Is a negative cash conversion cycle good or bad? (2024)

Is a negative cash conversion cycle good or bad?

What Does a Negative CCC Mean? A negative cash conversion cycle means that inventory is sold before you have to pay for it. Or, in other words, your vendors are financing your business operations. A negative cash conversion cycle is a desirable situation for many businesses.

What does a negative cash conversion ratio mean?

When the ratio is low or negative, it could be an indication that the company needs to adjust its operations and start figuring out which activities are sinking its income or whether it needs to expand its market share or increase sales in favor of revamping cash flows.

Is a low CCC good?

Essentially, CCC represents how fast a company can convert the invested cash from start (investment) to end (returns). The lower the CCC, the better. Inventory management, sales realization, and payables are the three key ingredients of business.

Is negative cash conversion cycle sustainable?

A negative cash conversion cycle isn't necessarily a good or bad thing, but it must be accounted for when managing cash flow. Understanding the order to cash cycle helps measure how long your business has to pay its bills, with cash flowing in and out over time.

What's a good cash conversion cycle?

A lower (shorter) cash conversion cycle is considered to be better because it indicates that a business is running more efficiently. It can quickly convert invested capital into cash.

Why is a negative cash conversion cycle bad?

A negative cash conversion cycle can have a significant impact on business performance and cash flow. If the CCC is too high, it indicates that the business is not generating enough cash from its sales to cover the costs of new inventory purchases or payments to suppliers.

What are examples of companies with negative cash conversion cycle?

Amazon.com is the outlier with a negative cash conversion cycle which is great for Amazon. Bezo's manages to hold inventory for 28.9 days plus 10.6 days to collect receivables or 40 days in total but then pays accounts payable in 54 days thus achieving a negative cash conversion cycle for Amazon.com of -14 days.

Is a negative CCC bad?

A negative cash conversion cycle means that inventory is sold before you have to pay for it. Or, in other words, your vendors are financing your business operations. A negative cash conversion cycle is a desirable situation for many businesses.

What is a healthy CCC?

CCC of less than 30 days is optimal as it indicates that the company quickly converts its investments in inventory and other resources into cash. CCC between 30 and 60 days is average and may indicate that there is room for improvement.

Why does Amazon have a negative cash conversion cycle?

Amazon: Amazon typically has a negative cash conversion cycle due to its efficient inventory turnover and payment terms with suppliers. Walmart: Walmart also maintains a negative cash conversion cycle by optimizing its inventory management and supplier relationships.

How does Apple have a negative cash conversion cycle?

Apple's robust O2C and other finance strategies help it have a cash pile of over $200 billion. It has a negative cash conversion cycle of -62 days, implying that Apple is essentially financed by its suppliers. Its Days Sales Outstanding (25 days) is less than half of the industry average.

What are the disadvantages of the cash conversion cycle?

Disadvantages. To ensure that the cash conversion cycle is always positive, the business has a tendency to clear the dues to the suppliers as soon as possible. This limits the use of the funds that the company can make of them.

Does a negative cash conversion cycle mean the average payment period is less than the operating cycle?

A negative cash conversion cycle occurs when a company's accounts payable period is longer than its accounts receivable and inventory turnover periods combined. This results in cash being received from sales before payments are due, improving liquidity and operational efficiency.

Is it better to have a higher cash conversion cycle?

The shorter your cash conversion cycle is, the better, because shorter cycles mean cash is moving faster through your business. The faster you sell your inventory, the lower your average days inventory is, so make sure you don't over-order or let it collect dust from holding it too long!

How can a negative cash cycle influence the wealth of company?

Sometimes a company will have a negative working capital cycle. This can be a sign of efficiency in businesses with low inventory and accounts receivable. In other situations, negative working capital may signal a company is facing financial distress if it doesn't have enough cash to pay its current liabilities.

Can a company survive with negative cash flow?

You can operate with negative cash flow so long as you have cash reserves or access to small business funding to continue operations. Startups, which commonly operate at a loss initially, often track their cashflow runway, meaning how long they can last with negative cash flow until they run out of money.

Can a company be profitable with negative cash flow?

Yes, a profitable company can have negative cash flow. Negative cash flow is not necessarily a bad thing, as long as it's not chronic or long-term. A single quarter of negative cash flow may mean an unusual expense or a delay in receipts for that period. Or, it could mean an investment in the company's future growth.

Which company has the best cash conversion cycle?

What does a negative working capital cycle mean?

Negative Working Capital Cycles

Many businesses have positive working capital cycles, and have a period of time they are waiting for payment. If you have a negative cycle, it means you have collected payment sooner than when payment is due to your supplier, meaning your formula equates to a negative number.

What is Apple's cash conversion cycle?

Apple Inc (AAPL) Cash Conversion Cycle (CCC): (66.21) for the quarter ended December 30th, 2023. Since the quarter ended September 26th, 2009, Apple Inc's cash conversion cycle (ccc) has decreased from (47.58) to (66.21) as of the quarter ended December 30th, 2023.

How to analyze cash conversion cycle?

The formula for calculating the cash conversion cycle sums up the days inventory outstanding and days sales outstanding, and then subtracts the days payable outstanding.

What is the cash conversion cycle for Walmart?

Walmart's cash conversion cycle hit its 5-year low in January 2021 of 1 days. Walmart's cash conversion cycle decreased in 2021 (1 days, -34.3%) and 2024 (5 days, -21.7%) and increased in 2020 (2 days, +6.0%), 2022 (3 days, +175.8%), and 2023 (6 days, +86.2%).

Which company has the longest operating cycle?

Manufacturing companies generally have the longest cycle because their cash is tied up in inventory accounts and in accounts receivable before coming back.

What is the impact of cash conversion cycle?

The cash conversion cycle is an important business metric that shows how efficient a business is. Tracking it allows a business to see how quickly it is converting cash in sales and back into cash. It also assists business owners to have a clear picture of their cash flow position.

What is the cash conversion cycle for Tesla?

Tesla's cash conversion cycle decreased in 2020 (3 days, -77.4%) and 2021 (-15 days, -640.4%) and increased in 2019 (12 days, +52.9%), 2022 (-9 days, -42.1%), and 2023 (5 days, -162.3%).