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Finance

“Honing in on Cash Conversion” Summary

Chapter 28 titled “Honing in on Cash Conversion” was did exactly that–it took direct applications of various business terms, and show a direct equation to figure out how long it will take for a business to become profitable, as well as how much money an individual company takes to finance.

The Chapter first explains DPO, or days payable outstanding as a concept. The author mentions how maximizing days payable outstanding can conserve company funds by a great deal, but can also hurt long term business relationships. The author says to pay attention in particular if the DPO is higher than your DSO (days sales outstanding) there is a large financial issue.

Here the cash conversion cycle is explained as the timeline of cash flow from investment to sales money. First, the company purchases raw materials, and has to pay for them–the key is to see how fast it comes back, with regards to time it sits in inventory, the accounts receivable period, and the time it takes to sell the finished product.

The author gives the following formula to calculate how long a company has their money “tied-up”:cash conversion cycle= DSO + DII (days in inventory) – DPO

The resulting number is the amount of days it takes for a company to recover its cash, from capital to money collecting for finished product.

By taking that resulting number and multiplying it by sales per day, you are left with the amount of money it takes to finance the same company. This is important to know, especially when starting a business, and certainly when maintaining one.