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Definition of cash-to-cash cycle time
This supply chain KPI measures the time it takes between paying for raw materials and getting paid for products a brand sells. This metric is a combination of several supply chain KPIs—including both inbound logistics and outbound logistics KPIs.
The cash-to-cash cycle time tells a brand how quickly they can turn their resources into cash, and the shorter the cycle, the better. Tracking this metric will help brands optimize cash flow management in the right areas to ensure less cash is tied up in operations.
The cash-to-cash cycle is also called the cash conversion cycle, net operating cycle, or cash cycle.
Importance of cash-to-cash cycle time in business
Increasing sales, by moving inventory quicker (with a high inventory turnover ratio), is a primary way businesses can increase profits. It follows that the shorter a cash-to-cash cycle time is, the faster sales are happening and inventory is turning over. Similar to the inventory–to–sales ratio, the cash-to-cash cycle is also a good indicator of the leanness of a brand’s supply chain.
Timing is also critical when thinking about the cash-to-cash cycle. Brands can both acquire inventory on credit, which results in accounts payable (AP), and sell products on credit, which results in accounts receivable (AR). The cash-to-cash cycle is not complete until those accounts are settled. That means that purchasing inventory and selling products on credit can mean a longer cash-to-cash cycle.
In addition to measuring the efficiency of a brand’s inventory management, sales realization, and payables, the cash-to-cash cycle also accounts for the time it takes to complete these processes and can offer insight into a business’ operating efficiency.
Generally, brands should aim for a short cash-to-cash cycle. That means that the time between the initial investment (purchasing inventory) and the final returns (sales revenue) is short.
Components of cash-to-cash cycle time
The cash-to-cash cycle includes the total time across the three stages of the cash conversion cycle: days of inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO).
DIO measures the inventory accounts receivable, while DSO measures the accounts receivable. These are both positive numbers since they represent outstanding funds coming into the business. DPO measures account payable and is a negative number because it represents funds leaving the business.
The days inventory outstanding (DIO) metric measures how long it will take for a brand to sell its inventory. A lower DIO is better because it indicates a low turnover time for inventory. To calculate DIO, brands need to divide the average inventory by the cost of goods sold (COGS) for a specific period. (To calculate average inventory, take the ending inventory minus starting inventory and then divide by the time period.)
The days sales outstanding (DSO) metric measures how long it takes a brand to collect cash generated from a sale. A lower DSO is also better because it means that the brand is able to collect cash in a short time. To calculate DSO, divide the average accounts receivable by revenue per day.
The days payables outstanding (DPO) metric measures the amount of money that a brand owes its current suppliers for inventory and finished goods as well as the time it takes to pay off those accounts. Unlike the other two cash-to-cash components, a higher DPO is better for corporate finance because it means the company can hold onto cash longer, which can increase its investment potential. This positive working capital cycle is reflected in the financial statement of a business.
Impact of cash-to-cash cycle time on financial performance
The cash-to-cash cycle is important to financial performance because it sets expectations between vendors and carriers by establishing regular, predictable payments. Keeping track of cash flow and understanding where a brand’s cash is tied up and for how long is critical to strong financial performance.
How to calculate cash-to-cash cycle time
Since the cash-to-cash cycle includes three different components, a brand will need to calculate days of inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO) first.
Formula for calculating cash-to-cash cycle time
The cash-to-cash cycle formula is as follows:
Cash-to-cash cycle = DIO + DSO – DPO
Example calculation of cash-to-cash cycle time
Let’s look at an example of a brand that sells beauty products. Let’s say the brand’s DIO is 41, its DSO is 33 and its DPO is 32. The cash-to-cash cycle would be: 41 + 33 – 32. The cash-to-cash cycle for that business is 42. That means it takes that brand 42 days from paying for raw materials and getting paid for the beauty products it sells.
How to improve cash-to-cash cycle time
There are several ways brands can improve their cash-to-cash cycle time, including optimizing inventory and making operations leaner.
Brands want to have a quick inventory turnover rate, meaning a brand is efficiently using its inventory. It costs money to store merchandise that’s not being sold, so brands want to ensure the right inventory levels so they aren’t paying excess storage costs but are also able to fill customers’ orders. A 3PL offers insight into inventory levels, real-time inventory tracking and demand forecasting to ensure optimal inventory levels.
The most efficient brands are able to cycle through inventory and convert those products into cash quickly. Doing a full audit of operations can help brands discover areas for improvement. A 3PL can help brands look for ways to optimize their supply chain operations to become more efficient.
Benefits of improving cash-to-cash cycle time
A faster cash-to-cash cycle time means brands are able to turn cash into products and back into cash on a faster timeline, which means more money available to invest in the business and grow. A faster cash-to-cash cycle time often means a brand is running leaner, which means fewer dollars are tied up in unfinished merchandise, also called work–in–progress inventory, and other forms of inventory that can’t be sold.
Optimize supply chain operations with Flowspace
Flowspace partners with brands to optimize the supply chain. Flowspace’s OmniFlow Visibility Suite gives brands real-time visibility and insights to track supply chain KPIs, including the cash-to-cash cycle. But Flowspace’s platform goes beyond just tracking KPIs; Flowspace’s fulfillment software provides merchants with actionable recommendations for how to improve and optimize their supply chain, including decreasing the amount of time it takes to convert purchased goods into profits.
The OmniFlow suite of tools provides visibility and control from order fulfillment through delivery with platform-level transparency so brands can stay ahead of low inventory. The platform’s real-time insights and predictive analytics allow brands to forecast inventory needs. Ensuring optimal inventory levels can improve customer satisfaction and build customer retention.
Get in touch with Flowspace today to learn more about how Flowspace can help your business optimize for supply chain KPIs.
Written By:
Allison Champion
Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.
