliers. 2) SmoothDraw

[@kimpham3695]

Thank you!

[@Edspira]

You bet!

[@sidcoolguy7]

excellent!!!

[@Edspira]

Glad you like it!

[@GeorgeThomas-ue6zk]

what if CCC is -ve

[@Edspira]

A negative cash conversion cycle is a great thing for a company. It means the company is receiving cash from customers before the company has to pay its suppliers. Costco is an example of a company that has a negative cash conversion cycle.