The Cash Conversion Cycle

The Cash Conversion Cycle is the time period between the outlay of cash to make a product and the collection of cash from the sale of that product.  The objective is for the cash conversion cycle to be shorter than your trade vendor credit terms. 

My name is Michael Barbarita from Next Step CFO with the Know Your Numbers Minute.  

Put another way, if you convert the production of your product into cash before you pay for the raw material you are going to be in good shape.  

Calculating the cash conversion cycle is a quick way to discover the cause of a cash flow problem.  

Remember, the most successful business owners know their numbers.

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Gross Profit

Understanding your gross profit and how to improve it is critical to maximizing profitability. Gross Profit is sales less cost of goods sold and cost of goods sold are all of the costs directly related to your product or service.

My name is Michael Barbarita from Next Step CFO with the Know Your Numbers Minute.  

Finding ways to increase your gross profit can have an exponential effect on profitability because your overhead expenses are basically fixed and don’t change much with increases in gross profit.

And remember, the most successful business owners know their numbers.

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Working Capital

Most business owners think of “working capital” as the cash needed to operate their business.  In the financial world the words working capital means something a little different.

My name is Michael Barbarita from Next Step CFO with the Know Your Numbers Minute.  

In the financial world working capital is actually a financial metric.  Working capital is defined as current assets less current liabilities and is a measure of a company’s liquidity.  

If current liabilities exceed current assets there is a working capital deficiency.  Use of this simple metric can identify the reason why a company is making money but has poor cash flow.

Remember, the most successful business owners know their numbers.

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