Скачать или смотреть cash flow and working capital management Module 4 Cash Conversion Cycle and Operational Liquidity

Module 4 focuses on the cash conversion cycle (CCC) and its role in managing operational liquidity. The CCC is a critical metric that measures the time taken for a company to convert its investments in inventory and other resources into cash from sales.
This module emphasizes linking operational efficiency with cashflow management, showing how delays in inventory turnover, receivables collection, or payment to suppliers can tie up cash and create liquidity stress, even for profitable organizations. You will learn to analyze, optimize, and strategically manage the CCC to improve liquidity, reduce financing costs, and enhance overall operational performance.
Learning Objectives
By the end of Module 4, you will be able to:
Define and calculate the cash conversion cycle (CCC).


Analyze the impact of CCC components inventory, receivables, and payables—on cashflow and liquidity.


Identify bottlenecks and inefficiencies within operational processes affecting CCC.


Implement strategies to optimize CCC without compromising operational efficiency.


Integrate CCC management into broader financial planning and strategic decision-making.


3. Key Concepts
A. Cash Conversion Cycle (CCC) Definition
The CCC represents the number of days a company takes to:
Convert inventory into finished goods and sell them.


Collect cash from customers.


Pay suppliers for purchases.


Formula:
CCC=Inventory Days+Receivables Days−Payables Days\text{CCC} = \text{Inventory Days} + \text{Receivables Days} - \text{Payables Days}
Inventory Days: Average number of days inventory is held before sale.


Receivables Days: Average number of days to collect payment from customers.


Payables Days: Average number of days to pay suppliers.


Strategic Insight: A shorter CCC indicates faster conversion of resources to cash, improving liquidity and reducing reliance on external financing.
B. Components of CCC and Operational Implications
Inventory Days


Measures efficiency in stock management.


Optimization: Implement Just-in-Time (JIT), forecast demand accurately, and manage safety stock levels.


Receivables Days


Reflects efficiency of credit policies and collection processes.


Optimization: Tighten credit terms, automate invoicing, use collection incentives.


Payables Days


Indicates how long the company utilizes supplier credit.


Optimization: Negotiate favorable terms, balance cash retention with supplier relationships.


Insight: Each component affects cash liquidity, and small improvements in any area can significantly enhance overall operational cashflow.
C. Operational Liquidity Management
Liquidity Definition: The ability to meet short-term obligations without additional financing.


Operational Liquidity: Cash available to sustain day-to-day business activities.


Strategies for Management:


Cash forecasting: Predict inflows and outflows accurately.


Working capital optimization: Reduce CCC and free up cash.


Liquidity buffers: Maintain sufficient cash or cash equivalents for unforeseen expenses.


Dynamic operational adjustments: Accelerate receivables, manage inventory turnover, and schedule payables strategically.