Cash-to-cash cycle
From Supply Chain Management Encyclopedia
The cash-to-cash cycle (C2C) 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:
This is opertaionalized from an accounting perspective as:
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 day 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.
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.
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 |