Asset Conversion Cycle (ACC)

This tool helps you identify key risk messages from the analysis of the Asset Conversion Cycle (ACC).

For key ratios:

Performance

• The longer the ACC, the higher the expected margin. The more pressure on margins, the shorter ACC need to be.

• What does the NWA / Sales ratio trend tell us?

Asset Conversion Cycle (ACC)

• Efficiency of current asset usage. What do accounts receivables and inventory turnover ratio trends reveal?

• Relationship with buyers and suppliers. What does accounts payables turnover ratio trends reveal?

• What do accounts receivable and inventory trends reveal about business risk?

Leverage

• The higher the risk, the longer the tenor of ACC, the greater the need for capital.

• Are there market, production, performance or collection risks in ACC?

LIQUIDITY CRUNCH WARNING SIGNS

ACC becomes shorter and generates a one-off cash injection, when:

• encouragingly, there is more efficient working asset management;

• worryingly, the client is in trouble because of:

‒ volume and/or price reductions;

‒ Pressure to delay payments, reduce purchases and/or inventory, and speed up receipts.

Always check when ACC generates cash. It is usually one off and may not be the result of efficiency

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