In our previous blog, we looked at How to Calculate your Cash Conversion Cycle score. Now you have this figure, what does it mean?
With the score you received from the CCC formula, cash-to-cash cycle time can then give you an idea of how your business is faring and any steps you need to take to manage your working capital. But how do you interpret the outcome of your calculations?
As a rule, the shorter your Cash Conversion Cycle, the better. Your findings may indicate a low value or even a negative one. In that case, that shows that the capital you’ve invested in your business through inventory is getting turned back into cash in your bank account quickly and your business has good liquidity.
Businesses that experience the best cash cycles are often ones with strong market positions and control of the terms in which the customers and suppliers operate. An example is a supermarket. With instant payment from customers (DSO) and the potential for long payment terms with their suppliers (DPO) it’s possible to have a minus cash cycle score.
On the flip side, a positive number can give your business some challenges. A positive cash conversion cycle tells you your working capital is being held up in either inventories or invoices. A positive cash cycle is usually found in businesses that allow their customers to purchase goods on credit, and they take a long time to repay what they owe.
This is not necessarily a bad thing as extending credit to your buyers can give you a good competitive advantage and make you the supplier of choice. You may find difficulty when you need quick access to working capital but there are solutions that can help with this like invoice finance.
If you’re keen to reduce your Cash Conversion Cycle, read our next blog for tips on How to shorten your Cash Conversion Cycle.
Read more on our Cash Conversion Cycle series 1. How to calculate your Cash Conversion Cycle score 2. What your Cash Conversion Cycle score means 3. How to shorten your Cash Conversion Cycle 4. Benefits Of Knowing Your Cash Conversion Cycle score
At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant estimate for the amount of funding you could access with our finance calculator. Products include invoice discounting and factoring that can boost your cashflow and give you access to a dedicated credit control team.
Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.