CCC FULL FORM
The CCC full form is the Cash Conversion Cycle.
Our word of the day is the cash conversion cycle. The Cash Conversion Cycle is the theoretical amount of time between a company’s spending cash and receiving cash per each sale output unit of operation etc.
It is a measure of how long cash is tied up in working capital the CCC is a great way to analyze the efficiency of an organization in managing has to generate more sales for cash in management accounting.
In (ccc full form)cash conversion cycle can be very telling for example when companies take an extended period to collect on outstanding bills or they overproduce due to poor estimations their cash conversion cycle is lengthened for small businesses especially long cash conversion cycle z’ can mean the difference between the bankruptcy and profits after all companies can only pay for things with cash, not profits, in turn, the net operating cycle as a measure of managerial competency as well as operational efficiency
How to calculate the ccc?
I want to show you how to calculate the length of a company’s cash
conversion cycle so to get the cash conversion cycle you begin with the number of days it takes a company to sell its inventory then you add to that the days sales outstanding, which again is the number of days it takes for a company to collect its accounts receivable so these two together if you remember these are the operating cycle okay this is the operating cycle for the company.
So it’s saying how many days it takes a company not only to sell the inventory but then to collect the cash from the outstanding accounts receivable right we’re assuming that the customers bought the inventory on credit okay but then once we have the operating the cycle we then subtract the days payable outstanding that’s the number of days.
It takes the company to pay its suppliers for the inventory, okay so it’s the operating cycle minus the day’s payable outstanding all right why is this important well basically if you think about this conceptually and I’ll show you a timeline in a minute what we’re doing here is we’re measuring the amount of time the difference between when the company pays cash for the inventory and the time when it receives cash for the inventory from its customers the longer that that difference is like the bigger this number is for the cash conversion cycle the larger and larger the longer several days that it is that’s more days that the company is gonna have to find a way to finance itself it’s gonna need cash on hand.
Because it’s still waiting for cash front from the inventory for its customers because it’s got outstanding receivables let me show you with a timeline and notice that probably sounds very complicated but it’s not that difficult alright let’s say you have a company called flying scooters and they purchase flying scooters from manufacturers and then they sell them to other companies okay so this flying scooters company it takes them 36 days to sell inventory, okay we’ve got 36 days to sell inventory and then once they’ve sold the inventory on average.
It takes 24 days before they collect payment into in form of cash from those customers okay so the operating cycle would be sick right 60 days here 36 days to sell the inventory 24 days, also, to collect from the customers so we take the 36 and the 24 that’s the operating cycle that’s 60 but then we subtract the 19 is saying look this company they paid so when they buy that inventory they’re buying it on credit right they’re buying it these flying scooters from manufacturers on credit it’s taking them 19 days before they pay that that back so if we get this here we’ve got 41.
okay, so 41 is our cash conversion cycle, what does that mean well let me draw out a timeline for you. so day 0 the company obtains its inventory. okay, day 0 I just mean the beginning, so right here they obtain inventory.
They buy it on credit from their suppliers from the companies that manufacture these scooters flying scooters purchases the scooters are inventory to flying scooters they purchase them on credit from the suppliers okay now 19 days later and how do we know 19 because that’s the days payable outstanding for this company 19 days later flying scooters pays cash for the inventory so, I bought the inventory here on credit.
It pays cash for the inventory 19 days later why is that important because look if we think about this company in terms of managing its cash right remember if a company ever runs out of cash it will go bankrupt so it’s very important that a company manage its cash well so it’s paying out cash here but it’s not receiving cash until here 60 days in the right because they sell the inventory 36 days in but then there are another 24 days before they collect the cash from the customers. Demers okay so that we’ve got 60 is the length of the operating cycle that’s when it gets us inventory but it’s not gonna get the cash that inventory until day 60 yeah buy it paid out cash for the inventory on day 19 so.
If we look at this amount here this amount of time that’s the 41 days that’s the cash conversion cycle so again why is this important that means that look think about it practically this company I paid cash for the inventory here but it’s not getting cash for the inventory until 41 days later.
What does that mean for 41 days that the company has to find a way to finance itself it needs cash for it and used to borrow money or needs you to know cash from prior operations it somehow needs cash so that they don’t go bankrupt in that 41 days okay so the higher this number is the longer the cash conversion cycle is the more time that the company needs to finance itself and so obviously no longer time horizon if this was like 49 days then the company even more cash because it needs to hold out until the point in time where collects cash from its customers.
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