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Cash Conversion Cycle (Formula, Examples, Calculation) | Can it be Negative? - YouTube
Channel: WallStreetMojo
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hey there folks welcome to Wallstreetmojo investment banking tutorial and today's
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topic is cash conversion cycle so cash
conversion cycle has everything to do
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with the amount which you have spent on
buying raw material till the amount
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which is left in your hand after you
have paid to the creditors alright so it
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is a pretty simple formula you know so
if you look at the particular screen
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which I've got here it says that cash
conversion cycle of ford with a V
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Amazon is this much so Ford is running a
cash conversion cycle of 261 days and
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while on the other hand Amazon's cash
conversion cycle is just 25 days so you
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might be wondering what what's happening
with these two companies alright so
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let's just look down and see what what's
happening here so I would just come down
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to the formula here and I would just
read it out and the so the cash
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conversion cycle is days invest
inventory outstanding plus days sales
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outstanding that's the days payables
payables outstanding so understand it
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this way so the amount of money which
you have paid to buy the raw materials
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has you know you have invested that
money there by raw material so that you
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can so that you can produce the goods
which you need to sell
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so once the good is produced you have
the inventory in hand so once the
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inventory in hand is there you will sell
it to someone on a credit right and once
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that happens you know the the debtor the
person whom you have sold it to will
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give you money after some time and then
from that money you would pay to the
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creditors if you might have taken the
raw material in on credit initially so
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after doing that you would be left with
some money and you know that is the
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overall money which you are left with
and the amount of time it takes you know
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from when you started investing in the
raw material till the time you have the
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money in hand is just cash conversion
cycle so let us look at the formula here
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again and it says that cash conversion
cycle is days inventory outstanding plus
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days sales outstanding less the payables
outstanding so when it talks about
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inventory outstanding it just mentions
that it just mentions about the
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inventory days and again the same thing
is with receivables days and payable
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days so typically what we calculated for
the balance sheet is just given here and
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the edition of inventory days and
receivables days and and the deduction
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of payables payable days from there so
how would you calculate the inventory
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days inventory days is very simple the
overall inventory which is there in hand
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by the cost of sales or rather the cogs
times the 365 365 is the number of days
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in a year and the same thing would go
for the days payable outstanding so days
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payable outstanding and inventory you
consider the cogs while for days sales
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outstanding you consider the sales or
the revenue alright so here in the next
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section we have got the day sales
outstanding so they days stay sales
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outstanding is accounts receivable the
amount of sales which you have made and
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credit by the accounts receivable by the
net credit sales all right into 365 and
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then again days payable payable
outstanding so accounts its payable the
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amount which you have to pay to the to
the creditors from whom you have taken
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the raw material times 365 so this is
going to be the formula for days payable
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outstanding and the addition of
inventory days and receivable days and
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the deduction of payable days from that
would give you the cash conversion cycle
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so let us try and look at on an excel sheet
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so days let's just say inventory days
inventory days receivable days and and
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payable days so CCR is going to be CCC
cash conversion cycle is going to be let
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me just spread it out for you so CCC is
going to be inventory days plus
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receivable days less payable days
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yeah so this is going to be your formula
so now inventory days how would you
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calculate inventory days inventory
days is equal to inventory by cogs times
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365 so this is going to be the formula
for inventory days in the same way
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receivable days is going to be the
overall amount of accounts receivable by
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the credit sales which you made so sales
or revenue let's just keep it sales
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times 365 again payable days is going to
be accounts payable by cogs times 365 so
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this is going to be the whole equation
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so the value for cogs is going to be
what the value for cogs is is going to
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be less gross profit so this is going to
be the equation for cogs in case it is
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not given but it is generally given as
cost of goods sold in the financial
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statements so let's just take a look at
the numbers for our companies here so
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let's just take a look for Amazon all
right so let's go to Edgar
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type the company's name Amazon and
search it so Amazon I think this is the
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one Amazon calm so now let us look at
the 10k here so Amazon.com and if you
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look at the consolidated financial
statement you would see the so this is
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the consolidated statements and net
sales figure is given but you don't have
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the value for cross profit and so we
have to find it here somewhere so in the
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assets you would get the value for in
the assets you would get the value for
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inventories so inventory values is given
here right and just have to look for the
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so statement of operations net sales and
then cost of sales you see this so net
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sales and cost of sales is given all
right
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and you can just calculate the values
from here so cost of sales for 15 16 and
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17 is given so let's pick up the value
for cost of sales so cost of sales is
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cogs
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cogs us this much and net sales is
product sales and service sales net
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sales is this much and we're assuming
that this the sale is credit sales right
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and what else we need here we need the
the value for inventory accounts payable
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and accounts receivable and these three
values would be available in the balance
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sheet so let's go down here and find the
value for inventories is this much
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accounts payable accounts payable is
this much so 34 billion dollars
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worth of payment has to be made and
accounts receivable or rather
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receivables is yeah so accounts to see
with a net and other so this is going to
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be 13 13 billion dollars
worth of payment has to be received so
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in this case what is going to be the
inventory days right so inventory days
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is just going to be inventory by cogs
times 365 so this is 52.32 days
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all right this is in days
I would call it days
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now receivable days I'll just copy it
from here let me just type it it's going
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to be what receivable days is going to
be accounts receivable by sales times
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365 and this is again going to be in
days and these are the value for 2017
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guys okay so please mind that and then
again payable days so payable days is
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going to be accounts payable by cogs
times 365 so this is again going to be
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in days okay so the overall cash
conversion cycle would be what the
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overall cash conversion cycle would be
inventory days + receivable days
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- payable days so the negative figure
denotes that the company is not paying
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for its inventory and this is a very
desirable situation to be in and you
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would not find with this this kind of
thing with many companies and if the if
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you find this it's a very good thing
it's a desirable thing so that means the
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company is buying everything on credit
and the creditors are letting the
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company you know run without demanding
money for a very long period of time and
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as the company receives money from the
from its customers it just pays the
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creditors back so that's what's
happening here and that's why a negative
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ccc can be seen here all right
so I'm hope you've enjoyed you know this
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particular video and you can read more
about this on
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the website here you know and bye for
now and have fun
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