Managing Cash
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Cash is king. Effective cash management directly affects a company's liquidity and the investment opportunities it can actually pursue.
What is the cash conversion cycle?
The cash conversion cycle (CCC) measures how many days it takes a company to buy inventory, convert it into a finished product, sell it, and finally collect the cash from the resulting accounts receivable balance.
Inventory and AR days add to the cycle, since both represent cash tied up before it comes back in the door. AP days subtract from it, since that's time the company gets to hold onto cash before paying its own bills.
What are the two goals of cash management?
Cash management comes down to two questions, pulling in opposite directions:
- Are we collecting cash quickly enough? The faster customers pay, the sooner that cash is available to use.
- Are we paying out what we owe as slowly as possible? The longer a company can hold onto cash before paying its own bills, the more use it gets out of that money in the meantime.
Shortening the cash conversion cycle is the whole game. Every day shaved off inventory or AR days, or added to AP days, is a day of cash freed up for the company to actually use.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.