Framework to cut operating costs and improve productivity

Framework to cut operating costs and improve productivity

How quickly things are changed. Just around this time last year, everyone in the country – the government, media, industry, capital markets was bullish about the continuing growth prospectus for Indian economy

As 8 – 9.5 percent growth rate in the coming 2-3 years expected

Ambitious Indian companies making acquisitions abroad

Now the near term outlook dosen’t look too brighter either

Here set of concepts, both financial and operational, which sheds some light on the problem

Cash to Cash cycle
Cash flows are greater importance in corporate health, particularly in current scenario.

Cash to Cash cycle is becomes a crucial supply chain performance metric.

What is cash-to-cash cycle?

It is the length of time for which inventory must be financed (the time between when you spend your money to when you get money for your products

C2C calculated based on three drivers of working capital

Days in inventory (DI) – time taken to turn raw material into sales of finished product

Receivables outstanding (RO) – number of days from product sale to receipt of cash form the customer
Payables outstanding (PO) – time taken to provide cash payments for purchases from suppliers

C2C=DI+RO-PO

EXAMPLE:
A company has 30 days of inventory (DI) gets paid fot its products in 45 days (RO) and pays its suppliers within 45 days (PO)

Hence

C2C is equal to 30 days

If the cycle is shorter for those who get paid at the point of sale and have manageable inventories
Its longer for those who pay their suppliers sooner than they get paid, keeping the inventory levels steady

Why should it be reduced?

Long cash cycles means bearing additional costs for keeping the supply chain running

How can you reduce it?