2018-06-11 02:52:45Finance and AccountingEnglishLearn what a cash conversion cycle is and why it's important to your business. Understand how to calculate your company's cash conversion...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2018/06/Small-business-owner-researches-the-basics-of-a-cash-conversion-cycle.jpgCash Conversion CycleSmall Business Term: What Is Cash Conversion Cycle

Small Business Term: What Is Cash Conversion Cycle

1 min read

Your company’s cash conversion cycle is the total number of days between the time you purchase raw materials to begin production to the time you sell your products. Basically, the calculation gives you an estimate detailing the amount of time your money is tied up before you start to make a profit.

To determine your CCC, you should add together:

  • The total number of days it takes to provide a service or complete your manufacturing process
  • The total number of days your products remain in your inventory before being sold out
  • The total number of days it normally takes for a customer to return a product if needed

Then, from that total you should subtract the total number of days it takes your company to pay whatever money it owes to other entities.

Once you know your CCC, you should start considering different ways to reduce it to loser the amount of interest your company pays to creditors. To do this you should consider:

  • Exploring alternative vendor options to find one with more favourable sales terms
  • Focus on online sales to get rid of your inventory faster
  • Review your production and shipping processes regularly to see if there are ways to streamline the process

In most cases, business owners wondering how to reduce CCC can do so by limiting the amount of money they have tied up at any one time and properly managing their inventory, accounts receivable, and accounts payable. So you should also consider using cloud-based accounting software, such as QuickBooks Online, so you can view all of these things in real time when needed.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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