FP&A: ANALYSIS OF CASH CONVERSION CYCLE (CCC) MODEL

Get the Excel CCC Analysis Model here: https://lnkd.in/dgdMSKYW

December 10, 2024

Actual Scenario (2024 Q2):

  • NWC: $19,726

  • Cash Impact: $6,164 (31%)

Optimistic Scenario (2024 Q3):

  • DSO: 45 days

  • DPO: 75 days

  • CCC: 10 days

  • NWC: $13,562

  • Cash Impact: $6,164 (31%)

    • Analysis: Reduced DSO and increased DPO significantly shorten the CCC, leading to a strong positive cash impact. This scenario reflects efficient receivables collection and extended payment terms, optimizing cash flow.

Pessimistic Scenario (2024 Q3):

  • DSO: 60 days

  • DPO: 30 days

  • CCC: 70 days

  • NWC: $23,836

  • Cash Impact: $-4,110 (-21%)

    • Analysis: High DSO and low DPO lengthen the CCC, resulting in a negative cash impact. This scenario indicates slower receivables collection and faster payments to suppliers, straining cash reserves.

Base Scenario (2024 Q3):

  • DSO: 55 days

  • DPO: 50 days

  • CCC: 45 days

  • NWC: $19,726

  • Cash Impact: Neutral (0%)

    • Analysis: Moderate DSO and DPO result in a balanced CCC and neutral cash impact. This scenario assumes a realistic middle ground, with average efficiency in receivables and payables management.

 

 

Recommendations:

  1. Optimize Receivables Management (Reduce DSO):

    • Implement stricter credit policies and more efficient collection processes.

    • Encourage early payments by offering discounts to customers.

    • Regularly review and follow up on outstanding receivables.

  2. Extend Payables (Increase DPO):

    • Negotiate longer payment terms with suppliers without damaging relationships.

    • Use technology to manage and optimize payment schedules, ensuring timely but delayed payments.

    • Monitor supplier terms and ensure adherence to payment agreements.

  3. Maintain Efficient Inventory Management (Control DIO):

    • Use inventory management systems to avoid overstocking and understocking.

    • Regularly review inventory levels and turnover rates.

    • Align inventory purchases with sales forecasts to optimize inventory levels.

  4. Scenario Planning:

    • Prepare for different scenarios by maintaining flexibility in financial planning.

    • Regularly update financial forecasts and adjust strategies based on market conditions and internal performance.

    • Use the optimistic scenario as a goal and the pessimistic scenario as a cautionary benchmark.

Conclusion:

To ensure strong cash flow and financial health, the company should aim to achieve the optimistic scenario by focusing on reducing DSO and extending DPO. Efficient management of receivables and payables will shorten the CCC, leading to a positive cash impact. Regular monitoring and adjustment of these metrics are crucial to maintaining optimal working capital and supporting sustainable growth.

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