Cash Conversion Cycle
|Posted by: Kenneth Jul 10 2004, 09:43 AM
I read you interesting article on the “Cash Conversion Cycle” (CCC), however I am still somewhat confused on one specific issue.
Basically, whilst I appreciate and understand the components of this important ratio, there seems to be no provisions for businesses dealing in BOTH Wholesale (Sales on Credit) and Retail (Cash Sales) activities.
Indeed, when I compute the Creditors Collection period, Debtors Collection period and Inventory Turnover so as to arrive at the CCC, I am not sure as to how to factor in the Sales effected through our Retail Business since this has a material bearing on the end result.
Actually, whilst I have used TOTAL figures for Creditors and Inventory Ratios, for the Debtors Collection period I only used CREDIT SALES and DEBTORS figures. This completely ignores CASH SALES.
Am I right in my logic that for accuracy’s sake, I should re-compute the % by using TOTAL SALES figure, rather than only Wholesale (i.e. Credit) Sales???
Your feedback would be greatly appreciated.
|Posted by: loanuniverse Jul 10 2004, 12:15 PM
The number is just a number. Which is meaningless without an interpretation within the context of the borrower and its industry.
To compute it you use total sales. This does not mean that the financial information could not be analyzed further by breaking down revenue streams and turnover.
Speaking from the point of view of a lender, the numbers will be compared with industry standards and deviations would need to be explained. A typical retail store might be converting in one or two days, but if the particular borrower sells wholesale then the number will probably be significantly different from its peers. This would need to be explained away in the body of the analysis.