Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

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Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance - نسخه متنی

Daniel L. Gardner

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The Cash-to-Cash Cycle

The operating cycle is very helpful in measuring the productivity of short-term assets relative to the time that expires in converting them to cash. What this tool does not recognize, however, is the fact that, at some point in the operation, payment has to be made for the acquisition of goods and services. The cash-to-cash cycle is useful in that it does contemplate the time that expires between paying for raw materials and collecting on the sale of finished goods. By including days payable outstanding (DPO) in the original operating cycle formula, management can focus on the days that transpire between payment and collection, constantly seeking to reduce the cycle to the company's benefit.

Given that an explanation of DOI, DRO and DPO has been provided along with an analytical breakdown of the operating cycle, what requires further discussion is the role of DPO in the cash-to-cash cycle. From there, an in-depth breakdown of the cash-to-cash cycle itself and what it means to a company's balance sheet is required. The opposite of the DRO calculation, DPO measures the time it takes an organization to receive, process and honor accounts payable. The DPO and cash-to-cash calculations for Y1 and Y2 are shown in Tables 12.5 and 12.6.

Table 12.5: NikoTech Days Payable Outstanding

$ in Millions



$285/($990/365) = 105 days

$360/($1,239/365) = 106 days

Table 12.6: NikoTech Cash-to-Cash Cycle



(177 + 72) - 105 = 144 days

(194 + 97) - 106 = 185 days

A year-to-year comparison shows that the cash-to-cash cycle grew by 41 days (185 - 144) from Y1 to Y2. Already in bad shape at 144 days in Y1, NikoTech's slide continued downward in Y2 as the elapsed time between paying suppliers and collecting cash grew to 185 days. As graphically displayed in Figure 12.5, this negative trend speaks volumes about the impact on cash as it surfaces later in the analysis on working capital, return on total assets and return on investment.

Figure 12.5: Y2 Cash-to-Cash Cycle (Based on Robert S. Kaplan and David P. Norton, The Balanced Scorecard— Translating Strategy into Action, Harvard Business School Press, 1996, p. 58. With permission.)

By now, breakdown of the cash-to-cash formula should reinforce some foregone conclusions. Because the DPO number only increased by one day in Y2 (105 to 106), all of the swelling in the cash-to-cash cycle can be ascribed to the issues already discussed for inventories and receivables. The tactical remedies suggested for the operating cycle apply equally to the cash-to-cash cycle and should be carried out immediately.

However, a more holistic approach would dictate that management not only focus on a remedy for the asset side of this equation but also take a serious look at what is behind the DPO number. When viewed in the proper context, the inflated DPO actually eclipses the dysfunctional performance of DOI and DRO. While a first glance at the DPO number indicates that it is helping the cash-to-cash cycle, it is really highlighting much more serious issues with which the company must deal.

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