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The Cash Conversion Cycle (CCC)
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Operating Capital refers to cash, debtors, creditors, and stock, and the process by which these elements interact from cash to stock to debtors and back to cash.
The time this process takes to complete is essential for the survival of a business, since even profitable companies can run into short-term cashflow problems.
This process is referred to as the cash conversion cycle (CCC).
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A company's cash conversion cycle refers to the period between payment for production inputs and the receipt of payment from the sale of the finished goods.
The longer the CCC, the more capital is needed to keep the process going. Few new enterprises are aware of this additional need for finance, let alone plan for it.
The CCC is driven by three variables:
- Stock turnover in days
- Debtors collection period
- Creditor payment period
The CCC can easily be calculated:
Stock turnover in days + debtors collection period – creditor payment period
The ideal situation would be where the CCC is zero or negative; that is, when the cash inflow from sales takes place before the cash outflow for production or sales inputs.
Example:
Quick Cash (Pty) Ltd has a stock turnover of 10 days, has only cash sales and takes exactly 30 days to pay its creditors.
The CCC would be: 10 + 0 - 30 = (20)
Quick cash, therefore, receives its cash from the sale of stock before it is needed to pay for the purchase of stock.