Theconversion cycle (CCC) is a critical metric that shows how long it takes for an organization to convert its resources into . In short, this metric shows how many days it takes to sell an item, get paid and pay back suppliers. When the CCC is negative, it means a company is getting financed by its suppliers to run the operations.
There are three aspects to take into account theconversion cycle:
- Days inventory outstanding
- Days sales outstanding
- Days payable outstanding
In other words, how long it takes for an item from when it sits in your inventory to when it is sold. How long it takes for you to the sale. And how much time you have to pay back suppliers.
Quick example: Imagine you buy from an online store (just like ). You ordered an item and spent $50. You’ll get the item in 7 days. The online store has already collected the $50 and will ask the supplier to send it over to you within a week. But the store will pay the supplier only after 30 days. This means that now the store has $50 that can spend the next three weeks before the amount is due to the supplier. Those three extra weeks are crucial as the money could be spent to order other items and sell them with the same conversion cycle.
Therefore when an organization learns how to use its business strategy to fuel the growth of the business.conversion cycle appropriately, it can become a sort of machine
I want to show you howuses a negative conversion cycle to generate extra to power up its business growth.
Don’t be fooled by Amazon meager net income
True,is a store, and as such it will have lower margins compared to other tech giants that operate in the advertising space (like or Facebook).
As you can see Amazon net income in comparison to its is 1.7%. It seems that primary business strategy is to be entirely aggressive in both pricing and service offering.
That is how it managed to disrupt a few industries along the way. But if its net income is so meager how’s the company generating to sustain the business?
Amazon and the cash machine business model
Amachine pattern for generating additional starts by efficiently managing three aspects:
- Days inventory outstanding (how long it takes before we sell that item we have sitting in the store?)
- Days sales outstanding (how long it takes to get paid by our customers?)
- Days payable outstanding (how much time we have before we are due to our suppliers?)
gurufocus.com reports that has a conversion cycle of -26.92!is quite successful in managing its conversion cycle. In fact, as of 2017,
Amazon.com Inc’s for the three months ended in Dec. 2017 was 19.87.
Amazon.com Inc’s for the three months ended in Dec. 2017 was 35.27.
Amazon.com Inc’s for the three months ended in Dec. 2017 was 82.06.
Therefore, Amazon.com Inc’s Cash Conversion Cycle (CCC) for the three months ended in Dec. 2017 was -26.92.
It practically means thathas almost thirty days before payments are due to its suppliers, while it has already generated available for the business by selling items in its online store!
But how and when does it make sense to operate a business model? I believe there are four main aspects to take into account:generating
- Trust from customers
- Negotiating strength
First, you need to be Trusted by customers
Before could become so efficient in managing its conversion cycle business strategy, it took years to become trusted by its customers. Today Amazon.com is one of the most popular websites on earth, where each day billions of people purchased anything:
Data: Similar Web
Digitalization makes it easier
With digitalization, it has become easier for online stores to manage theirconversion cycle. For instance, think of the case in which you open up a store with a simple landing page. You don’t have anything down yet, but you start getting sales in.
Once an item gets pre-ordered, you can get it from a supplier and send it over to a final customer. In short, digitalization helps companies keep a more efficient inventory based on what customers order online even before they have it sitting in the inventories.
That is not an Amazon case. Amazon played the opposite business strategy: build giants super-organized inventories called Fulfillment Centers.
Fulfillment centers are the key to Amazon successful cash conversion cycle strategy
Amazon has been investing billions of dollars in automating and making more efficient its “fulfillment centers.” That, of course, helped the company to strengthen its conversion cycle:
Advantageous credits terms with suppliers
Another aspect is the company’s ability to negotiate convenient payment terms with its suppliers. If you’re able to stretch the payments agreement terms in a way that allows you to run your business on credit, it becomes easier to have excessto invest in the business operations growth. Just like has been doing in the last years.
Affiliate networks and programs
Another critical element of Amazon successful cash business strategy was built upon a network of publishers around the web, that in exchange for a referral to Amazon products could get a fee. This is the premise of affiliate marketing, on which Amazon has also built its fortune.
Summary and Conclusion
Theconversion cycle is a crucial aspect of any business which success is based on short-term . When current assets minus current liabilities is positive, it means the company can generate extra from its operations.
If well managed theconversion cycle can become a sort of making machine that generates additional for an organization.
net income is. If you have the to run the operations, you can grow wildly!can teach you just that. It doesn’t matter how meager your
Below a summary of how it all works:
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