The cash conversion cycle measures the time between paying for inventory or inputs and receiving cash from customers. Shorter cycles indicate more efficient cash management.
The cash conversion cycle (CCC) is calculated as Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO). It measures the total time cash is tied up in the operating cycle. A positive CCC means you pay suppliers before collecting from customers - you need working capital to fund this gap. A negative CCC means you collect from customers before paying suppliers - this is ideal but rare outside of businesses with strong bargaining power. Reducing the CCC improves cash flow: collecting faster from customers (reducing DSO), selling inventory faster (reducing DIO) and taking full advantage of supplier payment terms (increasing DPO, without damaging relationships). Even a small reduction in the CCC can free significant cash for a business. SortBooks helps optimise the cash conversion cycle by monitoring all three components in real-time and identifying opportunities to accelerate collections or improve inventory turnover.
SortBooks helps with the bookkeeping behind cash conversion cycle by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing cash conversion cycle by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Working capital is the difference between current assets and current liabilities. It measures the short-term financial health and operational efficiency of your business.
Accounts receivable (AR) is the money owed to your business by customers who have purchased goods or services on credit. It is a current asset on your balance sheet.
Accounts payable (AP) represents the money your business owes to suppliers and vendors for goods or services received but not yet paid for. It is a current liability on your balance sheet.
Inventory refers to the goods your business holds for sale or uses in production. It is a current asset on the balance sheet and its cost flows to COGS when sold.
Cash flow is the movement of money in and out of your business. Positive cash flow means more money coming in than going out. It is often considered more important than profit for business survival.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.