Managing Cash by Managing the Supply Chain

A firm’s cash conversion cycle (CCC) time can be broken down into its constituent drivers: Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payables Outstanding (DPO). CCC time provides a measure of how long it takes for a firm to convert cash outflows (i.e. investment) back into cash receipts (i.e. returns/profits). It is typically measured in days via: CCC = DSO + DIO – DPO. All things being equal, a shorter CCC is preferable to a longer CCC as it means more efficient use of capital.

However, CCC times will vary widely across industries and geographies and should be understood in context. Different sectors will have different business cycles/models and this will be reflected in CCC times. Likewise, nuances in geography, business culture and infrastructure – both in the physical and financial supply chain – will result in varying CCC times. Where possible, ‘like-for-like’ comparisons are preferred. For example, one might compare a company’s CCC over time as an indication of operational efficiency. Alternatively, one might compare a company against its industry or its peers to analyse differences in strategy or business models.

A quick look at the CCC times of the retail sector over the last six years shows that overall CCC times have trended up. According to data from CapitalIQ, average CCC times have increased from 44 days to 47 days*. The increase is driven by retailers in Asia, with average CCC times increasing from 25 days to 33 days while Europe (51 days) and US (69 days) have seen relatively little change. Among Asian retailers, the increase in CCC is largely driven by an increase in inventory days, from 46 days to 56 days today.

Alignment of the Physical and Financial Supply Chains

One explanation for Asian retailers having lower CCC times could be the proximity of their manufacturing base – often in Asia itself – to their end markets. Indeed, the top quartile DIO for Asian retailers was just 27 days, compared to Europe (35 days) and US (59 days). It highlights the convergence of the physical and financial chain and the need for chief financial officers (CFOs) and treasurers to understand and consider both when looking to optimise CCC times.

It is worth noting that ‘optimised’ CCC times does not always necessarily mean shortest CCC times as strategic, risk and other business considerations need to be factored in. However, knowledge of the financial supply chain helps to shape a robust, strategic physical supply chain and CFOs/treasurers are uniquely placed to add value.

For example, a US retailer could choose to source its products from a low-cost Asian supplier. In so doing, it saves on direct cost but increases its DIO times. A proactive CFO/treasurer would validate the net benefit, and explore potential financial solutions such as supply chain financing (SCF) to lengthen DPO, shorten CCC times, and effectively negate the increase in DIO.

E-commerce and the Acceleration of Cash Conversion Times

The impact of electronic commerce (e-commerce) also shows up in CCC times. For example, Amazon has a CCC time of negative 27 days, driven by its superior DIO (45 days versus US retailers’ top quartile of 59 days) and DPO (94 days versus US retailers’ top quartile of 52 days). As e-tailing continues to disrupt established business models, retailers will need to configure their supply chains accordingly.

Within Asia, e-commerce is booming. In 2013, China broke the record for the largest one-day online sale with its Singles Day (11 November or 11/11) sales of at least U$5.8bn. This
surpassed by two and a half times the total for American retailers on ‘Cyber Monday’
, which in the US since 2005 has been established as the Monday after Thanksgiving. According to Forrester Research, Chinese consumers spent an estimated US$290bn at online retail sites in 2013, exceeding the US$260bn spent by US consumers.

E-commerce is poised to drive CCC times in Asia even lower. Retailers can use a shortened CCC time to free up working capital and use this excess cash to invest in logistics networks and strategic distribution relationships.

CFO and Treasurer as Strategist

A more active role is needed today, not only to identify and free up incremental cash but to help shape supply chain policies, to manage disruptive threats or build a distinct value proposition. This shift from the ‘gate-keeper’ role to a strategic role is not easy.

Often, CFOs/treasurers of larger corporate can find themselves with narrower, siloed views and have limited involvement in the end-to-end supply chain matters. For CFOs/treasurers of small and medium-sized enterprises (SMEs), the challenge often takes the form of limited resources and data. Manpower/resources are spent ensuring the smooth financial flow of the company. As such, there are limited resources to extract the appropriate data; much less to perform the appropriate data analytics to generate insights.

Leveraging on Data

Thankfully, the emergence of data-driven analytic tools and insights can help CFOs/treasurers identify opportunities to free up incremental cash and better manage their CCC. For example, they can compare their CCC times (and underlying drivers) against industry benchmarks and against specific peers. Doing so not only identify opportunity areas, it acts as an ‘early warning system’ to highlight competitive advantages that others may have started to build in their own supply chains.

For multinational corporations (MNCs) or conglomerates, working capital benchmarking also allows for geographic subsidiaries or business units to be better managed – for example, comparing an Asian subsidiary’s working capital performance against specific Asian companies to provide a more appropriate target.


There is a competitive advantage from optimising cash flow and working capital management. CFOs and treasurers are uniquely placed to manage cash and working capital efficiently by helping to manage the supply chain trade-offs. They are the natural guardians of large amounts of data and can leverage this to build holistic insights across the business. Through active management of the CCC and its underlying drivers, they can look for cash trapped in sub-optimal working capital practices, increase free cash-flow and drive value creation.

*All CCC data from Capital IQ; includes companies classified under ‘retailing’ industry, with revenues US$50m and above, and primarily located in Asia Pacific, Europe or US/Canada.


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