The Cash To Cash Cycle

The Cash to Cash Cycle

 

The Cash to Cash Cycle is a key measurement to supply chain management.  It is a measure of how fast a business takes its cash and converts its business process to cash again.  In the finance world, this called working capital management. 

 

One may ask why is finance being used to talk about supply chain management?  The reason is that financial statements give insights into the supply chain decisions of a firm, and how good those decisions were as compared to competitors.  In essence, how efficient is one supply chain firm compared to the next, hence the term “supply chain versus supply chain”.  The cash to cash is the major measure of the efficiency.

 

Here is a statement about supply chain finance from Supply Chain Digest and its list of megatrends:

 

“The connection between supply chain and a company’s financial performance has been at once both well known but not so well understood. There was something of a watershed with the 2008-09 financial crisis, when companies in effect used the supply chain as a source of cash as traditional credit simply dried up.

 

The next five years will see the field of supply chain finance continue to mature, and understanding how supply chain impacts the income statement, balance sheet, cash flow statement, and return on assets will become almost essential to reach upper level positions in supply chain. This will be an increasingly common area of internal supply chain training (as some do today).

 

The position of VP of Supply Chain Finance, found in a few companies already, will become more common.”

 

 

Any analysis of a firm’s supply chain and its impact to the cash to cash cycle has to begin with understanding the business model and the industry in which the firm operates.  Questions to ask are:

  • ·        What does the company do?
  • ·        What industry does it operate in?
  • ·        What are the competitive factors in its industry (the market, no. of competitors, its product lines, etc?)
  • ·        What is its competitive advantage?
  • ·        How does it satisfy its customers?
  • ·        What value does it provide to the end user?

 

These are the major that not only define the firm, but also defines its strategy and ultimately the shape and structure of its supply chain.

 

The financial statements of the firm are the “lens” of the business.  They allow one to see the financial impacts of management decisions on the firms; they also give valuable insights on how well the supply chain functions and delivers value to its customers.  The financial statements give the financial position of the firm at a point in time as well throughout a financial period.  A firm’s balance sheet gives the point in time perspective of the business, and the income statement (or profit and loss statement as it is sometimes called) gives the period perspective of the business.  Other financial statements which are important include the cash flow statement and statement of shareholder’s equity, which will be discussed in next week’s coverage.

 

As stated earlier, the cash to cash cycle is an efficiency measure by which one can see how long its takes to bring cash into the business.  The accounts affected by the cash to cash cycle include accounts receivable, inventory and accounts payable.  The equation for the cash to cash cycles is:

 

  • Accounts Receivable (A/R) + Inventory (Inv) – Accounts Payable (A/P) = cash to cash cycle (also sometimes called the cash conversion cycle – CCC)