[MUSIC] Comprehending the Production cycle and the Cash cycle. The cash conversion cycle is the amount of time between the company spending cash to suppliers in the production cycle before it is converted into cash through sales to customers. It is also called cash to cash, ccc. The production cycle is the period during which raw products and materials remain in the production process, from the beginning of manufacturing through the output of a finished product. Days of inventory on the hand, DIO, measures the length of time between acquisition of raw materials and sale of finished goods to customer. In commerce, DIO measures how many days it takes to sell the entire inventory. Usually, a company allows a buyer to pay off the amount due several weeks or even months after receiving the bill, a period defining the terms of payment agreed between them. DSO is the average collection period. Usually, suppliers grant their customers a payment period defined in the terms of payment. Days payable outstanding, DPU is the average payment period for cars and goods sold. Cash cycle time, or cash-to-cash, c2c, the average time between disbursements and receipts, reflects the duration of the inventory cycle to which is added the period of the collection of sales, and from which is the deducted the period of payment to suppliers. Cash cycle time, or cash to cash, C2C, is measured in calendar days or in days of sales, one day of average value. Typically in manufacturing, payments occur before receipts. You have to buy to produce before selling. The gap between payments and receipts that is constantly renewed create needs for funding to ensure the working of the business. It is called the working capital requirement, WCR. C2C = DIO + DSO- DPO. The longer the cash-to-cash cycle, the more the WCR, since it takes longer to convert inventories and receivables into cash. In other words, the longer the cash-to-cash cycle, the more networking capital required. >> Let's stay on that last image. In general, the cash conversion cycle is positive, and it generates a permanent requirement of capital. This is the working capital requirement, often called only working capital. Even if each component of working capital has relatively short lifetime, the operating cycles are such that the contents of each are replaced by new content. As a result, if business is stable, the working capital requirement that I am going to call WCR is a capital requirement as permanent as fixed assets. At this stage I would like to make two comments. WCR is a capital investment only if it is positive. The cash conversion cycle is negative when the company collects prior to disbursing. I speak in acronyms to make sure you follow, DSO + DIO is less than DPO. In such case, WCR is negative. This is my first comment, and it is worth gold. Thanks to a favorable timing mismatch, the negative WCR of the company Amazon, for example, is the source of funds equivalent to one month of sales, or about $8 billion. We can understand why Amazon has interest to grow its turnover even without the additional margin, 10% more sales, 800 million more cash. Second comment, we measure WCR with inventories and work in progress plus receivables from which we deduct payables. For a more detailed calculation we should include all accounts resulting from timing differences related to payment terms. For example, cyclical payables include salaries, transfered to bank account at the end of each month. Payroll taxes, paid before the 15th of the following month. And VAT, paid at the end of the following month. Cyclical receivables include prepayments to suppliers and other trade receivables. [MUSIC]