Cash Conversion Cycle Case Study 2022

FINANCE
Finance
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Table of Contents
Importance of cash conversion cycle...............................................................................................2
Purpose of cash conversion cycle (CCC)........................................................................................2
Components of cash conversion cycle.............................................................................................2
Analysis of company’s cash conversion cycle................................................................................3
Strategies for increasing Toyota’s cash flows.................................................................................4
Reference.........................................................................................................................................5

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Importance of cash conversion cycle (CCC)
CCC is the metric that reveals the time taken by the entity in converting its investments in
the inventory into cash. It is considered as important as it measures time period between cash
outlay and cash inflow that is number of days since the payment is made by it for procuring the
raw materials and receipt of the cash from sale of the goods. Further, it is important as the
business prefers lower CCC as it is conductive for the healthy level of working capital,
profitability, liquidity and cash flows of the entity (Yazdanfar & Öhman, 2014).
Purpose of cash conversion cycle (CCC)
Main purpose of CCC is to trace lifecycle of the cash used for the business activity. It
follows cash as it is 1st converted into accounts payable and inventory and thereafter into
expenses for the service or product development through accounts receivables and sales and
taking the same back into cash. Essentially the purpose of CCC is to represent how fast the entity
is able convert invested cash from the start that is from investment to end that is till returns.
Lower CCC represents better position of the entity (Garanina & Belova, 2015).
Components of cash conversion cycle
3 components of CCC are –
 Days inventory outstanding (DIO) – it is on average the number of days is taken by the
entity to turn its inventories into sales. Hence, it computes the average number of days an
entity holds the inventories before selling the same. It is computed through dividing the
average inventory by COGS and multiplying it by 365 (Zeidan & Shapir, 2017).