Question

Why is understanding the relationship between the cash conversion cycle (CCC) and net working capital important to the contemporary business executive?

Answer 1

The cash conversion cycle is the time taken for the raw materials purchased to be be ultimately realized in cash. Raw materials are purchased on credit from suppliers, converted into work-in-process and finished goods, then sold on credit to customers and finally the receivables are realized in cash.

The longer the cash conversion cycle, the higher the funds tied up in working capital.

Understanding the relationship between the cash conversion cycle (CCC) and net working capital is important to the contemporary business executive because longer the cash conversion cycle, the less efficent is the management of working capital. Having adequate working capital is important to ensure smooth running of operations, but at the same time excess working capital can be a drag on profitability as excess funds will be tied up in working capital which do not earn any return