The cash-to-cash cycle time is a financial metric that measures the time it takes for a company to
convert its cash outflows into cash inflows. The cash-to-cash cycle time is calculated by adding the
days of inventory outstanding (DIO), the days of sales outstanding (DSO), and the days of payables
outstanding (DPO), and then subtracting the days of payables deferred (DPD). The cash-to-cash cycle
time can be shortened by reducing any of the components, except for DPD, which should be
increased. Reducing which measure by 10% would contribute most to shortening the cash-to-cash
cycle time depends on the relative values of each component. However, given the information
below, reducing accounts receivable by 10% would have the greatest impact.
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The current cash-to-cash cycle time is:
Cash-to-cash cycle time = DIO + DSO + DPO - DPD = 60 + 90 + 30 - 15 = 165 days
If accounts receivable is reduced by 10%, then DSO becomes 81 days (90 x 0.9). The new cash-to-cash
cycle time is:
Cash-to-cash cycle time = DIO + DSO + DPO - DPD = 60 + 81 + 30 - 15 = 156 days
The difference is 9 days, which is the largest reduction among all the measures.
If inventory value is reduced by 10%, then DIO becomes 54 days (60 x 0.9). The new cash-to-cash
cycle time is:
Cash-to-cash cycle time = DIO + DSO + DPO - DPD = 54 + 90 + 30 - 15 = 159 days
The difference is 6 days, which is smaller than reducing accounts receivable.
If accounts payable is reduced by 10%, then DPO becomes 27 days (30 x 0.9). The new cash-to-cash
cycle time is:
Cash-to-cash cycle time = DIO + DSO + DPO - DPD = 60 + 90 + 27 - 15 = 162 days
The difference is 3 days, which is smaller than reducing accounts receivable and inventory value.
If cost of capital is reduced by 10%, then it has no direct effect on the cash-to-cash cycle time, as it is
not a component of the formula. However, it may affect the profitability and liquidity of the company
indirectly.
Therefore, reducing accounts receivable by 10% would contribute most to shortening the cash-to-
cash cycle time, given the information below.
Reference: CPIM Exam Content Manual Version 7.0, Domain 4: Plan and Manage Supply, Section 4.2:
Implement Supply Plans, Subsection 4.2.3: Describe how to implement financial management
techniques (page 40).
