# Cash-to-cash cycle

(Difference between revisions)
 Revision as of 19:55, 6 May 2011 (view source)Ekorsky (Talk | contribs)← Older edit Revision as of 19:56, 6 May 2011 (view source)Ekorsky (Talk | contribs) Newer edit → Line 19: Line 19: ==Example== ==Example== Suppose that data in the Table was generated from the records of an actual business. The data provides the required input for evaluating the lengh of the cash-to-cash cycle using the above C2C formula. The cycle values for inventory, accounts payable, and accounts receivable are shown separately. The C2C cycle increased from 20,35 to 22,30 during the period. Managers, however, are cautioned that more periods are required to detect trends and that relative performance against industry norms is the key. Suppose that data in the Table was generated from the records of an actual business. The data provides the required input for evaluating the lengh of the cash-to-cash cycle using the above C2C formula. The cycle values for inventory, accounts payable, and accounts receivable are shown separately. The C2C cycle increased from 20,35 to 22,30 during the period. Managers, however, are cautioned that more periods are required to detect trends and that relative performance against industry norms is the key. + $\mbox{January C2C Cycle}=\frac{\mbox{(480+320)/2}}{\mbox{750/31}}+\frac{\mbox{(420+610)/2}}{\mbox{1120/31}}+\frac{\mbox{(-305-200)/2}}{\mbox{750/31}}$ $\mbox{January C2C Cycle}=\frac{\mbox{(480+320)/2}}{\mbox{750/31}}+\frac{\mbox{(420+610)/2}}{\mbox{1120/31}}+\frac{\mbox{(-305-200)/2}}{\mbox{750/31}}$ Line 25: Line 26: * February =[(320+270)/2]/(705/28) + [(610+580)/2]/(950/28) + [(-200-150)/2]/(705/28) = 11.72+17.54-6.95 = 22.30 * February =[(320+270)/2]/(705/28) + [(610+580)/2]/(950/28) + [(-200-150)/2]/(705/28) = 11.72+17.54-6.95 = 22.30 - + + $\mbox{January C2C Cycle}=\frac{\mbox{(480+320)/2}}{\mbox{750/31}}+\frac{\mbox{(420+610)/2}}{\mbox{1120/31}}+\frac{\mbox{(-305-200)/2}}{\mbox{750/31}}$ + {| class="wikitable" {| class="wikitable"

## Revision as of 19:56, 6 May 2011

The cash-to-cash cycle represents the amount of time, in days, between the firm paying cash for input materials (e.g., raw materials for a manufacturer; finished resale product for a retailer) and receiving cash from customers. As seen in the formula, the C2C cycle is comprised of three elements: cash used in inventory and in accounts receivable and cash that is free due to nonpayment of accounts payable. Specifically:

$\mbox{C2C Cycle = days funds are used for inventory + days funds are used for receivables + days funds are available due to unpaid payables}\,\!$

This is opertaionalized from an accounting perspective as:

$\mbox{C2C Cycle}=\frac{\mbox{Average inventory level}}{\mbox{CoGs/Days in period}}+\frac{\mbox{Average receivabes}}{\mbox{Sales/Days in period}}+\frac{\mbox{Average payables}}{\mbox{CoGs/Days in period}}$

The C2C cycle value is an indicator of leanness when reduced inventory results from more efficient and effective processes and flows. It is also an indicator of leanness if days sales outstanding are reduced from more efficient processes. For example, a rewrite of ordering systems may reduce billing errors, which in turn reduces disputes and shortens the order-to-cash cycle. Everyday low pricing (EDLP) may also reduce errors and billing disputes. Arbitrarily reducing the credit cycle to customers or extending the payables cycle will reduce the C2C cycle. However, these efforts are not a result of leanness and thus are not viewed as sustainable nor as reflecting improvements in supply chain productivity. The formula for estimating the C2C cycle is provided below.

## Example

Suppose that data in the Table was generated from the records of an actual business. The data provides the required input for evaluating the lengh of the cash-to-cash cycle using the above C2C formula. The cycle values for inventory, accounts payable, and accounts receivable are shown separately. The C2C cycle increased from 20,35 to 22,30 during the period. Managers, however, are cautioned that more periods are required to detect trends and that relative performance against industry norms is the key.

$\mbox{January C2C Cycle}=\frac{\mbox{(480+320)/2}}{\mbox{750/31}}+\frac{\mbox{(420+610)/2}}{\mbox{1120/31}}+\frac{\mbox{(-305-200)/2}}{\mbox{750/31}}$

• January = [ (480+320)/2 ]/(750/31) + [ (420+610)/2 ]/( 1120/31 ) + [ (-305-200)/2 ]/(750/31) = 16.53+14.25-10.44 = 20.35
• February =[(320+270)/2]/(705/28) + [(610+580)/2]/(950/28) + [(-200-150)/2]/(705/28) = 11.72+17.54-6.95 = 22.30

$\mbox{January C2C Cycle}=\frac{\mbox{(480+320)/2}}{\mbox{750/31}}+\frac{\mbox{(420+610)/2}}{\mbox{1120/31}}+\frac{\mbox{(-305-200)/2}}{\mbox{750/31}}$

Day / Period 1.1 31.1 28.2
Days in period 31 28
Profit / loss statement Revenue (for the month) 1120 950
Cost of goods sold (for the month) 750 705
Gross margin (for the month) 370 245
Balance sheet items Accounts receivable 420 610 580
Accounts payable -305 -200 -150
Inventory: Raw, in-process, finished goods 480 320 270
Due to inventory = 16.53 11.72
Accounts receivable = 14.25 17.54
Accounts payable = -10.44 -6.95
C2C Total = 20.35 22.30