![]() It measures how quickly a business sells its stock and replenishes it over a predetermined time frame. Inventory TurnoverĪ financial metric called inventory turnover, also known as inventory turnover ratio or stock turnover, assesses how effectively a company manages its inventory. □ Enhance their working capital management. It is determined by: DPO = (Accounts Payable / Cost of Goods Sold) x Number of DaysĪ shorter cycle suggests a company can convert its investments quickly, while a longer cycle may indicate potential inefficiencies in inventory management, accounts receivable collection, or payment to suppliers.Īnalyzing and optimizing the cash conversion cycle can help businesses: ✅ Days Payable Outstanding (DPO) - This factor gauges how long it typically takes a business to pay its suppliers after receiving goods or services. It is determined by: DSO = (Accounts Receivable / Net Sales) x Number of Days ✅ Days Sales Outstanding (DSO) - The average number of days it takes for a business to get payment from customers after a sale. ![]() It is determined by: DIO = (Average Inventory / Cost of Goods Sold) x Number of Days ✅ Days Inventory Outstanding (DIO) - This factor calculates the typical time it takes for a business to sell its inventory. The cash conversion cycle is calculated using the following formula: Cash Conversion Cycle = Days Inventory Outstanding ( DIO ) + Days Sales Outstanding ( DSO ) - Days Payable Outstanding ( DPO ) The cash conversion cycle (CCC) is a financial metric used to assess the efficiency of a company's working capital management and its ability to convert resources into cash flow.Ī shorter CCC is preferred as it indicates that a company can quickly convert its investments into cash, allowing for more efficient use of working capital and improving overall profitability. □ Make informed decisions about managing their working capital. However, regularly monitoring net working capital can help businesses : The ideal net working capital level varies by industry and business circumstances. Negative net working capital indicates potential liquidity challenges and difficulties in meeting short-term obligations. Positive net working capital indicates that a company has sufficient resources to cover its short-term debts and maintain a healthy financial position. It is determined by deducting a company's current liabilities from its current assets. Net working capital is a financial metric that assesses a company's short-term financial health and liquidity. ✅ Unearned Revenue - Payments made by customers in advance for goods or services that haven't been sent or done yet. ✅ Current Portion of Long-term Debt - The part of long-term debt that must be paid back in the next year. ✅ Notes Payable - A written agreement that says the company will pay back a certain amount to lenders on a certain date. ![]() ✅ Income Taxes Payable - Taxes that the company owes to the government based on its taxable income. ✅ Accrued Expenses - Expenses that have already been incurred but haven't been paid yet, like salaries due, utility bills due, or interest due. ✅ Short-term Loans - Loans from banks or other financial institutions that have to be paid back within a year. ✅ Accounts Payable - A company's debt to its suppliers or vendors for goods or services it got on credit. ![]() These commitments are inherent to running a business and require the utilization of liquid assets or the genesis of new cash.Ĭurrent liabilities include obligations such as: When talking about a company's financial situation, "current liabilities" refer to debts and obligations due to be paid off within a year or the business cycle, whichever comes first. ✅ Notes Receivable - Customers or other groups promise in writing to pay the company a certain amount on a certain date in the future. ✅ Marketable Securities - Investments in securities, such as stocks or bonds, that can be readily bought or sold in the financial markets. ✅ Prepaid Expenses - Payments made in advance for goods or services that will be consumed or utilized within the next year, such as prepaid insurance premiums or prepaid rent. ✅ Short-term Investments - Investments that are easily convertible to cash within a year, such as marketable securities, Treasury bills, or certificates of deposit. It includes raw materials, work-in-progress, and finished goods. ✅ Inventory - A company's inventory or production materials. ✅ Accounts Receivable - Customer debt for credit-purchased goods and services. ✅ Cash and Cash Equivalents - Include physical currency, cash on hand, and funds in bank accounts that can be used immediately. These resources are indispensable for maintaining normal operations and meeting immediate commitments.
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