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Cash Conversion Cycle, Statement of Cash Flows
For most companies to be financially successful, it is critically important that operating cash flows be effectively managed. The Cash Conversion Cycle (CCC) is a traditional tool that companies use to measure the average time required for operating cash flows to cycle from cash out for the payment of payables and back to cash flow in from the collection of receivables. Knowledge that the rate their operating cash flow is speeding up or slowing down, as indicated by a decreasing or increasing CCC, while useful information, is of limited value to the company. The CCC indicates nothing about the absolute dollar amount of the cash flow.
This paper illustrates a method by which the current year actual CCC and the next year target CCC, along with a few other items of data, can be used to forecast the dollar amount of the next years operating cash flows. The extension of the CCC to enable it to help forecast the dollar amount of operating cash flows makes the CCC more useful to companies attempting to effectively manage operating cash flows.