How Fast Can You Grow Your Business? ...Click on the calculator below to find out Reprinted with permission from Paul Bosetti, MBA, Corporate Strategist.

The answer to this question lies in understanding how quickly your company turns money into goods or services and goods or services into cash receipts. The calculation needed to arrive at this conclusion is called the Cash Conversion Cycle (CCC). Knowing this ratio is vital since it represents the number of days a firm's cash is occupied with its operations. Naturally, a firm wants this cycle to be as short as possible. When a downward trend occurs the cash conversion cycle shortens. Cash becomes free for other uses such as investing in new capital, spending on equipment, and infrastructure.

The CCC is especially important when determining the amount of external financing you may require to grow your company as opposed to using cash generated by the company to finance the growth.

Using the Cash Conversion Cycle Calculator

To calculate your cash conversion cycle using the calculator you will need the following information from your financial statements

Net Sales Inventories Cost of Goods Sold Accounts Payable Accounts Receivable

Click here to use Calculator

Once you have these numbers click on the Cash Conversion Cycle calculator icon and input this information into the top of the calculator. You will see the results of your current cash conversion cycle in the results area (middle of the calculator). You can also imput target information at the bottom of the calculator to see how your Cash Conversion Cycle will change.

The calculator used the information you provided to calculate your Days Sales Outstanding (DSO), Days Sales in Inventory (DSI), and Days Payable Outstanding (DPO). The Cash Conversion Cycle (CCC) is then calculated by using the following formula, CCC = DSO+DSI-DPO.

1. Days sales outstanding (DSO): # of days between the sale of a product and the receipt of a cash payment. The formula is: DSP = Accounts Receivable / (Net Sales / Days in year (365) ) 2. Days sales in inventory (DSI): # of days it takes for a company to convert its raw material, work-in-progress and finished goods inventory into product sales. The formula is: DSI = Inventory / (COGS / Days in year (365) ) 3. Days payables outstanding (DPO): # of days between the purchase from a vendor and cash payment to that vendor. The formula is: DPO = Accounts Payable / (COGS / Days in year (365) * If you want to calculate these ratios on a quarterly basis substitute days in year (365) with 90 days.

Example: suppose your company had COGS of $15,000, inventory of $7,000, sales of $32,000, net receivable of $5,000 and accounts payable of $3,000. DSO would be (5,000 / (32,000 / 365)) = 57 days; a low DSO would indicate your firm collects your receivables quickly and is not giving out interest free loans. Accordingly, DSI would be ($7,000 / (15,000 / 365)) = 170 days; a high DSI may indicate you have too much cash tied up in inventory and you may possibly be running the risk of having too much dead or obsolete inventory. Next, we need to calculate the DPO ($3,000 / $15,000 / 365)) = 73 days; a hight DPO may mean you are receiving interest free loans from your vendors as long as you stay within you stated terms. Finally your CCC would be 57 days + 170 days - 73 days = 155 days

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