Southwest Business and Economics Journal 2018

Managing C2C to Increase Company Profitability

Paul D. Hutchison

University of North Texas

M. Theodore Farris II

University of North Texas

Subash Adhikari

University of North Texas

efficient and thus, more profitable than other companies in their industry. Due to technological

advances and as Supply Chain Finance (SCF) continues to gain in popularity, C2C will continue

to play a dominant role in business operations as a tool that helps companies improve their cash

management and provides them with increased liquidity/solvency.

1. Introduction

The purpose of this article is to present and examine the cash-to-cash (C2C)

metric, seek to understand how a company can manipulate it, and provide benchmarks for

companies to use for evaluation purposes. Companies that fully understand C2C can use

it to assist them in making their business more efficient and profitable. This study will

also provide a brief literature review, current C2C benchmarks over time and by industry

“is the period of time elapsing between the acquisition of goods and services…and the final cash

realization resulting from sales and subsequent collection.” Others use terms such as cash cycle,

cash conversion cycle, or net trade cycle to reference this same process. Essentially, these terms

are synonymous, and thus, the authors prefer to call it C2C. It has been considered to be among

the most fundamental ingredients of working capital management (Gitman 1974; Richards and

Laughlin 1980; Bodie and Merton 2000; Keown, Martin, Petty, and Scott 2003; Appuhami

2008). Once a company has a full understanding of how the elements involved in C2C work,

and operational efficiency and ultimately, increased profitability.

There are three key financial variables from a company’s Balance Sheet: Inventory, Accounts

converted into ratios using their complimentary elements from a company’s Income Statement:

Revenues and Cost of Goods Sold (COGS). Finally, as shown below, the data is standardized by

analysis.

(2) Days of Receivables

(C2C)

Net Sales ($)

(3) Days of Payables

(C2C)

These three ratios represent the Inventory Conversion Period, Receivables Conversion

Period, and Payables Deferral Period, respectively (Moss and Stine 1993). Inventory

Conversion Period represents the average number of days a firm holds its inventory before

selling it. Basically, it provides information about how fast/slow a firm is selling its inventory.

(4) Cash-to-Cash Cycle = Inventory

(C2C)

+ Receivables

(C2C)

- Payables

(C2C)

The calculated C2C may be either a positive or a negative number of days and indicates

the flow of capital with trading partners. A positive number indicates, on average, how many

days your capital is unavailable while you are awaiting payment from a customer. From a

company perspective, a high number for C2C days is unfavorable as it ties up capital assets and

increases opportunity costs or interest charges. In contrast, a negative number indicates how

many days you received cash from sales before payment is required to suppliers. Optimally, a

company would like to be close to 0 days (or negative days) (see Figure 1).

Southwest Business and Economics Journal 2018

that represent a point in time. They also fail to adequately incorporate a measure of the nearness

to cash for a company. When these ratios are High, they usually suggest a greater commitment of

firm resources to less liquid forms of working capital (Gallinger 1997). They also do not account

for the time involved to convert current assets to cash, nor the time required to pay current

liabilities. Thus, C2C addresses these deficiencies since it is a dynamic metric that looks at cash

flows occurring over time and could serve as a useful alternative for liquidity analysis.

In the past, several research studies have examined the relationship between C2C and

various firm performance measures. A study by Shin and Soenen (1998) examined the

association between a company’s C2C and profitability between 1975 and 1994. Their results

suggest a negative association between C2C and profitability and risk-adjusted stock returns (i.e.,

again associated with increased profitability as measured by ROA).

consistent with the empirical results of prior literature. For example, Lazaridis and Tryfonidis

(2006) used a sample of companies from Greece; Raheman and Nasr (2007) examined

Exchange. All three studies found shorter C2C was associated with improved measures of

profitability. Additionally, Bhutto, Abbas, Rehman, and Shah (2011) used Pakistani industries to

relationship between the length of C2C and sales revenue, ROE, and firm financing policies, yet

a positive relationship for total assets, ROA, and investing policies.

The relationship of C2C and firm profitability is also supported by a theoretical

framework developed by Gomm (2010) which showed C2C, as a component of supply chain

collaborations may lead to increased profit and improved competitive advantage (Randall and

Farris 2009a).

Finally, Farris and Hutchison (2003) provided benchmark C2C medians in 2001 for

various (non-service) industries, while Farris, Hutchison, and Hasty (2005) extended their

research by providing C2C benchmark medians for various service industries. Both studies

helped to identify key drivers for C2C changes, and suggest that firms have made concerted

efforts to manage their C2C variables.

2.3. Manipulating C2C

To minimize C2C days, a company seek to reduce days of Inventory, reduce days of

Accounts Receivable, or increase days of Accounts Payable. While all three C2C variables may

be examined individually at different times, the optimum approach for a company is to manage a

inventory within the supply chain.

To reduce days of Accounts Receivable, a company should regularly review its credit

terms with customers. To speed up cash collections, companies may consider requiring full or

partial payments up front for purchases or using cash discounting—a percent discount for early

cash payment on invoices. A company may identify which customers who are habitually late in

their payments, review the frequency of when the firm sends delinquency notices, and

periodically assess whether to keep or terminate delinquent customers. (Easton, McAnally,

Southwest Business and Economics Journal 2018

Sommers, and Zhang 2015). Internally, a firm may delay sales commissions until receivables are

consider factoring selected accounts receivable to third parties. The purchaser assumes the risk of

collectability and absorbs any credit losses.

Accounts Payable days may be increased by taking advantage of supplier terms. Thus, a

company may set up pre-established payments to a supplier electronically at the limit of their

reduces the time that cash is tied in the payment process. Additionally, a firm may consider

negotiating terms with suppliers to extend payment times. If a company is a significant customer

with a supplier, then they may be in a strong position in the supply chain to influence and extend

their payment terms.

2.4. C2C Benchmarking

C2C might be of interest to any individual firm that wanted to compare itself with other firms in

the same industry. Within a company, it serves as a measure of change across time for variables

reaching internally across functional silos. It may be used to compare performance between

divisions or product lines. Externally, it may be used to benchmark performance by comparing

performance against competition within an industry or with non-competing industries with

similar performance of C2C variables (Farris and Hutchison 2003; Farris, Hutchison, and Hasty

2005; Hutchison, Farris, and Fleischman 2009; Randall and Farris 2009b).

3. C2C Database

Accounts Payable days (see Table 1 and Figure 2). Overall, this suggests that companies are

managing all three variables of C2C over time, and that this trend will likely continue into the

future.

Southwest Business and Economics Journal 2018

1984-2016

8700

1000

2300

4920

1500

2000

2400

3300

2900

4500

5100

5800

7900

For 2016, one of the top C2C industry performers was SIC 5800 Eating and Drinking

Places which passes the common sense test when one considers the dining experience. One

prefers eating fresh food (which results in low days of inventory), pays using cash or quick to

collect credit or debit cards (low days of receivables), and the restaurateur pays suppliers on a

traditional 30/60/90 days’ cycle (extending days of payables).

Southwest Business and Economics Journal 2018

high number of days of inventory, payment for the finished product occurs rather quickly as

loan with the buyer, and payment to suppliers and employees tends to be rather short.