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Useful Performance Measures for Improving Profitability
There is a growing demand among companies for help in managing the cash flow cycle: accounts payable to inventory to accounts receivable. Managers must know their company's cash-to-cash (C2C) position, and not focus solely on bottom-line profits. With financial data and computer technology readily available for assistance, any company, or its business advisor, can easily determine its ClC and develop benchmarks for comparisons. Companies can take a broader view of the supply chain, which will help them in negotiating terms for accounts payable with suppliers and accounts receivable with customers, as well as in balancing supply chain transactions to obtain overall efficiencies and improved profits for all parties. Cash-to-cash analysis represents an excellent opportunity for accountants to expand their portfolio of valueadded skills.
Definition of CZC
C2C is a unique financial performance metric that indicates how well an entity is managing its capital. The definition of C2C, or cash conversion cycle, is "the length of Mme a company's cash is tied up in working capital before that money is finally returned when customers pay for the products sold or services rendered" (Neil C. Churchill and John W. Mullins, "How Fast Can Your Company Afford To Grow?," Harvard Business Review, May 2001). Admittedly, this definition ignores depreciation and places income taxes within operating expenses; however, the computation of standardized variables for multiple-company data serves as an excellent benchmark to help guide improvements within an individual company and across the supply chain.
Next, C2C is calculated for the company using these three variables:
C2C = Inventory^sub (C2C)^ + ReceivableS^sub (C2C)^ -Payables^sub (C2C)^
These equations standardize the data into days. The final C2C figure may be positive or negative. A positive result indicates the number of days a company must borrow or tie up capital while awaiting payment from a customer. A negative result indicates the number of days a company has received cash from sales before it must pay its suppliers for inventory. Ultimately, the goal for most companies is a C2C that is as low (or even negative) as is reasonable for a company in that particular industry. A lower C2C suggests that a company is more efficient in managing its cash flows, because it turns its working capital...