Files & Resources: breakingintowallstreet.com/kb/financial-statement-analysis/cash-conversion-cycle/ Table of Contents: 0:00 Introduction 3:49 Part 1: CCC Calculations for Target and Costco 6:50 Part 2: Valuation Impact 8:30 Part 3: When is the Cash Conversion Cycle Useful? 9:55 Recap and Summary
Would be interesting to see a similar video for software businesses. How payment terms (multi-year upfront, annual upfront, or monthly) affects CCC. No DIO because no inventory.
Thanks. We do cover some of these points in the video on SaaS accounting from a few months ago. For software companies, most people would probably just look at the Change in Deferred Revenue or Change in DR - Change in AR over something like the CCC due to the lack of Inventory.
To find the opening and closing balance of trade receivables, do we take the figures from the balance sheet which says trade and other receivables?, or do we check the notes part of the annual report and take the figure under trade receivables?
It's best to use the Balance Sheet figure to get the total amount of Receivables. The only exception to this is if the company also offers financing to customers and has receivables associated with that, you could argue that it's better to exclude those and focus just on the receivables associated with product payments, not financing. But then that gets into a discussion about what is actually "core" to the business, which gets complicated and is probably not necessary for a quick analysis like this one.
I'm not quite sure what you mean. We almost always look at the average Balance Sheet metrics because in the CCC calculation, we are comparing Balance Sheet line items to Income Statement metrics such as Revenue and COGS, which correspond to a period of time. We can't compare a snapshot-in-time metric (AR, AP, Inventory, etc.) to a "period of time" metric like Revenue, so the normal approach is to use the average for the Balance Sheet metrics.
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Files & Resources:
breakingintowallstreet.com/kb/financial-statement-analysis/cash-conversion-cycle/
Table of Contents:
0:00 Introduction
3:49 Part 1: CCC Calculations for Target and Costco
6:50 Part 2: Valuation Impact
8:30 Part 3: When is the Cash Conversion Cycle Useful?
9:55 Recap and Summary
Would be interesting to see a similar video for software businesses. How payment terms (multi-year upfront, annual upfront, or monthly) affects CCC. No DIO because no inventory.
Thanks. We do cover some of these points in the video on SaaS accounting from a few months ago. For software companies, most people would probably just look at the Change in Deferred Revenue or Change in DR - Change in AR over something like the CCC due to the lack of Inventory.
To find the opening and closing balance of trade receivables, do we take the figures from the balance sheet which says trade and other receivables?, or do we check the notes part of the annual report and take the figure under trade receivables?
It's best to use the Balance Sheet figure to get the total amount of Receivables. The only exception to this is if the company also offers financing to customers and has receivables associated with that, you could argue that it's better to exclude those and focus just on the receivables associated with product payments, not financing. But then that gets into a discussion about what is actually "core" to the business, which gets complicated and is probably not necessary for a quick analysis like this one.
Thank you
Thanks for watching!
Why are we getting avarage in 2 years and after calculating only 1?
I'm not quite sure what you mean. We almost always look at the average Balance Sheet metrics because in the CCC calculation, we are comparing Balance Sheet line items to Income Statement metrics such as Revenue and COGS, which correspond to a period of time. We can't compare a snapshot-in-time metric (AR, AP, Inventory, etc.) to a "period of time" metric like Revenue, so the normal approach is to use the average for the Balance Sheet metrics.
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