Is there a way to put a dollar value on the components of the cash conversion cycle?
Is there a way to translate DSO, DIO, and DPO to dollar amounts? A 2 day DSO improvement frees up $XXX that was previously trapped in receivables. Being able to put a dollar value on what impact a two day improvement had on cash flow would be more meaningful.
Yes, if you have the number of days and revenue for the period.
Rev $1000 for 2 days DSO of 90 AR = 45,000
Rev $182500 for a year DSO of 90 AR = 45000
Then you just calculate the change in AR from the previous period to get CF.
But 2 days is way too short, that's a little blip and not any sort of meaningful amount of time. I'd make the case that even a month is too short because most businesses fluctuate from month to month.
Thanks Greg, here is a better example of what I'm trying to figure out.
2016 Rev - 25,923,713 2015 Rev - 28,979,113 2016 A/R - 3,675,311 2015 AR - 5,165,354 2016 DSO - 51.75 days 2015 DSO- 65.06 days
There is a 13.31 day improvement for DSO over prior year. What dollar value (cash flow previously trapped in A/R) is available to the firm compared to prior year.
Thanks
Your cash from operations would go up by the difference in AR from 15 to 16, looks to be about $1.5mm in this case. If AR had increased then cash would've decreased by that amount.
So I've never heard of this being done so I'm just spitballing here, but I think you could also break the difference up by running a AR for 2016 using the 2015 DSO and seeing the difference in AR attributable to a drop in revenue and then the difference in 2016 AR using the 2015 DSO and the AR using the 2016 DSO would be attributable to the drop in DSO. Like I said, I've never seen or heard of that done but it makes sense mathematically.
You also have to consider the impact to NI though since the decrease in revenue will almost definitely equal a decrease in NI that offsets much of the CF from AR.
Would it make sense to say that compared to last year, an improvement of 13.31 days freed up an additional $945,327.70 in cash flow?
DSO 2016 - DSO 2015 = Improved DSO 51.75 - 65.06 = 13.31 DSO day improvement
2016 Rev / 365 = Daily Revenue 25,923,713 / 365 = 71,023.87 Daily Sales in 2016
2016 Daily Sales * DSO Improvement = Annual Additional Cash Flow attributable to DSO Improvement
71,023.87 * 13.31 = 945,327.70
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