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What Is Cash-to-Cash Cycle Time? | Speed Commerce

What Is Cash-to-Cash Cycle Time?

3PL Glossary > Cash-to-Cash Cycle Time

What Is Cash-to-Cash Cycle Time?

Cash-to-cash cycle time (C2C) refers to the duration it takes for a company to convert its investments in raw materials, production, and other operational expenses into cash from the sale of finished goods. This metric encompasses the entire business cycle, starting from the procurement of raw materials or inventory, through the production process, and ending with the collection of payment from customers. C2C is a comprehensive measure that provides insights into a company's efficiency in managing its working capital and the speed at which it can generate cash inflows.

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The cash-to-cash cycle time is calculated by considering three key components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). DIO represents the average number of days a company takes to sell its inventory, DSO reflects the average number of days it takes to collect payments from customers, and DPO indicates the average number of days a company takes to pay its suppliers. The formula for C2C is expressed as follows: C2C=DIO+DSO−DPO

Analyzing and monitoring the cash-to-cash cycle time is essential for businesses across various industries. A shorter cycle allows for more agile financial management, enabling companies to reinvest cash more rapidly, reduce financing costs, and enhance overall competitiveness. It also provides valuable insights for supply chain optimization, production planning, and improving the overall efficiency of operational processes.

FAQs

What's considered a valid or acceptable C2C depends on factors such as the nature of the industry, the company's supply chain structure, and its specific operational and financial goals. The most successful organizations can complete their entire cash cycle in 30 days or less. In contrast, less effective organizations require 80 days or more to finalize the cash-to-cash cycle and recover the funds invested in their products or services.

No, a high cash-to-cash cycle time (C2C) is generally not considered good for a business. A high C2C implies that a company takes an extended period to convert its investments in inventory and operational activities into cash from sales. This extended cycle can have several negative implications such as increased financing costs, reduced flexibility, and higher holding costs, to name a few.

Yes, it is advisable for businesses to benchmark their cash-to-cash cycle time against industry norms and competitors to assess their efficiency in working capital management and identify areas for improvement.

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